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03/14/2014

The Market Bottoms

With the five-year anniversary of the market lows of March 2009, it’s time to turn to the archives of StocksandNews to see what I was writing on at the height of the financial crisis. Frankly, what I put together the week ending 3/6/09 was extraordinary in terms of market history. Stocks would bottom the next Monday, March 9. 

Following is everything I wrote in my “Week in Review” column, verbatim, on the Wall Street side (I left out my “Foreign Affairs” and “Random Musings” sections) for Saturday, March 7, 2009. [Back then I posted Saturday mornings. These days, late Friday nights.]

For the week 3/2-3/6

[Posted 7:00 AM ET] 

Honeymoon? You Call This A Stinkin’ Honeymoon? 

Many of us are beyond being frustrated these days. The number one issue is the banks, yet President Barack Obama appears to be interested in solving everything else but getting to work on this paramount problem. As George Will commented, “This is like performing a heart transplant while the patient is running a marathon.” 

We learned this week that the unemployment rate for February hit 8.1%, as another 651,000 lost their jobs. Coupled with steep revisions downward for December (to a level of 681,000…the worst since October 1949) and January, the economy has now shed 2.6 million jobs the past four months and 4.4 million since December 2007, when the recession officially started. 

We’ve also seen shares in Citigroup trade below $1, General Motors to below $1.50, its lowest level since 1933, General Electric at sub-$6, the lowest since 1993, and the Dow Jones and S&P at 12-year lows. 

Warren Buffett: “The economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.” 

Stephen Roach, Chairman of Morgan Stanley Asia / New York Times: “Any whiffs of growth are likely to herald a false dawn, because the consumer remains in terrible shape. American families have lived beyond their means for more than a decade by borrowing against their over-valued homes. With both the housing and credit bubbles having burst, their stock portfolios down and their jobs threatened, consumers have been shocked into a new frugality. They are likely to be restrained for years to come. The consumption share of gross domestic product is still 71 percent – down from a peak of 72 percent but well above the 67 percent that prevailed from 1975 to 2000. 

“This points to an unusually anemic upturn, at best – not strong enough to keep the unemployment rate from rising to near 10 percent over the next year and a half. Since it’s hard to call that a recovery, it looks to me as if this recession won’t end until late 2010 or early 2011.” 

Niall Ferguson, Harvard professor / New York Times: “This is a crisis of excessive debt, the end of the Age of Leverage. It will take longer than a few more months to resolve bank and household insolvency, especially with asset prices continuing to fall so rapidly….This recession is taking place as the rest of the world is doing even worse than the United States. The collapse of trade as measured by East Asian export data is petrifying. 

“So far in this recession, remember, we have had only two consecutive quarters of declining gross domestic product. At the moment, I find it quite easy to imagine two consecutive years of contraction. And I don’t rule out two more lean years after then.” 

Economist Nouriel Roubini / New York Times: “Today, as we enter the 15th month, it’s obvious that we are already in a painful U-shaped recession that has become global and will last at least until the end of the year – 24 months, the longest since the Great Depression. Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with the unemployment rate rising toward 10 percent, we will still be substantially in a recession…. 

“And things could get worse. We now face a 1 in 3 chance that, if appropriate policies are not put in place, this ugly U-shaped recession may turn into a more virulent L-shaped near-depression or stag-deflation (a deadly combination of economic stagnation and price deflation) like the one Japan experienced in the 1990s after its real estate and equity bubbles burst.” 

It’s about a total loss of confidence, not only in the markets, but in our government, at least among market participants. 

Paul Krugman / New York Times 

“Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. ‘While the cost of action will be great,’ he declared, ‘I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.’ 

“Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern. 

“Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators. 

“Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again. 

“Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as ‘toxic waste,’ are really worth much more than anyone is actually willing to pay for them – and that if these assets were properly priced, all our troubles would go away…. 

“The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable. 

“But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.” 

Charles Krauthammer / Washington Post 

“And yet with our financial house on fire, Obama makes clear both in his speech and his budget that the essence of his presidency will be the transformation of health care, education and energy. Four months after winning the election, six weeks after his swearing-in, Obama has yet to unveil a plan to deal with the banking crisis. 

“What’s going on? ‘You never want a serious crisis to go to waste,’ said chief of staff Rahm Emanuel. ‘This crisis provides the opportunity for us to do things that you could not do before.’ 

“Things. Now we know what they are. The markets’ recent precipitous decline is a reaction not just to the absence of any plausible bank rescue plan, but also to the suspicion that Obama sees the continuing financial crisis as usefully creating the psychological conditions – the sense of crisis bordering on fear-itself panic – for enacting his ‘Big Bang’ agenda to federalize and/or socialize health care, education and energy, the commanding heights of post-industrial society. 

“Clever politics, but intellectually dishonest to the core. Health, education and energy – worthy and weighty as they may be – are not the cause of our financial collapse. And they are not the cure. The fraudulent claim that they are both cause and cure is the rhetorical device by which an ambitious president intends to enact the most radical agenda of social transformation seen in our lifetime.” 

Gerald Seib / Wall Street Journal 

“Any president, particularly the current one, has a lot of things to worry about. Should the level of the Dow Jones Industrial Average be one of them? 

“In a word: yes…. 

“Presidents usually pretend they don’t pay much attention to such stock-market gyrations. If it’s been said once from a White House podium, it’s been said a thousand times: ‘Markets rise, markets fall. We worry about the fundamentals of the economy instead.’ 

“President Barack Obama gave his own version of that response this week, declaring in response to a reporter’s question: ‘You know, the stock market is sort of like a tracking poll in politics.   It bobs up and down day to day, and if you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.’ 

“But amid today’s economic wreckage, it isn’t that simple, and Mr. Obama knows it. He illustrated as much by immediately following his ‘tracking poll’ comment, which drew quick attacks from Republicans, with a more extraordinary statement: He delivered something between a plug and a plea for investors to return to the stock market: 

“ ‘What you’re now seeing is profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.’ 

“That suggests the president grasps a new reality. The level of the stock market matters a lot more now than before, for political as well as economic reasons. Economically, it is a producer (or destroyer) of wealth for far more Americans than ever before. Politically, it represents a far more important barometer of the nation’s climate and psyche today than it does in normal times…. 

“(The) market and its health matter more on Main Street than ever before. On the psychological front…recent polling indicates that economic confidence began to plunge when housing prices and the stock market both dropped, suggesting that rebuilding consumer confidence will require both stable real-estate prices and a ‘decent’ Dow Jones Industrial Average…. 

“In other words, people were as likely to feel hurt by the stock market’s decline as by the overall economic decline…. 

“The spread of 401(k)s and individual retirement accounts means market conditions penetrate tens of millions more homes now, which is one of the most significant changes in the structure of the economy in the past generation…. 

“All of which raises the question of what the president could actually do to get the stock market moving upward. That’s not easy. Building confidence in his administration’s bank bailout plan is key, as is improving overall consumer and investor psychology.” 

And this editorial from the Wall Street Journal that truly defines the Obama presidency thus far. 

“Americans have welcomed the Obama era in the same spirit of hope the President campaigned on. But after five weeks in office, it’s become clear that Mr. Obama’s policies are slowing, if not stopping, what would otherwise be the normal process of economic recovery. From punishing business to squandering scarce national public resources, Team Obama is creating more uncertainty and less confidence – and thus a longer period of recession or sub-par growth. 

“The Democrats who now run Washington don’t want to hear this, because they benefit from blaming all bad economic news on President Bush. And Mr. Obama has inherited an unusual recession deepened by credit problems, both of which will take time to climb out of. But it’s also true that the economy has fallen far enough, and long enough, that much of the excess that led to recession is being worked off….What goes down will come up – unless destructive policies interfere with the sources of potential recovery…. 

“So what has happened in the last two months? The economy has received no great new outside shock. Exchange rates and other prices have been stable, and there are no security crises of note. The reality of a sharp recession has been known and built into stock prices since last year’s fourth quarter. 

“What is new is the unveiling of Mr. Obama’s agenda and his approach to governance. Every new President has a finite stock of capital – financial and political – to deploy, and amid recession Mr. Obama has more than most. But one negative revelation has been the way he has chosen to spend his scarce resources on income transfers rather than growth promotion.  Most of his ‘stimulus’ spending was devoted to social programs, rather than public works, and nearly all of the tax cuts were devoted to income maintenance rather than to improving incentives to work or invest. 

