Find our current and future
evaluations of the US economy on this page.
This is a straight forward
approach to Economics.
The foundation for our economic
analysis is the Investment Rate. The first step in evaluating
economic conditions is to evaluate longer term economic cycles.
The Investment Rate is the most accurate leading longer-term
economic and stock market indicator available.
Because The Investment Rate is
a long term indicator, some might not think that it is
appropriate to use when identifying short term cycles.
However, we have successfully done that. The Investment
Rate represents normalized demand trends, so when we compare
immediate demand levels to those normalized trends, we can
determine if demand will increase, or weaken in the next 6-12
month span. This helps with both business decisions, and
investment decisions. Find examples in the 2009 return to
Parity analysis, and the 2010 Forecasts.
Our current and future
evaluation of the economy:
Updated 4.14.10:
The current state of the consumer:
Several weeks ago, I balked at the
negative consumer sentiment number. I saw activity, I saw
happier faces, and I saw pocketbooks being opened, so that
negative number did not reflect the real current economy in my
opinion. The activity at that time was quite good. After a
long layoff and a roller coaster ride that would make Magic
Mountain shake, consumers came back a few months ago.
When I questioned that report, and
suggested that you discount it completely, I did so because I
saw a surge in activity. Not only did it stabilize, but many
consumers also came back with force. I could argue that many
women finally got the opportunity to shop again, but that would
separate men, who also were out in droves. Everyone seemed to
have a pent up desire to spend.
Is this human nature? When we are
forced not to spend, do we want to do it more and more. And if
so, when we get the green light to spend again will we clamor
over each other to reach the cash register? My current views
shed some light on those questions.
At this time, from my observations,
the surge in consumer re-participation is abating. They were
strong a month ago, and that lead to my former conclusion.
Since then, they have backed off.
With that, we are probably going to
have stronger confidence numbers, and analysts are probably
going to be late to the game again, but I see reasons to be
concerned, not reasons to be in frenzy. If we receive a report
in the next few days or weeks from some analyst or news agency
that suggests consumers are going to accelerate spending, I will
balk at that too.
My observations suggest that
consumers came out of the gates aggressively, but the turnout
now is much lower. Some are still there, much more than a year
ago, but the numbers are less than a month ago. People are just
not as interested because they have gotten that spending bug out
of their system already. Now, it is back to reality.
Therein lays the problem. The
consumer had a pent up demand, they acted on that emotion, and
now they are coming to tough conclusions again. Many of them
are realizing that they cannot afford to keep up that pace.
Shocking! America is finding the need to budget, at least many
consumers are.
If they are given a compelling
reason, I am sure some consumers might step up to the plate
again, but without that, I am seeing signs of tightening. I am
observing a restraint that was not there a month ago. From
that, I believe the future data will reflect an abatement of
demand.
The Overshoot
This fits directly in line with our
overshoot. Clearly, I have been preparing you for this
overshoot for a long time now. I have also been talking about
the Investment Rate and its accuracy for eight years. To you
commercial real estate buyers out there, who are not getting the
deal of the century on a foreclosed property you can turn around
and sell immediately for a profit, think twice. Think twice
about buying at the tail end of this overshoot, and think twice
about doing it in the first couple of years of the third major
down period in US History too.
The observations I am making now fit
in line because the data we will see will lag. The data will
not show the signs of a consumer pullback until the data shows
signs of consumer re-participation first. Yes, we are starting
to get data that shows that now, but there will be more before
it is over. That could help push us to the overshoot we are
looking for, and give us that opportunity to short we are
measuring.
Like a boxer using a straight arm, I
am measuring our course of action, and laying the groundwork for
what I think will be exceptional positions soon. For those who
were members in January, can you remember what I said the best
trade of the year would be? If you do not know, I will talk
about it soon. If you do know, prove it and respond to this
email with your guess.
With more positive consumer data on
the horizon, and a clear abatement taking place in real time, I
am looking for an overshoot, and then a taste of reality. After
this positive data, a turn down will come. When it does, Wall
Street will be hit again.
However, I cannot say that smart
money will lead the way. In fact, many smart money investors,
at least those who I thought I respected as being ahead of the
curve always, seem to be falling prey to the Market just like
everyone else. The proactive approach that has been proven for
years is once again being discounted by the masses, but some
smart money investors seem to be doing the same thing. Maybe
that is because they own some assets at extremely low levels.
My guess is, it is because they want to own more assets at those
low levels, they are in search of those opportunities still, and
they have forgotten about securing gains in the assets that have
already appreciated.
