December 2, 2022

The Flip Side of Bad News – Still A 90% Employment Rate

Disappearing Money

Charles Biderman of TrimTabs gave an interesting interview to Barron’s this weekend.  TrimTabs tracks flows of money in an effort to predict the stock market’s primary trend.

According to TrimTabs, “the first sign of a turnaround will be corporate insiders buying their own stock again and boards announcing new stock buybacks and cash takeovers of other public companies.  Right now, such buybacks are off about 90% year over year.

CEO confidence is at its lowest level since the Conference Board begain measuring in 1976.

Not a very positive assessment for those looking to put funds to work in the market.

In addition, the often cited “huge amounts of cash sitting on the sidelines” (in money markets funds), is also not apt to be a reason for launching the stock market higher either.   According to Mr Biderman,

“of the almost $4 trillion sitting in money market funds, almost two-thirds is institutional money, much of it probably earmarked as reserves against shareholder redemptions or committed to retirement and other long term purposes.  The money coming out of equity mutual funds is greater than that going into bank CD’s, money markets or other savings.  The money is disappearing because people are using it to live on.”

Of course, there are other possibilities as to where the disappearing cash is going.  Consider the  mistrust of the banking system and near zero interest yields on savings.  Perhaps some of these folks who sold their stocks are putting the money under their mattresses.  Or they just might be spending some of it.

Despite talk of consumers spending less and saving more, I have not really seen much evidence of that from one perspective.   I went to three casual dining establishments over the weekend (TGIF’s, Bertucci’s and Ruby Tuesdays) and each place was packed with customers.  There was a 10 to 20 minute wait time at each place for a table.   Maybe Connecticut’s economy is not yet getting hit as hard as other states.  Maybe people have decided to spend some of the money from liquidated equity funds.  Or, maybe things aren’t quite as bad as they say.   After all, even if the unemployment rate is at 10%, that means that 90% are still working and still spending.

Insolvent Banking System Eludes Government Containment

Denial Of Reality Becoming Impossible

The game of pretending that the world banking system and national governments are solvent becomes more difficult by the hour.

The true magnitude of the write downs that the banking industry needs to take to reflect the reality of asset impairment was highlighted by the Royal Bank of Scotland.   Pretending that the losses do not exist is no longer worth the effort since no one is fooled anymore.  There can be no recovery in bank lending unless impaired assets are written down and sufficient amounts of new capital are raised.  This is the point at which things get interesting since the capital markets are not open to the banks; the lender of only resort to the banking industry are the world’s central governments.  The really scary question now is whether the central governments have the financial capacity to recapitalize the banking industry (along with everyone else) without resorting to printing money on a grand scale.

Far from being contained, as some have proclaimed, the banking crisis continues to expand.  The debate is no longer focused on whether the banking industry is solvent.  The real question is whether central governments can contain the economic meltdown.

Consider the size of losses reported by Royal Bank of Scotland and the excuses and comments by RBS Chief Executive Stephen Hester.

RBS Expects Huge 2008 Losses

LONDON — Royal Bank of Scotland Group PLC said Monday that tough market conditions in the fourth quarter and mounting impairment charges could push it to a 2008 full-year loss of as much as £28 billion ($41.29 billion), the U.K.’s biggest ever corporate loss.

The government currently owns just under 58% of RBS after last year underwriting a £15 billion rights issue that saw little take-up by existing shareholders.

The move means RBS will now have to pay back less to the government, but it has also to agree to boost lending to consumers and businesses. The Monday update comes ahead of the announcement of its 2008 results on Feb. 26.

RBS Group Chief Executive Stephen Hester said: “The dislocation of credit markets and the global economic downturn continue to hit RBS hard, as with many other banks.

“We are making progress in recognizing excess risk and dealing with it. Significant uncertainties and risks inevitably remain.

“In this context, the support we are receiving from the government benefits all our stakeholders and enables us to provide more customer support in return.”

“With enhanced core capital, removal of the preference share dividend and the prospect of further asset and liquidity measures, RBS is able to continue its strategic restructuring purposefully,” he added.

