On A Slope Of Hope
Its the bear markets version of the wall of worry, which most financial pundits point to for a bull market to climb higher. As with most bull market mantras, there is an opposite, and sometimes more destructive, bear market version. That would be the "Slope of Hope"...which we seem to be on. As investors enjoy the recent stock market bounce, a dangerous calm has set in. All the new & improved stabilization actions taken by the government have again slowed the decent in stocks, but the damage is upon us & will continue to be reflected in the data & the healing is far from done. While it 'feels' like the market has stabilized & is shrugging off some pretty difficult economic & corporate newsflow, this stabilization is tentative at best. Real bear markets, and that's what we are in, tend to drag a bit...rather than spike down & rebound sharply, only to begin rising steadily. Instead, each tumble lower is met with a bounce followed by a bit of stability, before lurching lower...and then repeating. Disenchantment, disinterest, & disengagement sets in...CNBC might even stop asking you "Is Your Money Safe?" & "Do You Know Where Your Money Is?"...that would be a tell of sorts. Then it goes dead for awhile as investors recover & readjust to a new economic reality & net worth. I think we remain firmly on a slope lower...with a crash only prevented by the hope that the worst is behind us & the leaders are going to be able to reverse the economic slide. That hope may soon be replaced by worry followed by despair.

Madoff Fraud Fallout...Emotional, Psychological, & Financial, not necessarily in that order
From Manhattan to Long Island to Greenwich to Palm Beach to Aspen to London to Zurich, high society has lost billions of dollars & an immeasurable amount of faith & confidence. When belief in something gets shattered, it takes time & double the amount of proof to restore it. The Madoff Scam, ponzi scheme, fraud, whatever you want to call it, has destroyed decades of belief in not only mr. madoffs investment operation but in the confidence of the entire investment & hedge fund industry. Only time will tell the consequences of this latest blowup, but this could certainly mark an important point in the financial industry's history.
It harkens back to the great depression period when secretive & profitable Investment Trusts were all the rage & boasted high returns with seemingly little risk. They were designed for & catered to the wealthy, but towards the end of their greatness they opened their doors to all investors. Their demise was a part of the financial collapse of that period.
Today, With fund of funds now getting the regular guy involved in the big guys game & all the major brokerage houses & investment banks having 'alternative investment vehicles' (driving the investor to who knows where) to help smaller investors get access to previously closed hedge funds, most everyone is involved or exposed to the hedge fund world. The hedge fund industry has grown exponentially over the past few years & some have pointed to the possibility of a hedge fund bubble. Who knows, maybe its bursting as we come to the end of 2008?
Whatever the case, it is clear that this is another severe blow to investor psyche & wall streets credibility. With huge losses in most all investor portfolios, adding the revelation that an enormous fraud has been going on at one of the most well regarded & long established investment funds will certainly create further problems.
Investors large & small must question all their financial relationships & investments. Investors must now redouble there due diligence efforts in an attempt to insure & assure that their money is safe. Fiduciaries will be questioned & challenged to provide proof positive that all is well with client investments. Clearly the madoff news proves that nothing can be taken at face value & no investment is safe.
Investors continue to watch small banks fail, while the government injects life preserving capital to the large, too big too fail, banks, which would have failed without the government intervention, questioning the safety & soundness of the financial system almost on a daily basis. Now they are seeing the best known & most highly regarded hedge funds report astounding losses & gating investors from their money. Now this madoff madness. How can investors not question all the belief, faith, & confidence they have in the markets, their advisors, & their investments?
There is amazment & outrage. This is terrible for investor psyche, very very damaging to investor confidence on top of huge loses everywhere, in what investors think & hope are legitimate operations. The next round of redemptions could be multiple times what we have seen through year end. This could be another serious & ominous headwind for the stock market.
And it won't help the economy either. The wealthy are being damaged irreparably by the magnitude of the wealth destruction taking place and it is not going to reverse anytime soon. Whenever the recovery comes, it will not replace what has been destroyed, the money or the confidence.
The economic weakness is going to intensify from the very top. The wealthy will 'withdraw', literally & emotionally, from investing & consuming in a significant way for a significant period of time. The 'trickle down' impact will be devastating to the overall economy. The ripples that are sent out from the from this part of the economy touch many parts of society. The wealthy are industrial consumers & do the majority of the risk taking investing. Damaging their ability or desire to do those things will have far reaching implications. From luxury retail to charitable organizations, the wealthy have an important economic impact. And must, pardon the phrase, maintain their standard of living so that the economy doesn't implode.

THE AMAZING DEPRESSION
I always wondered why they called the depressionary period in the early 1900's "the great depression" as it was a horrible period of time. I just figured it was one of those oxymoron things. Yet, after learning about the the depth & breadth of the financial collapse & subsequent economic downturn I came to understand why it got the name & why it was appropriate, even if it was an oxymoron. The Great Depression was just that...great in its devastation of the economy & its impact on Americans lives & the country at large.
It seems apparent to me that we are currently on the precipous of the next deep & long period of economic distress & weakness. What we call it is yet to be determined as we are just first acknowledging it. As of early last week the NBER, which is charged with the duty of calling & marking recessions, its official that we are in & have been in an extended period of economic weakness...sometimes referred to as a recession. Others are still waiting for the text book example with two consecutive quarters of declining GDP, to admit the obvious, but statistics aside, we all know where we are & what is happening.
Now for the naming of it. So far, the best I've seen is "The Great Recession", which is referring to the fact that this economic weakness is now being seen to have began in December 2007, making this recession a full 12months in duration (so far we have only Q3 2008 at a down 0.5%, hardly a decline at all according to the data)& most are looking for it to intensify this quarter (Q4 2008)& for it to last through at least the middle of 2009 (Q2 2009). That would make it an 18+ month long recession, which is much longer than the average 10 month recession & longer than the 16 month weakness of the longest recession on record.
While I am in agreement that the weakness will last longer then usual, I am not so sure when it will end or how we will emerge from this extended period of weak economic activity. In fact I see many things that could make for an even worse forecast, something like a depression, defined as an 'extended' period of declining GDP growth lasting longer than two consecutive quarters.
If that were to happen, everyone would be amazed. Amazed that it could happen again even though we have learned from the past & have experts in charge looking out to prevent just such a scenario. I think its very possible that this generation is about to experience the biggest "come down" in the country's history. And I offer what it should be called... The Amazing Depression.
It will be amazing from many standpoints not the least of which will be how could this happen even with all expert knowledge of the first depressionary experience. Amazing that it occurred even with all the heroic efforts of the FED, Treasury, regulators, & congress trying to prevent it from happening. With Bernanke being the depression historian & having the hindsight to be proactive & learn from past mistakes. With Paulson's wall street smarts, unorthodox & inventive actions he has initiated to halt the momentum towards the abyss. With Congress nationalizing entire industries while doling out trillions to arrest the financial collapse. With regulators on the job with creative tools to manage the market participants. And the president continuously pointing towards positive & productive resolutions to the economic malaise. Still we head towards further economic weakness & uncertainty with the financial system seemingly broken.
As hard as it is for us to believe & accept, we may very well be in for that dreaded extended period of declining economic activity, also known as a depression. The powers that be are on the job & working feverishly to prevent that. Much of what is being done has never been done before & so the results & consequences are unknown. It is painfully obvious that so far at least, all that has been done has not worked to arrest the economic weakness from getting worse.
Going into the year end of 2008, a historic year on many fronts, not the least of which will be the crash of the equity markets here & around the world. 2009 will be greeted with further terrible economic data & corporate downsizings. Hopefully Barak Obama will be able to lift our spirits enough to overcome the financial hardship that looks poised to impact rich & poor alike. Businesses are bracing for the most significant economic reorganization of the last century & government is prepared to put in place rules & regulations to make sure this will not happen again...another really bad thing.
The trillion dollar stimulus of the new millennium will be set forth & the US will try to lead the world from the brink of financial & economic collapse. If it doesn’t work, we will be in the midst of what may be called..... The Amazing Depression.

