Comments on the Selloff and the Sequester: Still Cautious After All These Years

Things are beginning to resemble 2011, though with tech and the Russell 2000 small stocks as the "rage" this year, rather than commodities in 2011.  If past is prologue, stocks will survive a scare and rally.  Then, later in the year, "the horror, the horror" that most of this "recovery" from the Great Recession was exactly as Reinhart/Rogoff expected.

If the above scenario comes true, and of course it's pure speculation, we will see what we will see.  If my long-held Japan scenario continues to play out this year, new lows in long-term T-bond rates loom before yearend.

The speculative way to play this is to buy EDV or ZROZ.  Somewhat less speculative is to directly purchase a zero coupon T-bond of the longest duration possible.  In either of the above cases, one is basically gambling on reversion of long-term bond yields to the Japanese mean, as it were.   I and some of the accounts I manage are long EDV (we are Vanguard clients, and EDV is commission-free to Vanguard clients) and zero-coupon T-bonds, plus the more sedate TLT.

Regular readers know that the last time I had anything really nice to say about the US stock market came in early August 2011 after the mark of the beast 6.66% down day on the Dow  Even then, my bullishness was tepid.  Unfortunately, the late September recession call by ECRI made me step away from stocks and focus on the muni market, which was seriously undervalued relative to Treasuries.  Oh well...

But it looks to me as if the Russell 2000 is this market cycle's equivalent of the NAZ in the later '90s.  It's for mo-mo players only.  A lot has to go right with the economy for it to be even a fairly good investment on a multi-year basis.

One final thought.  The media is downplaying the effect of the sequester on the economy.  How, the mouthpieces ask, could a mere $85 B spending cut by the Feds harm the "recovering" juggernaut of the  economy?  Doesn't the stock market predict a boom ahead?

Yours truly thinks that the Fed is all in and cannot "stimulate" more, and the second derivative of fiscal stimulus will turn definitely negative if the sequester takes hold as legislated.  If anyone thinks this is somewhat the opposite of the situation in early 2009, given the tax increases that took hold on Jan. 1, please join me in raising your hand.

I am all for less unbalanced budgets.  I just think that in the investment world, they tend to lead to stock market selloffs and renewed bull markets in Treasuries.

Gold May Be Looking Tired

The latest gold rally is already showing signs of having brought in too many bulls too soon in the (unending) European crisis.  I was lunching Friday with a hedge fund manager who noted that a very recent survey continued to show that the favored investment of Americans, per the poll, was gold.  I had pointed to what I believe was an earlier version of the same poll in the summer of 2011 as part of the reason why I had begun selling my gold when it hit $1900/ounce, and sold more as the price dropped off.  Too much belief.  Where were these when I was buying gold in the $300s (unfortunately I did not buy "enough"!) in 2002 as part of what I thought was an obvious weak-dollar set of policies by both the Bush administration and the Fed?

Now we see a negative CPI print and rising claims for unemployment.  Plus the obvious diminution of buying power in a spreading number of regions in Europe.  Sorry gold traders, against this deflationary backdrop, rumors of the obvious-- that central banks will "print" as needed-- the following survey from Bloomberg.com makes me negative on gold short-term:

Gold traders are bullish for a fourth consecutive week after hedge funds added to bets that prices will rally, exchange-traded products backed by the metal expanded and Europe’s debt crisis roiled markets.

Twenty-four analysts surveyed by Bloomberg said they expect gold to gain next week and six were bearish. A further three were neutral.

In addition, Harvey Organ's latest summary of the COT in silver looks overtly bearish to him, and his reading of the COT in gold is mildly bearish.  I have found his analysis to be pretty good-- he "called" the latest gold rally well, for example.

At this stage in the game, my POV is to take bad news as bad news.  Gold almost always directionally trades with silver and platinum, and both of them have even worse charts on the 50-200 day sma basis than does gold.

Meanwhile, Bloomberg also reports that Israel's stock market is up 2% today, supposedly on hopes that the European authorities will stimulate something or other. 

We know "they" will do their job-- that's what "they" do.  But sorry-- they are not rampant inflationists.  If they were, the STOXX 50 etc. would not be in a pronounced downtrend. Copper wouldn't be under $3.50/lb.  Whole countries would not be going bankrupt due to difficulty rolling over old debt and selling modest amounts of new debt, because "they" would be "printing" the new money needed to keep the game going.  What's going on is more subtle than that.  It's the biflation I wrote about a lot last year.  I actually think that the inflation is returning to U.S. housing prices, which are historically cheap relative to gold IMHO.  And while you can't eat houses, you can either live in them or rent them out for, one hopes, a positive cash flow.

Our job as investors and traders is to recognize the planted stories in the media.  Thus, it was revealed that part of the latest peak in Treasury prices was spurred (finally) by buying by the public.  (I don't know what duration bonds and in what vehicles these were purchased, so I don't know how much staying power these investors have if yields back up more for a while as I expect.)  So congrats-- the public is finally buying Treasurys near the end of an over-30 year bull market. Meanwhile I was pounding the table last spring and early summer for Treasuries in several posts on The Daily Capitalist, beginning when 30-year T-bonds were yielding over 4%.  That was just one year ago or so.

During the latest peak in Treasury prices, electric utilities that have 'A' or better financial ratings and have at least a modest amount of inflation protection were left temporarily ignored by the media and the public, and their yield spread versus Treasuries went to historically wide levels.  So it appeared obvious to take profits in Treasuries and arbitrage, as it were, into the utes.  I'm not perceiving any excess in the utes yet given they trade as if their yields were bond-like, and in fact when I talk to financial people, they doubt the move.  They all express worries about the scheduled expiration of the Bush tax cuts.  That strikes me as an uber-strange response.  Aren't Treasury interest payments taxable, also?  (Plus I own the utes in IRAs and own tax-free vehicles in taxable accounts.)

I mention the above as a long digression in a gold-oriented post because I continue to believe that the aging investor base in the Western world and Japan has a built-in, difficult-to-shake bias for income with perceived safety.  That 'safety' will, methinks, inevitably turn out to be illusory, but the Japanese example shows that seemingly illogical phenomena often have good reasons to have occurred and to persist.  When they buy GLD, the only thing that is certain is the ongoing trust expenses, plus commissions of course. 

Per Bloomberg, gold traders are heavily bullish in contravention of the intermediate-term charts and at a time when everybody and his sibling knows that the world is going to pieces.  Brilliant!  They ignore that the same sorts of growthy trends that were occurring in 2009, 2010 or most of 2011 are not the dominant trend now.  The dominant trend on a macro global basis is the ill winds swirling around and blowing out of Europe.  What is going on in Europe continues to remind me of what was going on in the U.S. in 2008- cascading serious financial problems in core parts of the economy-- large financial companies in the U.S., systemically important banks and increasingly major governments in Europe.  At least in the U.S., there was one national government and one powerful Fed to do what they did.  Europe lacks that advantage. 

Gold and silver, as assets that actually cost money to store and that are not valid to pay debts, became items that were liquidated post-Lehman, and their prices plunged to yearly lows post-crash.  There simply was no rush to buy into an orderly short-term gold uptrend pre-Lehman such as has been occurring the last few weeks in gold.

