Another Acronym…TTPU

This week the U.S. government announced a new bailout measure, the “TALF”. Under the Term Asset-Backed Securities Loan Facility, announced Nov. 25, the Federal Reserve will extend up to $200 billion in non-recourse loans to holders of asset-backed securities (ABS) backed by consumer and small business loans in a bid to free up the ABS market. The Treasury Dept. said it will extend $20 billion in funds under the Troubled Asset Relief Program (TARP) to support the initiative. The TARP will support the TALF that will hopefully support the economy….

Also on Nov. 25 the Fed announced it will initiate a program to purchase up to $100 billion in the direct obligations of housing-related government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and up to $500 billion in mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae to ease the strains in the mortgage market. 

I have another acronym to add to the mix,  TTPU- “Time To Pay Up”.  As the “all out effort” is unfolded, I am left to ponder what our economy will look like 2 to 5 years down the road. Like an otherwise healthy individual who suffers from a sudden, debilitating heart attack and survives, the economy will likely be subdued for some time. The major challenge that the Fed will face coming out of this downturn will be controling very high inflation, if not hyper inflation.  When we begin to see daylight in the economy, and we will,  the fed will have to suck liquidity out of the system quickly to avert this hyper inflationary scenario and that, in my estimation, will dampen any ambitious growth expectations.

The Treasury and the Fed’s answer to the crisis so far has been to print more money.  That may very well be the only short term answer to this crisis and the only course of action that will ensure the survivability of our economy. My concern is how will we pay for this? Well, we have two choices. The first is to sell more debt to the world and mortgage our future to the Chinese. (some say we have done that already!). The second option is to tighten our belts as a nation. After extinguishing this great fire,  we need to be sure we refill our water tanks…As Americans, we have to reinvent ourselves to reflect the changing global realities. We must find our way back to being a nation of innovation and production. The “Time To Pay Up” needs to come sooner rather than later.

The Great Bait and Switch Of 2008

The rescue package approved for Citigroup this weekend is the latest effort by the Treasury and the Fed to stem the tremendous losses incurred by the banking giant (or former banking giant…) and ensure its survival.  By purchasing $20 billion of Citi preferred shares, the nearly 100 year old financial institution has effectively been nationalized. The market value of Citigroup at Friday’s close was around $27 Billion and it has lost nearly 60% of its value since the original investment by the treasury under the TARP program of $25 Billion just a few weeks ago.

Anyone else see a problem here?  We as taxpayers, to date have “invested” $45 Billion in Citi plus taken on tremendous exposure to their losses. The original measure proposed by Secretary Paulsen, one I thought would have been helpful in clearing financial institutions balance sheets and stimulate lending, has been scrapped without an cceptable explanation and instead what we got is a direct investment in these mismanaged financial institutions without any guarantees that these recipients will actually use these new funds to resume lending and shore up their consumer businesses. Something that is sorely needed to turn around our economy today.

The original idea to create an exchange to trade these troubled assets has also been put in the back burner and still today, we have no real idea how much of these toxic assets are out there in the balance sheets of these banks. Indeed what was originally supposed to have been a measure to stem the financial system meltdown, has become a concerted effort by the Treasury to ensure survival of some financial institutions and destruction of others. Isn’t the free market supposed to accomplish that? The “anointed” ones have used the TARP injections to buy out weak players (Wachovia and Washington Mutual) not necessarily a bad thing, but absolutely not what was proposed to Congress.

Market Update 11/21/08

The markets are experiencing some very severe attempts to breach levels set over a decade ago. The S&P and DOW futures are pointing to a higher open after the major selloff yesterday and the big question in traders mind is what is going to happen in the next 60 days prior to the Obama administration taking office? Will the Bush administration step up to the plate again to calm markets by approving a bailout of the automakers? Will Citi survive this latest run on its business?  I would recommend letting the markets test the lows before going long here.