WORKING FOR FREE

How long will the smartest & richest guys on wall street work for free? Well, not exactly free, but without the lucrative 20% incentive fees hedge fund managers get paid for investing profitably for their wealthy investors. Their regular management fees just aren't enough to make ends meet, and those ends are big.

Hedge fund managers are some of the highest paid people in the world. A good years bonus is like winning the lottery, in some cases the powerball lottery.

With 2008 shaping up to be the worst year on record for hedge funds; average long short equity fund is down approximately 20%ytd and many down 30%+, hedge fund managers will go without bonuses this year & they face a very high 'hurdle' in 2009.

In order for hedge funds managers to get their 20% incentive fee in 2009, the average manager will need to produce returns in excess of 25%. That would get their investors even... back to the high water mark, the high value of their investment prior to the recent decline. Above that, the incentive fee would kick in. Not impossible, but not easy.

So the question is, how long will these guys work for free? 2009 is looking increasingly more uncertain & risky...even with a trillion dollar infrastructure plan, bailing out the auto industry, backing up the financial & banking system, trying to support housing prices, employment still weakening sharply & consumers not consuming, businesses playing defense & in many cases contracting operations reducing spending & lowering capital expenditures, unknown new & ownerous regulatory environment to address recent failures, investors withdrawing from risk & in capital preservation mode...all in all a very difficult economic enviroment to develop investing themes & pick stocks. Not impossible, but certainly not easy.

Why not pack it in for 2009? Lower stress level, reduce risk of losing more wealth, watch things from the sidelines, & spend some time with the family.
Take some time to recharge the batteries, review the events of the past year & a half. Try to understand what has happened & what the implications are for the future. We have just been through & are still in the midst of an extraordinary historic period & its hard to really understand whats happening when you are immersed in it everyday & trying to react to all the news & data.

Why risk another down year, creating a further hole to dig out of? Why risk any further wealth destruction in such an uncertain environment that noone alive has any experience dealing with? Why risk being exposed to ongoing unprecedented & unknown financial & economic events? You aren't really being compensated for the risk or the responsibility.

Not many would fault you for making the decision. Our financial system has been completely changed. Our government has intervened in the markets in unprecednted ways. The FED & Treasury are actively trying to stabilze the system utilizing untested methods with consequences, both good & bad, that are yet to be fully understood. We have a new administration & congress headed to washington with plans to make many sweeping changes. Not exactly the enviroment one can expect to achieve 25% returns on stocks.

With that as the backdrop, it seems to make much more sense to come back in 2010-2011...a little time off might be a good thing.

Kali-phonia Governator Declares Fiscal Emergency

Don't Be Economic Girlie Men!
http://www.youtube.com/watch?v=SUzUbtIptqQ

In 2004, Governor Arnold Schwarenegger, declared that economic prosperity was alive & well, even while the very beginning of the financial stresses were starting to show up. The Governator quipped that the fiscally concerned were being "economic girlie men" making light of their warnings about housing bubbles & economic weaknesses that were popping up in various areas of the economy. Fast forward four short years & look at who's turned girlie governor? Seems that all that free market capitalism combined with lax regulations was a strong enough brew to turn even the toughest economic strong men... girlie. Governor Schwarzenegger, saying his state is going broke, declared a fiscal emergency and ordered the incoming class of lawmakers into a special session to fix a widening $11 billion deficit.
Schwarzenegger, a Republican, wants lawmakers to raise taxes and cut spending to narrow the gap that is projected to swell to $28 billion over the next 18 months. He invoked powers granted him in 2004 to declare a fiscal emergency, which gives the Legislature 45 days to plug the shortfall. If they fail to find a solution in that time, they are barred from doing any other legislative work until they do.
“Without immediate action, our state is heading for fiscal disaster,” Schwarzenegger told reporters today in Los Angeles. “I’ve had to make tough choices that I wish I didn’t have to make, and I know this is a terrible time to raise taxes, but it’s also a terrible time to make cuts to very important programs. But in an emergency like this, we have to take quick action to avoid even worse problems, even if they include decisions that we don’t like.”
“I compare the situation we are in right now to that of finding an accident victim on the side of the road bleeding to death,” Schwarzenegger said. “We wouldn’t spend hours debating over which ambulance to use or which hospital to send him to; we would first stop the bleeding, and that’s exactly what we have to do here.”
To fix the problem, Schwarzenegger has proposed increasing the sales tax to 8.75 percent from 7.25 percent for three years, as well as raising motor-vehicle fees. His proposal also would expand sales and use taxes to include appliance, furniture and vehicle repairs; golf greens fees; amusement-park admissions; sporting-event tickets; and veterinarian services.
His proposal would add a 9.9 percent-per-barrel severance tax on oil drilled in the state. The plan also envisions charging 5 cents for every alcoholic drink sold in the state. In all, taxes and fees would increase $4.7 billion while spending is cut $4.5 billion.
Democrats proposed a plan to cut $8.1 billion from the budgets of schools, colleges and other programs and raise another $8.1 billion by increasing vehicle license fees and freezing income-tax brackets at 2007 levels.
‘Not Blind Ideology’
“This is not blind ideology on the part of Republicans, but our sincere belief that higher taxes will hurt the economy and lead to more uncontrolled spending,” said Assembly Republican Leader Mike Villines.
The state sold $5 billion of short-term revenue anticipation notes Oct. 16 to help avert a looming cash shortage. California Treasurer Bill Lockyer was tentatively set to sell another $2 billion last month. He scrapped the loan and said the state can’t ask investors for more money until lawmakers trim the deficit.
Schwarzenegger is traveling to Philadelphia tonight for a meeting the National Governor’s Association is hosting with Barack Obama, at which the group will press the president-elect to boost construction spending and aid cash-strapped states.
Schwarzenegger said he wouldn’t ask Obama for a federal bailout as long as lawmakers refuse to pass a package of cuts and tax increases to narrow the state’s gap. “I would never ask the federal government to help us until we straighten out our own mess,” he said.
Schwarzenegger also called a separate special session today for lawmakers to consider a package of economic stimulus proposals to put people back to work, such as speeding up the spending of bond proceeds for public-works projects.
He also asked lawmakers to act on proposals to shore up the state’s unemployment insurance fund, which is projected to run out of money in 2009. Schwarzenegger has proposed cutting benefits from 50 percent of a worker’s weekly pay to 45 percent, while businesses would be asked to pay more for each worker. Currently, businesses pay into the fund on the first $7,000 a worker earns. Under Schwarzenegger’s plan, that would increase to $10,500.
Schwarzenegger wants lawmakers to consider a 90-day stay on home foreclosures and other efforts to help troubled homeowners modify loans.

