This Week in Barrons – 05_10_09:
"For decades I've heard stories and rumors about manipulation. I've always brushed those rumors aside. But, this is a different world, and the nation is literally fighting for its life. People ask me do you really believe the government would really manipulate the markets? My answer you bet I do, they're willing to do absolutely anything in their struggle to get the US economy back to normal again." - 88 Year old Newsletter writer Richard Russel, made famous via the DOW Theory letters.
The question is NOT whether we are going to come out of this recession soon – or whether we are going to return to "normal" or just see lower growth. The Question IS. Will the coming depression be sharp, painful and fast, or long and grinding? Yes I know:
- consumer sentiment is higher
- some of the nasty economic readings are "not accelerating" to the down side
- everyone wants to believe that the worst is past us and we are going to be okay soon – unfortunately that’s not in the cards.
- Chrysler and GM closed 2,000 dealerships (roughly 120,000 jobs – good jobs) – with more to come.
- But what about the trickle down → the advertising dollars on newspaper and local TV ads – the local coffee and lunch shops – the local charities – the suppliers of office equipment.
- And what about that job loss number that was hovering around 600k+ job losses per month – is that going down by this move?
- And what about the commercial property that they sit on – Commercial Real Estate is already on the ropes – and what banks are tied into those properties?
- Nothing has been done about the trillions in toxic derivatives that banks are holding. The ‘Mark to Fantasy’ model simply means that banks can lie about their value longer - it doesn't make them go away.
- What about Uncollectible credit-card debt rising to 8.82% - in February, the most in the 20 years that Moody's Investors Service Inc. has kept records.
- What about 101 companies in the Standard and Poor 500 eliminating their 401K contribution matches
- What about 480 trucking companies (7% of the nations trucking business) went out of business in the first quarter of 2009.
All along you always knew there'd be troubles here and there, politicians doing silly things, the occasional war we shouldn't be in, but through most of it I had a decent feeling about my fellow man. But now, seeing how our economy has been destroyed, while people we trusted who should have known better, simply let the greed take over, it shakes my beliefs in the moral fabric. It's degenerated to the point where instead of feeling that basically people are good and well intentioned, I'm beginning to think that man might be evolving to be a bit more evil at the core than I want to believe – with the end game being a centralized governing body over global finance. You see rich folks don't like having Government in their lives – but poor folks need Government in their lives. So what if the ‘game plan’ was to make more and more people broke, and thus dependant upon government. This economic crash wasn't by accident – it wasn’t a some good ideas gone sour – not was it silly greed gone wild – but rather it
"But if we are really heading for a massive depression, why is the market doing so well, and some of the economic numbers looking better?"
- the economic numbers have never gone in a straight line neither up nor down – there is always a counter trend blip in the opposite direction for a short period of time
- the "market" usually does things that don't make a tremendous amount of sense in the here and now. For instance why did the market gain 105% in 1933, as we were in the grips of the Great Depression, before rolling down to new lows? You need a longer view in order to have it all make sense.
Currently Banks, Insurance companies, Auto companies, Real estate companies, Manufacturers of all persuasions, and a host of other Industries need capital. They can't borrow it, and most already have debt loads they can't service. The "market" rising right now makes no sense if compared to the economic situation of the day – but if a rising market helps draw private investors into these capital starved companies, it allows the bankers and Wall Street to "live another day". With the help of the Presidents Working Group on Capital Markets, and some well placed futures buying from the major institutions (Goldman, JPM, and Citi) a rise was manufactured that caught the fund managers short, and then the fund managers and hedge funds had to scramble to "get in". And that becomes slightly self-sustaining, as they fear missing the run up more than getting clobbered again. Then, as the ‘sometimes misleading’ economic reports to look better than they possibly could, it "gives hope" to more people, and those people decide to "get in" before the market leaves them behind.
For example: A Friday Headline: “Led by a large decline in energy prices, U.S. consumer prices were unchanged in April after seasonal adjustments and have fallen .7% in the past 12 months, the largest decline in 54 years , the labor department reported Friday.” Excuse me – prices are falling where again? Oil was up $10 / barrel - Gasoline (according to AAA) was up 24 cents / gallon - Food prices are up - Medical costs are up - Education is up. BUT – the "government’s seasonal adjustments" to these figures were ENORMOUS - allowing the government to post the above headline. Therefore - to the average person – “things are getting better.”
Oh and what about the retraining for ‘better jobs’ in this world economy: "A Labor Department audit found that only 1 in 5 who participated in programs for displaced workers found jobs for which they had been retrained; nearly 40% ended up working part time or for less than they had earned before; 28% had not yet found any work at the end of their training."
In the here and now, we see the market stumbling a bit – and louder are coming the calls to retest the lows. Yet I think the probability of that happening right now is very low. Yes we could still get a "correction" but it's not going to be as deep as everyone thinks. Why? Because everyone is looking for this big deep retrenchment, so they can hop in at a cheaper price, and when the bulk of the investing world is expecting something to happen, it will not happen. Everyone will try and "get in ahead" of the next guy, and it will automatically short circuit itself. Could we fall a total of 8 - 10% → maybe → but right now, we can't even seem to manage a 5% pull back, let alone 10. The market won’t do what everyone wants it to do, but it will do what it wants to do – which is keep inching higher, trying to prove to the world that the healing is upon us and all will be well. Just realize that even if I'm right and we move ever higher into and through the summer, it's the ultimate suckers rally. We'll want to take the ride, but we will want to step off and go short when it's over. Don't sit there and "buy and hold" forever, you'll get crushed. Take this rally for what it is, and then when it tops out – get out.
We sold the last remaining shares of FAS at 12.73 → up 400%.
We sold the last UYM at 19.70 → up 59%.
We sold the last BUCY at 27.77 → up 40%.
We sold the last GMXR at 17.24 → 72%.
- Inflation is roaring no matter what Uncle Sam says, and tangible assets (think commodities like iron, agri, coal) will do well.
- Technology will become more important as struggling companies replace workers with machines.
- Remember that a rising market lifts all boats, and a falling market exposes the fragile the most. Watch the market for signs of the trend, and pick your spots.
Remember the Blog http://rfcfinancialnews.blogspot.com/. Be careful and talk to you next week.