Thus for people who already have core exposure to these metals, I'm not thinking that this is an opportune time to add to the holdings.  (If one owns none of them, that's a different story.)

I'm also not thinking that all the attention being paid to yet another "critically important" Greek event is worth all the digital ink that's been spilled on it.  I'm waiting for further events in Spain, and critically Italy, to see how these historic and sad dramas will play out in asset prices.

The numerous economic and other strengths of the United States continue to become more obvious to more and more people, and IMHO support the "America First" sort of investment strategy that I propounded last fall.  When it comes to gold, I'm just speculating that we may well see a period of disenchantment with it in some poll later this year or next year out of America, and that it or silver may then be properly set up for yet another major bull move.

If Today's Stock Surge Means Economic Strength, Why Did Electric Utilities Defy Weakness in Treasuries and Instead Break out to a Nearly 4-Year High?

On a day when Treasuries sold off sharply due in large part to simple profit-taking, it felt wrong to see the XLU (Utilities ETF) move up with the SPY tick-for-tick and close at a 45 month high.  My take is that investors are simply moving into the lagging safety-income vehicles and away from the (allegedly) super-safe govvies such as bunds, gilts, and Treasuries.  As I have been saying for some time, Con Ed ED is as good as it gets for me right now.  Strange though it seems, at its current almost 4% current yield, a 15% price move higher is entirely reasonable if we assume that the 30-year T-bond yield moves back to 3%.

Meanwhile, the S&P 500 150 day sma has just begun to point downward, with the index marginally below that line.

Also consistent with a topping process is Uncle Warren coming out to say there's not going to be any stinking recession.  And in the unlikely event there will be one soon, it's the fault of some other people (i.e., the Europeans).  Meanwhile, a pitiful few percent of U.S. GDP comes from exports to Europe, very little of that will be lost should Europe's economy get worse, and there's an offset as diminished economic activity in Europe means lower prices for imported oil and other imported goods into the U.S.

An awful lot of people such as Doug Kass are locked into the no-2012 recession camp.  (Recall that he put the risk of such an event at zero a few months ago.)  I dunno, but it is more than 4 1/2 years since the last recession began in the U.S. and 3 years since it ended.  All precious metals, copper and (sort of) oil are in bear markets.  Interest rates plumbed multi-decade lows-- which cannot possibly happen in the absence of agressive QE unless there simply is not much demand for credit.

Regular readers know that starting in early May last year, I have been emphasizing safety, and switched to a U.S.-centric investing posture.  (See Changing on a Paradigm from May 9.)  At that point or soon after, I was long gold and Treasurys; no more stocks or oil/silver:  pure safety.  Then I got more liberal as it became clear that the U.S. really was the "best house" in a challenged global neighborhood.  (See Gold on Hold; The New Play May Be in Munis from Sept. 25 -a Sunday.  Weirdly, gold closed the next Monday almost exactly where it closed today.  Talk about truly having been "on hold"!)  Since then, the leveraged muni fund NIO has paid out about 4.5%+ in tax-exempt dividends and has appreciated about 5% in price- and to me the key is, considering NIO and its peers vs. stocks, that this followed after a substantial uptrend in NIO and a severe correction in stocks. 

This I continue to see matters as laid out in my April 15 post, More Signs Of a Stock Market Topping Process Emerge.  The interesting and hopeful phenomenon that strength in electric utilities may just presage a non-catastrophe, merely an "ordinary" down-cycle should indeed the top be in already and a lower low await.    

Gold Up but Oil Down: A Mixed Message

Oil and gold are doing what they did in later periods of 2008 as well as last year.  Oil is breaking down while gold is moving up.  The gold:oil ratio is either about 20:1 (WTI) or about 17:1 (Brent).  Either way, gold is not historically cheap to oil.  There is clearly more room for oil prices to drop, both fundamentally and based on my reading of net short positioning  of the commercials in the crude oil futures market.  Thus as in 2008, a deeper low in the gold market is very possible (no guarantee), as people start really fearing deflation (perhaps).  More fundamentally, in recessions, people must pay their bills with currency, not gold, plus jewelry purchases decrease.  Finally, let's remember that the gold is now about 4X as expensive relative to U.S. residential real estate as it was when the ratio was at its minimum about seven years ago.  You can't eat either gold or a home, but you can live in the latter (or rent it out for a profit, or so you hope).  Value buyers are looking to homes this cycle for inflation protection, not only gold.  I think the financial markets will reflect this relatively high price of gold compared not only to houses but to metals such as platinum.

Thus I am looking at the action in the precious metals today as technical, under cover of the "they will print" POV.  But no U.S. recession is baked in the cake, and the current money flows into the Treasury market out of Europe and out of the global stock markets are probably sufficient to take the place of a new QE.

All recessions are deflationary (or disinflationary).  As regular readers know, I give ECRI's views more weight than the Street does.  Their WLI was down again today, and the multi-year trend is uninspiring.

If their U.S. recession call is correct while Europe works through its various problems, I think we can look forward to demand for commodities sharply diminishing.  For example, there is said to be a 2-year supply of platinum in ETFs, for which the public is paying storage costs.  LOL!  Platinum can go into deficit, plus what do you think happens to the demand for platinum jewelry in a global recession?  Platinum "could" fall a lot further from here.  Just look at the 2008 lows if you are skeptical.  Maybe it can't go so low, but sub-$1200 is quite possible.  I just don't see gold as a good value at its current price in that global recession scenario.  Message:  sometimes markets should be watched and not traded.

As I've been saying since January 2009, the U.S financial structure. has been developing as Japan did during its ZIRP period.  The zero bound has been a gravitational force, as it were, pulling the longer maturities toward it, with inflationary spurts during the expansion phase of the economic cycle. 

I still consider stocks as a whole to be overpriced.  OTOH, buy-and-hold investors are finally getting the chance to purchase a growing number of equities that are likely to outperform Treasuries on a multi-year basis, ignoring the fluctuations in between.  Hint:  think secure and growing income stream, a la BDX; or high and safe income stream even if it fails to grow ("we" think safe), as in ED.

Markets May Keep Trending Until the London Whale Dies

The WSJ is out with a JPM update.  It reports on its public site:

J.P. Morgan Struggles to Unwind Huge Bets

By Gregory Zuckerman and Scott Patterson

J.P. Morgan Chase & Co. is struggling to extricate itself from disastrous wagers by traders such as the "London whale," in a sign that the size of its bets could bog down the bank's unwinding of the trades and deepen its losses by billions of dollars.

The nation's largest bank has said publicly that its losses on the trades have surpassed $2 billion, and people familiar with the matter have said they could over time reach $5 billion.

But the losses could be even bigger if the company sells its positions into a market that has turned against its positions, ...