What Chief Executive Hester is really saying is that he managed RBS poorly and took ridiculous lending risks; no one will buy our shares or debt securities and we need a government bailout to prevent closing the bank.  Nonetheless, we now recognize “excess risk” and are ready to start lending again once we receive government funding.

Hester should be fired for incompetence –  he dissipated investor money and bank capital and now wants to try his hand with government supplied funding.

The question of how the British Government will raise the funds to bail out RBS is answered by The Telegraph.

Bank of England Edges Closer to Printing Money

Under the scheme’s terms, the Bank will be able to buy assets including corporate bonds and commercial paper, a move which Mervyn King, the Bank’s Governor, called “an important additional tool to improve financing conditions in the economy”.

The asset purchase facility does not in itself amount to quantitative easing or “printing money”, because the scheme initially will be financed by Treasury Bills and does not involve an increase in the money supply.

However, the Treasury has given the Bank’s Monetary Policy Committee the option to go down that road by extending the scheme at a later date and paying for assets with what amounts to newly created money and not Treasury bills.  Quantitative easing is a more unconventional tool available to the Bank beyond interest rates as it attempts to halt the pace of economic decline in the UK.

“This does not mean that quantitative easing will definitely happen, but does allow the MPC to move fairly quickly if they want to,” he said.

Ross Walker, economist at Royal Bank of Scotland, said: “This framework could readily evolve into full-blown quantitative easing – we would expect it to do so given the proximity of Bank Rate [to zero] and deteriorating economic conditions, perhaps as soon as March/April.”

I agree with Ross Walker – full blown money printing will occur as demands on the British treasury continue to explode in size.   The British Government, approaching the limits of their borrowing capacity, will come to the rescue of RBS and others by printing money.  At this point, no one is even trying to pretend that RBS is solvent or that the British government can bailout every failing enterprise.  The end result will be a catastrophic destruction of confidence world wide.  When governments’ last resort is to print money, one can sense that the end of the old order is near.

Half of Europe Trapped in Depression

Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch.

Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state.

A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece’s social fabric is unravelling before the pain begins, which bodes ill.

This week, Riga’s cobbled streets became a war zone. Protesters armed with blocks of ice smashed up Latvia’s finance ministry. Hundreds tried to force their way into the legislature, enraged by austerity cuts.

“Trust in the state’s authority and officials has fallen catastrophically,” said President Valdis Zatlers,
who called for the dissolution of parliament.

Spain lost a million jobs in 2008. Madrid is bracing for 16pc unemployment by year’s end.

Private economists fear 25pc before it is over. Spain’s wage inflation has priced the workforce out of Europe’s markets. EMU logic is wage deflation for year after year. With Spain’s high debt levels, this is impossible.

Italy’s treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome’s throat. Italian journalists have begun to talk of Europe’s “Tequila Crisis” – a new twist.

Greece no longer dares sell long bonds to fund its debt. It sold €2.5bn last week at short rates, mostly 3-months and 6-months. This is a dangerous game. It stores up “roll-over risk” for later in the year. Hedge funds are circling.

Printing money, a self destructive tactic is the last option left to the governments mentioned above.  Expect major social unrest in these countries as their governments collapse the national wealth through the printing press.

Depression Ahead, Prepare for Stock Rout

LONDON (Reuters) – Societe Generale said on Thursday that the United States’ economy looks likely to enter a depression and China’s could implode.

In a highly bearish note, veteran cross asset strategist Albert Edwards said investors should now cut equity exposure after a turn-of-the-year rally and prepare for a rout.

He predicted that the S&P 500 index of U.S. stocks could be set for a fall of around 40 percent from recent levels.

“While economic data in developed economies increasingly reflects depression rather than a deep recession, the real surprise in 2009 may lie elsewhere,” Edwards wrote.

“It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan. A subsequent trade war could see a re-run of the Great Depression.”

Edwards has long been one of the most bearish analysts in London, first with Dresdner Kleinwort and then with SocGen.