“His Treasury has been making a similar mistake with its financial bailout plans. The banking system needs to work through its losses, and one necessary use of public capital is to assist in burning down those bad assets as fast as possible. Yet most of Team Obama’s ministrations so far have gone toward triage and life support, rather than repair and recovery…. 

“Listening to Mr. Obama and his chief of staff, Rahm Emanuel, on the weekend, we couldn’t help but wonder if they appreciate any of this. They seem preoccupied with going to the barricades against Republicans who wield little power, or picking a fight with Rush Limbaugh, as if this is the kind of economic leadership Americans want. 

“Perhaps they’re reading the polls and figure they have two or three years before voters stop blaming Republicans and Mr. Bush for the economy. Even if that’s right in the long run, in the meantime their assault on business and investors is delaying a recovery and ensuring that the expansion will be weaker than it should be when it finally does arrive.” 

---
 
Around the World 

John Lipsky, First Managing Director IMF: “Our calculations suggest that the fall in global GDP in the fourth quarter of last year and the first quarter of this year is the sharpest we can find in the post-war records. A forceful policy response is both warranted and justified…. The emerging consensus is that it looks as if the downturn in the advanced economies will run through this year and into next year.” [Reuters] 

The IMF is close to announcing that global growth in 2009 will go negative, rather than the small increase it had been forecasting. Deflation is increasingly a concern, particularly with private sector wages. 

The Bank of England and the European Central Bank once again lowered their core lending rates to record low levels, 0.50% and 1.50%, respectively, as the Euro nations saw a key manufacturing index for February, the PMI, hit the 33.5 level [50 being the dividing line between growth and contraction].  

Property prices across Europe were falling in every market by the end of 2008, as one analysis notes core markets are set to suffer “marked downturns” in 2009. Author of the study, Professor Michael Ball, said: “There is greater synchronization of housing market declines in Europe than has been seen in the past and there are going to be some tough times before marked recovery occurs.” 

The 27 nations comprising the European Union have a myriad of problems, the biggest of which being the lack of institutional mechanisms for addressing individual issues, a la, say, the U.S. Federal Reserve’s many weapons. The EU is in many respects still in the formation stage, and, importantly, the member states continue to cling to history, so just when they can least afford it, they are beginning to face off and reveal ugliness not seen since both World War II and the Cold War. Hungary’s Prime Minister Gyurcsany warned “of a new Iron Curtain,” while old members such as Germany and France wonder how far they want to go in helping nations on the verge of imploding such as Hungary, Romania and the Baltic states. You also have the issue of many of the struggling nations not employing the euro, but Old Europe doesn’t want to speed up the process to allow a Romania to adopt it. 

And with all this transpiring, a topic I’ve long brought up, xenophobia, is today increasingly rearing its ugly head, with the Roma (Gypsies) a standard target.   There was a big incident in Hungary this past Monday, where two Roma, a father and his 5-year-old son, were routed from their home, which had been set on fire, and then shot to death; the latest in a pattern of racially motivated crimes. 5,000 showed up at the funeral and you talk about what must have been an emotional scene, here is the Reuters account. 

“Black-clad mourners wept and when the coffin was lowered into the grave in the small hillside cemetery, the world-famous 100-member Gypsy Symphony Orchestra started to play.” 

In Asia, there is no country in the world where opinion is more split than on China’s prospects, with some, such as Chinese Premier Wen Jiabao, forecasting 8% growth, the benchmark, while others say growth will be minimal. The reason for the uncertainty has to do with the legitimacy of any official data. I was listening to a conference call this week for a China biodiesel company (not the one I own) and as I told a fellow investor who was also in on it, when dealing with these folks you have to listen intently for the truth. [Though I hasten to add, the ‘greatest country on earth’…us…has more than a few examples of its own of deceit of the highest order the past decade in particular.] For example, this operator said they were able to sell all of the biodiesel they could produce. I’m not sure I believe that…and the results haven’t been audited as yet. 

So, when we hear that China’s own PMI index of manufacturing has risen three consecutive months (though still below 50…45.1 for Feb.), who the heck knows if a seemingly positive trend is really in place? The Chinese did admit that residential real estate is generally down 12-15% in value, depending on whether you are talking mass residential or luxury. 

In Japan, capital spending plummeted 17% in the fourth quarter, while next week it is expected that the government will revise Q4 GDP down to -3.3%, the worst level since 1974. 

Elsewhere, Malaysia’s fourth quarter GDP came in at up just 0.1%, while the Aussies unexpectedly revealed Q4 GDP declined 0.5%. 

The Obama Housing Plan 

48% of the nation’s homeowners who have a subprime, adjustable-rate mortgage are now behind on their payments or in foreclosure [60% in Florida]. 12% of all mortgage holders were at least one month late or in foreclosure [4.6% at least 60 days behind], up from 8% at the end of 2007.  

In looking at the number of mortgage holders “underwater,” 8.31 million properties had “negative equity” at the end of 2008, 20% of mortgage holders. In Nevada, 55% are underwater [Michigan 40%, Arizona 32%, Florida and California 30%. New York is best at 4.7% but this figure is adjusting rapidly.] 

So with the above in mind, we have the president’s housing stabilization plan. There are two main components. One allows those current on their mortgage payments but with little or no equity in their homes to refinance at today’s low interest rates. 

The second component involves modifying mortgages to lower monthly payments to what was once the universal standard, 31% of the borrower’s gross monthly income. 

But the first provision is open only to those with loans owned by Fannie Mae or Freddie Mac, which thus excludes borrowers with subprime and other exotica; as well as those with “jumbo” mortgages that are in excess of $729,750. 

Plus, borrowers owing more than 105% of their current value won’t be eligible. Well, just look at the above data on houses underwater and you can see how a huge slug thus become ineligible, particularly in the hardest hit states. In California, for example, one of the worst hit areas is the Inland Empire, where nearly half the homeowners owe more on their loans than the property is worth (and nearly a like percentage over the 105% threshold).  

At the same time, the Obama plan is at least a start and it’s far more than anything the Bush administration came up with. But we’ll see if the incentives for lenders built into the program are effective, and whether a just passed House provision, allowing bankruptcy judges to cut the mortgage debt owed by homeowners as a last resort to avert foreclosure, the “cramdown” provision, works as well. 

The bottom line is if you fit into one of these categories, or even if you don’t, you must find out who your lender or servicer is, assuming you can get someone on the phone. 

AIG 

On Monday, the world’s largest insurer announced a record $62 billion loss for the fourth quarter, with $billions and $billions of new losses to follow as the company pays one counterparty after another on the collateralized debt obligations it was guaranteeing. [The Wall Street Journal is reporting Saturday that among the recipients are Goldman Sachs and Deutsche Bank, both to the tune of $6 billion.] And on top of a previous $150 billion in government bailout funds, AIG secured a fresh $30 billion in exchange for the government taking big stakes in two of AIG’s biggest units. The London-based division that started this whole mess is under investigation by the U.S. Department of Justice, the SEC and U.K.’s Serious Fraud Office. It’s too bad some of William Wallace’s men aren’t around to take care of the miscreants in Medieval fashion, beginning with the rack. 

Federal Reserve Chairman Ben Bernanke, in a rare display of emotion at a Senate hearing, said of AIG: 

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG. AIG exploited a huge gap in the regulatory system, there was no oversight of the financial-products division, and this (became) a hedge fund that was basically attached to a large and stable insurance company.” But at the same time, last September there was no other option than to “try and stabilize the system” in saving the firm. 

Street Bytes 

--The Dow Jones Industrial Average – which is about to undergo a revamp with two components, Citigroup and General Motors, priced at the cost of a candy bar, being replaced shortly – and the S&P 500 traded at 12-year lows this week. The Dow finished down 6.2% to close at 6626, after trading below 6500 Friday afternoon, and is now off 53% from its highs of October 2007. The S&P, at 683, is 56% off its high of 1565. 

As if that’s not bad enough, the S&P Financials are now down 83%, surpassing the 82% decline of the S&P’s prime tech index following the bursting of the tech bubble, 2000-2002.  

Moving right along, sales at the chain stores for February, save Wal-Mart, were down, though some say not as much as expected; Wal-Mart was up 5%, but Target was down 4%, Macy’s 8.5%, Nordstrom 15%, and Saks 26%. 