How Did That Feel?

If you invest $10,000 & the investment declines by 75%...then increases in value by 100%...how much are you down? ...50%...ouch!

$10,000 x 0.75 = $7,500. $10,000 - $7,500 = $2,500. $2,500 x 1.00 = $2,500.

$2,500 + $2,500 =$5,000...still down 50%.

How does that feel? How realistic is it to expect a double in an investment that was so impaired or damaged? Hoping for this outcome seems fruitless & unlikely to happen.

Many investors are not only hoping that they get this or a better result from their existing longterm investments, they are making the decision to invest more in these impaired assets looking forward to doubles & triples as the stock market will surely recover & surges to new heights...at least according to many pundits on CNBC.

A quick look at the 'Japan Experience' & its 'Lost Decade', which is turning into two decades, shows quite clearly that further asset destruction is possible & may even be likely, based on recent US government efforts that look alarmingly similar to what Japan did which perpetuated the economic malaise.

I have a few clients that decided to ride on Warren Buffets coattails in mid-October. They read Warrens Op-Ed, "Buy America. I Am" which was published in the NY Times on October 17th & that was enough to put their fears to rest & allow them to ignore their devasted portfoilos for just long enough to encourage them to say "buy me some of what Warrens buying". That has proven to be a very poor decision...to the tune of 30-50% in many hiqh quality blue chips stocks including GE, Goldman Sachs, American Express, & Wells Fargo...all Buffett favs.

So I ask again...How does that feel? And whats the likelihood that you will do that again?

U.S. auto sector bankruptcy would devastate: GM CEO...So you better help us!

"This is an issue of the whole auto industry, if that becomes under severe pressure, the impact on the whole U.S. economy will be devastating," Wagoner said in an appearance on a NBC-affiliated television station in Detroit.

This is going to hurt me more than its going to hurt you?!?! Or is it the other way around??

Or maybe its..."Help me, to help you".

Either way, it seems that GM management is trying to scare the political leadership into saving them. GM will not stop making automobiles if it has to be reorganized in chapter 11 bankruptcy. Under reorganization, GM would be able to rework its labor & supply contracts, be relieved of its ownerous legacy pension & medical benefits cost (those will be taxpayer obligations either way), GM would be able to offload GMAC & ResCap lending operations to the TARP, and then they could compete effectively in the automobile manufacturing business. That is what should happen & that would be best for GM & America. Millions of jobs wont be lost in this process...unless that is what the excess capacity & waste is. Hundreds of suppliers won't go bankrupt...unless that is why the supply chain costs are so uncompetitive. And the US economy won't crash any more or less than it would if GM didn't file chapter 11, unless that is how important they are & how much they have been propped up for the last 10 years, even while being uncompetitive & mismanaged. All this talk about how important GM Is to the overall economy is just fearmongering... taught to them by the Bush administration...the same tactic just used in the $700 billion Paulson Bailout Plan. Bottom line is what's good for GM is not good for the America. GM is just plain old not good for America anymore. The legacy workers will be saved by the US taxpayer & the equity & much of the debt used to fund a failing enterprise will be lost. As for the number of jobs we will lose or how much it will hurt the overall economy...all that will happen whether we throw more money at the problem now or not.

"This idea that you just go into Chapter 11 and hang around for three months and agree to reduce your debt obligations and don't pay your retirees, this is a fantasy," Wagoner said. "Most people will stop buying the cars of a bankrupt company."

...Hey Rick...most people aren't buying your cars now!

Expecting A Crash

There is no denying that the stock market has been volatile. That volatility has been quite a bit more extreme & completely unpredictable. The weekly, daily, & most especially hourly swings are unprecedented & there is less & less reasoning behind the movements. Dismal economic data, disappointing & downbeat corporate reports & outlooks, confusing recovery plans & signs from our financial leadership...both corporate & political, are all combining to cause the market to be dysfunctional. Investors & money managers are simply confused. FEAR is the only motivation...fear of further losses & fear of missing the next 10% rally. Valuation, fundamentals, prospects for the future, understanding the current economic weakness & knowing that all the powers that be are doing everything they can to fix it all seem irrelevant to the movement of stock prices. We are experiencing hourly swings that used to take months or years. Numerous Fortune 400 billionaires have lost vast amounts of wealth. Many S&P 500 companies & Dow Jones Industrials have been reduced to mere fractions of their former valuations. Pillars of our country's corporate strength have been decimated & are doing all they can to survive the severe credit crisis & economic weakness. Government intervention after government intervention has failed to provide even temporary stability to the markets & has clearly not stopped the systemic failures from continuing to occur. Leadership has tried to assure & reassure the markets, corporate managements, & investors that they can contain, control, & rectify what is broken, yet to no avail & certainly to no success. Its obvious that the market is headed lower. While that path lower may be uncertain, it seems inevitable. Even as many put forth valuation as a reason for the market to stabilize & in fact move higher, that is just not enough anymore. Confidence is shattered. Fear is pervasive. Leadership seems powerless. And people cannot accept the risk of losing any more of their wealth. The stock market has demonstrated that it can destroy wealth swiftly & sometimes for reasons unknown until too late. The market & individual companies have shown that nothing is unusual anymore. Movement in the market & stock prices has become completely random. A huge rally or devastating decline would surprise noone at this point & could be seen as nothing but expected. While most continue to hope for the market to rally sharply in order to stop their financial pain, what should be expected is a crash.

Closing Out 2008...

Heading Into 2009

With about 8 weeks left in the year, 36 trading days to be exact, I have become more nervous, anxious, & concerned about the market action.

Nervous that the economy is in even more trouble than most believe & that stock valuations haven’t fully discounted that. Anxious that the market is fluctuating (volatility) more than most can handle, both retail & professional players, creating a very unstable investment/trading environment, where neither rallies nor sell-offs can be "trusted". And concerned that the dreaded 'black swan' event (dislocation/crash) is yet to happen.

Bailouts all around. Unprecedented rate cuts. A new & improved president & congress commited to doing anything & everything to fix what is wrong... regardless of the consequences. Capital injections into the banks, backstops for important industries & companies, and a middle class stimulus in the works should all set the stage for a recovery going into 2009. So why wouldn't the stock market be anticipating a much better economy & corporate profits 6 months from now?

Clearly, the end of 2008 will continue to provide dismal economic data & weak corporate earnings reports with cautious guidance going forward (this is now widely expected & anticipated), yet the news will almost certainly improve, at least relatively, in the early part of 2009.

The new president & congress will act quickly & boldly to do things to address the most important & critical problems and will pass a stimulus package ASAP. That could happen shortly after the Jan 20th innauguration & be implemented before the end of the 1st quarter. Getting from here to there, the market will have to get through the next 8weeks of gloom & caution, portfolio rebalancing, tax loss selling, & hedge fund liquidations(closures).

The holiday season will be muted by the overall economic bad mood (which is headlined in the news), layoff announcements, & stressed consumers. With this as the backdrop, I think the stock market will bottom sometime in early to mid December... volatility will hopefully subside & investors will come to terms with the new, lower stock valuations.

