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If You Can Keep Your Head

By Larry Doyle on February 20, 2009 at 9:45 AM in American Consumers, Bank Nationalization, Banking Institutions, Current Affairs, Economic Stimulus, Economy, Obama Administration, Tim Geithner

These are clearly the times that try our souls. In an attempt to bring a measure of perspective to the markets and economy, let us review some month-to-date stats for February and add economic commentary:

DJIA: -9%
S&P 500: -5.7%
Nasdaq: -2.3%
Bonds: flat to -10% depending on sector
$/Yen: 94.14 versus 89.81
$/Euro: 1.262 vs 1.280
Oil: 38.78 vs 41.60
Gold: 975 vs 929

There really has been no place to hide. Why? Very simply because in a “massive margin call” (selling assets purchased with borrowed money) when debt cannot be refinanced, all assets are “on sale” in order to pay down debts!!

We have achieved the objective we were looking for in the DJIA and are about 5% away from the objective on the S&P. If there are people who were outright short the market “nobody ever went broke taking a profit.” The question is where do we go from here? In order to address that question, we need to break it down into its component parts.

Will we see more forced selling and by whom?
Yes . . . hedge funds, private equity, insurance companies and others all will be sellers. Wall Street banks will NOT allocate balance sheet to take on assets. As painful as this is, I personally do not think we have seen a capitulation. While there will be some pools of private capital to provide liquidity as need be, they will be patient. As bad as the market feels, it does not strike me as oversold or overly cheap based upon expected earnings and the degree of uncertainty/risk.

Interest Rates
While we saw healthy activity in various sectors of the bond market in the first 6 weeks of the year, many sectors have given back a lot of ground this week. Credit risks, default risks, and foreclosure risks are keeping investors away. With a whiff of inflation today in the Producer Price Index and the Federal Reserve minutes focusing on inflation more than deflation, I do think we can see a serious move higher in government rates.

Global Markets
Europe is worse off than the United States. Asian markets had initially bounced but have since given back those gains. These export based economies have come to a screeching halt. Germany indicated it may take a stand, if need be, to support the Euro. Eastern European losses pose major concerns for Western European banks. I also read a startling stat today that Western European banks hold 75% of emerging market debt, while the U.S. and Asian banks hold less than 10% each. Sovereign credit risks are very high. Could a government default or devalue its currency to manage its debt? Most definitely!!

Economy
It is all focused on global government intervention. While the Obama Administration has only been in office for a month, the markets are not giving him, Secretary Geithner, and team a resounding welcome. The Administration has created measures of uncertainty while Congress was nothing short of pathetic in the process and execution of the stimulus plan. The housing plan and bank plans also present a wide array of “unintended consequences” which unsettle the market.

When can I get constructive?
I will go back to my piece entitled “Reason for Optimism” which I wrote on the heels of the Administration propping the “bad bank” (remember, I liked Bank Transition). For those who forget, the DJIA moved up toward 8600-8700 at that point and is down approximatley 13% since then. I do think the market is going to price certain banks to the point where the government will have little choice but to temporarily nationalize them. Where is Sheila Bair? We used to hear from her regularly. Has Secretary Geithner stifled her? The sooner the government makes this move, the sooner the markets may start to stabilize while not necessarily improve. Can you make investment decisions based on what wonks and policy mavens in Washington may do? We’ll keep our ear to the ground but don’t hold your breath because they have not given us a lot of confidence to this point.

I’ll keep writing. Please keep your cards and letters coming!!

LD

  • fiscalliberal

    LD – I think you are calling it right. Reality is what is needed now. We will get through this and hopefully we can learn. However – I am not certain why the media is giving Alan Greenspan the time of day today. He was paid to prevent this type of thing happening and he failed miserably.

    Last night Charlie Rose had Mark Andreeson and he is a breath of fresh air. Recall he developed Netscape which is the precursor for google. I would urge people who are down in the dumps about the current situation to go to the Rose webite and replay that interview. He talks about new things and what is happening. In a way, he is in his own bubble, but at least he is looking forward.