All classes of investor are being
dragged back in. This is exactly what we have been waiting
for. These are the classic signs of an overshoot. We have been
bullish, we have been on the long side, we have been riding the
wave up, but because we do not care about direction, we can also
turn on a dime. That is what proactive investing is all about.
When you tie your assets up in investments that depend on a
stronger economy or a higher market, our proactive approach does
not satisfy your emotion anymore.
In the end, I have not designed our
system to satisfy emotions. I designed them to rid us of
emotional burdens instead. If you are emotional, if you are
giddy, if you are nervous, stop. Sit back, relax, and let them
come. I am watching, I will always be watching, and I will
always do my best to keep you ahead of the curve too. Stay
proactive, stay liquid, stay on the course. We have been
planning for this, it is happening now, and we will take
advantage of it.
Updated 1.27.10:
I am backing off
of my inflation outlook. There may be reflation, and there
may be an attempt to solidify pricing power by some companies,
but very few will have the ability to do it.
Instead, and much more probably, price wars will take place.
We are already seeing it in the Verizon versus At&T battle.
Soon, cellular phone service will be a commodity.
Many other
expensive services will experience deflationary pressures as
competitive pressures change the playing field too. Growth
will not come from cost cutting anymore, prices will be hard to
increase, so the logical alternative from a corporate standpoint
is to increase market share. Some companies can afford to
slash prices. This will cripple income streams, but it
will also cripple their competitors. Gaining market share
is the name of the game in 2010. I expect to see more VZ -
T like battles. Then, I expect to see acquisitions.
Updated 1.14.10
Our economy is on the verge of
hitting a Wall. The recovery in 2009 was expected, and we
profited from it. From here, the prevailing headwinds will
soon start to take over. The excitement of the rebound
will only last a short while longer, if at all. However,
there could be another surge in the Market without better
economic signals, but it will not last. I do expect the
Economic signals to stop showing positive signs very soon, and
once that happens I expect investors to start to get nervous.
True nervousness will probably not set in until the latter part
of the year. Until then, the Market should ebb and flow,
while investors hope for the best. They will not get what
they want, if they are dependent on a continual increase.
The stagnating econometric
variables will be the first sign that the economy will continue
to weaken. The Market will not become truly nervous until
a series of stagnant economic data comes, and then start to
weaken too.
The year should shape up in line
with this general economic view.
We are still holding TBT, but GLD
was sold as referenced in our position trades link.
Updated 12.30.09
2010 - The Year of
the Increase
This is our
forecast for 2010.
http://www.stocktradersdaily.com/reports/2010.pdf
Updated
8.29.09:
|
My Reconciliation is based on a shift in an established
long-term pattern. Specifically, I am referencing the
relationship between interest rates and the stock
market. Since the FOMC began using the target rate in
1997, the Stock Market has been lead by the transition
in Interest Rate policy.
For years, I have
been offering updated graphs, which show that we should
be buying when interest rates stop being cut, and
throughout the raising cycle. Then, we should sell and
begin shorting the moment interest rates begin to be
cut. The charts below show this relationship through
October 2008. With projections you can see, if you
bought when the last cut was made in 2008 you are doing
okay yet again. This relationship has held for a long
time.
 This relationship
exists because Interest Rates were being adjusted due to
the relative strength or weakness in the economy. In
fact, very little concern was paid to inflation.
Although I would argue this decision, non-core
inflationary concerns were not driving the decision of
the FOMC. As a result, they raised rates during strong
times, and the Market increased during those strong
times too. Conversely, they cut rates during weak
times, and the Market declined just as we would expect.
As we know, the market goes up when the economy is
strong, and it goes down when the economy is weak. This
is not rocket science, even though Wall Street did not
seem to be able to see the forest despite the trees;
everyone wanted to argue this steadfast point every time
it was made.
Regardless, this
relationship only holds true when the determinate is
economic strength or weakness exclusively. When
inflation is factored in, the parity we have been
witness to dissolves. In the next cycle, that
relationship will dissolve. In this next cycle, a
shift in the long term established parity between
interest rates and the direction of the stock market
will occur.
The reason is
inflation!
The Economy is
entering an inflationary period, and as 2010 comes,
inflation will become a major concern. That will break
the relationship I have identified for so many years.
Here is how it
will unfold:
First, Wall Street
is found on the premise of increasing revenues. Most
companies have been able to quell critics recently with
cost cutting. We all know, that can only last for so
long. The next question is growth. When will real
growth come back? That is the tuff part. Everyone is
asking that question, but very few have a sound
response.
We know:
1.
The pool of potential
consumers has shrunk (layoffs)
2.
The remaining consumers
have been saving (increased savings rate)
3.
