Monday, March 8, 2010

A Year After the Bottom; How Are Things?

Ok, it has been two days now and I cannot get the song I posted last night out of my head!

I am a bit under the weather so this post may be a bit short short or appear scattered as I am a little low on energy.

A Year After the Bottom; How Are Things?
It was last March 9, 2009 when the bottom for stocks was set. I checked out my post from that day and I was surprised at how wrong I was going forward. Some great thoughts at the time:
-Earnings are both shrinking and unknown quantities
-Technicals are Bad
-The Market is playing chicken with the government
-Many market participants have said "No Mas!
-Deleveraging and lack of game rules mean many do not want to play
My final paragraph:
I am stunned at the current market levels. I am more shocked that we have yet to face "the moment" I have written about a few times. Denial still runs high, and many still think buying 6 months to a year will magically fix all that is wrong. That viewpoint will die off sometime this summer. Maybe then we will get some direction.

So based on where the market indices are today I was wrong on all accounts. Or was I?

That gets a bit tricky. What we have is a monster 70% moonshot market ride from the lows. The bulk of the move was accomplished by low volume futures gunning by a small number of large players and computers selling each other stocks. Today was the lowest volume day for many trading vehicles. Zero Hedge has a great graphic on the SPY aspect of this today. While earnings have been better than expected (what are the expectations based on? Reality?, LOL) cost cuts and cutting overhead (read as jobs) have been the drivers of gains not increased revenues.

So how are things a year after the big bottom? I would submit the only structural difference this March from last March is psychological.

Is the housing situation getting better? Maybe at the margins, but that mess is a slow motion wreck that will last years. Are all the losses by the banks finally done? Not if second liens get written off as "worthless" as Barny Frank would like to see. The jobs problem is not going away unless you are going to work for the census.

So what's the deal?

As I detailed in several posts (The Total Miss Pricing of Risk, Compression of the Risk Pyramid) the general accepted fact out there is that losses are a thing of the past because the US government will take them and pass them along to the taxpayer. Pension trouble? The Treasury will make good on obligations. State budget issues? No worries there either. What if mortgage rates rise and home prices and sales go down again? The FED will re-enter the market should things deteriorate. Across the spectrum the level of complacency is high. Even the Europeans are in on the game with packaged aid. Iceland is still sorting through their mess, but they don't count anyway.

I have been tagged as a "doom and gloomer" and I do not think that is an unfair characterization. I do tend to focus on the bad and not the good (or less bad less quickly as is today's norm) but I do tend to be more fact based in my thinking. I also do not have a bias per market direction. If it goes down, it goes down. If it goes up, it goes up. Many of the more optimistic types have a vested interest in a higher market.

In the end I think it boils down one observation. The markets right now are pricing in cheap money, practically forever. Participants have called the bluff of the government and now are operating with the full belief that they are covered 100% by a supportive big brother. Every day I see more and more articles which discuss, like it is no big deal, the desired policy for unlimited spending by the US government to engineer a Utopia of free money and low rates that the textbooks promise can be achieved.

On the surface everything looks better than one year ago. Structurally I think the situation is more dangerous than ever. Who backstops the US government in the end? We do, the taxpayers. If the V shaped recovery that will take us back to the bubble zenith does not materialize pretty soon I think the sort of tax increases that are going to have to happen will scare the living crap out of people. I am not convinced such tax increases will be possible politically. That leaves the printing press.

As I have been saying, the last hurrah is the US government and I would point you towards a Zero Hedge item just up that spells it out:
Is the Federal Reserve Insolvent?
Stop me if you have heard it before, Trillions in liabilities and about 54 Billion in cold hard cash as a buffer. Of course they can always print money and as we all well know no country that issues it's own money can ever run out of it!

Have I mentioned I like gold and silver here. Like, a lot.

Have a good night.


TomOfTheNorth said...

"On the surface everything looks better than one year ago. Structurally I think the situation is more dangerous than ever."

Spot On. Although there will be no mention of taxes until after midterms.

So then, what happens next?

Beware the Ides of March.....

S. Gompers said...

I would not call it a doom or gloomer...

A wise man always prepares for the worst, but hopes for the best. ;)

There are three types of people in the world.

Glass half empty's.

Glass half full's.

And dribble cups...

watchtower said...

I'm scared s***less at what I think is coming down the pike.

So far my family and I have made it thru round one intact, still working, still saving and still enjoying employer provided insurance.

Will I be able to say that after round two?

I honestly don't know, but one thing that I am sure of is that it's a coming.

"Once more unto the breach, dear friends, once more;
Or close the wall up with our English dead.
In peace there's nothing so becomes a man
As modest stillness and humility:
But when the blast of war blows in our ears,
Then imitate the action of the tiger;
Stiffen the sinews, summon up the blood,
Disguise fair nature with hard-favour'd rage..."

getyourselfconnected said...

what puzzles me is that things are indeed more dangerous but at this point it is all or nothing so nobody cares to worry. Nice set up.

