Eight Reasons the Market Is Going Down

He is Sprott On - Dollar Destruction

One of the folks I like to follow is Eric Sprott. He does not do a blog or seek a lot of publicity, but he has had some of the best performing funds in Canada for many years running, so I like to occasionally go to his company's site (Sprott Private Wealth, LP) to read his monthly thoughts and those of his colleagues. Indeed, his group for at least the past year and a half has actively been recommending investing in gold and it just so happens that gold is setting records recently, so they hit that one on the head. Don't believe me, look at the articles by John Embry at the Sprott company site. He has for a long time been the biggest gold bull around, and apparently for good reason.

Here is a link to Eric Sprott's September report on the U.S. dollar. Eric makes a very persuasive case for the dollar being toast. It seems we have been actively building our debt to the level we cannot hope to support even the interest payments in the future, especially when you throw in unfunded Social Security and Medicare obligations, so we have no reasonable alternatives. Bernanke is simply going to need to keep that printing press running full time, which will eventually and, probably, inevitably, lead to the dollar losing its status as the reserve currency. The value will continue to fall as well. This is no doubt why many are still recommending gold as a place to put your money.

Now, of course, I must add a caveat. Sprott has undoubtedly a lot of investments tied to the value of gold and the devaluation of the U.S. dollar, so keep this in mind in reading his thoughts.

And as Eric points out in his October report, the foreign appetite for U.S treasury purchases is decreasing sharply such that the Fed is becoming "the" market for treasuries, which is dangerous indeed.

(Update: Save your comments about how the dollar index was strengthening today, up .4% as I write, and how gold is down. It does not change the long term fundamentals discussed above.)

Survey Says . . . (cont.)

Just the other day I noted how people continue to survey economists for their predictions and economists continue to be too optimistic. So much so that on several recent forecasts not a single surveyed economist was sufficiently pessimistic to predict the correct result. Well, it happened again on the housing numbers for new home sales. Forecasts ranged from 412,000 to 460,000 and the actual result was 402,000. Time to wake up and smell reality.

Thursday we get government preliminary figures on third quarter GDP growth. The median economist forecast is 3.2%. I cannot wholly dismiss the impact of the cash-for-clunkers program or the first time home buyers incentive, but I think I am going to go out on a limb here and say 2.6%. Of course I should not ignore the fact that this will be a government preliminary number and some believe (you can guess where I stand) that the government cooks the books on the numbers. Nonetheless, 2.6% is where I stand. Feel free to add your vote. The winner will get special mention in my next post.

That Stock Thingy

I am shocked and dismayed. After a global 68% run in stocks and seven months of straight increases in the market we may - please, say it isn't so - have a month that ends down just a tad. Not a significant tad so far, but a tad nonetheless. How can it be?! The market can actually go down again?

I love this quote in this Bloomberg article that "The doubt and pessimism just won't go away." Seriously, we narrowly avoided a total financial meltdown seven short months ago and this is what this supposedly knowledgeable - quotable - person has to say. Unless Bloomberg is shooting for comedic relief, they need to be quoting better sources.

So back to the question of why the market after seven months of going up, some months significantly, might actually now have a slightly down month. Heeellllooooo! Why shouldn't it. Let me count, just a few of the ways (hold on to your hats):