Companies will have trouble
selling more because there will be fewer buyers
4.
Companies will need to show
better results.
With pressure from
their investors, companies will struggle to look for
ways of bettering results. They will not be able to
sell more goods than they are now, because the number of
potential buyers has declined, and unless credit eases
substantially again (it will not) or the unemployment
rate suddenly shrinks (it will not), the numbers of
buyers will remain the same, and not grow.
If growth by adding
volume is unlikely, many companies will find difficulty
producing increased results, because cost cutting will
no longer be acceptable. Their second option is viable
though. The current buyers will have been saving money,
and they will feel more comfortable about the economy as
2010 comes around.
The groundwork is
already laid.
Corporations will be
looking for a way to increase revenues, and they won’t
be able to do it by increasing volume. The logical
choice is to raise prices, and they will be able to do
it because consumers will accept it. This does not even
account for low interest rates, but that plays a role
too.
Instead, the simple
state of our economy will give rise to real inflationary
pressures. This will not be commodity driven, and
therefore it will not be discounted by the FOMC.
Instead, they will be forced to raise rates to curb
inflation for the first time in 10 years. That will
break the cycle outlined above, and that will cause
interest rates and the market to diverge for the first
time since the target rate began.
Inflation is on the
horizon, and there is a logical way to profit from it.
Buy Gold and
Short Treasuries.
Gold Plays:
GLD
UGL
DGL
Short-Treasury ETFs:
TBT
PST
|
Updated 8.9.09
If you have
been following my broader market observations you know that I
expect inflation to become a problem as we enter 2010.
That makes this FOMC policy decision extremely important.
Their decision to, or not to raise rates will determine the
severity of the inflation pressure in my opinion.
Unfortunately, I do not think they will act. I think many
on the committee will want to, but I think political pressures
will prevent them from taking action. Not Good!
As we enter
2010 companies will try to show positive results that are not
related to cost cutting measures. However, that will be
extremely tough. In fact, for many companies new volume
levels will stagnate. Sales volumes will not grow because
there will not be a substantial number of new consumers in the
Market. This is a big problem when the objective is to
show real growth.
However, the
consumers who are still in the Market, most of whom still have
jobs, will probably become more confident with the economy at
the same time. I expect the Market to continue to increase
through Q1/10, and that will be their rationalization.
Even though I would not be surprised to see a pullback after we
test 9642 in the Dow, I expect the Market to be much higher by
the end of the first quarter of 2010. This will create a
false sense of reality for many people.
Investors and
consumers will think that the Economy will recover swiftly as it
has for the past 26 years. Unfortunately, that will not
happen this time (Investment Rate).
My points on
that topic are left to another conversation though.
Instead, this one is focused on inflation. When 2010
comes, and companies find real growth almost impossible due to
the lack of net new buyers, they will turn to their existing
customers for growth. They can sell new products of
course, but a much easier method is to just raise prices.
After all, those customers will see that the Market is
increasing, they will have that false sense of security, and
they will be more willing to pay more for goods and services as
a result. It is a logical course of action for any
corporate executive. Raising prices is a great way to show
better numbers.
As we enter
2010, I expect inflationary pressures to be strong.
Corporate greed and the demands of Wall Street will be the
driving force. However, extremely low interest rates now
will allow that to become a reality too. Sure, real rates
are higher than the Target Rate, but they are still priced to
move. That means, companies can borrow more cheaply now
than they will be able to in the future. Everyone knows
this. In fact, that may be one of the political reasons
for leaving interest rates at their current levels right now.
If the FOMC raises rates, the US Government will also have to
pay more interest on the Treasury Bonds it issues. I think
we are having a tough time affording a rationale budget, much
less higher bond prices.
In any case,
the FOMC's decision this week will be critical. If they
raise rates by 50 basis points, I think it will be a move in the
right direction. However, I do not think they will.
I think they sit on their hands, at the request of Capital Hill.
We will find out how right I am when the minutes are released.
Initially, if
interest rates stay where they are, I expect the Market to react
positively. However, I also expect a positive result if
interest rates are increased. The first would be a relief,
but an increase would be followed by a knee jerk lower and then
a recovery on the rationalization that the Economy is improving
and allowing the FOMC to act. Either way, I expect a
positive result when the dust settles.
This
should be enough to get the Market close to 9642.
The problem
is, what happens when the decision to raise rates shifts from
one focused on economic strength or weakness, to inflation.
