Over the last several weeks a number of economic events have taken place that really concern me. For some time I’ve held the view that the economic recovery being reported by the media and government is anything but.

With port traffic down year over year close to 18%, hotel rentals down roughly 14%, car sales down from 20% to 40% (post stimulus), unemployment rising and consumer confidence falling, it is clear the average consumer isn’t coming back to the purchasing table. As the consumer accounts for roughly 65% of the economic activity in the U.S. this is a problem if we are to believe in a recovery. In conjunction with the above, a number of other things have taken place that only go to create the possible trigger for the next economic meltdown.

The Capmark and CIT bankruptcies

Capmark, the former GMAC commercial real estate mortgage lender, declared bankruptcy on October 25th. This mortgage lender happens to be one of the largest in the United States but what does this event really dictate?  The weakness in retail sales is being felt on all levels and is expected to carry on to other CRE lenders.  Translation – the Capmark bankruptcy was the first in a number of coming CRE lenders going bust.

CIT, one of the largest commercial and consumer financing companies, also declared bankruptcy. CIT is to small business credit what Lehman was to the derivatives market.  While the sudden impacts of a CIT bankruptcy may not be noticeable to the consumer, small business will feel the impact shortly as the company is only expected to provide roughly 20% of the loans they issued last year.

Such a situation will mean that small business will need to find other credit sources or go without.  With credit already in contraction that will mean the requirements are going to be higher in order to obtain credit and/or the interest rates will be significantly higher.  All of this points to a small business market with limited or no credit.

Much like the residential real estate market collapsed so will the Commercial Real Estate market and the effects will be felt by some of the largest banks in the U.S. The commercial and consumer financing collapse at CIT also advances the effects, all of which point to further credit restriction in the next 8 to 12 months.

This past earnings season

Did you notice this past earning season was a blow out?  Companies the financial pundits expect to report poor results did not and everyone was celebrating.  I mean, really, the DOW broke 10,000 again on the news.

CSX, the transportation giant, turned a profit of .74 cents per share. Alcoa recorded their first profit in more than a year, equipment giant Caterpillar turned a profit of .60 cents a share, Du Pont profits jumped 11%, GE posted a $2.5B net income… and the story can go on and on of positive news.

It’s a sham.

CSX turned a profit on revenue that was down 23%, Alcoa’s shipments were down by sequentially, the sales at Caterpillar fell 41%, Du Pont saw revenue fall 18% and GE’s revenue fell by 20%.

What people are seeing as a “positive” economic recovery is actually the result of major companies performing cost cutting.  On the majority, revenues in the large S&P companies were down year over year showing NO sign of improvement.

Stabilization, yes. Improvement, no.

The problem with this earnings season isn’t what took place here, rather what will happen in 6 months when it is obvious that companies can no longer cut costs without cutting in their ability to remain operational, or what will take place when people take notice to the fact that the holiday sales for 2009 will be flat – if no lower – than 2008?

Easy.  Everyday people will wake up to the lack of a recovery, leading to consumers spending less.  The impact will be felt in organizations as layoffs increase and more companies going under.

Not trying to be all negative, there were two really impressive notes from the 3Q earning season  – Apple and Amazon.  Both companies provided outstanding results on the bottom line and on revenue.

Oh, and about the dollar and gold…

There is something scary going on in the Gold and Dollar markets.

The dollar is bouncing index (USDX) is bouncing around the 75.00 support level, which is a drop of nearly 15 points since the start of 2009.

Why is this happening? Easy, the dollar is experiencing the world moving away from it as an investment vehicle due to the roughly trillion dollars the Federal Reserve has pumped into the system over the last 12 months.

Essentially, the Fed is literally making money out of nothing there by diluting the current currency value and the world market wants nothing to do with it.

Iran has stated they will not sell oil in dollars, rather a basked of currencies and gold. Russia, China, Turkey have all suggested the same possibility. As to add insult to injury all of the above countries have stated the U.S. dollar should no longer be the world’s reserve currency.

And since there is no other true reserve currency where is all the money going? It’s going into gold.

