It's Not a Crisis, But a Chaotic Calamity

Overnight globex markets plummeting in the wake of JP Morgan Chase (JPM) buying Bear Stearns (BSC) for $ 2/share, pennies on the dollar... this was to us the normal and logical expectation. To others it says that Bear was insolvent, but anybody who understands knew this already. Now people will awaken to realize that Legg Mason (LM) private capital's head and others have lots of money in this debacle; and again the Enron culture (where employees have too much of their holdings beyond required, in the firm they work for) are caught up in a demolition.

Bear Stearns sold as high as $170/share when we turned bearish on financials overall early in 2007. We remain quite bearish on all major financial holdings, and think bottom-fishing, though less risky than a year ago, remains premature. Our posture was signaled by the Merrill Lynch (MER) sale / short at 91, and Bank of America (BAC) around 54. These are not as yet low-risk buys in our opinion, as the senior market continues to have considerable downside irrespective of interim rebounds. This is because almost always there is the consideration of a washout (unless it's the actual crash, and the majority of the market is way ahead in the race to 'zero'). The average stock is off much more than 20% in the year-old broad bear distribution as per onging ingerletter.com forecasts and monitoring, and unsustainable rallies such as last summer or fall's sucker romps, that the globalist extremist radicals so heartily embraced. We may nevertheless be setting up for a solid short-covering rout. We're just not quite at that point of deliniation yet, though stay tuned.

Liquidity problems are more widespread.Confidence will erode further and stabilization for the short-term developing is feasible, but the development of a sustainable uptrend does not seem to be logical. While not discounting a temporary rebound - as we have noted, not so much because of psychology, but because internal market structures that can set that up are as outlined still below here - we continue to envision intermediate if not long-term outlined support thereafter.

So why the plummet Sunday night and Monday morning?

a) More people now broadly grasp the extent of calamity risk as they awaken, after most non-oil, non commodity stocks have already declined by - what? - double or more the proportion of the averages? This could start a washout at least temporarily;

b) Now the debate is whether the reported quarter-point Fed cut Sunday night is all, or there is more to follow on Tuesday. This brings up the ridiculous speculation of 'zero' U.S. interest rates - we're already there in 'actual' inflation-adjusted relationships - which is not bullish on the short-term, but may be for the ultimate long-run.

c) The previously announced 'emergency' economic crisis meeting Monday in Washington (notably ahead of the Fed meeting) is also being reflected by Sunday night's markets, as this is the first response to that Saturday statement.

d) Who's possibly next in line? Lehman's (LEH) CEO cut-short an Indian trip to fly back to New York urgently Sunday, after a personal telcon with Treasury Secretary Paulson. Obviously the concern is the crushing end to Bear Stearns sparking a domino effect, which is what ingerletter.com has warned of with respect to derivatives (and SIV / CMO / CDO), holdings that are not investment grade, and in-house 'net capital', which is still not defined in clear straightforward terms to the public.

As this evolves, people will finally realize that former bubble markets like Florida and California and so on, will not find a stabilizing bottom until inventory liquidation accelerates. That process has not seriously even begun to start, hence the level for that bottoming remaining problematic. We continue to hold to our original forecast that the entire bubble (and maybe then some) is given back, which means housing prices return essentially to 1998-2000 price levels, or more in the event of a full-blown depression. Replacement cost arguments are nonsense, since replacement cost will not be the only relevant consideration and since commodities and labor will all be at considerably lower price points, if this evolves in the way things are currently pointing.

That also is part of how and why all cases of inflation such as we've gone through, denied by nuts and government officials alike, precede deflation. Therefore the return on money is absolutely of nominal consideration versus capital preservation, as argued in 100% correct perception for the past year. That inflation yields to deflation is proven by home values now, stock valuations of an ongoing nature - they are not cheap unless one is foolish enough to look in the rearview mirror - and by other values coming down over time, including New York real estate, commodities, and, eventually, oil and food too.

The globalist extremist radical anti-Americans who talked of a permanent plateau of prosperity or saying 'Cash is trash', will eat those words, because 'Cash is and will be king' in one of history's great debacles, as forecast here in the year-end 2006 outlook calling for a major distribution of historical import in 2007's first half. There will be no decoupling by the 'new' emerging world. We may have to talk of submerging again, but you already know how we view all of this.

Trust was lost by those of us who 'got it' a year ago, by the reasonably savvy months ago, and by the masses only now. But that doesn't automatically ensure a bottom, though the market will indicate that proclivity. The risk-valuation system will, as I said last spring, not be what it was a generation ago. Counterparty surveillance will be 'suspect' for years to come. Self-regulation will dominate, and that is a function of the loss of trust in others.

