Lilguy

Where Is the Economy Headed? Four Bearish Views

I'm kind of in the "W" double-dip camp, but I don't necessarily see the second drop being a whole lot worse than the first. I expect the current bear market rally to sputter as the reality of 2Q becomes more evident and, particularly, as the 1Q accounting fakery of the banking industry can not be replicated for 2Q.

I have for some time thought the market would hit bottom in the 600s on the S&P500. Whether it drops below the 666 intra-day low it hit earlier this year is too fine a distinction for me to make. That said, I don't think we'll venture into the 500s and I believe we'll see the second bottom sometime this spring/summer.

After that, the market is likely to bounce along for quite some time, possibly reaching its current level late this year, trading in a modes range for at least another year, and only years from now approaching its 2007 highs.

It will not be pretty, but it is survivable.

Are We At a Tipping Point?

I agree with Mr. Mason. While we are closer to the economic bottom than we have been, we still have a way and a while to go. And it will all be reflected in increasing unemployment, more worse-than-expected earnings reports (notwithstanding the banks' creative accounting in 1Q), lower consumption, and more newly discovered bad debt in mortgages, credit cards, and businesses.

My guess is that, after an uptick in 4Q as the stimulus and holiday shopping kicks in, we'll continue our economic decline until at least mid-2010. After that, we'll have a couple of years of negligible real economic growth.

So you can jump into the market at any time, but don't do so expecting some V-shaped bounce from a near-term bottom that brings the market back to 2007 levels. My guess is the current rally will sputter soon and return to near or below its recent lows. I would expect a more legitimate, if less spikey, turn around late this year in the face of the temporary concurrent economic growth of 4Q and a more realistic expectation of the true economic bottom next year.

In the meantime, rather than chasing "green shoots," a better way to play this uncertainty and stagnation if you want to be in the market would see to be to look for really solid stocks with relatively low valuations (probably "defensive", but that's less important now than a year ago) with substantial dividend yields. At least you'll get something for you investment until the market slowly emerges from the economic muck and mire.

Chart of the Day: Common Capital vs. TCE

The purpose of the stress test, as repeatedly stated by Geithner, was to boost confidence in the US banking system. It was not about a "fair and balanced" assessment of their capitalization or solvency. The metric picked to show "confidence" was the one that allowed them to fare best.

In short, the confidence test was a con. The only real reason to have confidence in the banking industry is that Geithner & the White House have repeatedly stated they will not let large banks fail. Whether they have already or ought to soon is irrelevant.

Now, drink your kool aid, and be on your way.

Wall Street Is Still Operating on Hope

As usual, Mr. Picerno is on target. The "irrational exuberance" of the current bear market rally will be undone as the second quarter unfolds with banks reporting negative earnings and corporations across all sectors continuing to lower their earnings expectations. And, with 5 million more people unemployed than a year, household incomes and wealth plummeting while debt remains outrageous, the likelihood of a sustained economic turnaround anytime soon is minimal.

Is the Recession Over?

We are in recession.

We will probably get an uptick in economic activity in 4Q from the stimulus package and holiday buying.

We are likely to revert to recessionary form in 1Q2010 for at least two quarters.

If you want to call it a "W" recession, OK by me. But I'm betting the NBER just disregards the short-term economic gain and continues the recession well into next year.

Even when the bottom has been hit, we won't recover to 2007 economic or market levels soon. I think it will take at least two years from a mid-2010 bottom for real estate values to start sustained growth, consumers to begin spending at something near their previous extravagance (but still not as much), banks to work or sell off their toxic assets, the auto industry to find a new norm of 11-12MM sales per year (vice peak 14mm or current 9MM), and employment growth will still be minuscule--way lagging--and dragging--economic growth.

Ever More Unemployment

I think unemployment will continue to grow, especially among men, until at least the 4Q when holiday employment and the effects of the stimulus begin to take hold. Still the unemployment rate is likely to reach 10% by then. I think the rate will still in double digits through mid-2010--and the economic recovery that follows will be slow and essentially jobless for a couple of years.

Maybe more important, the high rate of unemployment has forced what I believe are secular changes in consuming habits. Households will be (as they have been for the last year) more conservative in their purchases even as the economy tries to recover. This will hold down both the recovery rate and keep the unemployment rate high.