1. Home building by any standard has well exceeded usual norms, compared to population and income, over the past several years - significantly. We are just now getting back to levels that are more sustainable, but we have the inventory overhang, increasing unemployment, existing housing sales and foreclosures, and multiple other problems facing home builders. Did I mention shadow inventory? If you do not know what that is, it is basically banks and homeowners who want to sell - foreclosure properties or otherwise - who are holding homes off the market. Look it up as some estimates of this shadow inventory are staggering. I refer you to Calculated Risk, the best site I know on real estate issues, both private and commercial.
2. Debt, debt and more debt. I refer you to one of my favorite blogs, Sudden Debt, that focuses on this issue. To put it short, under Greenspan and Uncle Ben our debt to GDP ratio climbed from 1.25X to 3.25X. Stop and think about that stat for a moment. And it does not include the incredible debt load the government has added this past 18 months. Boy is that a wakeup call. How did we do that?
3. I have written a lot lately about the financial bastards that brought us here. While I need not say more, I feel I must. The problem now is moral hazard. These institutions - according to numerous reports I have read of late - are returning to their risk taking ways. They are most certainly returning to rewarding officers and executives with handsome pay and bonus programs, despite these same individuals nearly causing the financial meltdown of the entire world. How can this be so soon - like less than a year - after we teetered on the edge of financial Armageddon? It is because the government stepped in with little to no conditions. And I suspect this was largely due to us letting wolves from the industry (who took on key government jobs, e.g. Paulson) guard us (taxpayer) chickens. You reward, or save, idiots for their idiotic behaviour and they will not only repeat it but build upon it. We folks, are building a much bigger bubble. In a few years you can quote me on that. And hey, I am not even an economist. No one surveys my opinion.
4. As suggested above, the government is making a substantial number of wrong moves. For one, they need to take apart the too-big-to-fail institutions. Instead they promoted them getting bigger and now we do not know what to do with them. I had the same advice in my very first blog a year ago, linked above, and stand by it. Take them apart and let the officers and shareholders share the pain. Do not support them at taxpayer cost. Now I see a lot more other commentators, including many who know more than me, giving the same advice.
5. Let me mention commercial real estate. One stat I read this year is that we have in the U.S. roughly 50% more retail space per person in this country than the second closest country. If you believe private real estate was overbuilt, you have not seen anything yet. Commercial real estate is still not near a bottom and it is incredibly overbuilt. We could be looking at a decade or more before this area of real estate comes back to where it belongs.
6. And did I mention adjustable rate mortgages (ARMs). I read a report this past week that over 90% of the option ARMs are yet to reset. These are the private mortgages where the borrower can choose to pay just interest or even less. There is some sense that the low rates now will help, which they will, but when you are resetting from interest only or less to interest payments and principal payments on an increased balance, then low rates are not going to save you. A lot of these will reset in 2010 and 2011, so we will see.
7. Shipping (Baltic dry index), trucking, port activity, shipping rates, and so on and so forth are all pointing to economic activity being negative. Not diving like we were earlier this year, but not rebounding.
8. Unemployment still increasing, not as fast but still increasing, and this has run on effects on retail spending, real estate and several other areas. As a side note I have to mention that a number of the bottom line improvements for companies this past quarter have been largely due to cost cutting (like layoffs) as opposed to increased sales. This does not spell recovery.

I could go on and on and in posts to come will do so, but the bottom line is that fundamentals are pretty much the worst they have been in my life time. Debt, government and private, continues to be my primary concern and you can easily see how many of the other areas noted above are closely tied to and - feeding or being fed by - that situation. Please feel free to add your thoughts, but I still have trouble sleeping at night - mostly because of my kids needing to deal with the stuff we are leaving for them.

Comments

[chris coonan:]

it will be a tough couple of years

the smoke screen being put up by the Wizard of Oz will crash down, and the reality will sink in soon enough....

there is no place like home. too bad so many people lost theirs.

Oct 29 05:53 AM

[Roger Knights:]

"Thursday we get government preliminary figures on third quarter GDP growth. The median economist forecast is 3.2%. I cannot wholly dismiss the impact of the cash-for-clunkers program or the first time home buyers incentive, but I think I am going to go out on a limb here and say 2.6%."

I think part of the reason for the market's decline this week has been low whisper numbers on the GDP. So a lowball guess makes sense. I'll guess 2.8%

BTW, what ever happened to the GNP?

Oct 29 07:23 AM

[Joyful Alte...:]

Re #7: Driving the interstates has become amazingly more tolerable for a bad reason: many fewer trucks.

Oct 29 08:29 AM

[thiazole:]

Funny that the GDP data had already been released before you posted this (3.5%). No guesswork needed - it was good.


On Oct 29 07:23 AM Roger Knights wrote:

> "Thursday we get government preliminary figures on third quarter
> GDP growth. The median economist forecast is 3.2%. I cannot wholly
> dismiss the impact of the cash-for-clunkers program or the first
> time home buyers incentive, but I think I am going to go out on a
> limb here and say 2.6%."
>
> I think part of the reason for the market's decline this week has
> been low whisper numbers on the GDP. So a lowball guess makes sense.
> I'll guess 2.8%
>
> BTW, what ever happened to the GNP?

Oct 29 10:02 AM

[Old Trader:]

That's assuming one has faith in the government numbers...it'll be interesting to say what sort of revision we get, down the road.


On Oct 29 10:02 AM thiazole wrote:

> Funny that the GDP data had already been released before you posted
> this (3.5%). No guesswork needed - it was good.

Oct 29 10:52 AM

[David Van K...:]

Several banks and brokerages released new, lower estimates for the GDP an hour or two before the number itself was actually released, and they were all wrong. Was this a big PR game, hoping to be able to say they saw "it" coming? Well it backfired, and they sure look like idiots now.

