The End of U.S. Investing as We Know It? 21 comments
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There are more than a dozen reasons to throw in the towel. The financial system has descended into complete chaos. The bursting of the housing bubble has left a record 10% of homeowners "upside-down" on their properties. And 50 years of American materialism has come back to bite us on the proverbial rear-end.
(That was just 3 reasons that many are currently citing. I could have mentioned layoffs, recession, inflation, stagflation, gasoline prices, falling U.S. dollar and the contentious U.S. election.)
I mean let's face it. The Great Depression was a walk in the park. Compared to what's coming down the pike... some "thinkers" are declaring the end to everything we've ever known or ever seen.
Personally, I believe the doomsday prognosticators are very sad people. Being right... which is an INfrequent occurrence for the doomsday crowd... is a pursuit that yields them fleeting moments of happiness.
Fear, anxiety, pessimism and anger are the emotions that embolden these folks to say, "See, I told you so." And it all occurs under the guise of a "realistic" point of view.
What is realistic, then? For starters, the S&P 500 SPDR (SPY) is down roughly 19% from its October 2007 highs.
It's bad. It's bearish. But it hardly qualifies as apocalyptic.
Recession-based bear markets are a natural part of investing cycles. More often than not, stock assets begin falling precipitously long before recessions start and they recover dramatically long before recessions finish. (They tend to start climbing at the mid-point of a recession.)
In my humble opinion, stocks could fall from 19%-27% in total. This is the average for recession-based bears... and I have no reason to believe that it'll be worse.
But why exactly should we believe the doom-n-gloomers who believe that stocks will be worth 1/2 what they were at the October 2007 peak? Because this is the worst economy/worst catastrophe/worst country?
Traditional valuation of company stock strongly supports the notion that the asset class is quite cheap. Granted, valuations don't mean much when fear is in the driver's seat. Nevertheless, it is important to distinguish the 2000-2002 stock market bubble (the S&P 500 SPDR (SPY) did fall 50% from its March 2000 highs) from the 2007-2008 recession/credit crunch.
The glass is not completely empty in 2008. In fact, it may actually be half-full.
For example, while the media focus incessantly on the recession, nearly all of the prominent economists polled in the Wall Street Journal concurred that the recession would be mild. That directly contradicts the idea that we're heading for a "depression" to rival the days of our grandparents.
What's more, the Federal Reserve Board is aggressively easing interest rates. While the negative effects it is having on the U.S. dollar are well-documented, the near-term reality of relief to consumers and small businesses can not be ignored. Rate cuts do not work for up to 9 months, but they do get into the system, and they do provide for attractive borrowing prospects.
It doesn't stop there. Federal government fiscal stimulus is coming in tax rebates. Moreover, bailouts of some kind will likely be afforded to some homeowners as well as financial companies. U.S exports are surging because of the weak dollar. Agriculture is expanding rapidly. And while, housing and auto may be contracting, the other 90% of the U.S. economy is still expanding.
What's the famous line from the movies? "What we have here is a failure to communicate." Simply put, troubles are being amplified tenfold, whereas positive news is being disregarded.
Of course, that's the nature of fear. And that's why the markets are struggling as badly as they are. But opportunists from Warren Buffett to institutional money managers do not stay sidelined for long. They know... we all know... that it is hugely rewarding to "get a little greedy when everyone else is fearful."
Wanna know when it's going to get better? Keep an eye on the Dow Jones Transports Fund (IYT). This is the breakout barometer that I will be watching closely.
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This article has 21 comments:
Americans need to come to grips with the fact that you can't borrow your way to prosperity. The past six years was make believe and the only way we can move forward is to give it all back and start over.
Street operators always make money. They probably do make it for themselves, selling the unsuspecting their packaged crap loans that the banks don't want on their own books. Trees don't grow to the sky.
www.leap2020.eu/GEAB-N...
heh, check out the second graph. in the end, all the misdirection in the world won't make this go away.
Do you think Bernanke has gone ultralong on financials??
