Feverish speculators were ripped in half. Intoxicated investors are still nursing healthy scars. It’s like the movie Jaws. As you slowly start dipping your toe in after the last brutal market attack and you get ready for the spring swimming season here are seven clear and present dangers you need to watch out for:
ONE: Commercial Real Estate
It won’t be long now until major REITS (real estate investment trusts) come unglued adding further shock waves to American banks. Wells Fargo (WFC) is one of many that have commercial real estate loan exposure. The SRS (an ETF based on the Dow Jones real estate index) fell back down on Friday to $52.90 not far from its 52 week low of $48. Although this ETF does NOT deliver as promised and it is packed with some of the strongest REITS it is the easiest way to short commercial real estate. Simon Properties (SPG), one of its largest holdings, is on the trouble list. As the sector gets hit, the cards will fall. Don’t be lured by REITs' juicy yields. Get out before the masses head for the exits.
TWO: Insurance Companies
Guess what large insurance companies invested in? That’s right, commercial real estate. Now, if you lost your job and your house is getting foreclosed on, chances are you’ll look to either borrow from your IRA or cash in early on any life insurance benefits. Expect these unprecedented withdrawals to cause swift changes to your policy and the amount and ease you can access your cash. Just as the commercial real estate assets on these insurance companies' balance sheets are being hit, people will start pulling their money out en masse. I expect a run on insurance companies next. If you are a shareholder or bondholder of a weak insurance company cut your losses as the market rallies.
THREE: A wave of Corporate Bankruptcies
Despite recent credit improvements and bear market rallies, the carnage of big business is not over. What can we expect this year? A lot more banks, clothing companies, factories, homebuilders and smaller companies unable to secure financing will be forced to close their doors. General Electric (GE) is all that remains of the original 12 Dow Jones companies. Everyone else merged or went under. These bankruptcies will send millions more to the unemployment lines and leave banks reeling again as they take the brunt of the corporate loans gone bad. What happens when the bailout band-aid factory itself runs out of money? If you answered “it will just print more”, you are today’s winner. What if the projected and expected bank failures eat up the FDIC insurance money? No problem, Benjamin has an unlimited supply of fiat brothers and sisters.
FOUR: The Almighty Dollar
The dollar is a moving target. On one hand it strengthens as other economies' problems prove worse than America’s and the world scrambles to buy our currency to pay off dollar denominated debts. On the other hand, the reckless debasement of the US dollar as the fed buys billions in treasuries and Freddie and Fannie backed securities puts our status as the world’s reserve currency in jeopardy. Already Russia and China are asking that a new global currency be part of the G20 discussions. Countries including Iran and Venezuela have refused to accept dollars for their oil. Since 1973 when Henry Kissinger persuaded OPEC nations to accept only US dollars in payment for oil, the greenback has had major strategic advantages as the reserve currency. If this tradition ceases we not only lose a tremendous strategic advantage, but a sudden dive in the dollar would cause financial panic, crashing stock markets and oil (priced in US$) would fly above $100/barrel and gold and silver would go into the stratosphere. If this trend continues the dollar could suffer the same fate as Zimbabwe.
One creative newsletter writer referred to it as a frugalista fiesta. I’m talking about heaven forbid, millions of fashion divas bred to consume, wearing last year’s designer wardrobes again today. As horrified consumers watch hard-earned money disappear they will shop less, save more and in an attempt to lure them back prices will continue to fall. Christmas sales were the worst in four decades. With 70% of Americans living paycheck to paycheck and 72% of GDP making up consumer spending, that rainy day is here. As the unemployed use up the years of contributions made to unemployment insurance, the clouds are about to deliver with gale force winds a torrential downpour. For the growing middle class forced to take jobs way beneath them to feed their family, just about everything except food, clothing and shelter will now be considered an unnecessary luxury. The first tier of casualties will be ski holidays and high-end vacations. Private schools are already noticing attrition in applications. On the flip side as things deteriorate, those with cash will be able to negotiate once in a lifetime deals on houses, boats, jewelry, furniture and other luxury items. 2009 will be the year of the dramatic reduction in value in two to ten million dollar homes.
States and counties with looming tax deficits will be forced to further cut funds for fire, police and other community services. Good citizens, having followed the rules, now out of work for an extended period are required to go to extraordinary lengths to feed their families. Should this trend continue, muggings, household thefts, kidnappings, bank holdups and identity theft will sky rocket. Gun and ammunition sales have already increased dramatically. This will make it easier for folks to get food on the table when the cupboards run dry. Watch for an escalation of crime not only in the cities but also in quiet, safe suburbia. Hold on tight to your sense of humor and your “don’t worry, be happy” spiritual attitude. These will be useful tools to navigate the next decade.
SEVEN: Baby Boomerang
Years of conspicuous consumption, excessive waste and depleting natural resources will come home to roost along with their kids and grandchildren who’ve lost jobs and need a roof over their heads. So, dust off the guest room. As boomers retire en masse over the next several decades they will be net sellers, not buyers to fund their retirement and to afford the new extended family back underfoot. Just as the administration puts a floor under real estate, the baby boomers will be down sizing. Only a great re-inflation of our currency will send housing prices higher.
As the beaches open for the upcoming swimming season, be vigilant as you step into the water.
Stock position: None.