The world Central Governments are resorting to the nuclear option – printing money – in a last attempt to hold the financial system intact.   Had they allowed selected major bankrupt institutions to fail, severe financial pain would have been inflicted on many.   The strategy of attempting to save all bankrupt industries with printed money will result in worthless currencies worldwide,  thereby guaranteeing financial ruin for all.

Stay Long SSO & DIA

My initial assessment on December 3rd that the world had run of sellers has been a win so far – see Breathless Hysteria Overdone?

I am maintaining my long positions in SSO and DIA.

Although not quite as bullish as I was a month ago, my thoughts remain the same:

Markets discount bad news and this market has discounted everything except the end of civilization.  The talking head predictions of doom dominate the headlines.   Today is probably psychologically equivalent  to when oil was peaking at $150 and predictions of $300 dominated the headlines.

Without bothering to consider what the future will bring, at this point there is money to be made on the long side.   The market is extremely oversold.  Nothing goes in a straight line.  High quality Dow stocks have 5-7% dividends.  The Fed’s zero interest rate policy will force money into higher risk investments.  There is optimism building about a new Administration.

Returns on SSO and DIA from December 3, 2008 closing to January 2, 2009 closing.

It is interesting to note that the DIA, an ETF structured to provide investment results that, before expenses, match the price and yield of the Dow Jones Industrial Average returned 4.8% vs 5.1% for the DJIA.

The SSO, an ETF designed to return twice the performance of the S&P 500, returned 12.3% vs a gain of 7.0% on the S&P500.

Generally speaking, the ETF’s worked as they were theoretically supposed to.

Under my theory of selective contrarian investing, which has served me well, this may be the time to start moving into selective issues in the oil and gas industries and to start selling positions in long treasuries.   Given the vast over performance of treasuries last year and the dismal results in oil and gas, the odds favor this investment reallocation on a long term basis.

I will be buying DIG this week and adding to positions on weakness.

Let’s all have a prosperous New Year!

Charts courtesy of Yahoo Finance

Newspapers Reveal Secrets To Wealth Accumulation

Today’s horrendous economic news on Singapore would seem to suggest that now is a poor time to be considering the purchase of foreign stocks.

Singapore GDP Posts Biggest Fall On Record

SINGAPORE — Singapore plunged deeper into recession in the fourth quarter as gross domestic product marked its biggest quarterly decline on record, said the government, which lowered its projection for 2009.

The darker outlook for the small, trade-dependent economy — considered to be a bellwether for the rest of the region — likely means the government will step up spending to offset a slowdown in manufacturing and a rapid cooling in the construction and services sectors.

Singapore’s economy contracted at a seasonally adjusted, annualized pace of 12.5% in the quarter, accelerating from a 5.4% decline in the third quarter, according to the Ministry of Trade and Industry’s estimate. It was the biggest contraction since the government began publishing seasonally adjusted data in 1976.

Citigroup economist Kit Wei Zheng is more pessimistic. He forecasts GDP will contract 2.8% this year.  “If we are correct, 2009 will mark the most severe recession in Singapore’s history,” he said.

Now let’s consider the advice of Warren Buffet  – “Be greedy when other are fearful and be fearful when others are greedy”.  The best advice is also the toughest to follow and none of us “feel good” buying on bad news.   For those who do invest based on the feel good factor, consider the following super bullish article from February 12, 2007.

Singapore: The Safest Route to Asia’s Riches

AS A RULE, SMALL TROPICAL ISLANDS HAVE AN OBLIGATION to the rest of the world to preserve themselves as sun-filled, rum-soaked, licentious getaways. But Singapore doesn’t do laid-back very well. Nearly 4,200 flights take off and land each week at its bustling airport, and its port is the world’s busiest. At 4.41 million, the number of mobile-phone users exceeds its adult population, and sometimes they all seem to be talking at once. Even Singapore’s national pastimes — eating and shopping — are pursued with a ferocity that might make a New Yorker blush.

When the purchase of stocks is the easy decision, the reason it’s easy is because bullish news is usually a phenomenon associated with tops, not bottoms.

Courtesy of Stockcharts.com

Emotions aside, where would you rather buy?