I was going to make other comments.  Absent dramatic words/action from an actor such as the ECB supervenes, I am going to treat the macro markets as if a whale is being eaten alive.  I did dip a toe in the stock water again Friday, buying a little of Deere (DE).  Deere had a "beat and raise" quarter.  It is at 10X TTM earnings and yields 2.5%.  I have been chasing it down for a couple of months now and think it goes much higher over time.  Even my tiny remaining AAPL stock yields more than a 10-year Treasury.  What has happened is that stock yields have finally begun exceeding Treasury yields (10 year bond, not the 30-year yet) as they always had before 1960 or so because of the "wrong thing", namely rising Treasury prices rather than rapidly rising dividends or more attractive (much lower) share prices.  Oh well.  The Japanese endgame, till now, was for the 10-year to yield 1%, the 30 year and stocks to yield 2%.  Of course, stocks sporting rising dividends likely did the best.

In any case, my working hypothesis is that so long as the sharks are eating away at the whale, the good values that are appearing in the stock market will get better (LOL), and incredibly we could see yet more upside in the favored government bond prices.

Of course, no one necessarily rings a bell for the benefit of us outsiders when the whale is fully eaten, but sometimes inferences can be drawn.

More a Stock Market than a Market of Stocks: Playing Defense or not Playing at All

Why begin a post on stocks by mentioning that I purchased a 5 year 'A' quality muni bond today yielding 4%?

Perhaps because I feel the risk-reward is better for this than for the stuff I've been buying lately in my stock accounts. And I hasten to add that in my retirement I am far from earning enough to even come close to the high tax brackets, so that I don't really need the tax-free nature of muni interest payments very much.

Nonetheless, having closed out almost all my weak dollar, growth-y financial assets except gold-related matters shortly after the hit on bin Laden, I have reviewed the 2007-8 investment scene as well as the 2000-3 post-bubble period and have found some asset classes that by those precedents look better than cash heading into what appears to be a cyclical industrial slowdown.

First, let's review what two conservative strategists think of the stock market as a whole. The Ph.D. economist and fund manager John Hussman has updated his views this week. He sees an average return for stocks over the rest of this decade as little better than 3% annually. So in his view one could just buy a 10-year Treasury for the same yield and wake up a decade later (the Rip van Winkle approach). He also refers to the more senior strategist Jeremy Grantham, who is famous for making uncannily accurate 7-year projections, and who is even more bearish about U. S. stocks than is Hussman.

Finally, there is the less well-known Andrew Smithers, who bravely published a book in 2000 calling out the stock market as a huge bubble. He soldiers on, every 3 months updating a chart valuing the stock averages both by his estimate of fair value based both on earnings (10-year average earnings) and asset value ("q"). According to his estimates, stocks are at least 75% over fair value, and are similar to their valuations at their mid-1960s and 2007 peaks.

But all these considerations are in the face of the seemingly permanent zero interest rate policy (ZIRP). So if cash is trash, and the powers that be have a somewhat illogical commitment to price inflation of pre-owned equities that is in aggregate called the stock market, then most portfolio theorists recommend some exposure to stocks, and I agree. And in truth, much as have been a proponent of gold investing since 2009 and was in and out of gold beginning in 2002, so long as I live in a "fiat" world where gold is not money in the transactional sense, and I have bills to pay, I need to think of fiat dollars and think that I can do a bit better than Hussman's 3+% with stocks for the short run.

Therefore, taking the Economic Cycle Institute's (ECRI) warnings about a major global industrial business cycle to heart, I have invested funds in the following stock groups: electric utility, health insurance, and defense. Admittedly I have primarily negative feelings toward the latter two groups of companies, but the only stocks that I have always refused to buy are cigarette stocks. (In fact, 30 years ago I refused to buy Bic stock because they made lighters in addition to pens; it soared without me on board.) I have also been buying into closed end muni bond funds, as these funds are able to use leverage to enhance yield with reasonable safety, and an individual cannot accomplish this.

On the other hand, interim kickback rallies notwithstanding, I look askance at the charts of energy, materials and even most tech stocks. Japan's history with ZIRP is that major bear markets can indeed occur without the central bank lifting interest rates. Cyclical industrial downturn such as that which may be approaching soon can teach a severe lesson to both veterans and noobs alike who trust in the central bank to prevent asset prices from falling in nominal terms.

If ECRI is correct, there will be continued important shifts in the pricing of different sectors of the stock market with more movement within the market than the averages will reflect, unless and until another systemic crisis a la late 2008 comes upon us and babies get tossed out with bathwater. One may need Biblical fortitude to resist the blandishment of tantalizing rallies in risk assets, however, to follow this cautious strategy through to its conclusion, which could very easily end (or not yet be ready to end) with the CNBC crew putting their Dow 10000 hats on backward.

Copyright (C) Long Lake LLC 2011

Statism on the March Gives Bears the Fundamental Upper Hand

Let's start with an ominous longer-term signal that is occurring in the stock market. The simple moving averages (sma) are the main topic. These have the advantage of smoothing out very short term moves. This discussion relates to the Standard & Poor's 500 index; the DJIA is similar.

The 50 day and 150 day sma have been downsloping with the current average below both, the the 50 day in the "proper" bear market configuration of being below the 150 and 200 day sma.

Reflecting prior strength, the 150 day sma has been above (higher than) the 200 day. This is about to change, absent an amazing move upward in the spot index. Assuming that this happens, the S&P 500 will be in the same configuration is was in throughout the big bear market of 2008-9. The 50, 150 and 200 day sma will then all be downsloping, the spot average will be below all of them (any bounces during the bear were contained by the 200 day sma until spring 2009 (green shoots rally), and the shorter-term the average, the lower it is. In other words, 50 below 150 below 200.

The last time this began: around or about Jan. 14, 2008. That was also a time of great uncertainty about the economy. Mainstream economists had not called even a mild recession, Bear Stearns stock was healthy, and so on.

Meanwhile, the Consumer Metrics Institute is showing some measures of growth as being in the bottom 2nd percentile of all quarters in the last 63 years.

From a stock market standpoint, it may not matter much if there is a new recession, assuming the recent one actually ended. The mild 2001 recession was followed by a new bear market low in 2002, though the economy was growing. The strong recovery after the 1973-5 recession was followed by a bear market in 1977, though the economy had no recession till 1980.

On the other hand, the major 1958 global recession was followed by a double dip recession in 1960 (which undoubtedly elected John Kennedy), but the stock market hardly noticed. The DJIA hit a record in 1955 and yearly through 1959, and by winter 1961 was setting new records again.

From a sentiment standpoint, the media has been confusing people. The White House began with the pre-election spin just a couple of months ago, touting the summer of recovery. The Veep allowed as to how the economy might just show 250-500,000 monthly job gains. What happened? A near-record rally in Treasuries and a surfeit of gloom.

Sentiment measures suggest that even if lower lows await, a stock market bounce would be no surprise even to the bears.

But Washington, meaning the Fed and the Feds, continue to assert their power in statist, unimaginative ways. They are like the 1962 Mets, of whom Casey Stengel said, "Can't anybody here play this game?". The only obvious reason the dollar hasn't collapsed again is that hardly any other major country is doing better. The money-printing is widespread globally, and the foolish borrowing and lending paradigm as a way to create a wealthier society is becoming more easy for the public to see has been little but a way to transfer wealth to financial types. These financial types now own a record amount of real estate in the U. S., having offered too-good-to-be-true deals to too many borrowers.

