David White

S&P Could Go Back to 750

The market speak says that the market rallied today on expectations that the FASB, which meets tomorrow, will announce they are going to ease mark-to-market accounting rules. If they do this, this will keep there from being so many large write-offs on Q1 earnings (i.e. it will mean Q1 earnings should be much better). If the FASB does not announce a change in the mark-to-market accounting rules tomorrow, the markets are expected to sell off strongly. It is unclear exactly what will happen on a positive announcement. It is also unclear exactly what such a positive announcement will be. It seems unlikely to me that the FASB would completely do away with mark-to-market. I am not sure what a compromise position will be. A compromise position or no change do seem like the most likely outcomes though.

S&P Could Go Back to 750

Home sales numbers were up today. Some people must be thinking that is great news!!! What they may not realize is that foreclosures are still up even from last year. When the home sales are bank foreclosures at far reduced prices, that is not a good thing. It means more people with ARM's, especially balloon payment ARMs, will not be able to refinance their homes at good interest rates (or at all). This means more homes are now under water (i.e. people owe more than their home is worth). This means still more foreclosures n the near future. This is not good news. A 19% year over year decline in home values is not good news, even if the number is skewed by foreclosures. Eventually the markets will wake up to this fact. Banks should not be rallying today. This is not a good news day for them!!!

S&P Could Go Back to 750

Tomorrow Initial Unemployment Claims and Factory Orders are reported. Given the job numbers today. One might expect the Initial Claims to to a little worse than expected tomorrow. Given the troubles at companies like BA, CAT, the automakers, INTC (and other semis), Semiconductor Equipment makers (orders are off about 50%), etc. one might expect the factory orders to be worse than expected. Perhaps the market is just waiting to catch up with itself tomorrow??? Could it be giving a head fake up before going down??? Or is it just making hay before the actual earnings data starts coming out?

S&P Could Go Back to 750

I tend to agree that caution is warranted. The ADP job loss numbers this morning were atrocious. They beat the estimates by almost 100K (i.e. more job losses than expected). Then too the S&P500 has a big oil stock component. The petroleum stocks went up by almost 3 million barrels this week. Yet today we see both oil and oil service stocks well up. The market rallied more than 200 points off its lows of the day.

The auto sales numbers couldn't have helped anything. Ford sales were down more than 40%. Toyota's were down more than 30%, etc. This just isn't good news in any sense or form. Yet the market is up.

The only explanation I can see is that the brokers are bidding it up before the earnings season begins in earnest. Then there will be no denying the numbers.

I look for the earnings season to be a sharp slap in the face. I am completely at sea to explain the current behavior. Perhaps Obama in the headlines is pushing the markets up???

Is It Time to Buy? What History Shows

Of course, for the US economy to improve long term, we have to lessen our dependence on foreign oil, foreign autos and imports in general. I guess we would have to save our auto industry to be able to do this, wouldn't we?

Is It Time to Buy? What History Shows

Actually the Chinese economy is a little bigge than I thought. The 2007 figures are approximately:
US $13.8 trillion.
China (from Wrold Bank) $5.33 trillion.

This has likely narrowed somewhat in 2008.

Is It Time to Buy? What History Shows

One further thought: If China felt they needed a $500+ billion stimulus package to prop up an economy several times smaller than the US economy, the US would need a package many times this to prop up its economy, and the US economy is not growing at 8% per year currently. That does sound really bad doesn't it.

Is It Time to Buy? What History Shows

Further the layoffs we have been seeing mean less spending by consumers and businesses. This means an even lower GDP, as spending accounts for 2/3 of GDP. Now predicted to be falling at more than 6% this quarter. This figure seems highly likely to worsen next quarter. Also the layoffs will likely worsen the home loan default situation. People without jobs often cannot pay their mortgages. This has the potential to be a huge cascade of bad news.