As a scientist I like to look at the glass and say the volume of the glas is one half actualized, HA!

Gawains would be proud of your Henry V knowledge! I have a Battle of Agincourt sword, hand made by Windlass Steelcrafts (they no longer offer this sword), and here is a similar one:

getyourselfconnected said...

Added an addendum that is well worth a look. Echoes what I have been saying for a bit.

Dave in Denver said...

Good commentary tonight. Dude, we're not "doom and gloomers," we're "truthseekers" who are willing to dig a little to see what's really happening. It's not our fault that most people don't like what they see when we present the facts.

Here's the thing: I've been labelled a doom and gloomer since 2001. The problem with tagging me/us as such is that everything I/we warned about has/is/will happen(ed)

getyourselfconnected said...

I know what you are saying. Last week on a post over at Housing Time Bomb I was called basically an idiot for my views but when I put out the facts the posters never returned. I think I am right that risk now is higher than ever, not lower.

Dave in Denver said...

Risk is WAAAY higher. People who have a better track on the "inside" scoop than we do have told me as much. Some of these people are truly frightened by what they are seeing.

Stagflationary Mark said...

GYSC (& all),

"On the surface everything looks better than one year ago. Structurally I think the situation is more dangerous than ever."

Here's a bit of trivia that I put on my blog today (along with a chart).

On March 6, 2009 the S&P 500 closed at 666.79. That was the bottom. It closed today at 1,138.50. That's a 71% gain.

On December 23, 2008 WTI crude traded at $30.28. That was the bottom. It traded today at $81.87. That's a 170% gain. Ouch.

If both of those trends continue, we'll be rolling in prosperity again before you know it. Not.

watchtower said...


That sword looks like a bad a** business weapon if you know what I mean.

GawainsGhost said...

Is the housing situation getting better? I seriously doubt it.

Repo week last week, and I had 11 new assignments to work over the weekend. Only 1 was still occupied, 2 had already been rekeyed and winterized (in other words, secured prior to foreclosure), and the rest were vacant.

Of these, one I was already familiar with, as I had written a price opinion on it for the mortgage insurance company at the time of its last sale, less than two years ago. Well, it's been vandalized and gutted. Someone did a real number on this house, broken windows, missing doors, lights, cabinets, torn out sheet rock, stolen wiring and plumbing, destroyed kitchen and baths. Wonderful, it's basically a shell with exterior walls now. But surprisingly this is the kind of house that investors love. They'll buy it for say $30,000, put $20,000 into repairs, then sell it for $65,000 in a few months.

Another was a real piece of work. Lawn overgrown, junk in the yard, a partially disassembled wood deck, trash and filth throughout the house, missing lights, carpet, doors, mold in the kitchen. Beautiful. But, you know, a couple of thrown pillows, some flowers here and there, someone will buy it.

Fannie is now offering $4000 cash-for-keys to occupants for houses and $1500 for apartments, and special financing (3% down, closing cost assistance) for buyers. Freddie is offering home warranties (2-year guarantees on all appliances, water heater, a/c, and circuit breaker).

I just read about the new Obama plan to save the housing market. Forced short sales. The lender will get $1000, and another $1000 for a second lien if there is one. The occupant will get $1500 for relocation. A price opinion will be performed by a realtor or appraiser, which will not be shared with the homeowner. And if an offer comes in at or above the price opinion, the lender must accept it.

Oh, yeah, that'll work. Hi, I'm the government, and I'm here to help you. I'm going to give you $1000 to take a 50% loss on a loan that costs several hundred thousand. Right. They have a special word for that, insolvency.

sedentary state said...

>the V shaped recovery that will take us back to the bubble zenith.

This is the crux of what makes some of us negative. We don't want to go back to a bubble zenith willy wonka land economy.

Anonymous said...

What none of you "gloom and doom" idiots get is that timing is the most fundamental part of all of this and none of you, I repeat, none of you have gotten that part of it right.

I have no doubt that at some point, the entire US economy will collapse. None. Is it going to happen this year? I dont know. Next year? I dont know. 10 years? I dont know. 100 years? I dont know.

People have been forecasting the imminent economic collapse nearly every year since the 1870s. All those people are dead now. Same thing with the 1930s. Most of them are dead now too, likely going to their death beds clinging to the notion that the "big one" was just around the corner. What a terrible way to live.

I can choose to obsess about it for the next 1-2-20-40 years, or I can recognize I cant do a damn thing about it and get on with life. I choose to live. Some of you should think about doing the same.

getyourselfconnected said...

not sure how much you check this site out but I would say I and many readers are indeed having a pretty good time.

watchtower said...

Anon said:

"People have been forecasting the imminent economic collapse nearly every year since the 1870s."

Yeah...but it's different this time.

: )