Regardless of the arguments of the redoubtable David Rosenberg and Gary Shilling, the history of the U. S. with the conditions of sub-3% 10-year T-notes and Fed debt monetization suggests that price increases lie ahead and may well exceed the paltry coupon of the bonds. The modern example of Japan as to why U. S. bonds are still on the bargain counter must take note that the average Japanese female is only producing a little over 1 child on average, whereas demographers say that 2.1 children per woman is needed just to keep the population stable. Plus, Japan is not spending a ton of money fighting "terrorists" all over the world.

I don't know the future of interest rates especially given the interest of the authorities to keep them artificially low for an extended period, but by definition the U. S. is not Japan. Yes, if our population is slated to decline massively and the U. S. stops chasing Afghans around their own country, I can certainly see price stability ahead despite a massive money-printing program by the Fed, but I am thoroughly unpersuaded that the Japan analogy is valid here.

With the U. S. in an all war, all the time (now it's Yemen!) posture draining lots and lots of money; with the Fed printing excessively; with a President who one poll showed was viewed by a majority of the public as being a socialist (he's certainly a statist); and with an economy that lacks a new New Thing to bring new efficiencies and new excitement to the plate; we now have a trifecta. Stocks as a whole remain seriously overvalued on both an asset and a smoothed earnings basis, cash is hugely undercompensated; and Treasuries have marvelous momentum but no one seriously expects them ever to be paid back rather than rolled over ad infinitum.

Maybe munis, certain high quality stock, gold, and perhaps oil given loose monetary and fiscal policies in the U. S., are not overvalued. The same goes for the currencies of the few true AAA-rated sovereigns, which according to independent experts do not include the U. S. but do include some Scandinavian countries, Switzerland, Australia and New Zealand, and perhaps Canada. (None of these are fighting any wars, though I forget if Australia or Canada still has any troops in Afghanistan.)

I am sticking with a very conservative strategy, owning only the highest quality assets and avoiding "bargains" such as any stock with a failing chart.

This blog has always called the stimulus bill a "stimulus" bill. Even Christina Romer's own research showed that tax cuts provide a positive return on foregone governmental income, whereas government spending has a multiplier effect of at most one and probably less than one.

We are simply seeing the typical results of a credit collapse. Central banks pump money into the financial system, leading stock markets to rise and now we are seeing the bond market rise as well (meaning rates are falling). The real economy can't use much of this credit money, though, which is why I said above that it is not all that important exactly when the next recession occurs (again, assuming the prior one actually ended).

Business has government's and the central bank's boot on its throat due to misguided policies that have never worked. Meanwhile the GAO has this to say about the U. S. Government last month:

During its audit of the fiscal year 2009 CFS, GAO identified continuing and new control deficiencies in the federal government’s processes used to prepare the CFS. The control deficiencies GAO identified involved
•
enhancing policies and procedures for identifying and analyzing federal entities’ reported restatements and changes in accounting principles;
•
establishing and documenting policies and procedures for disclosing significant accounting policies and related party transactions;
•
establishing and documenting procedures to assure the accuracy of Treasury staff’s work in three areas: (1) social insurance, (2) legal contingencies, and (3) analytical procedures; and
•
various other control deficiencies identified in previous years’ audits (see
app. I for related recommendations).

These control deficiencies contribute to material weaknesses in internal control over the federal government’s ability to (1) adequately account for and reconcile intragovernmental activity and balances between federal entities; (2) ensure that the accrual-based consolidated financial statements were consistent with the underlying audited entities’ financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles; and (3) identify and either resolve or explain material differences between components of the budget deficit reported in Treasury’s records, which are used to prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement of Changes in Cash Balance from Unified Budget and Other Activities, and related amounts reported in federal entities’ financial statements and underlying financial information and records. As a result of these and other material weaknesses, the federal government did not have effective internal control over financial reporting.

Of the 44 open recommendations GAO reported in April 2009, 2 were closed and 42 remained open as of February 19, 2010, the date of GAO’s report on its audit of the fiscal year 2009 CFS. GAO will continue to monitor the status of corrective actions taken to address the 10 new recommendations as well as the 42 open recommendations from prior years (see app. I).

A government that can't get its own financial house in order has no moral right or practical ability to try to control anything as complicated as the American economy.

Meanwhile an unreformed Republican party is likely to share the mismanagement of Washington in January.

For investors and increasingly for small businesspeople and much of the general working population, this is a nowhere to run, nowhere to hide economy. Caveat everyone and everything right now.

Copyright (C) Long Lake LLC 2010

Cross-Currents in the Markets; Over-Pessimism Extant?

As was stated here after the rebound after the early May flash crash, it has been time to sell the rallies. Stock charts look horrible, many superb fundamentalists believe stocks are 20-50% overvalued, and worries over a new recession abound.

Yet the deflationists appear to me to have overstated their case. Which reader is actually seeing price declines in what they pay for? Gasoline on trend, week to week fluctuations notwithstanding? Government fees and taxes? Food?

When one can only get a total of $29.50 or so in aggregate interest over 10 years by loaning $100 to the Feds, one has to wonder if it's worth it.

More to the point for traders, rates have plummeted recently. The 5-year Treasury note is below current CPI; the economy is currently expanding; the smoothed (3-month average) Chicago Fed National Activity Index is at a level associated with durable expansions after both mild and major recessions, and pessimism is high.

With a superb technical analyst, Carter Worth of Oppenheimer, who turned very bearish in the spring on 2008 and again near the reaction high this spring, calling for a bottom to this down move around S&P 980, it may be well to be ready to scale into high quality stocks and other assets that move opposite to Treasury prices. Amongst these may be silver.

As a long-term holder and trader of silver ETFs, I was pleased to see its relative strength today when the general stock market took a late-day hit. Silver is breaking to an all-time high in its 150 day moving average, having done so for the 40 week (200 day) sma already. While silver has not gone through its 2008 high (unlike gold), both are up a similar amount from their early decade lows.

Gold is a core holding. Watch silver.

Copyright (C) Long Lake LLC 2010

Gold'n Apple

Barry Ritholtz is out with a blog post with the respected technician Dick Arms pointing out that the extreme selling on Friday June 4 correlated with market bottoms in the past.

Only a similar amount of selling near the market peak in 2007.

And a similar amount of selling was seen Dec. 1 2008. But at that time the SPY was more than 30% below its 200 day moving average (smoothed). Now we are in the early stages of a market breakdown, so early that the 50 day sma is above the 200 day sma. We are not even in a bear market; there is little real fear that is the bottom-of-the-market/world-is-ending-type fear seen in late 2008/early 2009.

This was brought home this weekend in various small group encounters. Gold? It was as if I was from outer space, or a subversive.

The fact that gold is money according to the U. S. Government, IMF, China and Russia was not in people's minds.

Yet everyone I asked recently reports business down year on year. And last year, business was down vs. 2008.

The longer-term charts of gold and Apple both suggest that the current upswings in price have much more upside before they replicate growth surges off of prior intermediate highs. Apple could be selling for perhaps 10X 2012 earnings. That would be an earnings yield of 10%. Or you could get less than 1% yearly in a 2-year T-note. And gold is in a well-established bull market. Quite some time ago, Louise Yamada established a $1350/ounce intermediate price target for gold. Her longer-term targets start at $2000/ounce. In a liquidation panic a la October/November 2008, all babies get thrown out with bathwater, but the healthy ones rebound first.