--U.S. Treasury Yields
 
6-mo. 0.38% 2-yr. 0.95% 10-yr. 2.87% 30-yr. 3.55% 

Rates declined on the fear factor and further evidence the economy isn’t close to mounting a recovery. 

Warren Buffett: “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.” 

There was some important data on the economy, with January personal income up 0.4% and consumption up 0.6%, both better than expected. Construction spending was down 3.3% (worse than expected), while factory orders fell 1.9% (better). The ISM manufacturing index came in at 35.8 for February (better) while the ISM service figure was also better. 

--Editorial / Wall Street Journal…on the FDIC’s plan to seek $27 billion in new fees from the banking system to shore up its bailout fund. 

“(Sheila) Bair painted Friday’s decision to dun the banks for $27 billion this year as an act of fiscal responsibility, noting that unlike other rescue programs, the FDIC might not have to hit up taxpayers or tap that credit line this year. But this is a false economy if the money sucked out of the banking system to pay for deposit insurance drives more banks to the brink of failure. 

“That $27 billion levy against an insured deposit base of $4.76 trillion may not seem like much. But it could mean $2 million or more this year for a bank with $1 billion in deposits, which could in turn represent a substantial drain on earnings at a time when the economy needs banks to earn their way out of trouble. Money paid to the FDIC can’t be leveraged to support new lending, so $27 billion in FDIC premiums could also take $150 billion or so out of lending in the coming year.” 

[A Senate bill may loan the FDIC up to $500 billion…more next week.] 

--Editorial / Wall Street Journal 

“The Dow Jones Industrial Average fell another 281 points yesterday (Thurs.), or 4%, while President Obama began his political push for nationalizing health care and Barney Frank called upon state, local and federal officials to prosecute ‘those people whose irresponsible and, in some cases, criminal actions helped bring about this crisis.’ (In what must have been an oversight, Mr. Frank left himself off the target list.)” 

--Steve Forbes / Wall Street Journal 

“What is most astounding about President Barack Obama’s radical economic recovery program isn’t its breadth, but its continuation of the most destructive policies of the Bush administration.   These Bush policies were in themselves repudiations of Franklin Delano Roosevelt, Mr. Obama’s hero. 

“The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or ‘fair value’ accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down. 

“That works when you have very liquid securities, such as Treasurys, or the common stock of IBM or GE. But when the credit crisis hit in 2007, there was no market for subprime securities and other suspect aspects. Yet regulators and auditors kept pressing banks and other financial firms to knock down the book value of this paper, even in cases where these obligations were being fully serviced in the payment of principal and interest…. 

“Mark-to-market accounting is the principle reason why our financial system is in a meltdown. The destructiveness of mark-to-market – which was in force before the Great Depression – is why FDR suspended it in 1938. It was unnecessarily destroying banks.” 

[The House is set to begin debating whether or not to repeal or suspend mark-to-market.] 

--Auto sales in February were once again putrid. General Motors, down 53%; Ford, 48%; Chrysler, 44%; Toyota, 40%; Honda, 38%; Nissan, 37%...the lowest monthly total for the industry since at least 1981. 

GM added that aside from its well-known problems in the U.S., its European arm could run out of money by next month, putting 300,000 jobs on the continent at risk, in making a request for separate European bailout funds for its operations. 

Japanese auto sales plunged 32% in February, the biggest monthly drop since 1974. In all of 2008, sales in Japan were 3.21 million vehicles, also the worst figure since ’74. 

Toyota expects its world-wide production to drop 12% in the next year, but the CEO at Volvo said he was looking for the U.S. auto market to bottom in ‘09. Stephen Odell said, “I honestly believe this year is the trough, and we’ll need people to build cars and do other things.” 

--GE CEO Jeffrey Immelt, watching the world’s biggest conglomerate sink faster than A-Rod, acknowledged, “Our company’s reputation was tarnished because we weren’t the ‘safe and reliable’ growth company that is our aspiration. I accept responsibility for this.” So quit! Geezuz. This entire disaster occurred under your watch (Immelt took over from Jack Welch, Sept. 2001). 

Of course the story remains GE Capital and its massive real estate and mortgage holdings. As Steven Winoker, an analyst at Sanford C. Bernstein & Co. put it, GE has set aside roughly $10 billion in provisions for losses on its $380 billion in receivables at GE Capital. “The concern is that number should be much higher.” [Wall Street Journal] 

--If I’m Red Lobster, I introduce a new special… “The Clawback.” Same thing as being able to take home a doggy-bag, but a little re-labeling, coupled with some humorous commercials of lobsters pulling cash out of the pockets of Wall Street executives, may work wonders in satiating the public’s anger over compensation. 

This week we learned 11 Merrill Lynch execs were paid more than $10 million apiece in cash and stock last year, even as the firm’s loss for ‘08 was exploding to over $27 billion. And this doesn’t include former CEO John Thain and another nine cohorts who were all seeking $10 million+ for themselves before a Merrill Lynch board member, John Finnegan, who headed the compensation committee, stepped in and found the request “astonishing,” according to sources. [Greg B. Smith / New York Daily News] Thain acts like he voluntarily pulled the request, but the truth lies elsewhere. It turns out Thain, last October, was seeking $40 million!  

--Then there is the case of UBS, which could soon see some of its executives facing prosecution by the U.S. Justice Department as part of a widening investigation into tax evasion. It threatens to spiral out of control as the battle between the United States and Switzerland is joined; the Swiss having provided $60 billion in aid to UBS which is critically important to the health of the economy there.   

U.S. prosecutors say UBS Chairman Peter Kurer was part of a 2002 committee that “knowingly” withheld information relating to its obligations to report on American taxpayers’ secret accounts as part of a conspiracy to defraud the United States. 

UBS is now admitting 47,000 accounts are held by Americans who didn’t pay U.S. taxes on their assets, but the bank has only provided 300 names to the government in this showdown over secrecy. Democratic Senator Carl Levin (Mich.) said, “The rest of the world is getting fed up with offshore tax havens that turn a blind eye to tax evasion and allow their financial institutions…to profit from tax dodging.” 

--Elie Wiesel on Bernie Madoff: 

“I would like him to be in a solitary cell with a screen, and on that screen, for at least five years of his life, every day and every night there should be pictures of his victims, one after the other, always saying ‘Look, look what you have done to this poor lady, look what you have done to this child, look what you have done. Whatever is to hurt him, I think should be invented, because he deserves it.” [Jerusalem Post] 

Madoff, who appears to be set to plead guilty this coming week, agreed to give up the company’s artwork and entertainment tickets. What a guy. But the dirtball is still seeking to keep his penthouse and an additional $62 million in assets, saying they are unrelated to the fraud and belong to his darling She Devil of a wife, Ruth. 

--And in another episode of “Dirtballs Gone Wild,” we learn that Allen Stanford borrowed $1.6 billion from his Stanford Financial Group, though it’s not clear if this was how some estimated his overall net worth at $2.2 billion. As for CFO and best buddy James Davis, he has refused to cooperate in the investigation. 

--Hedge fund king James Chanos says it’s pretty clear what kinds of figures on Wall Street should be serving time; those who allowed material omissions that misled the public on a firm’s financial condition while said outfit was out raising money from the same folks. 

--Despite the slide in oil prices, Exxon Mobil is still hiking spending on exploration and development by close to $30 billion. Remember a few years ago when former CEO Lee Raymond would say Exxon isn’t changing its long-term views whether oil is $20 or $80 (the price back then)? Current CEO Rex Tillerson has the company in the same mode.  

--General Dynamics is laying off 1,200. Something about those ‘hated’ business jets and a bleak sales outlook for this division. 

--HSBC announced it is eliminating 6,100. 

--From Warren Buffett’s annual letter: 

“Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.” 

--Worldwide PC shipments are expected to decline 12% in 2009, the sharpest rate in history, according to Gartner Group. Even in 2001, at the height of the tech bust, the fall was only 3%. 

--Dividend payouts on the S&P 500 are forecast to decline at least 22% in 2009, the worst year since 1938. Wells Fargo slashed its dividend on Friday. 

--MGM Mirage, owner of some of the world’s best-known casinos, warned it is at risk of defaulting on its debt. The company is struggling to complete construction of its $9 billion CityCenter project in Las Vegas, the costliest such development ever, and has $1.2 billion of bonds due this year and a like amount in 2010. With credit markets frozen, it can’t refinance. 