I am also anticipating an increase in trading volume...maybe a sharp increase. Dollar weighted average volume must increase dramatically in order to accommodate for the much lower stock prices across all equities. That increased volume could be problematic for the market to handle as investors/professionals continue to withdraw (lower exposure & reduce leverage) from the stock market.

Early January could be the time to begin setting up portfolios for a better market in late 2009. I'm not exactly calling for a new bull market to begin, rather a sustained bear market rally that would coincide with the new administration & its bold plans & policies to fix the economy. An exhaustion of bad news & data which will become "boring" & uneventful (anticipated & expected), and possibly some relatively better news &/or economic data.

Bullish I am not. Less bearish...ok.

WHAT'S NEXT

I have looked over the market (wreckage) & I have come away with some ideas for what to expect next. It seems that the equity markets, both here & abroad, have effectively crashed & last week we had what is nothing other than a dead bull bounce. World markets have declined precipitously, precious metals have fallen sharply, oil had its worst weekly decline ever. Herculean efforts & programs have been put into place & are being set in motion, albeit slowly, and the governments all around the world have effectively agreed to not let the system fail, regardless of the consequences of what they do to prevent that failure, not sure which is worse, but the sales pitch is that what they are doing is better than the alternative, can't disprove that, but we will see what the results of the fixes are in the coming years, but I digress. System saved, where do we go from here?
The economy is showing clear & ominous signs of weakness, and most do not believe this will be a "V" recovery. In fact, some are now looking towards a deeper & more protracted recession, with some even murmuring depression. I anticipate, and now others do as well, that the economic data & corporate reports will continue to be bad for the next few months, maybe quarters. The housing & mortgage problems are being addressed by the treasury & the FED, yet the general economic fallout is starting to pick up steam & there really are no quick fixes for the general economy ... rates are already very low, consumer stimulus has been tried & failed, more consumer & business stimulus will be tried, but consumers are frozen & businesses are in contraction mode to cope with the weakening economy & forecasts for a slower recovery than most would hope for. Lastly on the general stuff, Credit has been changed dramatically, for both borrowers & lenders it will be harder & more expensive to get it…for consumers & businesses and the demand for it is even in question as businesses & consumers make a secular change to utilize less leverage/debt/credit.
Going forward it will be critical to determine if an industry or individual company will be deemed too important to fail & thus deserves a government bailout. The good news about that is that you know the enterprise will not fail. The bad news is that the government is your partner & your business model will be different & probably less profitable.
Once you determine that an industry or company will be allowed to fail, normal fundamental analysis of the industry & business prospects will be similar to previous efforts to determine value, with some additional emphasis on avoiding businesses that require credit or debt to operate.
Here are some additional financial issues that could have a significant influence in determining the valuation of companies.
1) Determine if the company has investment losses embedded in the corporate cash reserves & investment portfolios.
2) Determine if the company has goodwill writedowns.
3) Determine if the company has unfunded pension obligations that will require cash infusions.
4) Determine if the book value of the company has to be reduced.
Bottom calling on the market or individual stocks is an exercise in futility. I think the best we should hope for is stabilization...sideways trading for a few weeks. At that point, we will have had enough time to determine new valuations with consideration for the weakened economy and more restrictive capital/debt markets, That's when the bottom will form & a new recovery phase for the equity markets can start to develope.

I think the market is "broken"

The volatility & confusion & fear is creating a trading environment that is dysfunctional. Most if not all trading/investing decisions are being motivated not by fundamentals, but by fear of unknown loss, sometimes in a different asset. For example, if you are losing money in a low priced or illiquid asset, then you sell whatever is liquid & worth more, just to reduce risk & shore up capital, for future losses in the illiquid stuff. This is playing out in a very violent fashion in the equity markets, as literally hundreds of hedge funds are all liquidating portfolios, without regard for fundamental valuation. We are quite literally seeing floods of stocks being sold into a market that has no appetite for the supply. So, it looks as though the whole thing is essentially broken, unable to function properly. Investors & managers of capital will naturally withdraw from this type of environment, just to protect & preserve capital. The trading ranges have been expanded in a magnitude that will create a distrust in market selloffs or rallys. We will need to see a period of relative calm before the market can truly stabilize. And even when we get that settling in & reduced volatility, investors trust will be hard to regain. Nothing will be trusted again. No corporate leader, no government official, no financial intermediary, no selloff & no rally... The market is broken. The perception & now the reality is that financial markets are dysfunctional, risky, & not to be trusted. We have entered a new phase/period where investors large & small, rich & poor, long term or shortterm will have an aversion & fundamental distrust in the financial system & equity mkts.

Boy was I wrong...
I guess all the kings horses & all the kings men couldnt put the market or the economy together again.
It now seems that the forces of contraction, especially with credit, are overwhelming even the most dynamic & unconventional efforts to stop it. The economic data will continue to reflect a very weak economy & plenty of uncertainty about the near & intermediate termoutlook. Corporate reports will also reflect the weakness & serious economic challenges to their businesses going out 3-9 months. The election will add further uncertainty to the situation...and lets hope its a clean election with no uncertainty about the outcome, i.e. contested election. While it looks as though the financial system will survive, the resulting economy & business enviroment will remain highly uncertain & risky for the next few months & quarters.
Suffice to say...I'm alot less bullish.


Bear Market Bailout

Don't Fight The Treasury, especially if they are backed up by the FED, SEC, Congress, & The President

After watching the Sunday morning news programs, I have completely rethunk my macro thesis...most importantly for the short term.

It has become increasingly obvious that the Treasury secretary, Ben Bernanke, Congress, & the President have gotten together & decided that they will not allow free markets to be free, that freedom would do bad things, so the financial super heros have come together & agreed to use all their powers to stop the free markets from being free.

Their reasoning & purpose is irrelevant. Fear is the motivation. They have the powers & tools to do what they want with no checks or balances....at least thats what they want.

Bazooka...haha, we are about to use the equivalent of a nuclear bomb to recapitalize the entire banking & financial system of the United States. The collateral damage is secondary to the task at hand.

We are also going to help out China, Japan, Saudi Arabia, & many other foreign governments & corporations...this is vitally necessary in order to get them to lend us more money in order to have enough money to execute the bailout plan.

The urgency & cooperation is scary, and seems to suggest that it's a done deal.

If this goes forward, banks are fine. The consumer will get a break in the form of easing credit & another stimulus package. Housing will most certainly get some more help. The automobile industry already begging, will now get its bailout.

I wouldn't be at all surprised if the FED decides to add its two cents by cutting interest rates adding even more power to the bailout punch.

Finally, the focus on & demonizing of the evil short sellers seems to have a lot of popular support, so maintaining short positions or viewpoints will be at an even greater disadvantage than they usually are.

While I am still convinced that the general economy has its problems, all this artificial support & stimulus will have an immediate & important impact on the general economy & probably the mood & confidence of the public. Bear market rallies can be quite strong & powerful.

Perfect timing to make sure the election is a happy one & the holiday shopping season is a profitable one.In short, I'm bullish on America!

Fundamentally Sound...