Today's market action may have been telling. Gold approached another all-time high, yet only one current headline on Bloomberg.com mentions gold. Stocks get multiple mentions, as does the following that looks as though it comes from a ten-year old headline: Tech Lifts S.F. Prices as Ocean View Gets 26 Bids.

Here is the gold mention; it is being sold, not bought: Glencore may put gold assets on market, mulls IPO.

The subliminal message from the above is that gold is toppy, as the savvy Glencore looks to cash in on investor enthusiasm. And who knows? But this sort of action would be early, perhaps equivalent to NASDAQ 1000-1500 in the second half of the 1990s, not late 1999 when turkeys flew.

More sensible may be that of Rothschilds Bank; see Why Rothschilds is piling into gold, which begins:

Rothschild's Private Banking & Trust's head of investments Dirk Wiedmann has increased the firm's overweight positions in gold and hedge funds in preparation for further volatility and modest economic growth.

Wiedmann highlights short-term fixes for long term problems as a key headwind facing the global economy.

'The cracks in the financial system have been papered over and may not become critical for some time. Crucially, central banks will do all they can to prevent another recession. Policymakers will focus on short-term fixes and try to muddle through,' Wiedmann said. . .

Wiedmann expects gold prices to surge during the second half the year in an uncertain environment, comfortably breaking the $1,300 per ounce level - particularly if sovereign debt problems in Europe continue to escalate to a point where a break-up of the euro seems likely, he said.

For other commodities the firm has a neutral to negative outlook, arguing that buying opportunities may be emerging if financial markets stabilise.

Apple: secular, organic growth at a very cheap price/growth ratio and gilt-edged finances. Gold: The opposite, but public is not engaged and remains of the mindset that the thing to do is to own tiny minority shares of companies run by insiders for their own benefit, collectively comprising the "stock market". You can forget TRINS and sentiment indicators. What counts is what is happening in the real world. An overpriced group of mostly aging companies in league with poorly run governments are seeking price levels that take into account more risks than investors have been used to seeing come to fruition for quite some time.

Caveat emptor.

Copyright (C) Long Lake LLC 2010

Bad News from ECRI

In WLI Growth Drops Again, the Economic Cycle Research Institute states today that:

A measure of future U.S. economic growth fell to a 43-week low in the latest week, indicating that the pace of economic growth is about to slow, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 124.1 for the week ended May 28, down from 125.6 in the prior week. The index's annualized growth rate slid to a 50-week low of 0.4 percent from 5.1 percent a week ago.

As evidence that stagflation will have to wait and little pricing increase, ECRI also reports today in U.S. Inflation Gauge Falls To Five-Month Low that:

A monthly measure of U.S. inflation pressures fell to a five-month low in May as commodity price pressures ebbed, said a research group on Friday.

The Economic Cycle Research Institute's U.S. Future Inflation Gauge (USFIG), designed to anticipate cyclical swings in the rate of inflation, fell to 98.9 in May from a revised 101.8 in April. The original number reported in April was 100.8.

"With the USFIG falling to a five-month low, underlying inflation pressures appear to be ebbing," said ECRI Managing Director Lakshman Achuthan said in a statement.

The May USFIG annualized growth rate, which smooths out monthly fluctuations, fell to 12.5 percent from a revised 23.4 percent. The April figure was originally reported at 21.2 percent.

One can ignore cheerleading from the White House, as reported in Obama stresses positives in jobs report:

President Obama preferred to accentuate the positive today, citing last month's increase of 431,000 jobs but also acknowledging that the vast majority of them were temporary jobs dealing with the U.S. Census.

"This report is a sign that our economy is getting stronger by the day," Obama said during a visit to a trucking firm in suburban Maryland.

As tar balls wash up on Pensacola Beach, destroying the summer tourist season on the Gulf Coast, the economy is not getting stronger by the day. Statements like that show that this president is out of touch. Sound familiar?

We could be looking at an historic change election. More and more, the financial markets are looking like a rerun of 2008. As we enter summer fire season, we all need to remember Smokey's adage of safety first.

And to remember that Smokey was a bear . . . not a bull.

Copyright (C) Long Lake LLC 2010

Weak Jobs Report Has a Larger Context

As the markets take on a nastier tone, relative strength has been telling the tale. The non-Wal-Mart discount retailing stocks are holding up fine. I suspect that all the good news is out for them, though. Price cuts at Wal-Mart, Target and elsewhere cannot be resisted. For example, our local Wal-Mart (very large though not a supercenter) is adjacent to a Dollar Tree (very small). How can DLTR sustain its high margins when WMT and TGT are in a price war?

Even more problematic are vendors of non-necessities. Consider Verizon (VZ). Yes, telephony is a near-necessity. But premium calling and texting plans and other elective services are not. And many people continue to have both wired and wireless service. The VZ stock chart stinks. The market is saying that its high yield is in jeapordy. As with so many other industries that were growth industries in their time, VZ is now a "value" play. But VZ has a market cap of $77 B and a tangible book value of negative $60 B.

All stocks are vulnerable, especially those of companies that are doing the same old-same old, unlike Apple or Intuitive Surgical that have breakthrough products. CAT looked a bit high when it more than doubled off its 2009 to $49. It is now off its highs but still in the high $50s. Deere (DE) has a yet weaker 2 year chart. Increasingly it appears that China's property market has peaked, though the headlines warn that such may occur.

Meanwhile gold is holding even today while silver and the platinum group metals are falling hard, and AAPL is up on the week while the general indices are down a couple of percent (so far).
In a liquidation phase, no prisoners are taken, but for today at least, the dour view of the economy that has been propounded here incessantly is in gear with the markets. The U. S. is continuing to live off the seed corn that grew out of the major 20th century world war victories (I, II and the Cold War) and thus for now is the tallest midget. Ultimately in what may be almost a Manichean showdown, the USD and gold may well enter the finals as the pretender/contender (currencies) of the occupied countries of Japan and Germany (for example) drop away.

The USD won over gold in the Volcker/Reagan era and the aftermath of the Cold War victory. Governmental corruption in league with financial interests is more blatant now, however, and markets are all about trust. Trust has been harmed for quite some time. Businesspeople and investors are well advised to take reasonable precautions for adverse scenarios that could both cause and go beyond new stock market lows.

Copyright (C) Long Lake LLC 2010

Yes, But . . .

It's getting a bit boring to report the same old stuff, but here we go again.

Discover(R) says that Small Business Confidence Continues to Rise in May. Really, it's another case of bad but less bad. So a better headline would be, "Small Business Continues Its Misery". An ugly fact from this survey (conducted by Rasmussen Reports):

35 percent of small businesses surveyed said they believe the economy is getting better, up from 31 percent in April; 51 percent say the economy is getting worse, down a point from the previous month; and 12 percent see the economy as the same, down from 14 percent in April.

The percentage of small business owners rating the current economy as good or excellent was 12 percent in May, compared to 13 percent in April. The April and May ratings on the current state of the economy are the highest since June 2008. Thirty-two percent rate the economy as fair in May, while 56 percent still think it's poor. . .