--California Gov. Arnold Schwarzenegger declared a drought emergency last week, urging 20% cuts in water usage, but there is some question as to just how serious the situation is. Bettina Boxall of the Los Angeles Times reports: 

“Is it really that bad? 

“If you look at the numbers, the answer is no. Not only have a series of February storms pushed up mountain snowpack levels, but by historical standards the current three-year drought is far from the worst.” 

Heck, the snowpack has reached 80% of normal, according to the state’s Dept. of Water Resources. Precipitation in the northern and southern Sierra has climbed above 90% of average. 

So go ahead, water that lawn. [I didn’t write that.] 

--And now…another installment of Ireland Burning. 

84% of the people on the Emerald Isle are dissatisfied with the Government’s handling of the banking crisis. Nine out of 10 “want bankers who are found to be in breach of financial regulations to face criminal prosecutions.” 88% also feel they are being kept in the dark as to the scale of the debacle; no surprise when you have the likes of directors at Anglo Irish Bank giving themselves loans of $100mm…and with zero disclosure of same. 

The average home price is down 17% as of December vs. the peak in January 2007, but the pace of decline is accelerating. 

Eircom is set to slash 1,000 jobs, or one in nine, as the company has some $5 billion in debt. 

Besieged Prime Minister Brian Cowen is now projecting the jobless total could hit 500,000...with the unemployment rate for February having just hit 10.4%, its worst level since 1997. In the aforementioned poll for the Irish Independent, only half now say they have the money to pay the bills and maintain their living standards, a staggering fall from the days of the bubble I described here on countless occasions. 

I harp on Ireland, not just because I know this place as well as any, but also because you just have to know a little history (and/or to have seen some classic films) to understand that revolution is not out of the question by any stretch. The vast majority of the people, of course, would not desire any such thing, but the extremists on both sides can easily take advantage of the situation. Think socialists. 

--In Lower Manhattan, home to Wall Street, there are 48,000 fewer workers than before 9/11, while overall, Mayor Michael Bloomberg expects New York City to lose 294,000 jobs from mid-2008 through 2010, including 46,000 in financial industries. [84,500 have been lost thus far since August] The securities industry accounted for 51% of the growth in wages in Manhattan’s private sector from 2003 to 2007. 

--14 trading firms, including the likes of subsidiaries at E*Trade, Goldman Sachs and Knight Financial, agreed to pay a collective fine of $69 million to the SEC for “front-running,” or trading ahead of customer orders. 

--From Crain’s New York Business: 

“Anheuser-Busch’s policy of ‘net 120 days’ to pay ad agency invoices isn’t going down smoothly in New York. ‘They’re not helping our economy in a time of crisis,’ says one advertising executive, who asked not to be named. ‘It’s economic extortion.’” 

Damn right it is. It’s outrageous.  

--Thanks to a plummeting endowment, Yale University is hiking tuition 3.3%, even as it cuts the budget, such as in laying off 300 and delaying $2 billion of construction. 

--Deflation Watch: House rental prices for the Masters golf tournament in April are down as much as 50%. Four-day tickets are selling for 15% less than last year. 

--Chris C. and I exchange notes on the banking industry, stimulus plans and the like, and so he passed along a tale from Rebecca B.’s experience at a Chase branch the other day.     

“I walked into Chase to deposit my mom’s check and before I could even get to the teller line, an account rep walked over, picked me out of the line and asked if I was happy with my accounts, etc. We sat down at his computer and he said – you have a high interest rate of 25% on one of your cards, would you like that lowered? I said, yes, of course. Before, I had to fight to get it lowered and all this guy did was make a call and they will transfer my balance to a new card with 0% interest for the first six months, and then 6.24% after that.” 

Service? Caring about their customers? Can it be? 

--Deflation Watch, part deux: Employees at the Sacramento Bee approved a 6% pay cut in order to save some jobs at the paper. 

--Chris K. and I were talking about the coming implosion in the sports world owing to the economic crisis. Here in New York, you can only shake your head as two gleaming new baseball stadiums open next month, with a new football stadium for the Jets and Giants to open in 2010. Once the novelty runs out, particularly in the case of the Mets and Yankees, who can afford to go? I’m picturing baseball attendance overall will be abysmal this season. And as for the NBA, 20 of 30 teams are already losing money. How many will cease operation during the 2009-2010 campaign? You think that’s farfetched? Hardly. 

Chris pointed out a piece from Kansas City, the Missouri side, which faces an $85 million budget shortfall that has to be fixed by the end of the month and as part of the solution, the city would eliminate subsidies to the Truman Sports Complex, home to the Chiefs and Royals. This would violate a longstanding provision that, in terminating the lease, would allow the franchises to declare themselves free agents, though the legalities are in dispute. But you can see how far the tentacles of the crisis are going to reach. And I haven’t even mentioned the PGA or LPGA Tours, also increasingly a mess. 

--You want another real-world idea of how flawed the Obama stimulus plan is? I have this little creek behind my townhouse and over the 15 years I’ve been there the bank has eroded away significantly. So we keep bugging the town to do something about it (they admit it’s their responsibility) but we’re always given the excuse there are no funds. 

But, now, we were just told that if stimulus funds come through, maybe it will be addressed. I had to laugh. My creek qualifies as a shovel-ready project. Perhaps I’ll be able to do some salmon farming once the creek is fixed. 

--A friend working with the New Jersey bureau of investigations tells me he has a huge pile of potential Ponzi schemes sitting on his desk. 

--My portfolio: I haven’t said anything on this front recently because I literally haven’t made a trade the first two months of 2009. The only good news I’ve had is that the China biodiesel company I visited a second time last November is still on schedule to complete its second plant this spring. But I’m unconvinced there will be enough demand and pricing is negatively impacting margins, if my outfit is anything like the competitor I touched on above. I consider it dead money for all of 2009. It’s sickening. 

My geothermal company is in decent shape, ready to roll in 2010, but it still requires one last round of funding. Who knows, and, alas, its prime operation is in California. 

The California-based solar company that seemed on the verge of a comeback in early January, has now sunk like a stone. It reported solid revenues for the fourth quarter, and is drastically cutting costs, but it’s freakin’ California, let alone the overall housing environment, and it requires further funding to stay alive. 

My lithium battery investment, which thankfully I sold half of at a profit last year, has plunged amidst uncertainty on the awarding of Department of Energy contracts and loans. This company is one of many lined up at the window. Will they be a winner? I’d say it’s 50/50 at best. 

I have some assorted other flotsam, including a Brazilian airliner and a Mexican beverage company, but the above four concern me the most. Last September I openly discussed that unless credit opened up, the three U.S.-based plays could all go kaput. It’s why I’m forced to drink domestic these days, and I’m even cutting back on that. 

As for my moving from a long-held, and correct, 80% cash position to 50% cash / 50% equities at year end, I based my position totally on the belief that the Obama administration would come up with a viable solution for the banking crisis. Believe me, if a solid plan had been rolled out the first time Treasury Secretary Geithner stepped forward and instead proceeded to fumble, we wouldn’t be talking Dow 6600. And if President Obama hadn’t taken his eye off the ball, the economy, opting instead to launch a full-scale attack against capitalism and the ‘rich,’ we’d be far higher. 

But this commentary has never been about market timing, witness my two+ years at 80/20 without change. This time I got burned, but for crying out loud, guys, I’m still at 50% cash, which isn’t awful, especially if you saw the jokers that go on CNBC all day like I do. I am not changing my tune at this point. It is what it is. Perhaps at quarter end I’ll reexamine the situation. 

I also have to add a comment about the “hot spots” that “Week in Review” has long focused on, and with good reason. Today, they honestly aren’t as important in terms of their ability to shape the financial markets, barring a large-scale terrorist attack, of course. More on this next time…but for now… 

Gold closed at $942
Oil  45.52
 
Returns for the week 3/2-3/6 

Dow Jones -6.2% [6626]
S&P 500 -7.0% [683]
S&P MidCap -9.2%
Russell 2000 -9.8%
Nasdaq -6.1% [1293] 

Returns for the period 1/1/09-3/6/09
 
Dow Jones -24.5%
S&P 500 -24.3%
S&P MidCap -24.2%
Russell 2000 -29.7%
Nasdaq -18.0% 

Bulls 29.7
Bears  44.0 [Source: Chartcraft / Investors Intelligence…surprisingly, the number of bulls ticked up and the percentage of bears ticked down.] 
 

Wall Street History returns in two weeks.

