David White

Wall Street Breakfast: Must-Know News

Reuters" Mexican President Calderon announced that Mexico will suspend non-essential work and services, including some government ministries and private businesses, for five days starting on Friday, May 1. "

They're shutting down all business for 5 days just to try to slow the progress of this disease. If that is not negative economic impact I don't know what is. This is just a first step.

It will likley begin to spread rapidly in the US soon. Anyone who is not taking this disease seriously at this point is being foolish.

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.

Replacement Candidates for David Merkel's Portfolio: From AA to ZZ

NM is a good bet. It has excellent value. It has an extremely low PE and FPE. It also has an excellent Price to Book value ratio. Further it has both a new fleet in South America (for the river traffic mostly) which is supposed to begin adding 35% to EBITDA beginning in the 4th quarter of this year. It got pushed further downward in the recent market move in that direction, so it is an excellent buy now.