That is the dilemma I expect in 2010. That will break the
correlating trend between Market levels and Interest Rates that
has existed for more than 10 years. If you have not been
paying attention, the Market increases when rates are being
increased (since '98), and it has declined throughout the easing
cycles. That has only been true because every move has
been due to economic strength or weakness. When that
stops, when the decision is based on inflation again, the
correlation will stop. If rates are increased due to
inflation, I expect the Market to get hammered. That's
sets the stage for 2010.
Updated
7.23.09:
When I was a
financial advisor for Morgan Stanley, my managers held routine sales
meetings. These were often hosted by mutual funds or money managers,
who hoped to influence us to encourage our clients to invest money with
them. They always told us how to go about it. They pointed out ways we
could influence our clients to make decisions. I am going to talk about
this, and how it relates to recent history.
Yesterday, President
Obama made clear that he does not want Congress to waste time with
Health Care. All debate aside, he wants this done fast, and he has set
an agenda. If he didn’t, in his own words, nothing would get done.
That is because Congress, just like most individuals, would rather do
nothing than something. That is especially true when it means change.
That is not unique to
congress, but it is human nature. Few people would opt for the road
less traveled, even if it was logical, and purposeful. For Obama, his
goal is to correct an obvious problem, something everyone recognizes.
Still, many people would rather sit on their hands than do something
about it.
The same thing
happens when people consider investments. That is how the sales
meetings guided me, a decade or so ago. There were two emotions they
encouraged us to play on. They either wanted us to address the fear
within our clients, or the greed most of them had from time to time.
Once we tapped into the right emotion, we could direct them into
accounts that balanced their emotion, and the sales process was easy.
For example, if they
were afraid, we could pitch a bond fund. If they were greedy, we could
pitch the more aggressive fund, or the one with the best recent
performance. People love to chase performance, and it is an easy sell,
even if it is not the best approach.
Fear and Greed have
been powerful. In 2008, everyone was afraid, unless they were using our
proactive strategies of course. For those engaged in our proactive
strategies, they couldn’t care less where the Market went. Down was as
good as up, as far as they were concerned. Others lost everything, or
at least most everything. Now, as 2009 continues, the prominent
emotion is greed.
This, at least, is
true for the masses. The little guys have returned, and they are
emotional because they want it back. They want to “win it back.”
Unfortunately, we are not in Vegas, and we are not in a longer term
up-cycle anymore either. The Market has begun a prolonged decline, and
The Investment Rate tells you why. But nothing goes straight down.
Still, greedy
investors will begin to chase performance again. In fact, they already
are. Unfortunately for them, they will never change. They will end up
doing the same thing all over again, even though they know that gets
them in serious trouble. Even though they have just lost a substantial
amount of wealth using this same practice, greed prevails now, and
investors would rather stay the course and take their lumps again, than
make a change that is logical, and purposeful. Influencing people
to address risk controls is tough in this environment.
This is exactly what
Obama is facing with delayed congressional attention. In 2008,
everyone wanted proactive strategies, because they had to protect their
risk. Now, risk control seems far less important. Yet, it is more
important now than ever.
My detail has been
explicit. I warned of a severe decline in the middle of 2007, I have
outlined The Return to Parity that is happening now (I did this at the
beginning of 2009), and I have provided advanced warning that the
beginning of 2010 will mark the end of this hopeful recovery.
That does not imply
that I think the Market goes straight up from now to then. It will
trade down again. It always trades up and down along the way. The
frequencies will be important to monitor, but if the economic conditions
improve, I expect the Market to increase too. Therefore, over time I
expect the Market to head back up a little more at least.
However, it will not
get near 2007 highs again for decades.
Greedy investors are
hoping that it will. And, greedy investors are forgetting about risk
controls. Greedy investors are letting themselves repeat mistakes. But
greedy investors are not part of the leadership group either.
Therefore, they mean little to us.
We are not greedy
investors. We are risk conscious investors. We do not chase
performance, we chase risk control. That might mean we don’t get to
celebrate with everyone else when the Market experiences a surge like it
is now. However, we could. Our strategies are not correlated to Market
direction, and that is why they work regardless of market direction. We
could have a great week when the Market moves sideways, or a bad one
when the Market moves up. We could perform better than the Market from
time to time, or worse, but because we can make money in any market
environment, I expect our strategies to prevail over time.
That has already been
true.
However, our
strategies are not based on performance. They are based on risk
control. They are also designed to remove both fear and greed from the
equation. We are not afraid, because we are always in control of our
risk. And we are not greedy because we have already learned the hard
way that greedy investors will eventually pay the price.
Doing nothing is not
an option. Just like Obama is pressing Congress, I press everyone all
the time to manage their risk. That is the only way to stay ahead of
the curve in the years that lie ahead. If those risk controls are
relinquished the reversion to brackish investing will lead to wealth
deterioration if the findings of the Investment Rate hold. Still, new
members are having problems accepting risk control as a way of life.