We have been told over & over & over & over & over & over & over by administration officials, three treasury secretaries, two FED chairmen, congressional leadership, & the president that our financial system is strong & our economy is fundamentally sound.
Something must have changed this week. Based on the most recent events, which we are told almost caused a collapse of the banking system, there can be no doubt that our financial system is NOT strong. And there is a very good argument that the economy is NOT fundamentally sound.
If the government has to rescue or bailout the entire banking system in order to avert a systemic financial collapse, that is not good, strong, or sound. Whatever the new & improved resolution is, it cannot be done with ease or inexpensively. There will be huge & mostly negative repercussions resulting from the things that are being planned in order to fix or save the system. Doing nothing & allowing the problems to play out would be worse, much worse, than doing what our leadership is telling us we must do to prevent the natural course from happening.
Trust & confidence is in tatters. Foreign investors cannot be looking upon this as good or leading to a better investing environment in the US. Since we rely on foreign “generosity” in order to fund everything we do, that will prove to be a very bad thing. Interest rates will rise dramatically & the US dollar will decline in value. Gold will rise in value. Our financial health will continue to deteriorate whether or not the bailout proceeds.

Systemic Financial Breakdown...IT's HAPPENING

The long feared & often talked about systemic financial failure is occurring.
The financial system is currently experiencing the results & consequences of a systemic financial breakdown which is whats causing the various financial disasters that are reported every few weeks on CNBC.
The financial stresses are rolling through the system in a systemic wave of financial failures. Many are not newsworthy or large enough to jeopardize the system, but they are occuring with more frequency.
The FED, US Treasury, SEC, & Congress in coordination with selected foreign central banks & governments are desperately trying to control & contain the damage to the overall financial system.
The nature of the the system; electronic settlements, counter party risks, leverage, securitizations, & derivatives makes for a difficult situation & frankly makes for a much less predictable situation & outcome.
The enormity of the financial leverage & embedded counter party risks along with the electronic settlement systems may very well set in motion an uncontrollable "event"...crash?!
In fact, I think that the system will need to be temporarily shutdown to prevent a financial meltdown.
Financial armageddon aside, the result of this systemic financial stress will be sharply higher interest rates, tighter lending standards, a weak economic environment, & a slower recovery.

THE TOP IS IN

Enough of the "bottom calling".The August 11th government & SEC manipulated short squeeze "bounce top" is in.

The July 15th Fannie/Freddie bailout bottom will be tested shortly as the latest round of unorthodox, unprecedented, & un-free market FED, SEC, & Treasury actions have failed & are resulting in a further blow to confidence in the financial markets.

Confidence, which Treasury Secretary Paulson has stated ad naseum is critical to the healing process, has been damaged further by his most recent actions & assurances.

The financial markets have swung investors around wildly as government leaders in conjunction with corporate managements have continued to openly manipulate stocks & then assure market participants that all is well. All this has done is compound losses & damage confidence.

Bottom callers will have to circle the wagons upon their return from summer vacations.

OIL=$115...what a bargain!...Brother can you spare some CREDIT?

Remember the good old days when oil was $100/brl. That was January 2008. Todays price $115 was eclipsed back in May of this year. Eight weeks later we peaked at $147. Even at todays prices, we are a full 60% higher than a year ago $73, up 15% ytd, & up 37% from February 2008 low $86. Lots of economic credit being given to drop in oil prices & hope that the weakness continues.

While the lower energy prices will help a tad, consumption & business expansion is being strangled by credit, access to it, less equity to draw against, tighter credit standards to qualify, more critical appraisal process of assets being lent against, & very heavy (unrefinanceable) debt load from the credit binge.

Just recently the major auto cos restricted or stopped completely leasing vehicles. That's 20% of the overall auto sales & 30-35% of the luxury segment. Morgan Stanley, JP Morgan, Bank of America, Wells Fargo, Washington Mutual, NationalCity, Wachovia, and many other banks have recently started freezing HELOC's & other consumer credit lending lines as well as pulling back form the business completely going forward. Amex is "reviewing customer financial profiles" in determining credit limits on its flagship card as balances have been steadily increasing over the past few months (those are the rich folks building up excessive unchecked debt).

A credit starved consumer cannot perform his duties. Businesses will be critically impacted by this restriction on consumption.

Banks are also tightening business credit. Banks are further tightening & raising the costs of business credit. That will have a direct result on overall economic growth, job creation, business & debt restructuring, etc.

While the market was celebrating over oils retreat to $115/brl, the FED reported what should have drawn the attention of the "bottoms in/look out above" crowd...

WASHINGTON (Dow Jones)--U.S. banks continued to tighten their standards on loans to households and businesses in the second quarter, said a Federal Reserve study that also shows that many banks think the credit tightening trend could continue into the first half of 2009.
"Large net fractions of domestic and foreign respondents expected their banks to tighten credit standards on all major loan categories in the second half of this year, and smaller, though substantial, net fractions of respondents expected their banks to tighten standards in the first half of 2009," the study said.

The Fed's quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices shows that demand for bank loans over the past three months continued to fall off.
Every quarter, the Fed surveys a panel of senior loan officers at major banks across the country. Fifty-two domestic banks and 21 U.S. branches and agencies of foreign banks responded to the survey.

Banks received the survey on or after July 10, and their responses were due July 24.

About 60% of the domestic banks surveyed reported having tightened lending standards to large and middle-market businesses. That's up slightly from what was reported in the last Fed survey conducted in April and released in May.

About 65% of the institutions, a percentage that is also up from the previous survey, also said they had tightened their lending standards on so-called commercial and industrial loans, also known as C&I loans, to small firms over the same period.

"Very large majorities of domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook, their bank's reduced tolerance for risk, and the worsening of industry-specific problems as reasons for tightening their lending standards and terms on C&I loans over the past three months," said the survey.

In addition, a significant portion of the banks surveyed reported having tightened their lending standards on prime, nontraditional and subprime residential mortgages over the previous three months.

About 75% of domestic respondents, which is up from 60% in the previous survey released in May, said they had tightened their lending standards on prime mortgages. Also, six out of seven respondents that originated subprime mortgage loans, which is a higher proportion than what was reported in the previous survey, indicated that they had tightened their lending standards on those loans over the past three months.

Responding to a special question related to mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE), about 30% of the domestic respondents indicated that their bank had securitized with or sold to the government-sponsored enterprises conforming-jumbo mortgage loans over the past three months and about 45% expected their bank to do so over the next six months.

Half of the surveyed loan officers with companies that didn't securitize or sell conforming-jumbo loans pointed to a lack of demand for conforming-jumbo loans at their bank. Still, about 45% cited the cost of the GSEs' guarantee fees or other pricing terms. Roughly 40% of respondents whose banks didn't securitize or sell the jumbo loans pointed to a limited number of mortgage applicants at their bank who meet the GSEs' underwriting criteria.

Turning to the results of the survey's consumer lending questions, about 65% of domestic banks indicated that they had tightened their lending standards on credit card loans over the past three months, which is up remarkably from the 30% reported in the survey released in May.

Additionally, "considerable fractions of respondents reported having increased minimum required credit scores on both types of consumer loans and reduce the extent to which such loans were granted to customers who did not meet their bank's credit-scoring thresholds," the report said.

Bottom fishing...

Searching for the right price, valuation, multiple of current &/or future earnings power, is hard. Usually, the reason for this is that all the relevant information in order to properly value assets or businesses is not always available, easily obtainable, or understandable...and because the information & data are always changing. In my estimation, the information & data we do do not know is more negative than positive & it is most likely changing for the worse not better.