 
Brian Trumbore
 
 



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Wall Street History

03/14/2014

The Market Bottoms

With the five-year anniversary of the market lows of March 2009, it’s time to turn to the archives of StocksandNews to see what I was writing on at the height of the financial crisis. Frankly, what I put together the week ending 3/6/09 was extraordinary in terms of market history. Stocks would bottom the next Monday, March 9. 

Following is everything I wrote in my “Week in Review” column, verbatim, on the Wall Street side (I left out my “Foreign Affairs” and “Random Musings” sections) for Saturday, March 7, 2009. [Back then I posted Saturday mornings. These days, late Friday nights.]

For the week 3/2-3/6

[Posted 7:00 AM ET] 

Honeymoon? You Call This A Stinkin’ Honeymoon? 

Many of us are beyond being frustrated these days. The number one issue is the banks, yet President Barack Obama appears to be interested in solving everything else but getting to work on this paramount problem. As George Will commented, “This is like performing a heart transplant while the patient is running a marathon.” 

We learned this week that the unemployment rate for February hit 8.1%, as another 651,000 lost their jobs. Coupled with steep revisions downward for December (to a level of 681,000…the worst since October 1949) and January, the economy has now shed 2.6 million jobs the past four months and 4.4 million since December 2007, when the recession officially started. 

We’ve also seen shares in Citigroup trade below $1, General Motors to below $1.50, its lowest level since 1933, General Electric at sub-$6, the lowest since 1993, and the Dow Jones and S&P at 12-year lows. 

Warren Buffett: “The economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.” 

Stephen Roach, Chairman of Morgan Stanley Asia / New York Times: “Any whiffs of growth are likely to herald a false dawn, because the consumer remains in terrible shape. American families have lived beyond their means for more than a decade by borrowing against their over-valued homes. With both the housing and credit bubbles having burst, their stock portfolios down and their jobs threatened, consumers have been shocked into a new frugality. They are likely to be restrained for years to come. The consumption share of gross domestic product is still 71 percent – down from a peak of 72 percent but well above the 67 percent that prevailed from 1975 to 2000. 

“This points to an unusually anemic upturn, at best – not strong enough to keep the unemployment rate from rising to near 10 percent over the next year and a half. Since it’s hard to call that a recovery, it looks to me as if this recession won’t end until late 2010 or early 2011.” 

Niall Ferguson, Harvard professor / New York Times: “This is a crisis of excessive debt, the end of the Age of Leverage. It will take longer than a few more months to resolve bank and household insolvency, especially with asset prices continuing to fall so rapidly….This recession is taking place as the rest of the world is doing even worse than the United States. The collapse of trade as measured by East Asian export data is petrifying. 

“So far in this recession, remember, we have had only two consecutive quarters of declining gross domestic product. At the moment, I find it quite easy to imagine two consecutive years of contraction. And I don’t rule out two more lean years after then.” 

Economist Nouriel Roubini / New York Times: “Today, as we enter the 15th month, it’s obvious that we are already in a painful U-shaped recession that has become global and will last at least until the end of the year – 24 months, the longest since the Great Depression. Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with the unemployment rate rising toward 10 percent, we will still be substantially in a recession…. 

“And things could get worse. We now face a 1 in 3 chance that, if appropriate policies are not put in place, this ugly U-shaped recession may turn into a more virulent L-shaped near-depression or stag-deflation (a deadly combination of economic stagnation and price deflation) like the one Japan experienced in the 1990s after its real estate and equity bubbles burst.” 

It’s about a total loss of confidence, not only in the markets, but in our government, at least among market participants. 

Paul Krugman / New York Times 

“Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. ‘While the cost of action will be great,’ he declared, ‘I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.’ 

“Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern. 

“Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators. 

“Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again. 

“Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as ‘toxic waste,’ are really worth much more than anyone is actually willing to pay for them – and that if these assets were properly priced, all our troubles would go away…. 

“The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable. 

“But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.” 

Charles Krauthammer / Washington Post 

“And yet with our financial house on fire, Obama makes clear both in his speech and his budget that the essence of his presidency will be the transformation of health care, education and energy. Four months after winning the election, six weeks after his swearing-in, Obama has yet to unveil a plan to deal with the banking crisis. 

“What’s going on? ‘You never want a serious crisis to go to waste,’ said chief of staff Rahm Emanuel. ‘This crisis provides the opportunity for us to do things that you could not do before.’ 

“Things. Now we know what they are. The markets’ recent precipitous decline is a reaction not just to the absence of any plausible bank rescue plan, but also to the suspicion that Obama sees the continuing financial crisis as usefully creating the psychological conditions – the sense of crisis bordering on fear-itself panic – for enacting his ‘Big Bang’ agenda to federalize and/or socialize health care, education and energy, the commanding heights of post-industrial society. 

“Clever politics, but intellectually dishonest to the core. Health, education and energy – worthy and weighty as they may be – are not the cause of our financial collapse. And they are not the cure. The fraudulent claim that they are both cause and cure is the rhetorical device by which an ambitious president intends to enact the most radical agenda of social transformation seen in our lifetime.” 

Gerald Seib / Wall Street Journal 

“Any president, particularly the current one, has a lot of things to worry about. Should the level of the Dow Jones Industrial Average be one of them? 

“In a word: yes…. 

“Presidents usually pretend they don’t pay much attention to such stock-market gyrations. If it’s been said once from a White House podium, it’s been said a thousand times: ‘Markets rise, markets fall. We worry about the fundamentals of the economy instead.’ 

“President Barack Obama gave his own version of that response this week, declaring in response to a reporter’s question: ‘You know, the stock market is sort of like a tracking poll in politics.   It bobs up and down day to day, and if you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.’ 

“But amid today’s economic wreckage, it isn’t that simple, and Mr. Obama knows it. He illustrated as much by immediately following his ‘tracking poll’ comment, which drew quick attacks from Republicans, with a more extraordinary statement: He delivered something between a plug and a plea for investors to return to the stock market: 

“ ‘What you’re now seeing is profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.’ 

“That suggests the president grasps a new reality. The level of the stock market matters a lot more now than before, for political as well as economic reasons. Economically, it is a producer (or destroyer) of wealth for far more Americans than ever before. Politically, it represents a far more important barometer of the nation’s climate and psyche today than it does in normal times…. 

“(The) market and its health matter more on Main Street than ever before. On the psychological front…recent polling indicates that economic confidence began to plunge when housing prices and the stock market both dropped, suggesting that rebuilding consumer confidence will require both stable real-estate prices and a ‘decent’ Dow Jones Industrial Average…. 

“In other words, people were as likely to feel hurt by the stock market’s decline as by the overall economic decline…. 

“The spread of 401(k)s and individual retirement accounts means market conditions penetrate tens of millions more homes now, which is one of the most significant changes in the structure of the economy in the past generation…. 

“All of which raises the question of what the president could actually do to get the stock market moving upward. That’s not easy. Building confidence in his administration’s bank bailout plan is key, as is improving overall consumer and investor psychology.” 

And this editorial from the Wall Street Journal that truly defines the Obama presidency thus far. 

“Americans have welcomed the Obama era in the same spirit of hope the President campaigned on. But after five weeks in office, it’s become clear that Mr. Obama’s policies are slowing, if not stopping, what would otherwise be the normal process of economic recovery. From punishing business to squandering scarce national public resources, Team Obama is creating more uncertainty and less confidence – and thus a longer period of recession or sub-par growth. 

“The Democrats who now run Washington don’t want to hear this, because they benefit from blaming all bad economic news on President Bush. And Mr. Obama has inherited an unusual recession deepened by credit problems, both of which will take time to climb out of. But it’s also true that the economy has fallen far enough, and long enough, that much of the excess that led to recession is being worked off….What goes down will come up – unless destructive policies interfere with the sources of potential recovery…. 

“So what has happened in the last two months? The economy has received no great new outside shock. Exchange rates and other prices have been stable, and there are no security crises of note. The reality of a sharp recession has been known and built into stock prices since last year’s fourth quarter. 

“What is new is the unveiling of Mr. Obama’s agenda and his approach to governance. Every new President has a finite stock of capital – financial and political – to deploy, and amid recession Mr. Obama has more than most. But one negative revelation has been the way he has chosen to spend his scarce resources on income transfers rather than growth promotion.  Most of his ‘stimulus’ spending was devoted to social programs, rather than public works, and nearly all of the tax cuts were devoted to income maintenance rather than to improving incentives to work or invest. 