1) Declare the U.S. economy a national emergency
2) De-regulate offshore drilling and ANWR
3) Add 1 million barrels oil into strategic reserve
4) Discontinue oil commodity trading (through a series of means) for 60 days
5) Treasury subsidizes energy to the tune of $150 B (nuke plants, biodeisel and coal liquification)
6) Treasury makes $50 B available to Small Business Administration and portion to commercial banks with healthy balance sheets.
We do this, we will get recession, flat growth periods for 2-3 years over the long haul. The U.S. would restore global investor confidence and coincidentally, global good will considering the ripple effects of our financial meltdown effect 2/3 of the globe. Give the customer what it wants. Energy. First in the U.S. then as an exporter. We don't do this, I am fully prepared to provide for family and friends armed to the teeth in the foothills of the mountains while most Americans eat yellow government cheese and wheat pasta.
The global investor needs wants a safe place to put their money. They still trust the U.S. Treasury (barely) because We the People guarantee the note. What better place to invest and rebuild shattered global confidence then right in our own back yard?
Declaring the U.S. economy a 'national emergency' will re-establish consumer confidence and trigger a run on U.S. Treasuries, no?
1) There is no recessioin.
2) We might have a recession.
3) We are definitely in a recession.
4) This is the worst recession we've ever had.
5) Gee, that wasn't so bad.
We are deleveraging. What the investment banks had on their books, the money center banks had but didn't show. We had leverage in excess of 13:1, which is about what you'd have with 8% tier one capital.
The disdained source of most of this leverage is the CDO, mainly mortgage-backed (CMO), which has been written down far in excess of the anticipated loss on the investment. If everyone walks away from his house, that paper is in trouble. If they don't, there'll be some recovery on the writedowns of that paper.
Housing prices are down. The people who got screwed are the people who bought at bubble prices. The people who bought their homes 5 or more years ago made a fortune before the fairly modest 10% fall we've seen to date. Don't you remember how many people were bragging about "how much money I've made on my home"?
People who mail in the keys won't be able to buy a home again. How many people are willing to put themselves in that position? I'm betting that it will be surprisingly few, since there are incredible tax benefits to owning a home. And where will they live when they leave their homes? They'll have to rent. Forever.
Someone said, probably Hank Paulson, that we need to eliminate investments that are too complex to understand. There are people who use the financial system to enrich themselves, which is great. Then there are people who abuse the financial system to enrich themselves. And we have allowed that to happen by failing to rein in the institutions that allow them to do that.
As the Big Thinker wrote above, we have abused the trust that people around the world had in our financial system. Shame on us for allowing our parasites to infect the rest of the world.
BTW, that is enough for a couple months of imports (12 million per day). So, if they would just USE/SELL a million barrels a day for a few months, we could cut our imports by about ten percent and the world price of oil would PLUMMET.
Of course, Bush's friends would lose money. That would suck for them - and THAT is why he won't do it.
And a note to TAS, Republican presidents of late have been totally irresponsible on deficit spending. To the extent that we are now the greatest debtor nation in the world, totally dependent on other nations of uncertain intent, Republicans should be prepared for some occasional bad press. And incompetent Repubs willing to serve as errand boys for Wall St. are going to get criticism for their unsavory friends.
Remember, Republicans are against big government because they don't know how to run one.
Maybe we are halfway (or a third of the way) through the grieving process. What's interesting to me is the fact that at the half-way point, that's the low-risk entry point for investing long. You can't wait until the "gee, it wasn't so bad" stage to make money.
Perma-bears, and perma-bulls, you bothe need to get a grip!
You must not be getting the same information I am getting. BANKS ARE NOT LENDING!
The rates have been cut, but the rates the general consumer sees haven't been moving. On top of that, only those with spic and span credit are getting looked at.
Now why might that be? Could it be that perhaps that during the credit orgy for the past 5 years that they may have over-leveraged themselves and now they are desperately trying to shore up the books to reduce losses?
You have also glossed over record credit card, mortgage, and loan defaults. You say 10% are upside down in their homes, but you neglect the percentage of those who have simply lost their homes or are in the process of doing so.
Aside from BSC (which crumbled), just about every major bank has lost a significant percentage of income due to this mess. They may be still afloat (for now), but their taking some hits. As time goes one, expect more losses.