India recently purchased 403.3 tons of gold, which pushed the price up to an all time high over $1,100 an ounce. China and Russia are also fighting to purchase 200 tons of the glitter from the IMF as a safety net. There are cases being reported worldwide of such events – major world governments and banks making large (or huge) gold purchases, and they are doing so in order to protect themselves from the falling dollar.

The world sees the coming economic issues and they are doing their best to protect themselves.  For those who suggest that China would never let the dollar collapse due to their investments needs to think again.  They are selling off their dollar positions in small amounts and buying HUGE stocks of commodities.

And where does this lead us?

One day in the not too distant future the world will see an event that really catches them off guard, and as with other currency collapses, there will be not apparent reason for it. One day the dollar will make a large, if not unprecedented, turn downward. This will lead to massive and rapid inflation of specific goods… namely the commodities that China (and other world governments) have been stocking up on. The price of food will elevate quickly while the cost of your wonderful LCD TV will fall.

The rapid inflation will lead to small businesses trying to find cash to run operations, but guess what, the commercial financing market is going to be at a trickle thanks to the collapse of CIT and the restricted credit market. Oil prices will rise rapidly leading to the U.S. trucking and transportation industry straight into a depression. Commercial real estate will continue to collapse as people will be spending money on food, not on clothing, cars and electronics.  As a results, banks will feel the pinch.

Truly, we are in the perfect storm of economic events.  But what is the solution?

The answer comes down to our government and their willingness to mop-up the nearly trillion dollars in excess liquidity, as well as their actions to cut the level of U.S. debt.  Problem being, doing so will pull the legs out of the already weak economy.

In the end, it comes down to picking the lesser of two evils – preventing the collapse of the dollar or allowing the country to officially go back into a recession. The actions by this administration, as well as the past administration, have shown a history of poor critical decision making skills.

I understand that anything can happen and the economic world is “alive”.  Literally, things can change in a second; however, too many things have taken place and are all pointing in one direction. The best way to summarize the events we face is in a quote from the classic HBO series – Deadwood.

Wild Bill Hickok: You know the sound of thunder, Mrs. Garret?

Alma Garret: Of course.

Wild Bill Hickok: Can you imagine that sound if I asked you to?

Alma Garret: Yes, I can, Mr. Hickok.

Wild Bill Hickok: Your husband and me had this talk, and I told him to head home to avoid a dark result. But I didn’t say it in thunder. Ma’am, listen to the thunder.

Listen to the thunder, folks…

Yesterday I raised the question “what’s up with the mix signals on the economy?” The economic numbers just didn’t seem to match what the Federal Reserve was saying. I simply couldn’t see how the world is ending mentality gave way to a 6 week market rally and the Fed to say things are fundamentally sound.

Jim Rogers, a one time monster hedge guru, just isn’t buying the economic and stock market recovery:

I am not buying U.S. companies mainly because I think we may have seen a bottom but I don’t think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn’t last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system. The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.

It’s laughable on its face, but politicians think they’ve got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.

For the record, I do think that mark-to-market rules need to change but they would not solve the problem.

With politicians – not economists – saying the economy is fundamentally sound, and things are not as bad as perceived, the stock market has responded positively in the last week.  Just to remind you, the stock market is not the economy and in not an indicator of current economic indicators.

Nouriel Roubini, the economist who has been on target with a number of predictions regarding the economic climate, warns about the recent stock market rally:

It is déjà vu all over again. We have already seen this Groundhog Day movie at least six times over and over again in the last year or so: the market starts to rally – this time around about 8% in a week – and the chorus of optimists starts to say that this is the bottom of the economic and financial crisis and that we are at the beginning of a sustained stock market rally that signals the true end of this bear market.

Even before the latest bear market rally started last week I wrote the following on March 2nd:

Of course you cannot rule out another bear market sucker’s rally in 2009, most likely in Q2 or Q3: the drivers of this rally will be the improvement in second derivatives of economic growth and activity in US and China that the policy stimulus will provide on a temporary basis: but after the effects of tax cut will fizzle out in late summer and after the shovel-ready infrastructure projects are done the policy stimulus will slack by Q4 as most infrastructure projects take year to be started let alone finished; similarly in China the fiscal stimulus will provide a fake boost to non-tradeable productive activities while the traded sector and manufacturing continues to contract.  But given the severity of macro, household, financial firms and corporate imbalances in the US and around the world this Q2 or Q3 sucker’s market rally will fizzle out later in the year like the previous 5 ones in the last 12 months.