All the talk regarding the "bottom" is rather misguided & misleading. Misguided because a bottom cannot be called until circumstances stop deteriorating... which has not happened.

Misleading because once that happens or is predicted, a bounce back is not warranted or gauranteed.

In general, the "bottom", when it is eventually hit, will be nothing more than the new perception of fair value of the earnings power of individual companies & the overall market.

This "bottom", new fair value, will be predicated & determined by what corporate mngts, analysts, & institutional investors, swf's, big private investment pool mngrs, hedge funds, etc... forecast, predict, & believe future revenues & earnings will be... in 2009 & beyond.

As we make our way into the 2nd half of 2008, it is getting harder to see clearly into early 2009...with the ongoing financial deleveraging & more big losses in the pipeline, the clear economic weakness which is now throughout the economy...it spread... how-zing...which was well contained over a year ago (wasn't) & has methodically spread & morphed into an economic wreaking ball & bulldozer...knocking down every ancliary business & others too...

Mortgage lenders to the banks to financials to insurers to to the professionals lawyers, accountants, bankers, brokers, capital creators, etc... now the general economy is being starved & suffocated from its credit & consumption engine. that seems to be (will) intensifying...

Borrowing rates for businesses & consumers are the highest in years even while fed has lowered rates & flooded the system with money, like never before yet banks are tightening, CC cos are tightening & lowering lines, banks are cutting heloc's, refis are frozen, auto cos tightening credit, etc.

Consumer is in flux facing high energy & food costs + decreased purchasing power due to general inflation & tighter credit enviroment.

With that as the situation for when the market or economy reach the proverbial bottom, new fair value, we will then need to see if the early part of 2009 forward will bring economic strengthening.

From there the mkt & economy can either rise, flatten out, or fall more. Determining the bottom, new fair value, is reliant on what happens next... that's the hard part & what makes calling the bottom so difficult & elusive. Especially with so much risk & uncertainty facing the economy & the market.

Its malignant & its spreading...

There are starting to be signs that the ongoing, seemingly US centric, credit & real estate downturn (collapse) is triggering a similar or even worse situation in many European countries. The foriegn leadership is acting in coordination with the US fed & treasury, in order to get the situation under control, while telling the public that all is better...its clearly not.

Further herculian central bank & govt interventions will be tried, but as they have to date, will probably fail.... This ongoing credit contraction is triggering a global financial collapse... its going in slow motion because of all the fed & congressional & EU supports, and still the equity Mkts worldwide are making new cycle & longer term lows.

Banks & financials continue to require fresh capital... even after raising more than $500billion & cutting billions of $$'s in divividend payouts, and downsizing the businesses. US banks & financial stocks have lost market(shareholder) value of some $1.2 trillion!!! Yes, thats real money... even to a Goldman, Merrill, Citi, Bear, JP Morgan, WaMu, Wachovia, NatCity, Thornburg, blackstone or blackrock, Lehman, etc... career man, managing partner, inv banker, research analsyst, account exec, inst salesman, etc... Its all their money in stock & options that's disappearing.

Avg Joe investor is losing money in the banks & financials for sure, but the huge wealth that has been lost in the canyons of wall street & other financial centers around the country, i.e. Charlotte NC, Greenwich CT, etc... by a concentrated segment of the workforce(high wage earners) bigtime financial execs, is enormous & probably life changing.

But I digress... The credit crisis is undoubtedly still evolving, the deleveraging is happening, albeit at a interupted pace due to the artificial non-mkt forces that are being employed by the central banks that are now holding nearly $1 trillion of the bad & impaired securitized paper the inv banks have swapped for treasuries.

The revaluation process is trying to happen, but the supports are slowing that as well. Yet, the banks & financials are still raising round after round of fresh capital & cutting dividends & business operations, and selling the valuable pieces of their enterprises that are still worth good money.

JPM stock is below where it was when they got chosen by the FED to get BSC. MER is considering selling one of its crown jewels, either Bloomberg or Blackstone interests, C is selling anything it can as well. MS credit rating is being downgraded. And LEH is undoubtedly still in the throes of its own problems.

The financial leadership is continuing to proclaim their expertise & forecasts of the worst is behind us, & things are gonna be alright, especially if they can keep raising new capital to repair their balance sheets. What's also happening is that European financials are breaking down. The world stock markets are coming to terms with the reality & severity of the situation.

The next phase of the credit implosion seems to be upon us.

The credit cancer is malignant & its spreading.

Republican strategy = distort the facts & scare the voters
Republicans are doing this continuously with regards to the war on terror & the economy.
On the war...they are saying that the proposed democrats policies will endanger our safety here at home & destabilize the middle east...if we pull out of iraq it will be disasterous for iraq, allow al qaida to declare victory, takeover iraq & threaten security/stability in the middle east (funny, but that’s exactly what our war of choice has done) & "the terrorists will follow us home" (haha...they are here already & will attack us at a time & place of their choosing).
On the economy... now the big thing is republicans saying that the democrats will hurt the economy...the fear talk is that if democrats get the white house it will be disasterous for our countrys economic situation...they will raise taxes, increase govt spending, hurt corporations, etc...all of which was already done in the last 8 years ...(almost 8 years into bush-it & the economy is in worst condition since great depression, bush admin oversaw howzing bubble, credit bubble, lax financial oversight, many corporate disasters, huge increase in govt spending & deficits, rising unemployment, destruction of the middle class, 30% decline in US$, & inflation... including 300% increase in oil w/out any initiatives to address energy independence)....now they are going to try to blame that on the incoming president & democratic congress... the spin, deception, misinformation, & outright lies are truely incredible.
If the electorate can overcome the republican spin machine it will be an amazing accomplishment....and then they will go to the fail safe "he's hussien obama...a black supremacist, anti American, "wolf in sheeps clothing" who will destroy America...yikes.

The FED..."You're on your own kids" >>>--->
Based on the recent (three week old) information from the FOMC minutes as well as current economic data, it seems that the FED is out of the game till after the November presidential election. Barring another financial crisis or obvious & severe economic downturn, the FED will not act to lower or raise interest rates. The reasoning behind this conclusion is that the FED all but said as much in the FOMC minutes & they are very concerned about inflation. They won’t change rates right before the election as they wouldn’t want to be seen influencing the presidential race, and they have said the markets need time to heal. So, essentially the FED is saying to the financial markets…”you’re on your own kids”.
That’s a scary thought in an environment of sluggish or uneven economic growth combined with generally obvious inflationary forces, or what I will call, ”slugflation”. I like that word better than stagflation, as it crystallizes what that economic enviroment does to businesses & consumers. Slugflation, as the word implies, will slug businesses with higher costs & slower sales, while at the same time it will slug consumers with higher prices & fewer jobs or stagnant incomes.
The prospect of no further FED action, except for the rolling TAFfys, TSLFys, & SLAFfys, is quite a new investment environment for most who have begged for & relied on FED & government interventions to defend their investment ideas & strategies. Allowing the free market to actually operate free from all the artificial supports & government interventions could pose a problem for the majority of investors, mutual fund mngrs, & hedge fund managers, especially with the ongoing belief that the market will be saved if any trouble comes along.
Looking ahead to a relaxing Memorial Day weekend with my family, I can’t help but be concerned about the current economic predicament====$4+ gas, high food costs, an ongoing how-zing collapse, an impaired financial system, a tight lending environment, a hotly divided electorate, & a sluggish economic environment. We have been told there are no silver bullets & that time is the remedy for many of the problems. I guess I can put my hope in the Treasury Secretary’s words “that relative to other developed nations around the world the US economy is fundamentally strong, flexible, & resilient”.
Or I could sell in May & go away.