The balance of this for global finance means turmoil, chaos, and, in the intermediate term, not necessarily a weak dollar, after the current crash is completed of course. Bank 'net capital' requirements were and are the problem, and will be reset. You will not see a replication of this kind of profligate 'lend if they have a pulse' mentality for many years, if ever. I would think at least for another 30-50 years, at which time there could be a new speculative frothy period of robust over-enthused gains. But that is good in a sense, allowing Wall Street, housing and banking, to revert from an entitlement or a casino (depending on leverage) mentality to the investment strategy.

We continue with our macro bearish stance and have disputed all the 'valuation' arguments for buying. There is no change, though we may attempt to scalp extreme weakness (a couple shots to the downside) if so-inclined tomorrow for our intraday S&P members. We do emphasize, though, that short of a miracle - it is Easter week after all - all rallies will remain false and abortive. But we could get enough negativity going to set-up short-covering pops of significance in theory. More needs to be seen first though.

The actual economic end to this and the next most-wrenching phase of the bear market dating from the early 2000 euphoria (interrupted by the called-for reflation bull move of 2002-late 2006/early 2007) should be completed sometime ahead of the economic end over the period(s) ahead.

Finally, for over a year, every ingerletter.com nightly report has contrasted the coming debacle with the 'railroad-bond junk debt bubble of the 1880's, and the 'panic of 1907', expected to become the 'panic of 2007' and of course 2008. The pendulum response between euphoria and despair continues to evolve as projected. Chairman Bernanke knows that he inherited this mess from Chairman Greenspan, who now reflects more realistically on the mess he helped engineer by ignoring his own economists, who in 2002 warned where this was leading.

This Fed Chairman is doing what he can, which is sustain the banking system. There is no hope of buttressing the mortgage area. That's just talk and merely noise, that calms the panic among the masses as disaster evolves. As said a year ago, rather than bread and circuses, ask Americans for sacrifice. Buy war bonds, not Chinese consumer-goods, and be America(s) first. This is not isolationism, but common sense, after the global extremists led us to, if not over, the edge of ruin. The time for playing high probabilities (we outlined) in oil, gold, foreign currencies is aging. Patience and keeping a short-leash on your cash has been our advice for over a year (or alternatively the guideline sell/short of Merrill Lynch at 90 or Bank of America at 54 as an example). Others finally agree, but that's irrelevant now that the bulk of the damage has already been done.

Now comes the drama, after which the curtain goes down on center-stage. Public policy will be revised. We are honored to have been able to more-than-generally outline how this would evolve over the year-plus just past, and look forward to steering the ship through remaining icebergs, while others are only now beginning to test the water temperature. The outcome will not be restriction on market flexibility and capitalist competition - though the global protagonists will say so - but the restoration of those realities that were destroyed by the absence of trade policies, financial market oversight, and complacency on the part of Congress, as well as the former Fed, during a time intended to be a reflation that would allow us to repatriate our debts with depreciated dollars.

Ironically that will occur, but with more domestic pain that was necessary if the regulatory bodies had tempered the greed and ratings inequities that, by definition of structured to fail paper, was inherent within the 'game.' This game was embraced by all too many, though not all, major financial entities, and it still has fallout risk to pensions, municipalities, and actually, most tragically, puts our Republic at some great danger. And that doesn't omit the rest of the world.

Comments

[User 164723]

Wow, I wish I understood more of what he just said.
Through this whole thing playing out, I keep hearing that guy in my head saying "Lost another loan to Di-Tech". I hope those who let this happen pay dearly for what they've done to the entire country for their short term greed.

[Alamedan]

Having worked and saved for many years I have become, due to age and disability, a reluctant capitalist--a very cautious and therefore financially intact investor in equities. The triumphalist hootin' and hollerin' of free market fundamentalists (Kudlow, Bush et al) have always made my skin crawl. Perhaps their days of honoring themselves will soon be over.

[Link Z.]

The answer to this recession is to "Buy American". Until and unless Americans are willing to buy American cars, and American products again, the world will not want them either! We need a new tax depreciation law. Only goods made at least 51% made in America get any tax depreciation. Those made 100% in America get an even faster rate of right off, and are labeled "100% Made in U.S.A."
We have the answer, it's us..All 320 million of US. LZB

[User 164801]

Some excerpts from ConsumerReports:
"Reliability remains a forte for most Japanese brands. Twenty-three of the 33 models in our “most reliable” list are from Japanese automakers."
"Only three domestic models made the Most reliable list: the Ford Fusion, Mercury Milan, and the two-wheel-drive Ford F-150 with the V6 engine. U.S. makes, however, account for almost half the models—25 of 44—on the Least reliable list. There are 13 from GM, 6 from Chrysler, and 1 from Ford."

So you can get a double-bonus. First buy an American car, then you can pay an American for the extra service it needs.

You can buy a GM, agree with them that global warming is fiction, improve a US company while hurting the environment, or just buy a Prius.

