This Week in Barrons – 05_24_09:
Before we start on this Memorial day, let’s all give thanks to all the fine brave men and women who have slugged it out from the Hedgerows of France, through the jungles of South Asia, to the biting desert winds of Iraq. We thank you!
That being said: Without people buying things they don't need with money they don't have, the true economic activity of this country is going to be considerably less than almost anyone imagines.
“Unemployment” will begin to consume us, and this time ‘unemployment’ may NOT be the lagging indicator that it once was. In past recessions companies would lay off workers attempting to lower operating costs. So, the economy begins to slide, companies would lay-off, and the FED would cut rates and pump money. People would take advantage of the low interest rates and easy credit by borrowing and consuming slightly more. This increased demand on goods and services would cause an increase in production, and this increased demand would then bring workers back to work. So ‘normally’ the data shows that during this transition period – the economy does increase – BEFORE the uemployment picture improves. This is why everyone talks of unemployment as being a lagging indicator.
Unfortunately recent years of easy credit have left the consumer strapped with too much debt. Combine these debt loads, with the crash in Real Estate and in the economy itself, (toss in the fact that banks aren't lending as freely as they used to) and you have a situation where the lower interest rates and printing money by the Trillions doesn’t have the same effect. In reality – consumer credit is virtually frozen except for very high credit scores. Commercial credit IS frozen (i.e. banks aren’t lending to build more strip malls and offices). So unlike in previous times when people would take on more debt in order to get the economy going, this time (a) the credit isn’t available, (b) there’s fear in the minds of the consumer because their main personal asset has been catastrophically reduced in value, (c ) in response to fear savings rates have increased, and this combination eliminates the ability to create jobs by creating more business.
That is why (this time) the unemployment figure is NOT a lagging indicator, but rather a real time snapshot of what's going on in the economy.
- Potentially the ONLY avenue left to improve the consumer’s mind-set and get him purchasing again is via the value of his 401k (i.e. improve the value of the Stock Market – and the consumer could be spending again!)
- Another way out of a recession is WAR. On this Memorial Day I remember a quote by Major General Smedley D. Butler: "War is a racket brought upon us by profit seeking madmen.” To date, $832.2 billion dollars have been spent to fight the wars in Iraq and Afghanistan.
- Virtually every Friday night for the past 25 weeks we've had a bank failure and the Government has had to rush in and prop it up. Yet on Thursday the biggest bank in Florida, in fact the biggest banking failure of 2009 hit the wires, but this one was very different. There was NO bailout. In fact, Blackstone and Carlyle (two very large investment houses – B&C) were already lined up to take over the bank. Why no FDIC, why no bail out? Simple – B&C have information and contacts that allowed them to set up ahead of time and swoop in, picking up the best assets – and sending the bad assets, well back on the shoulders of the taxpayer. And truth be told – on Friday night two more Illinois Banks failed – bringing the total to 36 so far this year. Remember we said that the FED will hand pick who succeeds and who fails, and "non-team players" are destined to fail.
- Real spending on equipment and software dropped markedly in the first quarter, with declines about as steep and widespread as in the fourth quarter of 2008. Orders and shipments of nondefense capital goods excluding aircraft fell in March, turning negative again after having been flat in February. The fundamental determinants of equipment and software investment stayed weak in the first quarter: Business output continued to drop sharply, and credit availability was still tight. Despite the significant cuts in production in recent quarters, inventories remained sizable early in the year
- The dollar just hit a new 2009 low.
- Gold keeps inching higher.
- April housing starts fell to all time record lows.
- Potentially 600K more homes are sitting on the sidelines ("shadow housing") that will come to market in terms of foreclosures, shortly.
- Entering 2010, the “Pick-A-Pay”, and “Alt-A” loans will be resetting, and for many people that have been making the minimum payments during their "intro" period, they'll see jumps of up to 50%.
Right now the market is digesting an incredible run, tacking some 36% on the S&P. By all means it should roll over and crash, but so many are now convinced that the FED has it all right and we'll be getting out of this soon, that they want in, not out. In our view, any reasonable dip will end up being bought. The market is probably destined to move higher over the next few months. Right now we're simply awaiting it to retake 900 on the S&P and 8500 on the DOW. If it can overtake both those levels, the next stop will be higher, in fact I can still see DOW 10K in our future.
But again – fair warning – this is a Bear Market (“suckers”) Rally. It is designed to suck in the most amount of people before it rolls back over, and the next time it does there will be no stopping it. We will have a date with DOW 4500 in the next two years. Gold will be higher, much higher. Silver will be higher. Interest rates will be higher.
- Stay long stocks over S&P 900, and DOW 8500.
- Sit on your hands under those levels.
- Buy gold – and try to move to the physical metal because the ETF can be manipulated.
- For the short term – I still like MOO, IPI, and XLK – again if over 900 and 8500 on the DOW
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Please celebrate Memorial Day. Until next week – be safe.