Let greedy investors
celebrate. They are not privy to the information you have. Do not
diverge from your strategies. I know it is hard not to get caught up in
the frenzy, but I warned about this many months ago, and I have updated
comments regularly. This recent euphoria should come as no surprise.
I have outlined it, we have prepared for it, and it is happening exactly
like I suggested.
Stay focused and
remain in control of your risk.
You will be happier in the end if you do, and you will stay ahead of the
curve over time. Every day is a Tuesday means two things.
First, it means that we do not become afraid when everyone else panics,
but it also means that we do not get euphoric when everyone else is
filled with excitement. Instead, we stay the course, and approach
things the same way every day. Now is no exception. In fact,
it is more important now than ever.
Good Trading.
Thomas H. Kee Jr.
President and CEO
Stock Traders Daily.
Updated
7.21.09:
This is a
very important update:
http://www.stocktradersdaily.com/clubsite/Club/InvestmentRate/economic721092/economic721092.htm
6.9.09
Our Economic
analysis has been updated, and it now extends beyond 2010 with
this current report. It is titled: The Grimm Reaper is
Knocking. It uses the Investment Rate to compare current
demand ratios to normalized demand ratios to gauge future
economic activity. This was the same basis used in the
Return to Parity Analysis issued in December, 2008. It
also references the PST and TBT positions that were recommended
in December, and the UYG and URE positions that were recommended
the day after the Market bottomed in March. This is a must
read for everyone because it sets the tone for the next six
months.
The Grimm Reaper is Knocking
Updated 5.3.09
Economic conditions
are starting to improve as planned. From here, I expect
the Headfake outlined in the Return to Parity Analysis to be
realized. Find the Rturn to Parity in the Investment Rate
section. I have prepared a presentation explains my
outlook for the remainder of 2009. Please take the time to
review this presentation. It outlines these changes, and
will only take a few minutes.
http://www.stocktradersdaily.com/2009Strategy/player.html
2.19.09
Recent policy decisions and a Greater Depression
When Bank of America decided to Buy Countrywide last year, I
went on record. In my opinion, that was one of the worst
mistakes in the history of our Financial Markets. Now, that
opinion is starting to prove itself. Review the article here:
http://seekingalpha.com/article/59910-bofa-s-countrywide-purchase-is-a-huge-mistake
Given recent developments, I am going on record again. In my
opinion, the decisions of our new administration will lead the
US into a Greater Depression. This may be the worst mistake in
the history of the United States. The Trillions of dollars
spent to buy our way out of this mess will be wasted, and the
byproduct will stifle the economy for many years to come.
Although the purpose of the resolutions is well intended, the
consequences will be more than the country can bear. After a
sobering period of demand – side stability, the US Taxpayer will
have to pay the price. In addition, the government will not be
able to spend these monies every year to employ the 2 million
jobs referenced by President Obama in recent days.
Instead, when the spending phase is exhausted those jobs will be
lost. A perfect scenario suggests that the private sector would
then pick up those laborers. However, a debt burden will linger
over the country at the same time. Therein lays the problem.
With Social Security and Medicare bringing up the rear, the
taxes levied on the wealthiest Americans will skyrocket. This
will create a circular trap which limits reinvestment into the
economy, and which impedes growth as a result. Those laborers
will not be rehired.
In addition, and more importantly, this will happen during the
third major down period in US History. Normalized demand ratios
decline for the next 16 years, according to my proprietary
analysis. This called The Investment Rate, and it is the most
accurate leading longer-term stock market and economic indicator
ever developed.
Therefore, the result of today’s decisions will compound as
demand for new investments continues to decline. Accordingly,
the United States will be faced with the worst financial crisis
it has ever seen
Here is the timeline:
1.
-
Demand Side stability will surface in the next 6-12 months
-
The Economy will appear to be in a recovery process
-
The Target Rate will begin to increase
-
Taxes will go up
-
Economic recovery will stall
-
The declining demand ratios evidenced by the Investment Rate
will prevail.
-
Social Security and Medicare will be front and center
-
The value of the Dollar will decline.
-
Foreign interest in US assets will wane.
-
A Greater Depression will result.
The Mortgage mess was just the beginning. BAC, C, GM, and
Chrysler are all on the chopping block today. Over time, this
list will grow. This is Contemporary Darwinism at its best.
Only the strongest, most nimble companies will survive. We
cannot stop this natural selection process. We cannot prop up
weak companies. Moreover, we cannot buy our way out of this
mess. The more the US spends, the more the taxpayers lose.
