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.