Consumer Confidence Crushed As Upward Mobility Dies

No-Lay Off Policies Crumble, as reported by WSJ

Until recently, Enterprise Rent-A-Car Co. prided itself on a 51-year history of never laying off a U.S. employee. When competitors slashed fleets and shuttered branches after the Sept. 11 attacks, Enterprise kept hiring.

This fall, though, the nation’s largest car-rental agency said it would dismiss 1,000 of its 75,000 employees, as Americans curtailed driving and flying. “These types of declines are unprecedented,” says Patrick Farrell, Enterprise’s vice president of corporate responsibility.

The deepening recession is prompting layoffs at long-established employers that avoided job cuts in previous downturns. These layoffs demonstrate both the severity of the current recession and the continued erosion of workplace norms that once shielded many U.S. workers from permanent job loss.

Several of these employers are in hard-hit industries. Employment in the car rental and leasing sector, for example, fell 3.3% in October from a year earlier, according to the U.S. Bureau of Labor Statistics. Gentex Corp., a Zeeland, Mich., automotive supplier, conducted its first layoffs in 34 years this month amid plunging car sales. Declining gambling revenue prompted the Little River Casino in Manistee, Mich., to dismiss 100 of its 950 employees in November, the first layoffs in the resort’s nine-year history.

Waning Stigma

Some workplace experts say such layoffs show that the stigma associated with permanent job cuts — unthinkable to many employers three decades ago — continues to decline. They say companies find it easier to let go of workers when rivals and other employers also are eliminating jobs.

Kevin Hallock, a professor at Cornell University’s School of Industrial and Labor Relations, says as layoffs become more common, managers may find it easier to discount the human and business costs.

“It was a really difficult thing for them the first time,” he says. But “they got over that hump.”

Many of the employers conducting their first layoffs say they first tried other ways to cut costs, such as freezing salaries or drumming up work for idle employees.

This is not the type of post World War II recession the world has been accustomed to.  This recession, caused by a financial crisis, is distinctly unique in its global reach and appears to have no precedence.   To compare what is happening today to the Great Depression of the ’30’s is simplistic at best given today’s infinitely more complex global financial system.  The 30’s depression, as is the case today, was preceded by a booming highly leveraged economy  Beyond that similarity, there is little from the past which can guide us today.

Bernanke, a “student” of the Great Depression is finding out that his textbook solutions do not seem to be working.    The only certainty is that no one can say how long and how crippling the current economic downturn will become.  The speed of the collapse and the destruction of our conventional view of how things should work are causing the greatest harm of all –  the destruction of confidence caused by asset and job losses.

Assets

Loss of confidence works in many ways to confound whatever amount of fiscal stimulus the government undertakes.   Future financial action is predominantly rear view mirror based.   If stocks or housing have been great investments in the past, that view is extrapolated to infinity by most investors.   A rising market has many cheerleaders which reinforces the trend.

Confidence, once shattered by plummeting prices, needs many years to draw investors back into a broken asset class.   Having a job or a stimulus check is not enough to create the confidence to invest if you believe that you may not have a job tomorrow.

Jobs

Even more destructive to confidence is the abrogation of labor agreements once viewed as sacrosanct.

The greatest assault on our economic foundation is not the collapse of the banking system or investment banks on wall street.  The harshest economic reality of today is the realization that our long held belief in upward mobility has come to an end.   No longer can we assume that our children are entitled to earn more than us.   The American dream is becoming a nightmare as highlighted by pay and benefit reductions and job losses.  Job losses become the ultimate negative feedback loop.   Unemployed people do not spend.  Those with jobs are not confident that they will keep their jobs and spend frugally.

The number of companies announcing job cuts has so far been on a par with our last recession.  The number of companies announcing salary and benefits reductions is unprecedented.   Corporate America’s actions foretell a bleak economic assessment going forward.

It will take many years of economic improvement until the shattered confidence of both employees and employers is restored.   The upside of this downturn is that the urge by consumers to take ridiculous leveraged risks with borrowed funds will be curtailed.   Going forward, banks will price risk properly and the financial system will become sound again.   The hard part will be getting there.