The troubling aspect of the Treasury’s lack of follow through on the purchase of illiquid mortgage assets, as was originally proposed,  is also having a detrimental psychological impact on the market. Questions are being raised as to the depth of the crisis in lieu of Paulsen’s about face. The VIX settled at above 80 again yesterday and with today being November options expiration, it should be an extremely volatile session with potential for huge up and down intraday movements.

 We will be looking at the market action at around 750 on the S&P and 7500 on the Dow. If we get a good bounce from these lows set yesterday we may be forming another short term bottom and may be able to entertain some ranges for the upcoming expiration cycle. In these markets fundamental analysis really takes a back seat to technicals as everybody knows the fundamentals point to a market that is very “cheap” but in the absence of leadership, short term  trading will rule the day and long term investors will continue to sit on the sidelines.

Regulatory Overhaul Is A Must…

 Good common sense regulation is at the root of successful Capitalism. That statement is contradictory to many who believe capitalism is about little to no government intervention and oversight of markets. Well that is not the case. The lack of regulation is as much a risk to capitalism as too much regulation. The key to restoring our place as the safe haven to the world’s investment capital is to have just the right amount of common sense regulation of global financial markets. Too much regulation and you choke off growth and send players overseas in search of better terms and without enough regulation and you send the same participants overseas in search of more stable financial markets.  I see this balance as crucial to any long term recovery.

 For example, what would happen if NBA games were played without referees? You would have a messy game with a lot of interruptions and heated discussions. On the other hand what type of game would you have if there were 5 referees on the court all at once? Much the same, a lot of interruptions and a lot of heated discussions…

Obviously, part of the risk in ANY free capital market is the innate ability of some individuals to bend the rules to their advantage no matter how much regulation is enacted. That will never change and is part of human nature. What we can do is enact strict and enforceable penalties to those who break the rules of the game and put the whole system at jeoperdy!

 Is short selling a problem? absolutely not! The problem lies in the current system of oversight and regulation that allows a Fannie Mae and a Freddie Mac to reach such levels of leverage and overall mismanagement. The problem lies in allowing a 70 trillion dollar credit default swaps (CDS) market to go unregulated!

In my estimation, the biggest long term challenge our markets face from the recent turmoil is the loss of investor confidence in the transparency of our financial system. Retiring Baby Boomers for example, who had been told to invest in equities through their retirement in order to bolster growth in their portfolios to account for potentially living  35 to 40 years in retirement have all but given up on the markets.  You can bet those dollars will not find their way to our stock markets any time soon unless we enact tighter regulation of global markets.

Market Week Ahead 11/16/08

This week should continue to be a financial “roller coaster” with several bits of economic data which will point to continued weakness. With stocks down roughly 35% year-to-date – as measured by the Dow 30 – has Wall Street already factored in the worst? I believe so and there isn’t much surprise left on the downside. The market has basically priced in the worst case scenario or at least very close to it.  We continue to expect high volatility this week and markets bouncing around the lows of October and resistance points already established. Earnings from Dell, Target, Lowes and Home Depot should add to the instability as well as continued layoffs from the likes of Citigroup.

On Tuesday and Wednesday expect a lot of attention to be paid to the PPI and CPI numbers. Inflation, although an after thought in the current economic crisis, should begin to show some up ticking and expect some statements from the fed regarding inflation concerns later in the week. On the positive side, the market is heading into a seasonably favorable period and fund managers may begin to bottom fish for some bargain and counterbalance some of the prevailing “doom and gloom” in the markets.

Are Credit Cards Next To Fall?

Many experts believe the next shoe to fall in the economy is the credit card industry.  With American Express becoming a bank-holding company this week in order to get low-cost funds and share in the $700 billion bailout pool, it’s clear that even traditionally resilient industries like credit cards are feeling pressured. The average rate of credit card debt charge offs has been held to 5% a year over roughly the past 10 years and many analysts are predicting defaults could go as high as 10% in 2009 reaching $18.6 billion in the first quarter and $96 billion by the end of next year.