Spring of Discontent
By the looks of the first few high profile Q1 earnings reports & warnings... the next few weeks will probably be chock full of more earnings misses & lowered guidance from all corners of the economy... Not just the banks, brokers, & builders. In fact... The big writedowns have become boring... Now a writedown has to beat UBS' $31 billion before it will even make the newsbug. What will be most disconcerting to the market will be the reports from the big diversified multi-nationals that will begin to show the slowing & contracting effects of the ongoing howzing & credit crisis. By the recent retail snales data, there can be no doubt that the US consumer is being impacted (even at the upper end, the rich... As lots of the wrenching financial distress is hitting lots of high earner areas... Banks, brokers, builders, financial engineers (masters of the universe)... Consumer confidence @ 26 year low confirms the sales data... or vice versa. Howzing pretty much has no hope anymore... So the earnings reports & incremental new bad data points will be basically ignored... Unfortunately for the rest of the mkt... especially financials & banks.. The continued bad howzing, as well as commercial real estate(CMBS... learn it) data due to come... will force more multubillion $ writedowns as the credits deteriorate with the asset values... as Paulson & Bernanke have said "a necessary & painful adjustment", it will continue. some signs also appeared in the last few weeks that CC & auto will deteriorate with the overleveraged consumer further straining the credit derivative mkt. Liquidity will remain dysfunctional until the financial system heals itself...read "unwinds the 30x leverage". Most Mngt will be well served to lower expectations &/or guidance for the Q2 earnings as well as talk down 2H guidance... If for nothing else than to set up a potential for a beat going into 2009. M&A has been all but dormant(except for msft/yhoo, and that starting to get weird)... and deal after deal has been abruptly or gradually called off... undoing billions in mkt cap & upcoming liquidity events. The unusual & herculian efforts being put forth by the FED & the federal govt(haven't seen congress cooperate & get more legislation passed ever) have helped to control & slowdown the adjustment in leverage & price, but both those adjustments will still take place, just slower & over longer period of time. The best part of the interventions is that it has taken systemic breakdown risk off the table. There will still be more hugely dilutive capital raising transactions as well as some reasonably high profile bankruptcies but no total financial collapse... and for what it worth that is a good thing. Unfortunately, as this process plays out, growth will be constrained as credit contracts & companies downsize(repair balance sheets & recover from losses), adjust cost structures, & resize for a slower growth enviroment. Difficult economic & corporate news will continue through this environment. Many taxing authorities (local municipalities, counties, cities, states, & federal coffers) will see, & start to whine about, a marked decline in tax reciepts as economic activity stalls. In some places... NYC tax revs could drop by 20% due to the high concentration of tax revs from investment banks. It is very obvious that Inflationary pressures have & will persist, whatever the causes, and there are good causes, commodity prices, soft, hard, & energy have stayed persistently high... No sharp spikes & dropoffs... just high & higher, as the slowing of the adjustment process allows for the economic activity to stay moderate, rather than a more sudden & abrupt slowdown. A stagflationary economic period could lead to an even more difficult enviroment for business & the consumer, but that wouldn't be seen till into the 3Q. If that developes 2009 will look to be worser... but lets not go there. For now the focus should be on the next few weeks... I know this isn't fashionable, but I don't think the "bottom" is in place. As a stream of bad news comes out the mkt will herk & jerk lower... In hopes of setting up a possibility for a year end rally... albeit from lower levels but rally nonetheless. The market has its best rallies on the heels of bad news events...so we should hope for more of those as it spurs the FED & govt to attention.
As we get there investors should raise cash, hedge longs positions, buy inverse index etf's(speculative), buy Gold & energy... Green & Agritrade.

If the Market is forward looking...what was it seeing in March?

Just 11 weeks ago, on March 17th, "Mr Market" took a look into the future & screamed...holy @#$%!! That Monday we all watched in amazement as Bear Stearns was taken under by JP Morgan @ a token $2/share and the broader market made new lows. While a full fledged financial collapse was averted, thanks to heroic & unprecedented actions by the FED & Treasury, the beginning of something bad was upon us. The market put in a "bottom" on that day, yet we all should have taken heed to what the market was seeing for us in September?

Was the market seeing the credit contraction ending, or the how-zing market recovering, or the banks restoring their capital, or the investment banks getting through the losses & deleveraging, &/or a robust economy?

If the market is supposed to be forward looking & a forecaster of future economic activity, then maybe the market was warning us about what was about to & is continuing to happen.... more losses in all parts of debt market, more dilutive capital raising, more wrenching corporate restructurings, & a stagflationary economy.

The "rally of hope" that all was well after the Bear Stearns event, was based on the belief that the worst was behind us & recovery was ahead... yet the facts are now showing otherwise... We are still in the midst of the problems & have yet to see the end of the crisis. The financial markets are in the throes of an unprecedneted credit contraction that will take time...maybe a long time. If Lehman's debt can get downgraded after all the fed support & fresh capital raising, they didn't need, then how can the problems be behind us when its clear they are ongoing?

The credit losses continue, the capital raising continues, the corporate restructurings continue, and there are still unknown losses & issues to resolve like CMBS, consumer/auto credit, municipal debt, ARPS, how-zing forclosures, unwinding of all the various FED TAFy's that is holding the bad debts, the GSE's risks, the rating agency nonsense, the bond insurer situation, and inflation & the economy.

To think the credit crisis is over & we are on our way back to a normalized investment enviroment, while nothing we are currently seeing indicates that the crisis is over, is simply more hope.

One of the best written & clearly stated explainations of what has transpired , what we are experiencing, & what we could expect going into the later half of 2008 & into 2009.