Next up: A flood of articles and TV appearances analyzing the GDP. Some will say with great confidence that the number is wrong (it is in fact a first estimate, due for revisions according to normal practice), that it has been manipulated, the government is lying, Ben Bernanke personally just picks the number, etc., anything to justify a negative outlook, reconcile their incorrect forecasts with the actual number, and maybe to support conspiracy theories too.

Oct 29 11:01 AM

[Craig Brown:]

Okay, I went out on a limb that the government sawed it off. I wrote my prediction yesterday at my blog and it was only posted by Seeking Alpha today. I have no control over when it appears - or if it appears - on Seeking Alpha.


On Oct 29 10:02 AM thiazole wrote:

> Funny that the GDP data had already been released before you posted
> this (3.5%). No guesswork needed - it was good.

Oct 29 12:03 PM

[thiazole:]

I believe recovery revisions usually end up going higher (ie, this number could go north of 4% when the revisions are done).

Whether or not the government numbers are a farce or not is a debate for a different thread - I think they are consistent, and that is what is important (ie, even if they are a farce now, they always have been and the market has adapted to it). What is important for investors is how the market will react, and so far (as predicted), the market likes what it sees.

On Oct 29 10:52 AM Old Trader wrote:

> That's assuming one has faith in the government numbers...it'll be
> interesting to say what sort of revision we get, down the road.<br/>

Oct 29 12:09 PM

[thiazole:]

I was talking about Roger Knights. I know there is a delay to when you post an article and when it shows up. Both of your estimates were reasonable IMO, just no reason for Roger to make an estimate.


On Oct 29 12:03 PM Craig Brown wrote:

> Okay, I went out on a limb that the government sawed it off. I wrote
> my prediction yesterday at my blog and it was only posted by Seeking
> Alpha today. I have no control over when it appears - or if it appears
> - on Seeking Alpha.

Oct 29 12:12 PM

[thiazole:]

A big thing that the more serious pundits will claim is that this is a "one time" event and that 4th quarter will come back only barely positive because surveys point to a weak holiday season. They are forgetting two things - 1. inventories (I think a real attempt will be made this quarter to stop inventory contractions, which alone would be a significant addition to GDP) and 2. the fact that according to the ECRI, holiday spending surveys that come at the end or right after the end of a recession pretty much always grossly underestimate actual spending. They have documented this phenomenon and talk about it often.


On Oct 29 11:01 AM David Van Knapp wrote:

> Several banks and brokerages released new, lower estimates for the
> GDP an hour or two before the number itself was actually released,
> and they were all wrong. Was this a big PR game, hoping to be able
> to say they saw "it" coming? Well it backfired, and they sure look
> like idiots now.
>
> Next up: A flood of articles and TV appearances analyzing the GDP.
> Some will say with great confidence that the number is wrong (it
> is in fact a first estimate, due for revisions according to normal
> practice), that it has been manipulated, the government is lying,
> Ben Bernanke personally just picks the number, etc., anything to
> justify a negative outlook, reconcile their incorrect forecasts with
> the actual number, and maybe to support conspiracy theories too.

Oct 29 12:19 PM

[Mad Hedge F...:]

kjd Those of you who heeded my GLOBAL RISK ALERT on October 13(click here for report at www.madhedgefundtrader...) missed the top of the market by six trading days and 10 S&P points. I’m sorry; I’ll ring the bell more precisely next time, with a more accurate date and time. Since then, technical sell recommendations have been breaking out like acne at a junior year prom dance. You are all now out of your positions or love them so much that you are willing to carry them through another crash. At the risk of hubris, even PIMCO’s Bill Gross has jumped on the bandwagon, although I doubt he needs my help ascertaining the direction of stocks and bonds. The way everything turned tail and ran at exactly the same time was a complete vindication of my theory that a tsunami of liquidity was raising all boats, completely unjustified by the underlying fundamentals. Long time readers of this letter know the only short I have advocated this year was in long dated Treasury bonds through the TBT. But the better than expected Q3 GDP of 3.5%, obviously fueled by temporary government programs like “cash for clunkers” and the first time homebuyers tax credit, may be presenting one of those pristine, “sell on the news” moments. Will this data finally give us our long awaited double top? Fading rallies in stocks is looking more enticing by the day.