Fiscal disciplines should be the focus, but that seems to be the
last thing on anyone’s mind. Didn’t we learn that lesson
already
11.2.08
I do not specialize in Real Estate, but THE INVESTMENT RATE
has a direct impact on Real Estate prices and this is an
important time to comment on that relationship.
These comments are important to:
My comments are a direct byproduct of the article I wrote on
Thursday as it relates to the current anomaly in THE
INVESTMENT RATE. If you have not read it please do so now.
Thursday's Article:
http://www.stocktradersdaily.com/News%20Release/News_release_TA_00002000800100030008arm.htm
In the above article I also elude to an anomaly in THE
INVESTMENT RATE. Last week I sent a private email to our
membership explaining that anomaly and the opportunities that
lie ahead as a result. Current members can review those
comments again using the link below.
Media and non-members should wait until my Marketwatch Article
for November is made public by Dow Jones.
Here is the Anomaly Summary:
http://www.stocktradersdaily.com/clubsite/Club/InvestmentRate/index.html
Real Estate Decisions:
I'll start with a 'shoot from the hip' assessment, and explain
my position thereafter:
I think Real Estate prices will experience a significant
increase in the next 6-12 months. If you are a seller of real
estate I would wait for 6 months because I think you will get a
better price at that time. Further, if you indeed own excess
real estate I would seriously consider a full liquidation in
6-12 months as well, because I don't expect follow through. If
you are a buyer, I would NOT be a buyer of investment property
at all. Economic conditions should improve over the next 6-12
months as real estate prices bounce back, but that will be
temporary.
The referenced articles satisfactorily explain my position on
Interest rates and the anomaly, and they provide rationale for
my 'bounce back' opinion. Further, the anomaly offers
additional evidence which tells us NOT to expect a continuation
after the bounce back. This part of my recent study is what
prompts my reconciliation that current buyers of real estate be
warned.
Unless you engage real estate with the objective of turning it
over in 6 months, I think an investment in Real Estate is a poor
decision even in the face of the bounce back I expect. If you
are a buyer today I do think you will be happy for the next 6-12
months because pricing should improve. However, in 24 months
that all will change, in my opinion, because Real Esate prices
will fall hard yet again as demand ratios decline over the next
decade. This will adversely impact the economy, again.
I expect a Greater Depression. I expect the
United States to reach an insolvent state, and I expect the
dollar to devalue severely as the Treasury is forced to print
money to cover debt. I expect all this to come in the face of
deteriorating longer term demand trends evidenced by THE
INVESTMENT RATE. Normalized trends will surface sfter the
return to parity referenced in my Anomaly article comes full
circle.
After the immediate wave of economic drubbing subsides I expect
improvement for the next few quarters. However, the
comparison-based improved economic conditions will not last
long. The headfake will hurt many investors yet again. Do not
let it hurt you.
I expect good times for a while. Enjoy it while it lasts.
9.23.08
The economic
landscape has changed after the 'short selling debacle' caused
runs on some our nations largest institutions. The
problems stemming from the failure of the CDO - CDS markets are
becoming more and more clear. For those that don't
understand the significance, this Market was approximately $46
Trillion in 2006-2007, according to some estimates. The
Treasury is about $5 Trillion, just to offer a comparative
analysis. Translated, the economy holds a significant
amount of synthetic debt.
This is the root
of the problem in our economy right now. This is what
congress is faced with, and this is what Paulsen and Bernake are
trying to combat with their $700 Billion Proposal. This is
a byproduct of the Investment Rate by the way, and a major
variable in the probability equation of a Greater Depression, a
term we have already discussed.
First, risk
analysis tell us that the balance of risk given the $46 Trillion
synthetic debt Market vs the $700 Billion proposal is
significant. Can $700 Billion really cover the cost?
Also, many wall street pundits are asking why the Government
would acquire ownership stakes in the banks who choose to engage
the government for solvency. The answer is quite clear...
By definition
synthetic debt only holds value IF the loans are paid. If
the loans fail the portion of the bundled debt package that was
tied to the failed loan dies along with it. In many ways
this can be analogous to an expiring option. This option
just happens to pay interest. However, there is no
underlying asset!
The risk is
default.
Owners of
synthetic debt will lose all of their investment if all of the
loans in the bundle default. If only a portion default,
the losses will be limited to that portion. Although the
bundling of loans dilutes the potential for complete loss, the
risk is still very clear: The potential for 100% loss exists.
This is why the Government is proposing an option to acquire
equity in the banks who engage this program. Otherwise the
risk to the taxpayer would be 100%. Wall Street pundits,
including Larry Kudlow, need to stop balking at this.