“His Treasury has been making a similar mistake with its financial bailout plans. The banking system needs to work through its losses, and one necessary use of public capital is to assist in burning down those bad assets as fast as possible. Yet most of Team Obama’s ministrations so far have gone toward triage and life support, rather than repair and recovery…. 

“Listening to Mr. Obama and his chief of staff, Rahm Emanuel, on the weekend, we couldn’t help but wonder if they appreciate any of this. They seem preoccupied with going to the barricades against Republicans who wield little power, or picking a fight with Rush Limbaugh, as if this is the kind of economic leadership Americans want. 

“Perhaps they’re reading the polls and figure they have two or three years before voters stop blaming Republicans and Mr. Bush for the economy. Even if that’s right in the long run, in the meantime their assault on business and investors is delaying a recovery and ensuring that the expansion will be weaker than it should be when it finally does arrive.” 

---
 
Around the World 

John Lipsky, First Managing Director IMF: “Our calculations suggest that the fall in global GDP in the fourth quarter of last year and the first quarter of this year is the sharpest we can find in the post-war records. A forceful policy response is both warranted and justified…. The emerging consensus is that it looks as if the downturn in the advanced economies will run through this year and into next year.” [Reuters] 

The IMF is close to announcing that global growth in 2009 will go negative, rather than the small increase it had been forecasting. Deflation is increasingly a concern, particularly with private sector wages. 

The Bank of England and the European Central Bank once again lowered their core lending rates to record low levels, 0.50% and 1.50%, respectively, as the Euro nations saw a key manufacturing index for February, the PMI, hit the 33.5 level [50 being the dividing line between growth and contraction].  

Property prices across Europe were falling in every market by the end of 2008, as one analysis notes core markets are set to suffer “marked downturns” in 2009. Author of the study, Professor Michael Ball, said: “There is greater synchronization of housing market declines in Europe than has been seen in the past and there are going to be some tough times before marked recovery occurs.” 

The 27 nations comprising the European Union have a myriad of problems, the biggest of which being the lack of institutional mechanisms for addressing individual issues, a la, say, the U.S. Federal Reserve’s many weapons. The EU is in many respects still in the formation stage, and, importantly, the member states continue to cling to history, so just when they can least afford it, they are beginning to face off and reveal ugliness not seen since both World War II and the Cold War. Hungary’s Prime Minister Gyurcsany warned “of a new Iron Curtain,” while old members such as Germany and France wonder how far they want to go in helping nations on the verge of imploding such as Hungary, Romania and the Baltic states. You also have the issue of many of the struggling nations not employing the euro, but Old Europe doesn’t want to speed up the process to allow a Romania to adopt it. 

And with all this transpiring, a topic I’ve long brought up, xenophobia, is today increasingly rearing its ugly head, with the Roma (Gypsies) a standard target.   There was a big incident in Hungary this past Monday, where two Roma, a father and his 5-year-old son, were routed from their home, which had been set on fire, and then shot to death; the latest in a pattern of racially motivated crimes. 5,000 showed up at the funeral and you talk about what must have been an emotional scene, here is the Reuters account. 

“Black-clad mourners wept and when the coffin was lowered into the grave in the small hillside cemetery, the world-famous 100-member Gypsy Symphony Orchestra started to play.” 

In Asia, there is no country in the world where opinion is more split than on China’s prospects, with some, such as Chinese Premier Wen Jiabao, forecasting 8% growth, the benchmark, while others say growth will be minimal. The reason for the uncertainty has to do with the legitimacy of any official data. I was listening to a conference call this week for a China biodiesel company (not the one I own) and as I told a fellow investor who was also in on it, when dealing with these folks you have to listen intently for the truth. [Though I hasten to add, the ‘greatest country on earth’…us…has more than a few examples of its own of deceit of the highest order the past decade in particular.] For example, this operator said they were able to sell all of the biodiesel they could produce. I’m not sure I believe that…and the results haven’t been audited as yet. 

So, when we hear that China’s own PMI index of manufacturing has risen three consecutive months (though still below 50…45.1 for Feb.), who the heck knows if a seemingly positive trend is really in place? The Chinese did admit that residential real estate is generally down 12-15% in value, depending on whether you are talking mass residential or luxury. 

In Japan, capital spending plummeted 17% in the fourth quarter, while next week it is expected that the government will revise Q4 GDP down to -3.3%, the worst level since 1974. 

Elsewhere, Malaysia’s fourth quarter GDP came in at up just 0.1%, while the Aussies unexpectedly revealed Q4 GDP declined 0.5%. 

The Obama Housing Plan 

48% of the nation’s homeowners who have a subprime, adjustable-rate mortgage are now behind on their payments or in foreclosure [60% in Florida]. 12% of all mortgage holders were at least one month late or in foreclosure [4.6% at least 60 days behind], up from 8% at the end of 2007.  

In looking at the number of mortgage holders “underwater,” 8.31 million properties had “negative equity” at the end of 2008, 20% of mortgage holders. In Nevada, 55% are underwater [Michigan 40%, Arizona 32%, Florida and California 30%. New York is best at 4.7% but this figure is adjusting rapidly.] 

So with the above in mind, we have the president’s housing stabilization plan. There are two main components. One allows those current on their mortgage payments but with little or no equity in their homes to refinance at today’s low interest rates. 

The second component involves modifying mortgages to lower monthly payments to what was once the universal standard, 31% of the borrower’s gross monthly income. 

But the first provision is open only to those with loans owned by Fannie Mae or Freddie Mac, which thus excludes borrowers with subprime and other exotica; as well as those with “jumbo” mortgages that are in excess of $729,750. 

Plus, borrowers owing more than 105% of their current value won’t be eligible. Well, just look at the above data on houses underwater and you can see how a huge slug thus become ineligible, particularly in the hardest hit states. In California, for example, one of the worst hit areas is the Inland Empire, where nearly half the homeowners owe more on their loans than the property is worth (and nearly a like percentage over the 105% threshold).  

At the same time, the Obama plan is at least a start and it’s far more than anything the Bush administration came up with. But we’ll see if the incentives for lenders built into the program are effective, and whether a just passed House provision, allowing bankruptcy judges to cut the mortgage debt owed by homeowners as a last resort to avert foreclosure, the “cramdown” provision, works as well. 

The bottom line is if you fit into one of these categories, or even if you don’t, you must find out who your lender or servicer is, assuming you can get someone on the phone. 

AIG 

On Monday, the world’s largest insurer announced a record $62 billion loss for the fourth quarter, with $billions and $billions of new losses to follow as the company pays one counterparty after another on the collateralized debt obligations it was guaranteeing. [The Wall Street Journal is reporting Saturday that among the recipients are Goldman Sachs and Deutsche Bank, both to the tune of $6 billion.] And on top of a previous $150 billion in government bailout funds, AIG secured a fresh $30 billion in exchange for the government taking big stakes in two of AIG’s biggest units. The London-based division that started this whole mess is under investigation by the U.S. Department of Justice, the SEC and U.K.’s Serious Fraud Office. It’s too bad some of William Wallace’s men aren’t around to take care of the miscreants in Medieval fashion, beginning with the rack. 

Federal Reserve Chairman Ben Bernanke, in a rare display of emotion at a Senate hearing, said of AIG: 

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG. AIG exploited a huge gap in the regulatory system, there was no oversight of the financial-products division, and this (became) a hedge fund that was basically attached to a large and stable insurance company.” But at the same time, last September there was no other option than to “try and stabilize the system” in saving the firm. 

Street Bytes 

--The Dow Jones Industrial Average – which is about to undergo a revamp with two components, Citigroup and General Motors, priced at the cost of a candy bar, being replaced shortly – and the S&P 500 traded at 12-year lows this week. The Dow finished down 6.2% to close at 6626, after trading below 6500 Friday afternoon, and is now off 53% from its highs of October 2007. The S&P, at 683, is 56% off its high of 1565. 

As if that’s not bad enough, the S&P Financials are now down 83%, surpassing the 82% decline of the S&P’s prime tech index following the bursting of the tech bubble, 2000-2002.  

Moving right along, sales at the chain stores for February, save Wal-Mart, were down, though some say not as much as expected; Wal-Mart was up 5%, but Target was down 4%, Macy’s 8.5%, Nordstrom 15%, and Saks 26%. 

