The pattern continues

Don't count on "Change" to help the Stock Market

The pattern continues. Just a few days before a long weekend & the presidential inaugural, the banking system came close to another meltdown, only to be saved by the Federal Government, again, another in the ongoing, rolling, systemic failure of the financial system. Its now clear that CitiGroup has failed & has essentially been nationalized. BofA must have notified Treasury that the Merrill deal was in jeopardy as the losses would be too big for it to absorb, or just decided it was the right time to play its hand for a government deal like JPMorgan got for Bear Stearns, so Ken Lewis got the Jamie Dimon package of government guarantees & backstops in order to takeover Merrill Lynch & its rotting debt portfolio. Neither is a good thing & neither will spur demand for borrowing.
Both incidents point to the unmistakable fact that the financial system is still fragile & all the efforts to date have NOT resolved what is wrong. The government has again stepped in front of the market right in the nick of time to defend against further equity market declines. The only difference this time is that they did it during normal working hours rather than on Sunday night....probably a scheduling conflict with the upcoming inauguration.
Now market players are focused on Tuesday's inauguration of President Obama. While that event will be inspiring & exciting, it will not spur a pick up in economic activity, except in Washington DC. Many 'hats' are being hung on the change that is coming, especially the economic recovery plan, hoping that the bulk of the change comes in the value of stocks & homes.
The unfortunate reality is that the new president will be hard pressed to create robust economic activity, regardless of how much change he ushers in. The dismal economic situation will endure for quite sometime, probably six months minimum. The economy is in a downward trajectory due to all the bad things that have occurred & that will not reverse quickly. President Obamas first 100 days, which ends May 1st, will be filled with historically weak economic & corporate reports, ongoing municipal & corporate downsizing, & continuing consumer retrenchment.
If congress acts with urgency, it will also be punctuated by a trillion dollar stimulus plan, the equivalent of a defibrillator electric shock blast for a heart attack victim. When economic activity does stabilize, stop declining, the recovery will be a long process that will not lend itself to a sharp & steady upturn. Rather it will be slow & laborious, starting & stopping many times as the various government assistance, supports, rescues, bailouts, zero rates, & stimulus work there way into the broader economy. The repair & recovery of our impaired economy will take a very long time & to expect anything different is just hopeful.
Don't count on President Obamas promise of Change to alter the facts & reality of our economic predicament or to make the stock market rally, especially in the nearterm.

Shoes To Drop In 2009

2008 was a very eventful year filled with many manmade & natural disasters. Stock market participants suffered torrential shoe storms, getting hit on the head many times throughout the year with so called 'shoes' dropping, sometimes they came in pairs. After each historic shoe event, the question was... will more shoes drop & from what closet will they come?

I'm here to give fair warning that there are more shoes to drop, some coming from closets we aren't even paying attention to. Arguably, we should all be prepared & ready for these shoe showers, as the economic data & corporate reports are foreshadowing more weakness that will last for a longer time. With that backdrop, here is my 2009 shoe drop forecast.

1) Commercial Real Estate is going to face the same challenges that the residential housing market went through & continues to go through...except it will be worse. This shoe has implications for banks & insurance companies as well as the commercial real estate developers, both public & private.

2) There will be at least one automobile manufacturer(GM) bankruptcy by early spring. If this shoe drops, a second automobile bankruptcy (Chrysler) should follow shortly thereafter. And, a European automobile manufacturer could also go into Administration as well.

3) Corporate pension plans will show a big problem. Specifically, most if not all corporate pension funds are significantly underfunded & will require companies to shore up those pensions using up vitally needed cash.

4) Private Equity will suffer severely as funding continues to be very difficult & operations of the businesses will be impacted by the recession & will require capital. In addition, the IPO market will provide no relief for P/E to monetize investments & exit businesses.

5) Hedge Funds will continue to face redemptions & underwhelming performance. This will continue to pressure the markets & reduce liquidity. It will also impact the brokerage industry.

6) Municipalities all across the country will face huge budget deficits & will be forced to cut services & raise taxes. A major municipal default will occur before year end.

7) More small & mid-sized bank failures will occur...these will be the flip flops of the shoe storm.

8) The housing depression will conitinue as prices continue to fall & demand for homes does not materialize even with all the government programs being put forth. Housing inventory will rise to historic levels. at least one major homebuilder will go bankrupt.

9) There will be at least one, more likely many, major retail bankrupcty and at least one major commercial retail landlord, REIT, will go bankrupt.

10) Warren Buffets Berkshire Hathaway will face the slings & arrows of the ongoing economic weakness & financial crisis. The stock will be cut down to size...maybe $50,000/share or so. The legendary CEO Warren Buffet, having just won the CEO of the year award for 2008 will be unable to defend his empire from the current economic situation. As with many other pillars of the financial markets & wall street, it would only be fit for the company to show its vulnerabilities and succomb to the forces that have impacted every company in every business that Berkshire Hathaway owns or operates.

As you can see, the closet is full & the shoes are ready to drop...heads up.

Frugality is the New Black

Thrift & savings are back in style. No longer will you look at others in envy of their luxury & excess. Most will want to hide, and preserve, whatever wealth they have hoping it's enough for their later years in life. Whether you have (had) money or not, you won't be questioned about your thriftiness, you will be acknowledged & admired for it.

There is a SECULAR change happening. The theory of "if we advertise it they will buy it" is being challenged. The common notion that Americans will continue to consume at a rate well beyond their needs & ability is being forcibly changed.

The American psyche about how & what they need, want, desire...consume is changing. The concept of ever growing prosperity & entitlement has been replaced by a fear of having less & living a lower 'standard', maybe even not keeping up with the Jones'.

The damage of a generation of profligacy & excess is done. It is apparent that the baby boom generation, for all its good, has left an indelible mark on our country's financial health & has jeopardized its own retirement years. The next generation is watching & hoping the financial damage can be fixed before they retire. And, the younger generation is watching in horror & preparing carefully to make sure they don't end up with an even worse financial situation.

None of these 'generations' has lived "like their grandparents" did. I remember my grandparents always asking why we needed this or that or why we weren't using something longer or more thoroughly...you know, to "get the most for your money". That wasn't part of our thinking. IN fact, most of the time we were getting very little for our money, and didn't really care much about it. We thought their would always be "more where that came from".

My grandparents were always trying to "get the most for their money". We would mock them for their thrift & frugality...joking that they should stop being so cheap & enjoy their money (spend it). Well thank goodness they didn't listen to us, because when the passed away they had something left, which we got & enjoyed (spent) in short order.

The current economic situation has created a new dynamic. Wealth has been destroyed & careers have been interrupted. Every socio-economic class has been impacted. The government is trying everything to fix the situation, but we all know what has happened & that the future is going to be different. Changes are being forced upon the entire American population. Consumption behavior has changed & will be very different going forward.

The implications of this secular change in consumerism are enormous. One good implication is that in 5-10 years, we will have rebuilt our savings & financial security. Near term, this will cause considerably more economic damage in order to resize our retail complex.

The boom times have created a hugely overbuilt retail complex...from the manufacturing & supply chain to the marketing & store base...all of which will have to be 'downsized', some wiped out completely. The days of relying on the all mighty US consumer are over. Frugality is the new black.