Credit Hurricane To Make Landfall

Bennet Sedacca...Minyanville
Jun 02, 2008

I don’t enjoy paying nearly $100 to fill up a tank any more than do people who are less fortunate than me. It is a tax those over-leveraged consumers don’t need as they face foreclosure and potential layoffs. It's no surprise, then, that consumer confidence is plummeting to a 28-year low, with a distinct difference this cycle. In the recent past, cyclical lows in consumer confidence have been accompanied by cyclical lows in equities. But again, the unwinding of credit is something we have not seen the likes of since the 1930’s and it is my belief that consumer confidence will go down and stay down. The key takeaway from all of this is that unless the loans that the alchemists used to put together the esoteric garbage that resides on balance sheets of brokers and banks perform, the brokers and bankers (and other investors embroiled in this mess) will not perform either. The daisy chain has begun; the hurricane is approaching our shores. Since I operate under the principle of ‘you cannot be too cautious with other people’s money’, I'm as cautious as ever.Inflation Adjusted West Texas Intermediate Crude (WTIC) Click to enlarge (Copyright 2008 Bloomberg L.P.) It's no surprise that oil crises have led to both recessions and lower stock prices. In the chart below, note that when oil rises dramatically, GDP growth slows or turns negative. Again, since this cycle is so unprecedented in so many ways, the economy is likely to stay weak for a protracted period of time. One of the big questions going around Wall Street these days is not if we are in a recession, but how long will it last and what shape will it take. Will it be a quick "V bottom"? I find this highly unlikely. A "W" bottom, or a "double dip," which some critics of President Bush find to be fitting? I don’t buy that either. The nastiest possibility is an "L-shaped" recession where we go into recession and stay in recession, much like the 1930’s experience here and the post-bubble experience in Japan. I'm not a proponent of that as well. I am looking for a sawtooth pattern where the economy drifts in and out of recession for many years until many of the excesses are wrung from the system. This should not be a great time for long only equity investing. Rather, an absolute return approach with capital preservation at the core, which includes credit risk avoidance for the most part. Inflation Adjusted WTIC versus Quarter over Quarter GDP (Annualized) Click to enlarge (Copyright 2008 Bloomberg L.P.) Non Farm Payrolls versus Gasoline Futures Click to enlarge (Copyright 2008 Bloomberg L.P.) Inflation Adjusted WTIC versus S&P 500 Index Click to enlarge(Copyright 2008 Bloomberg L.P.) The stresses on the economy are really being felt with the price of gasoline heading north of $4.00 per barrel. The longer prices stay up here, in oil and/or unleaded gasoline, the longer the economy will have a drag on it, and the more pronounced the change in the consumer’s buying habits. There were points along the line, at $2 per gallon and then $3 per gallon, where consumers continued to spend. For the longest time, consumers were using their house as an ATM machine, then credit card usage spiked, and now finally, gasoline consumption is dropping, and dropping rapidly, We are now at the point that the vicious cycle has begun—when higher prices lead to less spending which leads to less job creation (or job destruction) all at a time when the consumer is strapped. This will likely make the recession more protracted than almost anyone believes. The chart below which plots unleaded gas against Non Farm Payroll changes says it all. What is The Fed’s Next Move?One thing is for sure. The Bernanke-led Fed has its hands full cleaning up after ex-Chairman Greenspan, who is slowly going from hero to villain. The Maestro certainly didn’t create the whole problem by himself, but his legacy likely won’t be what he had hoped for. I've been critical for years as the Fed from 1995-2005 was clearly targeting asset prices. Like they say, "You know you are in an asset-based economy when the stock market has more of an impact than the real economy does on the stock market." We are there for sure. While Bernanke has been very imaginative in his policies, there is a sense of desperation in the air. I believe that the Fed will keep at it and simply try to slow down the unwinding process. Note the Federal Funds Futures graph below, which for the first time in a long while the market is pricing in a Fed tightening or rate hike by year-end. I'm betting the opposite way and will be adding duration and convexity to portfolios over the next month as I think inflation fears will switch to deflation fears; this is because we are in a period of debt destruction and periods of debt destruction are usually accompanied by bouts of deflation. I don’t buy the theory that the falling dollar will result in skyrocketing rates as some do. The U.S. is certainly in trouble, but we aren’t alone—we may just be ‘the best house in a bad neighborhood’. We are all in this together and emerging markets, after a nasty correction, will likely lead the next economic leg up. Demographics, in terms of birth/death rates and deficits for as far as the eye can see are a miserable back drop for our economy. Had the Fed left the business cycle alone and not targeted asset prices, we likely would not find ourselves in this mess. If would be nice if we could just click our heels and make it all go away. It will take time and some pain to pay off all these debts. Longer than most "hopers" are hoping for.Federal Funds Futures Curve Click to enlargeSummary: It’s Time to Buy the Storm Shutters Anyone that has a place on the beach in Florida or other hurricane-prone locales knows all about hurricane shutters. I had them at my beach place, but we always laughed that if a real hurricane hit, the shutters and the building would be swept into the ocean. One thing we never did was to tempt Mother Nature—we always take over "just in case." Such is the environment now. While I would love to take loads of risk (like hanging out at the beach and hoping the hurricane misses me), I'm not. There are days, weeks and months that we're humbled by the market’s ability to shake off bad news. I think there will be four words that many will hope they had heeded—full faith and credit. I even believe that while Fannie Mae and Freddie Mac (FRE) have an implicit guarantee from Uncle Sam (Ginnie Mae also has an implicit guarantee), I think that Fannie and Freddie, before it is all over (as their balance sheets may possibly be the worst of all as they soak up all the unwanted loans from defunct lenders and originators) will also have the explicit guarantee of Uncle Sam. What happens to the common shareholders is anyone’s best guess, but my thoughts are that the preferred shares are likely money-good (even though we have recently pared back those positions), the mortgage pools will likely end up like Ginnie Mae. It is why I, in 99% of cases, do not take credit risk. In the first place, I don’t think I'm being properly compensated. In the second place, given what I know about the balance sheets of everyone from consumers to banks/brokers to the U.S. government itself, I find leverage and way too much of it. I'm humble enough to say that I could be wrong and the fears I have could be overblown, but that is something I can deal with. What I can't do is to recklessly take risk in the face of what will likely go down as the greatest unwind of our lives.

Barak Obama Fear Mongering

...a learned response from the Bush Administration

As the inevitable democratic nomination of Barak Obama gets closer & closer, the fear mongering about what will happen to the United States (& Israel), if he becomes President, has reached a fever pitch...even I am starting to get scared!

The fear mongers want us to believe that Barak Obama is an anti-American, anti-Semitic, "wolf in sheep's clothing", black supremacist that will put policies in place which would alter our country's moral & cultural beliefs, or worse, threaten our safety & our democracy. They want to convince the American electorate that Barak Obama has his sights set on somehow sabotaging our very existence. Are we to believe he could actually do that?

Thankfully, we still have a democracy made up of three branches of government with checks & balances to prevent any one branch of government from being to powerful. Unfortunately, for quite sometime, our government has not operated that way.

The country has become accustom to being ruled by a secretive, overbearing, our way or the highway, fear mongering Bush administration. I think there is very little chance that congress or the American people will allow the next president (or hopefully any future president) to govern the country that way.

President George W. Bush & his administration have ruled the United States via subversion, deception, coercion, and various other undemocratic, & in some cases illegal ways. They have systemically & methodically violated the constitution, the bill of rights, & the federal penal code (not to mention the Geneva Convention) all the while favoring their friends & business associates with the spoils of their efforts. And with complete disregard for the wishes of the American people.

They have justified their actions by telling the American people, usually way after the fact (& after they have been caught, denied the charges, & subsequently been uncovered), that it was for national security purposes & if they told us we would have been in danger.

President Bush has ignored the advice of his senior advisers all the while claiming the moral high ground or authority, regardless of expert & layman advice to the contrary.

The fear mongers think that they can scare the American people out of voting for a person they trust & believe would do a good job running the country using the very tactics that they used to lead us to war. Ramp up the fear, question your patriotism, & accuse you of aiding & abetting the enemy.

The fear we should all have is of another president like George W. Bush & the people who were his accomplices during the past eight years. All of which has threatened our democracy & our safety.

Vote your wallet, vote your religion, vote your conscience, vote your morals, vote for who you think will look out for your best interests or the best interest of the country, vote for who you think will improve the world. If we knew what George W. Bush would have done during his time as president, many Americans would have cast a different vote.