As with the auto industry in Detroit, some of the credit-card industry’s current problems have been years in the making. Over the past decade, U.S. households have been loading up on debt, with credit-card balances rising by as much as 75% since 1999.   Meanwhile, home equity, the biggest source of wealth for most families, has been drained by the mortgage crisis. The question of greatest concern to credit addicted Americans ( and America for that matter) is where to  turn to for a loan in times of emergency? As saving rates have plummeted over the past several decades, America has increasingly become a nation living paycheck to paycheck. If that paycheck isn’t there ( ie: high unemployment) we may be in real trouble. Job creation is the key to our economic recovery much like during the depression of the 1930’s.

I do not believe the credit card industry will implode as the subprime mortgage industry. Issuers of credit card debt have been very aggressive in the past year in lowering lines of credit to distressed customers and raising overall rates and fees in order to mitigate the effect of higher default rates. 2009 should be a very bad year for the industry perhaps one of the worst years on record, but barring a total collapse of the economy, the credit card industry should weather the storm.

Market Week Wrap up 11/15/08

 Wall Street ended the week with stocks plunging, recovering and then dropping again as investors absorbed another round of bad economic news. The Dow Jones industrials fell close to 340 points. The Commerce Department reported that retail sales dropped by the largest amount on record in October as consumers cut back on spending in the wake of the financial crisis. Retail sales fell by 2.8%  last month. Again not unexpected news but enough to dampen any thoughts of an early 09 recovery.

Selling in advance of a Saturday hedge funds deadline contributed to the market’s volatility, and some pullback was expected following the big rally Thursday. Bernanke said during a speech in  Germany, that he would work closely with other central bank official to try to alleviate the global financial crisis and left open the door to more interest rate cuts. The general consensus from market analysts is that 2009 will be a particularly bad year for the economy even though the stock markets may see some sustainable rallies toward the middle of 2009 in anticipation of a recovery in 2010.

 We caution that we are still in a very difficult market for “Buy and Hold” investors as this has become increasingly a trader’s market.  We continue to believe that markets will be range bound from the lows set in October to roughly the 9600 level on the Dow and 1050 on the Standard and Poors 500 with volatility remaining at elevated levels for some time.

End of “Buy and Hold”?

Lately market experts and investors alike are asking if the days of buying and holding good quality stocks for the long haul are over. After all, this generation of investors has been hit extremely hard not once but twice in 8 years. This decade will go down as the decade of the short term trader and I believe the days of the ”Buy and Hold” strategy may very well be gone if not forever, at least for the foreseeable future… It is important to note that I say this not in doubt of the power of America’s economy to rebound, we all know this recession will pass, but in Americans general mistrust of financial assets, especially stocks, after this crisis.

Trust is a very important component of “long term” investing. To employ a long term investment approach in equities, or any other investment class, you must believe that tomorrow (whenever tomorrow may be, 5, 10, 20 years down the road) stocks will generally yield better returns than other types of investments (ie. Real Estate, Cash Equivalents etc). Not only must you believe that the stocks chosen in the strategy perform well but you must believe that the entity entrusted with the custody of these assets performs well…Trust in the fact that funds will be administered prudently is paramount. A conservative investment needs to behave like a conservative investment not like a speculative hedge fund. Just ask any holder of Fannie Mae and Freddie Mac stocks (and bonds) if their trust has been shaken and you will surely get an ear full…

Fundamentally, transparency of publicly traded financial companies must improve. I don’t believe anyone doubts that. The concern is that regulators will go too far in demanding disclosure that it will hurt equity investors as much as it may help them. For markets to be attractive long term investments there has to be a premium paid to risk takers for taking a risk on some “unknowns” . Take away the unknowns and you take away the reward for the risk. Bottom line here is that we are witnessing a major shift from long term buy and hold strategies to more managed short term strategies much like our own. Until the markets find that important balance between under and over regulation and finally earn the trust of long term investors again, stick to a “Buy and Sell” short term trading strategy.