If I was heavily investing, I would take my profits (if I had any) in the current market until the indicators show the economy is turning – not simply reacting to oversold buying.

Previously I made mention that individuals should listen to Warren Buffett.  His years of experience simply demand that anyone interested the economy pay attention to what he says, regardless of his recent investment choices.  But what about when Nouriel Roubini speaks?  Should anyone pay attention?

Your very first reaction may be “who is Nouriel Roubini?”

Roubini is a professor of economics at New York University and one of the first economists to warn that the housing market will sink the U.S. economy.  In 2006 he went on to warn:

In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae andFreddie Mac.

No one believed him due to his extremely negative outlook.  No one could even begin to foresee, let alone imagine, such a massive economic emergency, mainly because the economy remained strong over such a long period of time.

Now Roubini is providing an even bleaker outlook to the current situation:

“We are in the 15th month of a recession,” said Nouriel Roubini, a professor at New York University’s Stern School of Business, told CNBC in a live interview. “Growth is going to be close to zero and unemployment rate well above 10 percent into next year.”

Echoing a speech he made earlier in the day, Roubini said he sees “no hope for the recession ending in 2009 and will more than likely last into 2010.”

Finally, while he says there will be “a light at the end of the tunnel”, it’ll probably get worse before it gets better. Those who believe in a second half recovery this year “are delusional” he says.

In fact, based on Roubini’s calculations, we could conceivably see the S&P 500 at 500, the Dow at 5000.

My knowledge of Roubini is limited but he seems to be on of the only economists that is willing to say it the way it really is.  Maybe that is due to him not being associated with a financial institution or banking entity.  

Is he right?  No one knows.

Much like Buffett, it would make sense to listen to him and decide for yourself if his forecast strikes a chord.

While Buffett has suffered just like any other investor during the current bear market, it is still important to listen to what he is saying.

Billionaire investment guru Warren Buffett has underscored dire times ahead for the United States, declaring the world’s biggest economy has “fallen off a cliff”. 

While praising repeated efforts by the US Federal Reserve to stimulate the economy, Mr Buffett said the economy “can’t turn around on a dime” and that the combined stimulus efforts could trigger higher inflation once demand returns. 

“We are certainly doing things that could lead to a lot of inflation… in economics there is no free lunch,” Mr Buffett said.

No one is right or wrong all of the the time but Buffett’s experience and exposure to economic data demands we listen.  If we believe what he says is another story.  While we are facing the largest period of deflation in recent history, I believe inflation will come back with a vengeance.

All I can say is “WOW!”

The inauguration was highly impressive on a number of levels.  On a very basic level, watching the ceremony unfold, with barely a glitch, in such perfect manner was very impressive.  Take into account the history that was unfolding, add in the sea of humanity, and you have the perfect recipe for a modern day drama. 

I was quite impressed with the class President Obama showed during todays events.  While our nation faces a number of uphill battles, he did not place blame with any one specific person or political party.  He did move away from the political attacks in hopes of bringing the country together and, I believe, in a number of ways he did.  While I found his overall message to be less positive – and more realistic – than I had expected, he provided a message that resonated with the masses in general.

I do have a major problem; however, with something that took place today.  The crowd was booing when VP Cheney and President Bush were introduced (and, yes, they were still the VP and President at the time).  If you have a problem with the former VP and President I fully support you and your views, but you simply do not boo.  This isn’t a free speech issue, it’s a respect issue – respect for the Office of the President – not necessarily the person.  You respect the position. When you disrespect the Office, you are disrespecting the nation, and it only shows the ignorance that still is within our society today.  

Again, best of luck President Obama.  You have a huge task in front of you.  

Stock Market

At the beginning of the year, all of Twenty days ago, I was concerned about how quickly the stock market was rising .  The DOW almost reached 9100, and it was acting as if no recession was gripping our economy. Bad news would come out, the DOW would go up.  Good news would come out, the DOW would go up even faster.  The market was enthusiastic for no real reason, and now it has a huge hangover.  Today the DOW dropped 332 points, closing below 8000 for the first time in 2009.  