It's going to be awhile before we get out of this hole, healthy banks or no.

Long-Term Investors Should Think More About Buying than Selling

"We continue to believe long-term investors should think more about buying than selling. Anyone with an investment horizon of five years or longer is not likely to regret buying stocks today."

I consider myself a strategic investor, but I really have a hard time envisioning an investment horizon of "five years or longer" in the current global economic climate. The next 3-5 years promise to be one's of global economic (& political) turbulence in my somewhat pessimistic and often cynical view, so it's hard to think of investing beyond that timeframe. I'm concerned about a number of economic forces (some of them conflicting) that would erode the stock (& other) markets, including:

--Inflation and/or deflation--deflation now, but inflation is wired in
--Value of the US dollar (& parallel increasing reliance on international trade for US economic health)--currently increasing, but decreasing over time in the face of a strengthening China and other economies
--Financial health of US households--less wealth, less pay, more unemployment--all makes increasing consumption (that drives US companies) highly unlikely
--Government intervention in private sector--Some is good (as in being done properly & prudently), some is not--more importantly, there does not appear to be a clear exit strategy that would give investors confidence--and we haven't even really started on re-regulation of the private sector ('tho Pres. Obama's plan to announce corporate tax increases today may be a start)

The result is that, if one has a five-year-plus investment horizon, one has to make a large number of seemingly improbable assumptions about a return to the historic (at least pre-2006) economic and market norm. I believe that is highly unlikely and that a new--and less wealthy and risk bearing--norm will emerge, but I haven't a clue what it will look like.

So, I have little in the stock market and don't plan to invest more soon. For the moment, I'll trust in the "...go away in May" record of the market and re-think my investment strategy in the fall. Until then, I'm playing defense.

Annihilate the Perverse Effect of CDS on Bondholders

You go, Bo!

Ignore Detroit's Bondholders' Whines

I'm thinking this doesn't have anything to do with the bonds or unions or Chrysler's value (nada). It's all about CDSs. Now (or soon) the bondholders who have "protected" their holding with CDS insurance can tell the insurance company to pay up at full face value.

And I'm betting that insurance company will be AIG, which means you and me and the rest of the American taxpayers will be paying off the banks and hedge funds that hold these bonds.

Ain't that great!

'Surgical' Bankruptcy for Chrysler

I sure hope the President's right on this one, if only for the sake of the tens of thousands of workers whose jobs are on the line. That said, I would not be surprised by the process taking more than two months and maybe even changing a lot that has already been agreed upon.

This may be surgery, but it's likely to rip-your-chest-open exploratory heart surgery rather than three small holes gall blader arthroscopic surgery. (I've had the latter--and I don't want the former!)

How Much Will Citi's Credit Card Losses Rise with Unemployment?

Oh yeah, credit card debt at Citi, BAC, AmEx, etc., will go bad as unemployment continues to grow. OTOH, I don't think it will have the same effect as mortgage defaults have had, simply because people are unable to leverage their credit cards as much as they leveraged their homes. Still, it's gonna hurt many banks' asset base, reserves, and ultimately lending ability. Another arrow in the chest of an early economic recovery.

Is Biden Associated with a Hedge Fund Scandal?

Certainly members of the Biden family are associated with another banking scandal, but it is a long way to go to put any links, much less blame, on the Veep.

Maybe that will happen, but I doubt it.

When Will Larry Summers Apologize?

To answer Felix's question: When hell freezes over.

The man has no conscience, just ego. He will never admit a mistake nor acknowledge that he is captured by the banksters.

How Is April's Fed Statement Different from March's?

In short, the Fed is seeing green shoots, but not the underlying rotted black roots.

Examining the 'Sell in May, Go Away' Axiom

The axiom is especially useful to small investors who invest in index mutual funds or ETFs. While there are clearly other factors to consider, not least of which may be taxes on gains (good luck with that!), there is no reason to try to fight some pretty obvious patterns in the market.

Moreover, speaking at the moment, if you've made some gains in the latest rally, it may be time to bring those puppies home. I can't see the current bear rally going much further and retrenchment could be fast and furious.

And, you know what, you can have a nice vacation sometime over the summer without worrying about whether your mufu or ETF is tanking. The stock market is far from the only place to gain satisfaction.