Market Week Ahead 11/09/08

The Dow Jones finished the week down 4.1% in a week that again saw tremendous volatility in stock prices. Economic data hit the markets hard with unemployment jumping to 6.5% and close to 1.8 million jobs lost so far in 2008. Other manufacturing and housing data added to the concerns that the economy is slipping into a deeper recession than previously estimated by most economists. With that being said, the market from a technical standpoint was predictable and we successfully tested support and resistance levels.

 

Our assertion that the markets are going to be range bound for the next few weeks is reinforced every time our resistance and support levels are tested successfully. The S&P 500 had a very hard time at crossing the 1000 level as as automatic programs kicked in every time time the bulls made a run at it. On the down side the Dow also showed resistance at 9000. Also very importantly, the market on Friday shrugged off the terrible earnings announcements from Ford and GM showing that traders are willing to jump in at the 8600 level on the Dow and 900 on the S&P 500.  It is an extremely strong sign of a market finding a base when terrible economic news is discounted with a rally. Again we are not sounding the all clear here by any means but it seems that we are getting a bit more clarity from the markets.

 

This coming week is light on economic news and we should see the VIX pull back again to the mid or upper 40’s. As the outcome of the elections fade a bit from traders minds, at least in the short run, we should begin to concentrate on retail earnings and the outcome of the U.S. auto industry crisis.  If we indeed hold these levels next week we may setting up for a technical bounce towards the end of the week and into next as the 10 day moving averages are attempting a cross of the 30 day on both the DIA and the SPY.

6.5 % Unemployment…

The Bureau of Labor Statistics of the U.S. Department of Labor released a report, which showed that non-farm payroll employment decreased by 240,000 in October and the unemployment rate jumped to 6.5%, from 6.1% in September. Economists had been looking for a job loss of 200,000, with the unemployment rate climbing to 6.5%. For the first ten months of the year, the country has lost an astounding 1.2 million jobs and over fifty percent of that has come in the last three months.

We have seen jobs losses with every successive month this year and so far, not only do we not see an end in sight, the problem is actually accelerating. According to the Labor Department, we saw continuing job losses in manufacturing, construction and several service-providing industries, while the health care and mining industries add jobs. With the 0.4% jump to 6.5% in the unemployment rate, the number of those that are unemployed climbed by 603,000 and the 6.5% unemployment rate means there are now 10.1 million people without jobs. The unemployment index is, as far as I am concerned, the most important indicator on the health of the economy. These figures today although not unexpected, certainly do not bode well for the economy.  

It is important to note that the stock market as a discounting mechanism has priced in a  recession and although these numbers look bleak today, the markets are reacting positively. Why? because it is not an unknown that we are in recession and recessions mean higher levels of unemployment. Earning have been down but not far from market expectations. Generally, markets can deal with bad news as long as the news is not unexpected. I reiterate my assertion that the bottom we made recently is an intermediate term bottom and, barring any unexpected events, should hold for some time.

Market Week Ahead 11/02/08

As if the national elections alone weren’t enough to stir some anxiety in the markets, we have three very important economic indicators this coming week to add to the fray. On Monday, the Institute for Supply Management will report on how the nation’s manufacturing firms fared in October. The report for September showed that manufacturing firms contracted much faster than expected, signaling that the economy had entered recession territory. For September, the ISM index fell to 43.5% from 49.9% — the sharpest one-monthdropin the index since 1984. Then on Friday, the government will report the change in payrolls and the unemployment rate for October as well as the Federal reserves report on consumer credit, both which are expected to highlight a much slower economic slowdown than previously expected. We may very well give back some of the gains of the recent few trading sessions.

Although the markets have come off recent lows strongly, there are obviously  nasty headwinds for the markets to deal with before we see any sustainable rallies- we are still in a very dangerous bear market and caution should be exercised by traders and investors alike.  Although it is doubtful from a technical standpoint that the markets will retest the October lows , it is not entirely out of the question.  Something to watch out for as well is the Nov 15th deadline for redemptions from most hedge funds. The markets are anticipating very large draw downs and even though most hedge funds are prepared for these huge redemptions it may still surprise the markets in the short term.