Oct 29 02:23 PM

[User 397195:]

What about the swine flu? If this thing picks up do you really think people will be hitting the malls. I work in Toronto and already can see the impact this is having. Commuter traffic on the trains have dropped significantly.

Oct 29 03:58 PM

[Old Trader:]

thiazole,

I'd wager a big chunk of the bump came from Cash for Clunkers, which is now history. Perhaps the proposed extension of the home buyers' tax credit might help, but I'd suspect that wouldn't work its way through until the following quarter.

The additional extension of unemployment benefits might help some, but if I were the one drawing such extended benefits, while I'd be grateful, I sure as hell wouldn't be rushing out to buy a new flat screen TV, or booking a Caribbean cruise.

The current scenario reminds me SO much of trying to pump air into a tire with a hole in it. If ya pump hard enough, you MIGHT get the rim off the pavement, but you're sure as heck are not going very far down the road.


On Oct 29 12:09 PM thiazole wrote:

> I believe recovery revisions usually end up going higher (ie, this
> number could go north of 4% when the revisions are done).
>
> Whether or not the government numbers are a farce or not is a debate
> for a different thread - I think they are consistent, and that is
> what is important (ie, even if they are a farce now, they always
> have been and the market has adapted to it). What is important for
> investors is how the market will react, and so far (as predicted),
> the market likes what it sees.
>
> On Oct 29 10:52 AM Old Trader wrote:

Oct 29 07:24 PM

[jstratt:]

Sometimes you have to consider alternative points of view. It can really make a defference in investing. Back in my 1st year out of college in 80 gold was on a tear and peaked at 890 or something close. Silver peaked at approx $52 and Oil was higher.

I was working in the Oil tool industry and we fell down laughing when we heard mention of an Oil glut. Everyone knew that the only way it could go was up. A few month later the company was almost defunct and Oil would drop to $9 or less.

I am not suggesting Oil will drop today below last years lows. What I am suggesting is that you should not believe all of the gibberish about the dollar being dead. Of gold going to the moon etc.

Just realize that capitalism works because governments around the world make it work. They realize that it creates a better political environmet at home and a higher standard of living throughout the world. A move to the G20 means the 20 most economically important nations will work to create a better economic world in the next year.

In the meantime many knuckleheads will postulate about how the world or the dollar or a country will fall off a cliff. Diversify your assets and invest. If the fools convince you to bury your money in the back yard you are the loser. Investing in treasuries at 0.5% is the equivalent.

I offer this opinion for what it is worth to you. Contain your fears and contain those around you who are scared. Scared money is always a loser.

Oct 29 08:28 PM

[thiazole:]

You should read this Edmunds analysis of cash for clunkers. I think it will surprise you: www.edmunds.com/help/a...

Also, in your analysis of the tire with the hole in it, where is the air going? Money doesn't just vanish. Inventories continue to crash and companies will eventually need to restock, and that adds to GDP.

On Oct 29 07:24 PM Old Trader wrote:

> thiazole,
>
> I'd wager a big chunk of the bump came from Cash for Clunkers, which
> is now history. Perhaps the proposed extension of the home buyers'
> tax credit might help, but I'd suspect that wouldn't work its way
> through until the following quarter.
>
> The additional extension of unemployment benefits might help some,
> but if I were the one drawing such extended benefits, while I'd be
> grateful, I sure as hell wouldn't be rushing out to buy a new flat
> screen TV, or booking a Caribbean cruise.
>
> The current scenario reminds me SO much of trying to pump air into
> a tire with a hole in it. If ya pump hard enough, you MIGHT get the
> rim off the pavement, but you're sure as heck are not going very
> far down the road.

Oct 29 11:28 PM

[Old Trader:]

thiazole,

Re: the Edmunds analysis you were kind enough to send along; it reminds me of the stuff Lawrence Yun of the NAR writes. Next time I'm in the market for a good used car, I'll be sure to scrutinize The Economist, too.

As far as my leaking tire analogy, the "air" is going into risk assets. I differentiate between the "market" and the "economy" and feel there's currently a "disconnect" which will be rectified.


On Oct 29 11:28 PM thiazole wrote:

> You should read this Edmunds analysis of cash for clunkers. I think
> it will surprise you: www.edmunds.com/help/a...
>
>
> Also, in your analysis of the tire with the hole in it, where is
> the air going? Money doesn't just vanish. Inventories continue
> to crash and companies will eventually need to restock, and that
> adds to GDP.
>
> On Oct 29 07:24 PM Old Trader wrote:

Oct 29 11:58 PM