28 percent of small business owners say economic conditions for their businesses are getting better, down from 30 percent in April; 44 percent said conditions are getting worse in May, down from 48 percent in April; and 24 percent said things are staying the same, up from 19 percent in April.

25 percent of small business owners indicated they were increasing business spending in May, up from 23 percent in April, while 46 percent said they were reducing spending this month, compared with 43 percent in April, and 31 percent said they are spending the same, up from 25 percent in May.

If you have absorbed the above, you would find a different headline than Discover found.

No wonder stocks are going down. Abu Dhabi's problems gave way to the problem's of the larger country north of it (Greece), which are giving way in the headlines to the problems of a much more substantial economy (Spain), and if you think it ends at Spain, you are an optimist. And at home, small business continues to be the canary that eternally "dies" warning of poison gases inside the mine. Just as Greece's problems are not new as of 6 months ago, America's economic non-recovery absent governmental and Fed machinations is not new.

The bear market that accelerated so rapidly to the downside in late August 2008 when Fannie and Freddie went into conservatorship and then imploded with the Lehman/AIG/Sunday evening announcements/etc. is back. That's the meaning of the topping out around the "Lehman gap". The drip-drip downtrend that was happening off the fall 2007 top was hidden by the huge moves down and up.

It's back. Yes, there was a true bull move in a secular bear market; but, till proven otherwise, it was nothing more than that. Small business doesn't lie.

Copyright (C) Long Lake LLC 2010

Trader's World, Trader's Market

The trading range for stocks and other commodities a la 1994 that some strategists have foreseen looks to be occurring. In the absence of a new recession starting this year, a major bear is unlikely, but from the exalted stock market peaks of not long ago, a 20% decline from peak to trough such as were seen in Jimmy Carter's first couple of years would be quite reasonable. Some large companies' stocks such as Nokia and Goldman Sachs are in major confirmed downtrends; others such as AAPL and ISRG have barely been touched. So it goes.

In the metals, the more precious they are, the less they are down today. Gold is barely off; silver is down 2+%, platinum 3+% and palladium 5+%. And the Shanghai general index was down 5+%.

In this over-financialized world where the traders at GS and their bosses don't really care about the success of their own company's stock but rather about their bonus, this is just what they ordered. Lots of debt, lots of financial product, lots of roiling of the markets creating opportunities for revenues; lots of sound and fury, but to the detriment of society at large.

Does any trader who is bidding up the price of long Treasury bonds really wish to hold a 30-yield U. S. Treasury in his own personal account for 30 years? To ask the question is to answer it. If there is one in a hundred, that would be a lot in my opinion. But no matter. China is tightening and may now be in the early stages of a real estate collapse. So much for a strong yuan.

We are seeing the natural evolution of a world with too many promises. These promises include contracted debt as well as social promises including unwritten promises such as are inherent in Medicare and Social Security. There are too many imbalances for comfort.

This is why many of us believe that we are in a secular bear market for stocks and probably low quality assets such as have large run-ups the past year. Traders are, strangely, thinking long-term and for now going with quality.

Copyright (C) Long Lake LLC 2010

Change is in the Air

Yesterday's stock market chart can be viewed as a fractal (a sort of microcosm for those not familiar with the term) for the stock market chart of the last few years. Big drop, partial recovery, downward trend. What caused the air pocket is of little interest at Econblogreview. Facts are stubborn things. 10% off one day, why not 20% or 30% off the next? And then why not a 70% overnight devaluation of the dollar, a la Argentina? Against what, you ask? Against gold; that is how the reserve currency can devalue.

No charts for a few more days due to limited Internet access due to travel.

According to "q" as interpreted by Andrew Smithers and various measures of the "CAPE" (cyclically-adjusted price/earnings ratio), stock averages should drop about 33% simply to get to fair value. To get to a mere 25% undervaluation implies a 50% off sale.

The chart structures tell you much, more more valid information than whatever you see in the WSJ or NYT. By the time the MSM tells you why stocks have fallen, they have largely finished doing so.

There has been precautionary selling on the Stock Exchange . . .

To be long a lot of conventional stocks here is problematic. All sorts of good arguments exist as to why they may be undervalued. Selling ROST now, 7 points off the high, is crazy given that Greek riots have nothing to do with sales of packaway out of fashion pants at deep discounts. Yet a butterfly's wings may theoretically affect the weather in faraway places . . . even if the mind cannot comprehend it.

Right now eyes are pointed to disarray in Euroland. Yet there is an underlying rot and disarray Stateside. Liquidity has been poorly rewarded the past year plus. The times they may be a'changing.

Copyright (C) Long Lake LLC 2010

Market Tone Changing?

Amidst widespread blogosphere revulsion against all sorts of sovereign debt, for whatever reasons the markets decided to sell Treasuries, which tied in with a stronger dollar against even weaker currencies, and gold acted like a weak currency but was the strongest of the precious metals complex.

Got that?

In stocks, what does smell a bit "correctional" is how many individual issues I follow that have developed positive movements over the 50,150 and 200 day moving averages. And meanwhile Gallup still shows hiring and spending becalmed in depression-range lows. Bill Gross of PIMCO may be selling stocks, as he touted them over bonds. Who knows?

The roiling currency markets are sure reminiscent of 1997-8. That actually marked the end of the great broad bull market of the 1990s, with the Value Line Index peaking then and the rally narrowing through 2000 to the best-known large caps and the flashiest tech-type stocks. In a secular bear market, is the past year's rally enough to lead to a similar scenario? Here we had AAPL up today in a down tape, ORCL down just a bit but with a strong chart, and the breakout candidate WPI (Watson Pharma) up a bit as well. Except for bottom fishing in RE, which is trading way below tangible book value, I am avoiding relatively weak stocks such as FPL (which can't get out of its own way) and have taken some significant percentage profits on some of the discount retailers.

One of my working hypotheses has been a sudden collapse in Treasury yields if even a mini-version of late 2008 strikes. There is precedent for this. The sharp 1987 October bear market was followed 2 years later by a lesser but significant bear move in part related to something or other with United Airlines.

As said many times and not profoundly, all days are new days, but we are in exceptionally unprecedented times. Just because so many aspects to the economy look like typical bottoming processes followed by significant upturns does not prove that this well happen again. The obvious reason to be different is that the Fed is out of interest rate reduction bullets and has monetized amazing amounts of debt.

Yours truly is unpersuaded that the dollar is sound, and the traditional thing against which its soundness is measured is gold. Who knows if gold got too popular, but it certainly didn't move to a 3 standard deviation outlier position vs. anything else, which is the standard definition of a bubble. The other metals are a different story, however.

If we get a sharp sell-off in stocks, the betting here (but not with much money or with any leverage) is that money will flow into Treasuries. If not, then Bill Fleckenstein and Nassim Taleb's disaster scenario may be here, and look out below. Then it would be bills, gold and meals ready to eat if you can find any.

Copyright (C) Long Lake LLC 2010

The VIX Stabilizes: Implications

The nearby 2-year chart of the stock market's "volatility index" (VIX), also imprecisely called a fear index, shows the fabled second derivative of the trend turning bearish (i.e., less bullish as the decline is in abeyance for now). The VIX peaked in the fall as the worst part of the advance-decline number of stocks occurred, and had a secondary peak into the current bear market bottom in March, then declined steadily as the stock market marched upward with few pauses.