--U.S. Treasury Yields
 
6-mo. 0.38% 2-yr. 0.95% 10-yr. 2.87% 30-yr. 3.55% 

Rates declined on the fear factor and further evidence the economy isn’t close to mounting a recovery. 

Warren Buffett: “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.” 

There was some important data on the economy, with January personal income up 0.4% and consumption up 0.6%, both better than expected. Construction spending was down 3.3% (worse than expected), while factory orders fell 1.9% (better). The ISM manufacturing index came in at 35.8 for February (better) while the ISM service figure was also better. 

--Editorial / Wall Street Journal…on the FDIC’s plan to seek $27 billion in new fees from the banking system to shore up its bailout fund. 

“(Sheila) Bair painted Friday’s decision to dun the banks for $27 billion this year as an act of fiscal responsibility, noting that unlike other rescue programs, the FDIC might not have to hit up taxpayers or tap that credit line this year. But this is a false economy if the money sucked out of the banking system to pay for deposit insurance drives more banks to the brink of failure. 

“That $27 billion levy against an insured deposit base of $4.76 trillion may not seem like much. But it could mean $2 million or more this year for a bank with $1 billion in deposits, which could in turn represent a substantial drain on earnings at a time when the economy needs banks to earn their way out of trouble. Money paid to the FDIC can’t be leveraged to support new lending, so $27 billion in FDIC premiums could also take $150 billion or so out of lending in the coming year.” 

[A Senate bill may loan the FDIC up to $500 billion…more next week.] 

--Editorial / Wall Street Journal 

“The Dow Jones Industrial Average fell another 281 points yesterday (Thurs.), or 4%, while President Obama began his political push for nationalizing health care and Barney Frank called upon state, local and federal officials to prosecute ‘those people whose irresponsible and, in some cases, criminal actions helped bring about this crisis.’ (In what must have been an oversight, Mr. Frank left himself off the target list.)” 

--Steve Forbes / Wall Street Journal 

“What is most astounding about President Barack Obama’s radical economic recovery program isn’t its breadth, but its continuation of the most destructive policies of the Bush administration.   These Bush policies were in themselves repudiations of Franklin Delano Roosevelt, Mr. Obama’s hero. 

“The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or ‘fair value’ accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down. 

“That works when you have very liquid securities, such as Treasurys, or the common stock of IBM or GE. But when the credit crisis hit in 2007, there was no market for subprime securities and other suspect aspects. Yet regulators and auditors kept pressing banks and other financial firms to knock down the book value of this paper, even in cases where these obligations were being fully serviced in the payment of principal and interest…. 

“Mark-to-market accounting is the principle reason why our financial system is in a meltdown. The destructiveness of mark-to-market – which was in force before the Great Depression – is why FDR suspended it in 1938. It was unnecessarily destroying banks.” 

[The House is set to begin debating whether or not to repeal or suspend mark-to-market.] 

--Auto sales in February were once again putrid. General Motors, down 53%; Ford, 48%; Chrysler, 44%; Toyota, 40%; Honda, 38%; Nissan, 37%...the lowest monthly total for the industry since at least 1981. 

GM added that aside from its well-known problems in the U.S., its European arm could run out of money by next month, putting 300,000 jobs on the continent at risk, in making a request for separate European bailout funds for its operations. 

Japanese auto sales plunged 32% in February, the biggest monthly drop since 1974. In all of 2008, sales in Japan were 3.21 million vehicles, also the worst figure since ’74. 

Toyota expects its world-wide production to drop 12% in the next year, but the CEO at Volvo said he was looking for the U.S. auto market to bottom in ‘09. Stephen Odell said, “I honestly believe this year is the trough, and we’ll need people to build cars and do other things.” 

--GE CEO Jeffrey Immelt, watching the world’s biggest conglomerate sink faster than A-Rod, acknowledged, “Our company’s reputation was tarnished because we weren’t the ‘safe and reliable’ growth company that is our aspiration. I accept responsibility for this.” So quit! Geezuz. This entire disaster occurred under your watch (Immelt took over from Jack Welch, Sept. 2001). 

Of course the story remains GE Capital and its massive real estate and mortgage holdings. As Steven Winoker, an analyst at Sanford C. Bernstein & Co. put it, GE has set aside roughly $10 billion in provisions for losses on its $380 billion in receivables at GE Capital. “The concern is that number should be much higher.” [Wall Street Journal] 

--If I’m Red Lobster, I introduce a new special… “The Clawback.” Same thing as being able to take home a doggy-bag, but a little re-labeling, coupled with some humorous commercials of lobsters pulling cash out of the pockets of Wall Street executives, may work wonders in satiating the public’s anger over compensation. 

This week we learned 11 Merrill Lynch execs were paid more than $10 million apiece in cash and stock last year, even as the firm’s loss for ‘08 was exploding to over $27 billion. And this doesn’t include former CEO John Thain and another nine cohorts who were all seeking $10 million+ for themselves before a Merrill Lynch board member, John Finnegan, who headed the compensation committee, stepped in and found the request “astonishing,” according to sources. [Greg B. Smith / New York Daily News] Thain acts like he voluntarily pulled the request, but the truth lies elsewhere. It turns out Thain, last October, was seeking $40 million!  

--Then there is the case of UBS, which could soon see some of its executives facing prosecution by the U.S. Justice Department as part of a widening investigation into tax evasion. It threatens to spiral out of control as the battle between the United States and Switzerland is joined; the Swiss having provided $60 billion in aid to UBS which is critically important to the health of the economy there.   

U.S. prosecutors say UBS Chairman Peter Kurer was part of a 2002 committee that “knowingly” withheld information relating to its obligations to report on American taxpayers’ secret accounts as part of a conspiracy to defraud the United States. 

UBS is now admitting 47,000 accounts are held by Americans who didn’t pay U.S. taxes on their assets, but the bank has only provided 300 names to the government in this showdown over secrecy. Democratic Senator Carl Levin (Mich.) said, “The rest of the world is getting fed up with offshore tax havens that turn a blind eye to tax evasion and allow their financial institutions…to profit from tax dodging.” 

--Elie Wiesel on Bernie Madoff: 

“I would like him to be in a solitary cell with a screen, and on that screen, for at least five years of his life, every day and every night there should be pictures of his victims, one after the other, always saying ‘Look, look what you have done to this poor lady, look what you have done to this child, look what you have done. Whatever is to hurt him, I think should be invented, because he deserves it.” [Jerusalem Post] 

Madoff, who appears to be set to plead guilty this coming week, agreed to give up the company’s artwork and entertainment tickets. What a guy. But the dirtball is still seeking to keep his penthouse and an additional $62 million in assets, saying they are unrelated to the fraud and belong to his darling She Devil of a wife, Ruth. 

--And in another episode of “Dirtballs Gone Wild,” we learn that Allen Stanford borrowed $1.6 billion from his Stanford Financial Group, though it’s not clear if this was how some estimated his overall net worth at $2.2 billion. As for CFO and best buddy James Davis, he has refused to cooperate in the investigation. 

--Hedge fund king James Chanos says it’s pretty clear what kinds of figures on Wall Street should be serving time; those who allowed material omissions that misled the public on a firm’s financial condition while said outfit was out raising money from the same folks. 

--Despite the slide in oil prices, Exxon Mobil is still hiking spending on exploration and development by close to $30 billion. Remember a few years ago when former CEO Lee Raymond would say Exxon isn’t changing its long-term views whether oil is $20 or $80 (the price back then)? Current CEO Rex Tillerson has the company in the same mode.  

--General Dynamics is laying off 1,200. Something about those ‘hated’ business jets and a bleak sales outlook for this division. 

--HSBC announced it is eliminating 6,100. 

--From Warren Buffett’s annual letter: 

“Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.” 

--Worldwide PC shipments are expected to decline 12% in 2009, the sharpest rate in history, according to Gartner Group. Even in 2001, at the height of the tech bust, the fall was only 3%. 

--Dividend payouts on the S&P 500 are forecast to decline at least 22% in 2009, the worst year since 1938. Wells Fargo slashed its dividend on Friday. 

--MGM Mirage, owner of some of the world’s best-known casinos, warned it is at risk of defaulting on its debt. The company is struggling to complete construction of its $9 billion CityCenter project in Las Vegas, the costliest such development ever, and has $1.2 billion of bonds due this year and a like amount in 2010. With credit markets frozen, it can’t refinance. 