Then we have the super Fed coming in and bailing of BSC with tax-payer dollars. They basically had to PAY JP to buy BSC after JP looked at their books. How many other companies are sitting on top of a rapidly depreciating pile of paper? How many more companies will th Fed bail out with tax-payers cash instead of letting these horribly mismanaged companies pay the consequences for their actions?
It's fine to be a happy bull when there is reason for it, but come on. The only thing preventing a much needed correction is the Fed hopping into the markets. And all they're doing is making things worse.
To IThinkBig:
1) Declare the U.S. economy a national emergency
Exceptionally bad idea. In fact, allowing direct government intervention into the market is an idea that borders on the imbecilic. Let's not repeat the mistakes of th great empires in past (or suffering countries of present times).
2) De-regulate offshore drilling and ANWR
The ANWR does not hold a significant stockpile of oil. By significant, I mean less than a decade's worth, and that keeps getting shorter as consumption increases. The Canadian tar sands contain MUCH MUCH more. Drilling the arctic would do little to ease anything. Besides, you're not fixing the problem. You're fixing a symptom. The problem is our dependence on oil. The only way that's going to change is by eliminating cheap oil.
3) Add 1 million barrels oil into strategic reserve
And what good would that do? Los Angeles alone burns though that in a day. Even the so-called strategic oil reserve wouldn't keep this country running longer than a few months at our consumption rate.
4) Discontinue oil commodity trading (through a series of means) for 60 days.
Again, that would do absolutely nothing. The oil market moves with or without US commodity trading. The prices will change whether people are trading it on th market or under the table. At least on the market you can see the prices.
5) Treasury subsidizes energy to the tune of $150 B (nuke plants, biodeisel and coal liquification)
That's all well and good, but where do you think this money is going to come from? The wonderful budget from Bush already puts us about a half-trillion in the whole for this year alone. On top of that, at our current expenditure rate will bankrupt our government in a couple of decades.
There is no money for subsidies unless it's being borrowed. That economic crapfest stimulus package? That's funded by China. The government had to borrow money to send out those checks.
The government shouldn't subsidize anything until it can get it's spending under control, or we are really going to be hurting in the not to distant future. See the US comptroller for more info.
6) Treasury makes $50 B available to Small Business Administration and portion to commercial banks with healthy balance sheets.
Again, where are the funds going to come from? Borrow it? And how does one determine a bank with a healthy balance sheet? All assets look solid and good on paper until the bills come due. That's what got us into this mess to begin with.
Government intervention is not the answer, especially when your own government's fiscal responsibility is highly questionable (What's a $10 trillion dollar debt between friends). Companies and people were irresponsible. Let them reap the rewards.
~X~
Stalin. Now there's a fellow who knew how to run one.
The instruments of short are far more lethal than instruments that help you go long. The capacity of ultra shorts like SDS, DXD to draw last ounce of blood left in the bulls is immense. A bull is a bear at the same time. Those who in this august thread feel that a bull is never a bear fail to comprehend that GS made its monies from short on ABS.
A week last 'Tuesday sophistication of bull-bear relationship can be well imagined that a hedge fund that bought huge qty of 40 puts on BSC was borrowing from BSC to short them. Imagine borrowing a stiletto from the lover to plunge in the heart of your lover.
GS and LEH earnings yesterday should have been much worse after 9 months of continuous bleeding of the financial sector.
XHB, XLF have suffered immensely to the extent that as if US economy is in depression not even a severe recession. The illiquidity of the CDO’s, ABS and CMBS kind of paper is deeply discounted; all this is sign of capitulation where market news takes far higher toll than it is warranted but that very selling is what differentiates USA from Japan, where inaction can help linger a problem whereas ask question later shoot first led the fed to sell BSC at 2$’s to JPM, later on it was evident that the price was far lower than what shareholders expected or deserved, in this kind of environment the snap back rally of yesterday was just a sweet reminder that how low and badly markets have been discounted.