Mais voila! The VIX has more or less flattened the past 2 months and is well within its trading range of the past 2 years. From the beginning of 1997 till the end of 2003, the VIX probably averaged about 25--exactly where it closed Thursday. Stocks traditionally fall when the VIX rises, though the mathematics of calculating VIX do not necessarily imply that relationship.

Even if a new bull market is underway, a simple view of the chart suggests that a spike in the VIX to 40 would be an ordinary test of "resistance". Patient and brave bulls might find that a convenient entry point.

Of course, there is nothing in the chart to suggest an actual trend change, but we are now for the first time since the major bear market took hold a year or more ago both at longer-term "support" for the VIX with as much chart suggestion of a move up as a move down.

Copyright (C) Long Lake LLC 2009

Deflation in Markets Today

Today was an ugly day in the American financial markets. There was, simply, a lack of liquidity. Stock prices fell with no attempt at a rally. Unfortunately, gold and silver prices fell as well, as did oil, without much buying interest in Treasuries.

Another dismal (un)employment number was the excuse for today's moves. The blogosphere but not the mainstream media noted that once again, the dismal loss of as estimated nearly half a million jobs in only one month was understated. The actual measured (estimated) job loss was over 100,000 worse, due to the unmeasured adjustment called the birth-death adjustment (so called because small businesses are born and die under the radar screen). Supposedly, the small businesses not measured in the "establishment" survey created over 100,000 jobs in June and over 220,000 jobs the past 3 months. Ha! Click HERE for the table and links to more info on this obscure but important measure.

The table above shows the inflation/deflation-adjusted track of 4 major bear markets. Going back to the frenetic top of the U.S. stock market over 9 years ago, it is easy to see that the NASDAQ bubble was the worst ever, and the bubble as measured by the S&P 500 is as bad in its 10th year as any in memory.

Longer term, there is "good" news here and there. Everyone is now aware that markets can fall and stay down. There is much more rational pricing over multiple markets. And, the growth in GDP and employment on a rolling 10-year basis has reached cyclical lows similar to other major bottoms in the economy, such as 1938.

On a very long-term investing horizon (over 10 years), the current era could represent a secular low that ended up being favorable for high-quality assets, though the short-term is a very different story, it would appear.

Between random events and active manipulation of the economy and the markets by changing forces with changing and inscrutable motives, predicting the short-, intermediate-, and long-term outlook is more challenging than ever. Cast a cold eye on all forecasts. Seek out current yield equal to or above current inflation.

Investors should both stick with markets they know best, concentrate on businesses they control if possible, and have enough cash to commit either to a deeply undervalued sector should one appear or to hop on a trend if they feel it is playable (using "play" money in the latter case!).

Copyright (C) Long Lake LLC 2009

Ford-tastic?

Ford Motor Co. had an earnings "beat" (surprise!). In Bloomberg's Ford Loss Is Smaller Than Estimates as Cash Use Drops (Update2), the following quote is presented:

Excluding items the second-largest U.S. automaker considers one-time costs, the loss of $1.8 billion, or 75 cents a share, beat the $1.24 average of 11 analyst estimates compiled by Bloomberg.

“This is a fantastic performance,” John Wolkonowicz, an IHS Global Insight analyst in Lexington, Massachusetts, said today. “They’re burning cash at a much lower rate. They’re going to come out of this OK. I now believe they won’t need a government handout.”

What Bloomberg goes on to report (below-the-fold, as it were) is:

Ford’s U.S. vehicle sales fell 43 percent, contributing to its largest first-quarter loss since 1992.
The net loss was $1.4 billion, or 60 cents a share, compared with net income of $70 million, or 3 cents, a year earlier, the company said.

Revenue fell to $24.8 billion from $39.2 billion, excluding special items, as Ford slashed North American production by half. The average analyst estimate was for $23.2 billion.

The automaker has been able to forgo U.S. aid because it borrowed $23 billion in 2006 before credit markets froze. As collateral for that financing, which Mulally called “the world’s largest home equity loan,” Ford put up all major assets, including its headquarters and blue oval logo.

Ford lost a record $14.7 billion in 2008, and analysts expect the company to be unprofitable this year and next. Mulally has said he expects to break even by 2011.

Here are some of Ford's financials as of 12/31/08 as reported to the SEC (per Yahoo's Finance section):

Net tangible assets: Negative $19 B
Net working capital: Negative $31 B

Ford is going to continue to lose money year after year. Some "performance".

On second thought, it is a performance: the stock market is now more of an act than usual. Much of it is a bad act. Perhaps Mr. Mulally is a better actor than Cerberus and the unending stream of guys whose names all kind of sound the same who have run GM into the ground decade after decade.

Re the stock market as a whole, Louise Yamada continues to hold to her bearish technical view as she recently has been pointing out that the averages are continuing the trend of finding resistance at progressively lower levels. Resistance now is around Dow 8000, down from 10,000 and then 9000.

Unfortunately supporting this bearish view is the alacrity with which insiders have jumped to the sell side, as Bloomberg reports in Insider Selling Jumps to Highest Level Since ‘07 as Stocks Gain":

Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market. . .

Insiders from New York Stock Exchange-listed companies sold $8.32 worth of stock for every dollar bought in the first three weeks of April, according to Washington Service, which analyzes stock transactions of corporate insiders for more than 500 mostly institutional clients.

That’s the fastest rate of selling since October 2007, when U.S. stocks peaked and the 17-month bear market that wiped out more than half the market value of U.S. companies began. The $42.5 million in insider purchases through April 20 would represent the smallest amount for a full month since July 1992 . . .

Obviously the data only covers 2/3 of April, but considering that the Dow has almost tripled since the 1992 comparison month, we are looking at a huge diminution in insider buying over time.

As Nassim Taleb keeps reminding us, the past is a very imperfect predictor of the future, but I for one find the unchanging emphasis and dubious enthusiasm about beating (managed, lowered and poor) analysts' estimates; government-created bank "earnings"; and the refusal of many of the most eminent pre-bear market bears such as Louise Yamada, Nouriel Roubini and Meredith Whitney to change their tune to be important considerations. The Great Depression had shoots of green as well, with ECRI's long leading indicators showing largely positive year on year comparisons for about an entire year between 1930 and 1931.

Finally for now, please consider Mish's Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis. This blog has used/reported on the term "looting" for what has happened to the use of taxpayer funds to support stockholders and bondholders of financial companies.

EBR continues to believe that there are elements of both the Great Crash of 1929-32 and Watergate/S&L looting crisis extant. Anyone perhaps outside of Barack Obama and other insiders of the highest levels who believes he or she has a good read on how the future will unfold, including pricing of almost any asset, is in my humble opinion overly confident.

Copyritght (C) Long Lake LLC 2009

To Dither or Not to Dither, that is the Question

Score another one for CR, who reports today that a Fed President has finally come around to the idea that the big banks are too big and sick to succeed, in "Fed's Hoenig: 'Too Big has Failed'" (this links to Calculated Risk's post on the topic).