However, that
doesn't change the bailout's efficacy.
$700 Billion
without associated risk controls is penance to the US Taxpayer.
This is the resolve of Congress, and this is where the debate
comes from. I don't blame them. I personally have a
problem putting $700 Billion of US Taxdollars in an option!
Especially in the face of the 3rd major down period in US
History, according to the Investment Rate.
The banks should
be left holding the bag....but not the banking system.
Maybe this is
where the capitalist structure really begins to work?
Maybe this is where Darwinism applied to economics becomes
relevant? Maybe this is where the potential insolvency of
the banks who own the synthetic debt becomes a reality?
Maybe this is where the shit hits the fan?
I personally feel
that Paulsen and Bernake have done a horrible job developing and
selling the proposal and although I do expect congress to pass
something to patch this immediate issue, I do not expect their
proposal to pass. Further, for Paulsen not to recognize
the significance of this issue after his tenure with Goldman
Sachs is catastrophic. He may be a true free market
capitalist, and if so he should be willing to let the banks
fail. That may be the answer...sort of....
This leads me
to my proposal.
We have already
heard the terms 'good bank' and 'bad bank,' these are excellent
terms. Unfortunately, the proposals that we have been hearing
thus far are to sell the bad banks to the US Government to get
the synthetic debt off the books, and allow the good banks to
remain in the hands of shareholders. Not so fast!!!!!!
I appreciate the
notion of good bank and bad bank because that clears up plenty
of the associated risk tied to the synthetic debt market.
However, I do not agree that the Taxpayer should buy the bad
bank to provide solvency to the underlying entity. Nor do
I want the US Government to own shares in companies they do not
control.
Instead, I
believe that the Government, where needed, should
buy the good bank instead! The
Government, for a short while, will own the solvent, operational
bank, but it will never own the synthetic debt under my
proposal.
The remaining
portion of the potentially insolvent bank owned by shareholders
and bondholders would be tied directly to the bad bank if the
entire entity needs Government assistance, and those
shareholders would bear the entire risk associated with the
synthetic debt. The government should not be willing to
buy the bad bank in any circumstance whatsoever!
Definitions of good and bad assets would have to be made clear
through policy.
In fact,
banks should be required to differentiate between good and bad
assets now, prior to the risk of insolvency. By dividing
these assets now potentially insolvent banks might also have the
ability to spin off the bad bank to shareholders, leaving them
with a significantly smaller equity percentage in the good bank
of course. This, in turn, would still leave shareholders
with some equity in the good/solvent bank, ownership of the bank
bank, and the banking system would remain in tact because the
good bank would not dissolve. The shareholders and
bondholders would remain owners of the synthetic debt.
If the Government
is forced to assume control of the good bank based on the
insolvency of the underlying entity, the US Government would
then revert the existing 'good bank,' which should be solvent
and operational, back to the public through special offerings.
This would allow the Taxpayer to recoup the expenditure and it
would put the onus of 100% loss on the 'bad bank' instead.
If those CDOs hold value, the shareholders of the bad bank
should be able to liquidate those assets for fair value in the
open Market. If they don't, the bondholders will lose
everything. But the risk will be on them, not on the
Government.
The Government
is already overleveraged.
This proposal
would require the development of new agencies and it would
require the active involvement of the Treasury in direct
connection to Wall Street to spin off these 'forced majeure'
banks. However, it would prevent Taxpayers from assuming
the risk on behalf of the banks which caused this problem in the
first place, and it would allow the banking system to remain
operational.
In the case of
bankruptcy without prior differential, the US Government would
impose a mandate to restructure the bank into 2 entities based
on policy, sell the good entity to the government, and dispose
of the bad bank in the open market under bankruptcy proceedings.
Given a declining
Investment Rate, the government should not leverage itself
without protection, and the 'bad bank' policy being proposed
does not offer any protection whatsoever while increasing the
risks measurably.
My proposal
offers protection, and it will allow the banking system to
remain in tact. My proposal pays no consideration to the
shareholders or owners of potentially insolvent banks, but
instead it focuses on the banking system itself.
Significantly lower equity values would be a natural byproduct
of my proposal, and warranted.
Paulsen and
Bernake have failed thus far.
Good Investing.
Thomas H. Kee Jr.
President and CEO
Stock Traders
Daily.
6.7.08
I continue to expect serve
recessionary and depressionary economic data within 12 months,
but I continue to believe that the economic drubbing with remain
controlled for the time being.
Oil prices are a concern, and I
expect consumers to restrain travel plans and energy
expenditures in the face of soaring energy prices.
