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Sobering Stat: ARMS Index Indicates Market Is at Peak, Not Bottom

The remarks of Cautious Investor below struck me as well reasoned and an insightful commentary about the macro economic condition in the US and how that is and will affect peoples' lives (jobs) and the constraints on spending. By mentioning the significance of underemployment, Cautious Investor widens the base of our malfunctioning economy on a level that will work to the disadvantage of the large majority of investors in equities. Corporations can only cut costs so much, and existing employees' productivity has limits as well. There is no way for any systemic rise in corporate profits given a dwindling consumer demand within the foreseeable next couple of years at least. Indeed, "things, when looking around the corner, appear rather bleak."!
Thank you Cautious Investor for hitting it on the head and writing in such an articulate manner.


On Aug 29 10:23 AM CautiousInvestor wrote:

> A host of the technical indicators I use have been warnings but this
> market is being driven by historically unique forces, including massive
> deficits and proportionate liquidity injections, or is being supported
> my the machinations of the Fed. In either case, what in the past
> have proven to be useful tools are being compromised, if not castrated,
> in the current setting.
>
> The market is clearly overbought and has risen to unsustainable levels.
> It was first better than expected earnings, then it was the growth
> of China, then it was about housing and other reports, then it was
> we sold a few more cars through the clunker program and now we are
> starting to take stock of the basics. They have remained unchanged
> and over the long-run these cannot be abrogated by either liquidity
> or complicity.
>
> Growth in China is in serious jeopardy and central authorities are
> genuinely concerned about creation of excess capacity and speculation
> in commodities, casino's and equities. Recent policy actions, designed
> to mute some of the excesses, has been initiated over concern of
> these excesses and the larger unspoken concern over the financial
> health of the economy. Corporations with deteriorating earnings are
> borrowing more money; under usual conditions they would be denied
> additional credit. In parallel, banks are concealing non-performing
> loans through rolling them over. Some smart people, including Micheal
> Grant, think China is a ticking time bomb.
>
> Meanwhile, stateside, the core problems of underemployment, consumer
> spending and bankiing sector health remain unchanged.
> To an extent consumer spending and underemployment are intertwined;
> but even if consumers, who have jobs, were not frightened by the
> economy and the administration's policies they would still want to
> save and liquidate debt therby containing spending. Prospects for
> the unemployed are miserable and, unfortunately, government and the
> apparatchiks of MSM do nothing to either clarify or correct the resports
> released federal departments and agencies. The bottom line is hiring
> is still trending down amid a growing potential labor force.
>
> If China follows the path of Japan, the model country that could
> do no wrong until 1989, and the US consumer spending continues to
> contract, what will be the catalyst to spur growth and profits? Many
> times people when confronted by such a question will resort to bromides
> that touch upon ingenuity, creativity and innovation but it is easy
> to forget that these essential qualities must be nurtured.
> A solid investment environment depends on a strong and stable currency,
> restrained federal spending, less harmful legislation, dependable
> contract law, limits on taxation and countercyclical capital regulation.
>
>
> In my humble view things, when looking around the corner, appear
> rather bleak.
>
>
>

AIG: Mixed Signals and Blind Pools

Actually, rose colored glasses do help many blind people. Being blind typically does not mean the person doesn't perceive light. To the contrary, bright light can be quite disturbing to many blind persons. Hence, dark or rose colored glasses are often worn to mitigate the nebulous glare. Moral of the story: one should be careful when asking a redundant question in trying to make a point.

Three Views of Three Big Failures

David, an excellent commentary on the downfall of giants, correctly pointing out that many people share in the blame game. You included yourself for not warning people louder begfall the collapse. Many investors, myself included, also must share the blame. Here's my story in brief.

I wish you had been working for Moodys and Standard & Poor who through last summer rated AIG "AAA." I did not do my homework this past July and August when I decided to purchase AIG then prime-rated bonds. I bought them based on their comparative high yields to maturity, never thinking for a moment the issuer might be in deep distress. I should have done a thorough investigation, knowing that ratings tned to be much more accurate retrspectivly than prospectively. Given the ratings and the notion that the world's largest global insurance company cannot go under (or need a bailout that probably will not work) I chased yields as it turned out were too good to be true. . I assumed without any checking that AIG had a reasonably good balance sheet, further assuming that new cash would be flowing in as is typical in most insurance underwriting businesses. And finally, knowing that Buffet has favored insurance companies in his BH portfolios, I kidded myself in thinking "I could be like Warren." Not this time. In any event, you comments on AIG in particular were enlightening fopr me. Reading the piece was humbling.

AIG's Bond Sale Is No Cause for Celebration

Extraordinary research and analysis of the interactions of the feds and AIG management -- well, "saving" AIG appears more about saving counterparties than the company -- which, I agree, is unssustainable beyond a few years unless profitable asset sale divestitures can be more about saving