Commodities are higher for a reason, it is not that demand and consumerism globally have fallen off the peak, depression and disasters also recessions everyone loves are based on falling demand, commodity prices are high because a full 1 billion middle class consumers have added on to the global scene from Latin Americas to India to China. BRICS are the countries who are commodity rich, and need lot of infrastructure development; they are loaded and ready to spend on basic amenities like power houses, roads and health. The master economies of the world and mature companies are set to take advantage, lower $ would mean they are more competitive than Europe.
Rising consumerism benefits USA the most, MCD’s, Starbucks and Pizza Huts are products that these new billon consumers will add on to their diet, unhealthy it may be but ‘in’ it is. This is considered as a sign of affluence.
A decade ago Greenspan use to worry about USA as oasis of stability, the speech of irrational exuberance also contained that USA cannot be the last banker of resort to everyone from LTCM, to USSR to Latin America or Asian debt contagion. Today most of these sick economies are great possible customers of mature economies, we are at a cusp of huge move forward, the pessimists will keep distorting the mantra and demanding ‘death dance’ and full capitulation, however one thing only will decide the fate of the markets or recession or death of $, is new consumerism and new commodity rich countries part of the global free trade or they are behind the Iron curtain, hte one thing I am sure about h
Is that these new consumers are very much a part of the scene and are looking ot buy on GOOG, but latest INTC 6th generation chips and are avid users of face book and all that is western produced, the best advice they get for their infrastructure development is from likes of BSC and GS or LEH, mark my words that bull is a bear and bear is a bull, those who will not be able to change colours and tie themselves with old school definitions will be crying hoarse, markets is for people who are optimistically poised and understand the full dynamics of the global realties.
The ability of the market to punish excesses and exuberance mercilessly and overnight is the strength of this market. BSC 9.4% shareholder was turned from a billionaire to a pauper overnight, is this not what we all want to punish those who make mistakes, and are we not addressing the fine print of moral hazard more than adequately, now when these funds want to kill everything in sight than comes the bank of last resort and take those ‘papers ‘which back nearly the other 99% of the American population houses and they do not have exposure to ‘ninja loans’ or subprime problems..
Lot of carry has been unwounded but yen at 96 with possible 0% rates on the horizon and still no consumer demand will be hard to appreciate any further.
However, the results for the three months ended Feb. 29 beat consensus forecasts that have been knocked down by credit fears.
The glass is not completely empty in 2008. In fact, it may actually be half-full.
The company reported income of $1.56 billion, or $1.45 a share, compared with $2.67 billion, or $2.51 a share, earned in the year-earlier first quarter. Net revenue fell 17% to $8.32 billion, the company said.
Analysts had, on average, forecast a quarterly profit of $1.03 a share as well as revenue of $7.19 billion.
Morgan Stanley said net income included the results of Discover Financial Services and Quilter Holdings Ltd., which were reported as discontinued operations.
Morgan Stanley took mortgage-related trading net write-downs totaling $1.2 billion during the latest quarter. Additionally, it booked net losses of $1.1 billion tied to marking down the value of loans as well as closed and pipeline commitments.
Investment-banking revenue was $980 million, which included advisory revenue that rose 19% from a year ago to $444 million, Morgan Stanley said.
The company said its asset-management business faced "challenging market conditions" punctuated by losses in real estate and structured investment vehicles, resulting in quarterly losses of $161 million before taxes.
"Despite turbulent markets, Morgan Stanley achieved strong performance across man y of our businesses," said Chief Executive John Mack in the company's earnings release.
"While many of our businesses are facing challenging market conditions that we expect to continue in the months ahead, we are satisfied with how Morgan Stanley navigated the ongoing market turbulence," the CEO added.
The company also said Morgan Stanley's board approved the appointment of a new chief risk officer, Ken deRegt.
The co mpany said it has not bought back any stock so far this fiscal year.
Morgan Stanley's shares rose more than 17% during Tuesday's market rally, sparked in part by the latest Federal Reserve interest-rate cut.
Also Tuesday, Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc. both reported quarterly profits that declined more than 50%. However, both sets of results came in ahead of expectations. See full story.
But I do enjoy reading the doom and gloom scenarios on blogs like this. They provide the same kind of thrills, chills, and adrenalin rush of a B grade horror film. That reminds me - Gotta pick up some popcorn on the way home tonight.