Here is one small quote from the Hoenig speech itself, the link to which is here.

• Third, if institutions -- no matter what their size -- have lost market confidence and can’t survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses, and begin the process of restoring them to private ownership.

Meanwhile, if you are wondering why the stock market goes down almost every day and almost every week, Dr. Krugman opined in a New York Times op-ed yesterday as to why; the title gives his point away: "The Big Dither".

MSN Encarta defines "dither" as a noun meaning a state of nervous agitation or indecisiveness.

Clearly Krugman means the latter. From his op-ed:

Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. “While the cost of action will be great,” he declared, “I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.”

Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic (emphasis added), over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.

While the Hoenig speech is lengthy, please read CR's post on it, and please read the Krugman editorial, which is concise.

As predicted in this blog since last year, the Obama administration early on made up its mind to continue the Bush-Paulson-Bernanke-Reid-Pelosi-Frank plan of doing nothing other than throwing money at the banksters who caused this mess and have been extorting money in unbelievable quantities, threatening to huff and puff and blow the house down if they didn't get the money. But they are bluffing. Their wealth is in the house, too.

At least there are hopeful signs that more than some bloggers and academics are realizing that dithering is no policy and that the public has an interest that is opposite from that of the banksters.

Everyone knows that the stock market is poised for a sharp move in one direction or the other.
The end of the first phase of the bear market is in sight if President Obama would find an excuse for Tim Geithner to resign and persuade Dr. Bernanke to go back to Princeton, and bring in some Swedes and Japanese who resolved their banking crises a decade or more ago to advise the President and the new heads of Treasury and the Fed.

In the meantime, the more the new president focuses on healthcare, green energy, and war in Afghanistan, the more he looks out of touch. The economy is the only paramount issue, and the major problem with the economy is the parlous state of the large complex financial institutions. Be not fooled by early polls. Mr. Obama is actually trailing one G W Bush in popularity at an equivalent time in each presidency.

Adjusted for inflation now vs. deflation in 1929-31, the stock market crash to date is the worst in the last century for the length of the bear market to date (about 17 months). Sooner rather than later, Barack Obama will own this economy in the minds of the public.

Dither no more, Mr. Obama. Tear down these banks.

Copyright (C) Long Lake LLC 2009

Nightcap/Bloomberg Video Indicator

In a bull market, the trend is your friend on the upside, so that when good news breaks out, even if it is expected, the asset class goes up. Thus in an established or prospective bull market one looks for a combination of gloomy sentiment but a good chart and some good news for a buy point, and the upside can be great.

In a bear market, the opposite is true. Breakouts tantalize, get to or above key numerical targets or moving averages, but good news has only a transient ability to push the asset class higher, whereas bad news and gloom are no longer contrary indicators suggesting that the smart money should be buying a dip. Rather, the bear market got going for a reason, and bad news is taken as confirming that there is no reason to buy and a rally a good time to "lighten up". Currently that reason not to buy or to lighten up is that very bad things are actually happening in the economy in every part of the world that matters. Somehow it is hard to see that GE will have legitimately good news when it reports earnings tomorrow, no matter whether it "beats expectations" (that horrible, horrible phrase).

In that context, I will assert without detailing that the Bloomberg.com Video Indicator, a proprietary indicator that we use here, has finally shown some net negativity tonight. While it is nice to see this, it is only reflecting reality for a change, and has not gotten overwrought on the downside. So I ignore it tonight and believe it has no predictive value right now.

What may well have predictive value is that every bear I know who manages money was waiting for Inauguration Day or the signing of a stimulus bill (which might have been the same day, it was once said) to sell the November-January rally short. But as pointed out here about 2 weeks ago, the markets peaked once they realized that the economic and financial strategy of the new administration was one of continuity, not dramatic change. Frustrated bears who have not pulled the short-selling and put-buying trigger are waiting for a rally to do so. This makes me nervous about any rally in the short term.

Now we have the headline that Mr. Geithner, incoming Treasury Secretary, opined that China is manipulating its currency. Not that this is a surprising opinion, but many sources indicate that China is being hit very hard economically. How could it not, given that every important export market it has is collapsing? Yet Bloomberg warns that "Geithner Warning on Yuan May Trigger Renewed U.S.-China Economic Tensions". I'm not hyperlinking this article because I'm not going to read it. If you and I know that China manipulates its currency, then for sure China knows it, and therefore that knowledge cannot trigger anything, even a phone call from Beijing to D.C. China will in fact work with its customers to keep its factories going, but there's no easy solution to this problem. Naked Capitalism has been a great source of updates on the China story and is worth checking out daily if China is a special interest of yours.

With Japan's stock market picking up energy on the downside, lwith ots of bears on the U.S. stock market frustrated because they missed this current down-move, with proprietary services such as Lowry's getting very bearish recently after the 2-month rally, and with some bears such as the redoubtable Mr. Fleckenstein having publicly turned bullish, and with almost every economic headline looking scary (and some sugar-coated to look better than they are), it seems to this blog that the conditions are aligning for a further sharp move down to new lows in the market. (I hope NOT and recall that a year ago, when the SocGen news broke, it was reported that Jan. 22/23 is the statistical gloomiest time of the year for people's mood.) Calculated Risk reports real improvement in commercial paper spreads between high- and low-quality issuers, but numerous severe bear markets have existed without this spread being an issue. If stocks were to move to new lows soon on the back of new unexpected bad news (as predicted by Dr. Roubini as being in the cards) and therefore provide an almost unfair test to the nascent Obama Administration, and were to do so without the sort of financial crisis that the collapse of Lehman led to, then I would also predict that the global financial anxiety that has led to the Perth Mint being sold out re its gold production would ebb, and that the price of gold would then find that down is the path of least resistance. In other words, what might be happening is that the financial crisis that began 18 months ago is "in" the markets, but that a more traditional recession bear market is taking over. After all, with former blue chip bank stocks trading at $3 to $5 per share, further declines in them won't affect the averages much.

As Mish keeps pointing out, the reality right now, today and tomorrow, is deflation. There are essentially no bull markets anywhere. I can't remember a time in 30 years in the financial markets when that has been the case. The usual buyers of stocks on declines are in disarray, which explains why rallies have failed for a year-and-a-half straight. Governments hate gold and will not allow it to be money. Gold costs money to store and insure. It can be confiscated. Bond principal and interest can be confiscated as well via default or inflation. The most highly valued stocks in the U.S., such as Procter & Gamble, IBM, AT&T, and GE, either have large negative tangible net worths or trade so far above tangible net worth that they are valued like small rapid-growth companies with very high ROIC. IBM's main business is manufacturing earnings, often supported by treating its employees disgracefully and using every accounting trick in the book. So there is risk everywhere for all major asset classes. (Forget commodities.) Cash in the bank yields little or nothing; perhaps a 2% CD is a great risk-reward investment. One of these days the risks will be to the upside and against the bears. My heart wants to be bullish now. My head says to fuggetaboutit. The ultimate lows of this bear market could be much lower than anyone is talking about, even Nouriel Roubini.

Let's hope that GE tells it like it is tomorrow without playing IBM-like games, and let's hope that what it has to say isn't too bad.

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