Three Days Does Not a Market Make

While I am excited about the recent upturn in the stock market, I am also realistic about its sustainability. I do not back off my statement of reaching a 5000 DJIA before the end of this year. No indicators and/or fundamentals have changed in the past 72 hours.

Bear Market Rally or Dead Cat Bounce

Watching “The Kudlow Report” last night was almost surreal.  It seems that everyone has forgotten about the last 18 months of economic destruction that has taken place in the Country behind a one-day “bounce” in the stock market.  People are now talking that the bottom has been reached; we are on the way out of the recession; and these are not Govt officials or CNBC talking heads, but supposedly legitimate investment professionals who have many years of experience.

 

Let me give you four reasons why the stock market will continue its march to 5000 over the next 8 months:

 

1)      All the ARM and other adjustable mortgages have not yet went into default.  Experts estimate another $200B-$400B worth of mortgages are trending towards default and ultimately foreclosure.  This means the underlying problem – housing – has not been fixed so why the optimism?

 

2)      People still cannot get credit so the auto and real estate industry will continue the steady decline into the abyss.

 

3)      Over 600,000 jobs were lost LAST MONTH!  And the pace is increasing not decreasing.  If people are till losing their jobs then how can they contribute to the economy?  If people don’t contribute (i.e. spend) then how will the economy recover?  It won’t.

 

4)      Commercial defaults and bankruptcies are starting to rise.  Businesses with no “business” go bankrupt.  When they have no money to pay their employees or keep the lights on then they also have no money to repay their loans and credit lines.  Experts predict a possible $1 trillion in defaults from the commercial sector in the next 18 months.

 

My question to the investment “professionals” who failed to see the recession coming, does this sound like a recovery to you???

Warren Buffet Bombs Big

The bigger they are, the harder they fall. Finally, the world has accepted that Warren Buffet is no oracle; he just started before everyone else. Insurance units provided him with money to cushion his Berkshire Hathaway from the failing economy. However, with BRK owning over 70 businesses, and most of them in housing related industries, he was bound to feel the heat.

When will people realize that past performance is not indicative of future results? This is not just a tagline or a disclaimer. It’s a warning. Do not go blindly following “geniuses” like lemmings or you will suffer the same fate. I bet that Buffet will be behind a bailout for insurance companies next.

Where the Hell is Paul Krugman?

As much as I admire the President, it seems that he is not filling key positions with the right people for the job. Paul Krugman should have been Treasury Secretary because Tim Geithner sat as head of the New York Fed since 2003 and did nothing to prevent the crisis. Krugman might be an opinonated SOB, but that makes it more worthwhile to put him in the hot-seat and let him figure this out. Or forever shut him up.

Oh yeah, Krugman also won the Nobel in Economics and wrote the book on Depression Economics in 1999. (updated in 2008) So he must know something about the topic.

Besides it looks like ol’ Tim is up to Hank Paulson’s tricks again by helping his friends on Wall Street and backhanding the U.S. taxpayers.

House Passes Stimulus Bill; Again

And no Republicans voted for it; again.  It seems that the  Republicans want President Obama to fail so bad that they are willing to let the country sink into an even deeper recession.  Or are they?  All Republicans know that their votes are not needed to pass the bill in the House.  So voting “nay” does not mean anything in the short term.  What they are hoping for is that the stimulus would not do much to uplift the economy over the next year and half — which would give them plenty of ammunition to shoot at thier Democratic opponents in the mid-term elections.  The Senate vote is more critical.

Dems need at least three Republicans to join them before the bill can pass.  This should not be a problem because they go the three votes when the bill was $838 billion.  Stay tuned.

To Infinity And Beyond (or Obama’s Stimulus Package)

It seems that the magic number for Presidnet Obama’s stimulus package keeps growing as each day passes.  It started at $500B, then $675, and now the media claims that Obama told Nancy Pelosi that $775B is the lucky number.  I think that he should take the $300B in tax cuts and tack them on-top of the stimulus plan and then round the whole thing up to $1 trillion.  This would eliminate the need to come back and forth to Congress for more cash.  Paulson asked for (and recevied) $750B last year from Congress.  Should not the President of the United States be allowed to ask for more?

Job Creation 2.0

When talk of jobs is mentioned, rarely do we hear President-elect Obama break down the different segments of his 2.5m (recently updated 3m) plan.  There are in fact three distinct segments that make up any jobs “creation” statement:

 

Jobs Retained: (my estimate through 2011 = 2.5 million)

This might be the most important segment and must take priority over the others.  With 2.7m+ jobs lost during the past year and 533k lost last month, there must be actions taken to stop the bleeding.  This is where tax policy will have its strongest effect.  Positive change to payroll/corporate and capital gains taxes will enable corporations and entrepreneurs keep the good people they have on board.  The situation in Chicago shows that an owner wants to pay his workers but is unable to thus they resulted in a lock-in.  Sometimes people are caught empty-handed by pure market factors and not by corporate malfeasance.