However, I also expect alternative expenditures to prevail for
the time being. Would be travelers will, I expect, opt for
vacations much closer to home. Maybe they will opt for
summertime purchases such as barbecues, camping equipment, and
sailboats may become much more popular too. The point:
consumers will try to find alternatives which don't involve
excess energy costs.
I expect driving to be minimized,
public transit to be utilized, and flights to be forgone,
especially when family vacations are considered. From an
industry perspective I expect the travel industry to show very
weak numbers after the summer months.
However, as stated above, I d not
think that the 'drubbing' of the economy will start again
officially until the 4th quarter of the year.
In the 4th quarter I expect 2
important things to happen:
-
Wall Street will realize
that Interest rates will rise aggressively in early 2009
-
Wall Street will realize
that taxes will increase aggressively in the beginning of
2009..
Immediate conclusion:
I expect current and continued
Market volatility. I continue to promote proactive trading
strategies. Long/Short Strategies will prevail. I
expect the Market to collapse as the year comes to an end.
Until then a volatile back and
forth Market should prevail.
THK.
4.4.08
The Economy is probably in a
recession at this time. If not completely, certain sectors
undoubtedly are. We can only identify recessions after the
fact, so by the time you hear a confirmation of a recession the
Market and the Economy have probably already begun to recover.
I expect the current recessionary
environment to improve somewhat. I do not expect the
Economy to appear strong by any means, but I believe that the
drubbing the Economy has experienced over the past few months
will subside for a few months at least. This should
influence traders and investors to breathe a big sigh of relief,
and it may influence higher Market levels too.
Take it while you can get it,
because the bad news will come again. Late in the year I
expect another drubbing. By the 4th quarter of 2008 the
market should look very fragile again, and as we roll into 2009
I expect a depressionary environment to surface.
11.25.07
the Investment Rate has told us
that liquidity levels would peak at some point in 2007.
That has happened. Now, the economy is under severe
pressure. We expected this as well. This pressure is
not likely to subside anytime soon. In fact, the market is
likely to continue to be under severe pressure for the
foreseeable future. This is based on liquidity levels.
New money drives the economy and the Market, and clearly
liquidity levels have peaked and they are declining measurably.
When this happens aggressive downward moves are likely in the
market, typically in advance of worsening economic conditions.
Our economy is surely going to enter a recession and it is
likely to be quite severe. The consumer is already heading
for the exit, and the consumer drives this economy. Debate
the worldwide economy all you want, but unless our consumer
continues to actively spend money our economy is going to
fizzle. In fact, our economy, if indeed it continues to
worsen as we expect, will drive all other economies down with
it, at least for a while.
Immediately, expect the crisis in
the housing market to worsen going into 2008. Foreclosures
should start to hit the market much more aggressively in the
first quarter. Jobless rates should increase, GDP levels
should decline, the economy will fall into recession, and it
will all be lead by the consumer. In addition, we should
expect tax rates to increase after the election, and that will
only add to the pressures on the market.
Foreign interest in US
investments should also be extremely weak. Yes, there is a
glut of cash available for investment from foreign investors,
but most of them are targeting international investments in Asia
and Europe rather than in the United States. From the
standpoint of foreign investors, the problems in the United
States are going to worsen, and they are the root of the
problems that may adversely affect other markets as well.
Obviously smart money is looking for opportunity, but with the
continued decline in the dollar, the return from any equity
investment in the United States will be offset by the continued
slide in our currency. The net rate of return for foreign
investors therefore is substantially lower than it might be in
other foreign investments. We cannot expect foreign
investors to hold this market up. Though the dollar is
low, the net rate of return is poor.
Ultimately, our economy is on the
brink of a very bad recession. The stock market, housing
market, the consumer, financial stocks, now technology, are all
offering red flags. That, coupled with the findings of the
Investment Rate, tell us that liquidity issues abound. The
market has followed the Investment Rate perfectly since 1900,
and it tells us that the market is on the brink of the third
major down period in US history. Holding assets at this
time is a big mistake. Buy and hold strategies, the Warren
Buffet style, although very attractive over long periods of
time, do encounter bumps in the road. Buying and holding
from the peak of the third major down period in US history
should be considered such a bump. If you bought and held
at the beginning of the first major down period you lost 75% of
your assets and it took 26 years for you to get whole. If
you did it during the second major down period you lost 50% of
your assets and it took 10 years to get whole. If you have
the time, and you are willing to stomach the loss, then buy and
hold strategies may work for you. Otherwise, reverting to
cash and looking for opportunities again when the declines are
over makes a considerable amount of sense. The economy is
going to get much worse.