I hate that American companies give me these kinds of choices.

The "American sacrifice" should be for American execs to given lower and/or performance-based salaries to deliver higher-quality products. And tax benefits could be boosted by achieving reliability (and for goodness sake fuel efficiency) improvements.

[Zulu]

I agree entirely that Americans need to stand up and be accountable for their deficit. The solution is in being export driven and consuming local and not imported product. Think of your own retirement fund. Are you supporting those companies that you hold in your portfolio?

[Tony Soprano]

Articles like this are getting long in the tooth. Most of the publisher's to this site are bearish.

The above piece is long and confusing. In my opinion, the short of it (no pun intended) is that we will prevail. We have the best government in the world. Every time our govt has intervened in some crisis it has worked and that goes all the way back to 1914.

Jim Rogers will have to take a sleeping pill tonight. He is so angry at the Fed. The weak dollar will mean that China, (Jim Rogers dream country) will sell fewer goods to us. That will slow their economy. China already has high inflation. Commodities dropped like a bric today. (no pun intended) China could burst. They have problems, in Tibet, more pollution than septic tank, very high inflation and more govt intervention than Al Gore, Ralph Nader, or Ted Kennedy could dream up in ten thousand years.

Gartman today on Fast Money said he is now long of JP Morgan – a bank stock. For those of you who don't know him he has been short of stocks and long of gold for a good while. But he has reversed his position.

[gene inger]

point of clarification: when the curtain rings down on center-stage, we will be basing out at a BOTTOM of the decline in my view; not starting a downtrend; barring a worst-case scenario.

We were bullish from 2002-early 2007; but called it a 'reflation' and thought they squandered an opportunity to 'square matters' early-on. Just as the upside then was unsustainable, so hopefully will be the downside. Please understand I didn't mean to be complex, as we simplify all this with 'bullet points' for our members. They know our goal is to see the Fed intervene and engage wisely, as belatedly they are doing.

The cost of 'moral hazard' is not as bad as the alternative. And it was the NY Fed, not the FOMC, that handled this. The NY Fed is in-charge of market integrity; not interest rates. We have argued that this is less a liquidity issue (among banks) and more a solvency issue. Solvency is part of market integrity; not monetary policy.

Our members know that the next major (not just trading; and in that area we went long around midday for a trade not enduring reversal) strategy shift will be completing our year-plus of bearishness. I hope that clarifies our thinking a bit. However, if these engagements by the Fed(s) falter (we are on thin ice) there is a more somber type alternative. Heavily in cash (most in 20 years for over a year now) we are looking for entry not exit points, but only as the market gives a message that the coast is clear(er). The perfect-storm still roils.

thanks for the discussion... I appreciate the thoughts..

[hattryx]

let the capital markets play out. stop interfering. do what's best for you and the invisible hand will work. how can you be so stupid? bail out x, bail out y, bail out fat freddie and loosey fannie. screw em all. if somebody has the the money, let them lend. let colleges lower tuition and homeownership cost less. where is the friggin problem?

[300mph]

awesome - "how can you be so stupid?", apparently you are completely clueless to the ravaging effects of deflation. So, let's restate, how can YOU be so stupid?

[No Moss]

Gee, I feel like it's the end of the world, Mr. Inger. Must be a market bottom. Yeah, it's a big problem. We have a big economy. Therefore, we have big problems, along with big successes. Our economy is shifting as we react to a changing global landscape.

Get used to it. We'll wring out the excesses and then real estate in California will go back to being impossibly overpriced, or maybe, hopefully, just a little bit less than impossibly.

It's not the end of the world, or even of the Republic. Greed took over for a while. As usually, the perps got a few handslaps, a few heads rolled, a few big guys lost a bundle. Mostly, the public lost, either directly or by bailouts.

But life will go on. The ship is still sailing, maybe a little bit slower right now. But we're scraping off a lot of barnacles, and we'll go faster in a little while.

Unregulated mortgage brokers? Bad idea. Hedge funds with leverage and black box "quant" machines? Why did we think those would work longer than someone's big paycheck? CDOs in banks' hands but not on the books? Real bad idea. 30-1 leverage at investments banks? Even worse. It was greed, OK? Billion dollar paychecks for hedge fund managers, bonuses and kudos on Wall Street and in bank board rooms for taking too much risk. We are scraping those barnacles off. They'll be back, but for the time being they're being scraped off.

We'll do a lot better when we have actually have to work for a living. And Mr. Cayne can go back to playing bridge.

[hattryx]

deflation? really? that's what you come up with? houses and education are now commodities? ravaging effects? back to the books with ya.


On Mar 18 01:41 PM 300mph wrote:

> awesome - "how can you be so stupid?", apparently you are completely
> clueless to the ravaging effects of deflation. So, let's restate,
> how can YOU be so stupid?