 

Jobs Filled: (my estimate through 2011 = 2 million)

There a millions of open requisitions at thousands of companies in America.  The problem is that there is no efficient and effective way to match the job seeker with the positions that match their skills.  Even the U.S. Govt has tens of thousands of job postings on Usajobs.com that have been open for months.  Hotjobs.com, careerbuilder.com, jobs.com and many others do not live up to their names for 80% of job seekers.  The Govt must first fine tune its own jobs postings, fill them, and then reach out to other databases and sources.

 

Jobs Created (new): (my estimate through 2011 = 1 million)

This is the trickiest segment of the three.  Even if billions of dollars are poured into highway infrastructure, will there really be new jobs created or will existing contractors use this “new” contract money to retain people?  It could depend on the size of the new contracts.  It could also depend on the contract language and terms that must be included.  I suggest new contracts be written with a clause that requires contractors to hire 1 employee per $200K of contract value.  This could be the silent hand that forces job creation.

 

Given those points, I expect a job target of 5-5.5m is necessary to restore economic confidence in America.  With 2.7m+ lost in the past 12 months, a 3m increase in the next 2 years will have a minimal effect.  I think that HBS Professor Jim Haskett is right in calling for “stretch” management to be instituted at American companies.  In this sense the Govt would be the beneficiary of this GE concept.

 

Your thoughts?

The Struggling States Need $40B for Healthcare and $136B for Infrastructure Projects

The Nation’s Governors met with President-elect Barack Obama today to try to get some of the proposed $500B plus stimulus package that he will sign when he is President. The problem is how do we hold these States, and their CEO’s, accountable for misaligned management of public funds? Why are they not looked at under the same light as the Wall Street CEOs? Neither group has been found to engaged in criminal activity. However both groups are partly to blame for not avoiding a financial meltdown. New Governors can get a pass but those that have been in office for more than 3 years should accept some reasonability for not preparing their states properly to whether a downturn in spending.

 

What will America get in exchange for the $176 billion these States are asking for? No preferred shares in the States themselves? No ownership of assets such as land or lottery income? Nothing. At best it will be a “loan” with 30 years to repay at 2-3% interest. This will not a sound investment if the State governments will not be held to similar covenants imposed on private companies receiving U.S. Treasury cash.

 

And where will the money go? To companies that already have contracts with the States?  Or will new relationships and bids need to be developed to accept U.S. Treasury cash. Is preserving existing jobs the same as creating new ones? No, but it’s a start. I say require the contract winners to hire 1 employee per $300k value on the contract. This is a two-pronged way to stimulate the economy.

Almost 1 Million Homes Lost to Foreclosure Since 2007

RealtyTrac reported today that more than 85,000 homes were added to the foreclosure list in October, bringing the total homes lost to foreclosure since August of 2007 to 936,439. Why did it take this long for Hank Paulson and Ben Bernanke to finally offer real help? Again, I believe that Hank and Ben were clueless to the real cause of the crisis so consequently they could not offer a proper solution. Or maybe is they stemmed the bleeding at the mortgage level, their friends on Wall Street would not have been able to get any money and would have to watch their “cash cows” die.

China Should Have Offered a $1 Trillion Stimulus Package

With the U.S. presenting $750B bailout package, the P.R.C. should have upped the ante beyond $586B to $1T and secure its place amongst world financial leaders. This number, although only $414B more than what was offered, would have made a strong impression on investors and importers around the world. It also would have said that China was going to stand behind its exports and ensure that any global meltdown will not be at the hands of the Chinese.

 

This is important for two because of two facts:

1)     China is the world’s largest consumer of natural resources

2)     China is the world’s 2^nd largest exporter of goods

 

Even if China really does not care much about the rest of the world, increasing their bailout would secure their own interests. Domestic Chinese companies need the natural resources to produce their products and run their operations. If these companies have to scale back their operations then china’s domestic economy will sour. Most of these companies export between 70%-95% of their manufactured goods to the U.S. and other nations so China also has a vested interest in making the global economy stronger and more stable.

 

Despite what the world thinks about China’s development, if you look at the infrastructure, poverty level or quality of living for its residents, and the state of healthcare facilities, they are way behind developed nations like U.S., Germany and U.K. China needs to maintain a yearly growth of at least 8% for the next ten years in order to complete the transformation from Communist backwater to Pseudo-Democratic world leader. Unlike China, Japan is not taking any chances and has pledged to the IMF a record amount of $106B worth of aid if needed. They have been through a very rough financial crisis in the early 90s and they are not looking to repeat their mistakes. China easily dwarfs Japan’s $997B in Forex reserves with $2T reported back in September. (to place this in context, the U.S. has only $73B in Forex reserves)