Is It Time to Buy? What History Shows

Today for instance, the market has put in an intra day triple top at about 90.8 on the SPY. This is substantial overhead resistence, even if it is just today's data. Following the candlestick theory, etc., this likely means the market will go down in the short term. Adding to this, the market has remained in approximately the SPY 88 to 92 trading range for the last 4 days. It seems likely to move away from the trading range in the near future. If the news is any indication, the direction is likely to be down.

Is It Time to Buy? What History Shows

Of course, there is still more. The commercial real estate market looks to be in serious trouble in the near future. The likely large number of defaults on these loans could put a severe strain on the banking system (and credit availability). Commercial real estate loans are generally much shorter term loans of 3 to 10 years, so some significant portion of them will be coming due in the near term. Plus commercial real estate value is generally based on its ability to consistently generate money. If the both tenancy and rent prices are down, the commercial real estate will technically be worth much less money. The owners will then have a very hard time getting replacement loans for their commercial real estate (most commercial loans are short term with a balloon payment at the end). It seems likely there will be a lot of defaults in this area in the near future. Banks will again lose a lot of money. No doubt this is why people are now calling for a greater stimulus package. Still this also makes it likely that there will be more business failures, more CDS problems, etc.

Is It Time to Buy? What History Shows

Further the markets seem to be trading in a little bit of a channel at the moment (SPY 88 to 92). I am not hearing any good news, except perhaps the automaker bailout and the stimulus package. Even in the case of the stimulus package, I keep hearing that it needs to be even bigger than originally planned. Now people are saying it should be over $1 trillion. If this happens, it may help a lot. However, it seems unlikely that the bill to be enacted in January will be this big. Rather it seems the CDS issue is more likely to begin rearing its ugly head. Since I cannot find news which would lead me to believe in a breakout to the high side, I am inclined to believe there may be a breakout to the low side in the offing in the near term. Perhaps OPEC's likely actions to curb production will be the eventual trigger for this? Perhaps the magic Dec. 15 date for some defaults and some hedge fund closures will be the trigger? Perhaps the market will ignore all bad news (and go up)? The last is a little hard to believe. Perhaps Wall Street has gotten back in. Now they want to get everyone else aboard before they sell again for a profit? Only time will tell.

Is It Time to Buy? What History Shows

The last two days seem to have been an oil mediated rally. The oil selloff was probably overdone. However, if oil rises, that is likely bad for most US stocks. It is certainly bad for the overall US economy. Therefore I cannot buy into the idea that the overall market is rallying on that basis. A lot of the news is bad. The bailouts are getting bigger. We may see states going to Washington to be bailed out soon. Certainly California has a huge deficit, and it is in trouble. Many other states are too. Plus there is the CDS bubble which has yet to burst. With all of the bailouts, failures, and near failures, plus the loans to the emerging economies (which are dependent on exporting their goods) there is just too much potential for a CDS major catastrophy. I am leaning more and more toward this view. These CDS's did not really exist (or at least to no where near the extent to which they do now) in prior recessions, so we likely have not seen the effects big failures may produce due to these vehicles. I am not looking forward to it.

Citing history is great. It is important to remember the mistakes of the past. But it is also important to remember that someone is always inventing a "better mousetrap". There is always some new wrinkle which you also need to factor into your calculations to have a prayer of being correct. You don't seem to have done this. The market definitely seems to be ignoring it. Some of the loans to emerging market countries may soon be in default. These will trigger CDS activation conditions. If the Senate doesn't act quickly the CDS's pertinent to the Big 3 may soon begin to be felt. This whole thing could cascade again. Credit could freeze up again. I don't like what I am seeing. We could be a week or two (or a month) away from a major meltdown.

Buffet and company may not have seen in the past what may occur for the first time in this market crash. They are likley still not buying in at the high, so they may still be okay in the long run. However, if you are investing money you want a good return on in the next 2-3 years, youu may wish to sit on the sidelines a little longer. It's probably better to be careful when you are not as rich as Buffet.