Yes, the news looks scary once again.  The survival of US banks are in question. Will Bank of America survive?  How long will it be before The Royal Bank of Scotland will be fully nationalized? What company will go bankrupt next?  Look past the obvious bad news and you can see good news.  REALLY good news, actually.

Take a look…

IBM posted a profit of $3.28 for the quarter – .$25 higher than expected.  Not only that, IBM expects to make $9.20 per share for the 2009 fiscal year, up $.45 from what was previously forecast.  Johnson and Johnson posted quarterly profits 14% higher, though they expect 2009 figures to be flat.  CSX – the rail transportation company – posted a profit of $.90 per share, a whole penny less than expected. 

The earning are there and better than expected from some of the economic bellwethers.  I’m not saying the economy isn’t in the crapper, nor am I saying everything will be fine tomorrow, but I do believe that the market has swung to low too fast.  

Essentially, I think the stock market is way oversold and is trading on emotion, not on the reality of the current situation.

Pilates, I have a new found respect for you

Today was the first day of my workout routine and Pilates was on the docket.  I doubted the effectiveness of a Pilates workout… until today.  For a 17 minute workout I felt the “burn”, as it were, and I was sweating up a storm.  

Seriously, I was very surprised and I cannot wait for the next workout… oh, and I’m down to 162.5 pounds, down 6 pounds in about two weeks.  There is no target weight I have in mind, I simply am taking better care of myself and it seems to be working.

Erasure Pop Remixed!

I had the chance to listen to a promo copy of Erasure’s “Pop Remixed!” and I can officially say that I am disappointed.  Really, not trying to sound negative or unsupportive, but the remixes are really…   thin… weak… uninspiring.  

Here is a quick breakdown.

Always – The Manhattan Clique remix doesn’t embody any of the original – outside of the vocals, nor does it do the song justice.  I’ve never understood the fascination Erasure has with Manhattan Clique as their work never seems impressive.

Drama!  - Really, you would think that Andy Bell would honor his own song in little better than this.

A Little Respect – Hello bad late 90’s Euro Trance music

Fingers and Thumbs – The full remix is long and, at times, seemingly pointless. Worse yet, the remix uses a vocoder on Andy’s voice…  The edit version is OK, but nothing impressive.

There was such potential here but my fears, I believe, have been realized…. 

Until next time, stay (fill in the blank).

Friday was witness to an alarming bit of news.  Ok, “bit” of news is not the way to put it, shocking is more like it.  533,000 jobs were lost in the month of November due to worsening economic conditions, significantly higher than the expected 400,000 positions.  

As if the news today wasn’t scary enough, one needs to look at the jobs lost last three months to understand the big picture on employment. 

(from bizzyblog.com)

Folks, that is roughly 1.3M lost jobs in three months.  At this point, it is understandable how 1 in 10 American homeowners with a mortgage are either at least a month behind on payments or in foreclosure and that unemployment went from 4.7 percent just one year ago to 6.5 percent this past fall.

The discussion about another great depression continues to circle the media.  Some say yes, some say no. While unemployment is currently nowhere near great depression levels, but remember that unemployment didn’t it 25% until roughly 1933 – almost 4 years after the market crash of 1929.  

It didn’t happen overnight then, and wouldn’t happen overnight now.  I fear another depression is in the on the way, or a hard rescession that of the early 70’s.  Eitherway, I still believe we haven’t even begin to see how bad things are going to get.

People are saying the stock market is in “uncharted” territory these days.  That isn’t exactly the truth.  Take a look at this chart from dshort.com:

The last 3 major bear markets all dropped from 48% to 89%.  Add in our current market and one will see that we are at, roughly 51% as of 11/21/08.  

On another note, the stock market, and the performance of the market, was not the cause of the Great Depression, nor is it the reason our economy is in the current place it is.  I simply want to point that out as I’ve heard three stories within the last 48 hours that implied such a correlation.  

I will have more on the bear market later today…. if you are a true fan of history, you know what I am researching… but if you do not have a background in history / finance… the “Great Depression” you think of that around the crash of 1929… yea, that wasn’t the “Great Depression”.  I’ll show you the 1st Great Depression and let the echoes of the past haunt you as you come to realize the largest depression could be happening all over.