--California Gov. Arnold Schwarzenegger declared a drought emergency last week, urging 20% cuts in water usage, but there is some question as to just how serious the situation is. Bettina Boxall of the Los Angeles Times reports: 

“Is it really that bad? 

“If you look at the numbers, the answer is no. Not only have a series of February storms pushed up mountain snowpack levels, but by historical standards the current three-year drought is far from the worst.” 

Heck, the snowpack has reached 80% of normal, according to the state’s Dept. of Water Resources. Precipitation in the northern and southern Sierra has climbed above 90% of average. 

So go ahead, water that lawn. [I didn’t write that.] 

--And now…another installment of Ireland Burning. 

84% of the people on the Emerald Isle are dissatisfied with the Government’s handling of the banking crisis. Nine out of 10 “want bankers who are found to be in breach of financial regulations to face criminal prosecutions.” 88% also feel they are being kept in the dark as to the scale of the debacle; no surprise when you have the likes of directors at Anglo Irish Bank giving themselves loans of $100mm…and with zero disclosure of same. 

The average home price is down 17% as of December vs. the peak in January 2007, but the pace of decline is accelerating. 

Eircom is set to slash 1,000 jobs, or one in nine, as the company has some $5 billion in debt. 

Besieged Prime Minister Brian Cowen is now projecting the jobless total could hit 500,000...with the unemployment rate for February having just hit 10.4%, its worst level since 1997. In the aforementioned poll for the Irish Independent, only half now say they have the money to pay the bills and maintain their living standards, a staggering fall from the days of the bubble I described here on countless occasions. 

I harp on Ireland, not just because I know this place as well as any, but also because you just have to know a little history (and/or to have seen some classic films) to understand that revolution is not out of the question by any stretch. The vast majority of the people, of course, would not desire any such thing, but the extremists on both sides can easily take advantage of the situation. Think socialists. 

--In Lower Manhattan, home to Wall Street, there are 48,000 fewer workers than before 9/11, while overall, Mayor Michael Bloomberg expects New York City to lose 294,000 jobs from mid-2008 through 2010, including 46,000 in financial industries. [84,500 have been lost thus far since August] The securities industry accounted for 51% of the growth in wages in Manhattan’s private sector from 2003 to 2007. 

--14 trading firms, including the likes of subsidiaries at E*Trade, Goldman Sachs and Knight Financial, agreed to pay a collective fine of $69 million to the SEC for “front-running,” or trading ahead of customer orders. 

--From Crain’s New York Business: 

“Anheuser-Busch’s policy of ‘net 120 days’ to pay ad agency invoices isn’t going down smoothly in New York. ‘They’re not helping our economy in a time of crisis,’ says one advertising executive, who asked not to be named. ‘It’s economic extortion.’” 

Damn right it is. It’s outrageous.  

--Thanks to a plummeting endowment, Yale University is hiking tuition 3.3%, even as it cuts the budget, such as in laying off 300 and delaying $2 billion of construction. 

--Deflation Watch: House rental prices for the Masters golf tournament in April are down as much as 50%. Four-day tickets are selling for 15% less than last year. 

--Chris C. and I exchange notes on the banking industry, stimulus plans and the like, and so he passed along a tale from Rebecca B.’s experience at a Chase branch the other day.     

“I walked into Chase to deposit my mom’s check and before I could even get to the teller line, an account rep walked over, picked me out of the line and asked if I was happy with my accounts, etc. We sat down at his computer and he said – you have a high interest rate of 25% on one of your cards, would you like that lowered? I said, yes, of course. Before, I had to fight to get it lowered and all this guy did was make a call and they will transfer my balance to a new card with 0% interest for the first six months, and then 6.24% after that.” 

Service? Caring about their customers? Can it be? 

--Deflation Watch, part deux: Employees at the Sacramento Bee approved a 6% pay cut in order to save some jobs at the paper. 

--Chris K. and I were talking about the coming implosion in the sports world owing to the economic crisis. Here in New York, you can only shake your head as two gleaming new baseball stadiums open next month, with a new football stadium for the Jets and Giants to open in 2010. Once the novelty runs out, particularly in the case of the Mets and Yankees, who can afford to go? I’m picturing baseball attendance overall will be abysmal this season. And as for the NBA, 20 of 30 teams are already losing money. How many will cease operation during the 2009-2010 campaign? You think that’s farfetched? Hardly. 

Chris pointed out a piece from Kansas City, the Missouri side, which faces an $85 million budget shortfall that has to be fixed by the end of the month and as part of the solution, the city would eliminate subsidies to the Truman Sports Complex, home to the Chiefs and Royals. This would violate a longstanding provision that, in terminating the lease, would allow the franchises to declare themselves free agents, though the legalities are in dispute. But you can see how far the tentacles of the crisis are going to reach. And I haven’t even mentioned the PGA or LPGA Tours, also increasingly a mess. 

--You want another real-world idea of how flawed the Obama stimulus plan is? I have this little creek behind my townhouse and over the 15 years I’ve been there the bank has eroded away significantly. So we keep bugging the town to do something about it (they admit it’s their responsibility) but we’re always given the excuse there are no funds. 

But, now, we were just told that if stimulus funds come through, maybe it will be addressed. I had to laugh. My creek qualifies as a shovel-ready project. Perhaps I’ll be able to do some salmon farming once the creek is fixed. 

--A friend working with the New Jersey bureau of investigations tells me he has a huge pile of potential Ponzi schemes sitting on his desk. 

--My portfolio: I haven’t said anything on this front recently because I literally haven’t made a trade the first two months of 2009. The only good news I’ve had is that the China biodiesel company I visited a second time last November is still on schedule to complete its second plant this spring. But I’m unconvinced there will be enough demand and pricing is negatively impacting margins, if my outfit is anything like the competitor I touched on above. I consider it dead money for all of 2009. It’s sickening. 

My geothermal company is in decent shape, ready to roll in 2010, but it still requires one last round of funding. Who knows, and, alas, its prime operation is in California. 

The California-based solar company that seemed on the verge of a comeback in early January, has now sunk like a stone. It reported solid revenues for the fourth quarter, and is drastically cutting costs, but it’s freakin’ California, let alone the overall housing environment, and it requires further funding to stay alive. 

My lithium battery investment, which thankfully I sold half of at a profit last year, has plunged amidst uncertainty on the awarding of Department of Energy contracts and loans. This company is one of many lined up at the window. Will they be a winner? I’d say it’s 50/50 at best. 

I have some assorted other flotsam, including a Brazilian airliner and a Mexican beverage company, but the above four concern me the most. Last September I openly discussed that unless credit opened up, the three U.S.-based plays could all go kaput. It’s why I’m forced to drink domestic these days, and I’m even cutting back on that. 

As for my moving from a long-held, and correct, 80% cash position to 50% cash / 50% equities at year end, I based my position totally on the belief that the Obama administration would come up with a viable solution for the banking crisis. Believe me, if a solid plan had been rolled out the first time Treasury Secretary Geithner stepped forward and instead proceeded to fumble, we wouldn’t be talking Dow 6600. And if President Obama hadn’t taken his eye off the ball, the economy, opting instead to launch a full-scale attack against capitalism and the ‘rich,’ we’d be far higher. 

But this commentary has never been about market timing, witness my two+ years at 80/20 without change. This time I got burned, but for crying out loud, guys, I’m still at 50% cash, which isn’t awful, especially if you saw the jokers that go on CNBC all day like I do. I am not changing my tune at this point. It is what it is. Perhaps at quarter end I’ll reexamine the situation. 

I also have to add a comment about the “hot spots” that “Week in Review” has long focused on, and with good reason. Today, they honestly aren’t as important in terms of their ability to shape the financial markets, barring a large-scale terrorist attack, of course. More on this next time…but for now… 

Gold closed at $942
Oil  45.52
 
Returns for the week 3/2-3/6 

Dow Jones -6.2% [6626]
S&P 500 -7.0% [683]
S&P MidCap -9.2%
Russell 2000 -9.8%
Nasdaq -6.1% [1293] 

Returns for the period 1/1/09-3/6/09
 
Dow Jones -24.5%
S&P 500 -24.3%
S&P MidCap -24.2%
Russell 2000 -29.7%
Nasdaq -18.0% 

Bulls 29.7
Bears  44.0 [Source: Chartcraft / Investors Intelligence…surprisingly, the number of bulls ticked up and the percentage of bears ticked down.] 
 

Wall Street History returns in two weeks.

 
Brian Trumbore