    • LD

      Fiscal….Thanks for the plug and also for the tip on the Charlie Rose interview.

      We have challenges but with courage and leadership we will work our way through this. Andreesen is right. While we always need to learn from what is in the rear view mirror, we can’t live back there, so let’s move forward!!

  • jbjd

    Anyway, who is going to investigate, when things go wrong?

    Someone just sent me this link about a provision in the ’stimulus’ bill that stifles the independent authority of Inspectors General. “This was snuck in,” [Senator] Grassley told me. “It wasn’t something that was debated.”
    http://www.dcexaminer.com/politics/The-RAT-hiding-deep-inside-the-stimulus-bill-39805642.html

    • LD

      Hopefully Mr. Grassley has the courage and displays the leadership to pursue this issue.

      • jbjd

        From your mouth to…

  • mountainaires

    Confidence Destroyed

    More than 80,000 emailed CNBC to tell Rick Santelli they would be there for the Chicago Tea Party.

    Caution: ’87 Rerun on Deck

    http://market-ticker.denninger.net/archives/812-CAUTION-October-87-Re-Run-On-Deck.html

    Let’s face the facts – 92% of Americans are either paying their mortgage or don’t have one. We didn’t use our homes as ATM machines. We didn’t lie about our incomes. We played by the rules and do not have bone-crushing debt loads.

    http://market-ticker.denninger.net/

    There are men in all ages who mean to govern well, but they mean to govern. They promise to be good masters, but they mean to be masters.”
    –Daniel Webster

    • cynic

      We didn’t lie about our incomes.

      Several homebuyers interviewed on MSNBC’s 2-hour “House of Cards” program reported that they hadn’t lied about their income.

      Apparently loan processors, working on a commission basis, routinely falsified such application information to increase their volume of approved loans. Such agents were not generally required to have licenses, background checks, or any sort of training beyond how to fill out an application form. There was no 3rd party oversight of the process.

      A loan originator said one successful processor’s only previous work experience had involved pizza delivery. Since the loan originators made their money based on volume also, and since they simply passed loans on to the next link in the chain, they also had little concern about anything other than maintaining high volume.

  • mountainaires
  • bart

    LD,
    I’m just a layman trying hard to follow this stuff as best I can. Could you please explain this?

    We have achieved the objective we were looking for in the DJIA and are about 5% away from the objective on the S&P. If there are people who were outright short the market “nobody ever went broke taking a profit.”

    And what is the takeaway from this?

    Interest Rates
    While we saw healthy activity in various sectors of the bond market in the first 6 weeks of the year, many sectors have given back a lot of ground this week. Credit risks, default risks, and foreclosure risks are keeping investors away. With a whiff of inflation today in the Producer Price Index and the Federal Reserve minutes focusing on inflation more than deflation, I do think we can see a serious move higher in government rates.

    Thanks!

    • LD

      BArt,

      Happy to help.

      In a number of different pieces we were calling that the stock markets would retest the lows seen on Novemebr 20th. We did retest that low for the Dow and closed about 4-5% higher than that low for the S&P 500. In short, I am trying to be humble but state that I had the right call.

      In regard to Interest Rates (a surrogate term for the Bond Market), a number of sectors, primarily the corporate bond and high yield sectors had a lot of issuance in the first 6 weeks. However given the increasing concerns with the economy it seems that the economy will suffer more defaults and that concern has caused different sectors to give back (decline) this week. Additionally a concern about inflation eats away at bond values and may lead to further declines in bonds. (remember inverse relationship between interest rates and bond prices…interest rates up means bond prices down)

      Hope this helps!!

  • sunup

    LD..I read all your articles and am learning a lot.

    Question..In a previous thread in answer to a query you mentioned “senior secured floating rate loans”. Would you explain what these are. It is a new term to me..Thanks

  • LD

    Senior Secured Floating Rate Loans

    Corporate loans that are not fixed rate but would float (adjust) with an in index, likely a short term interest rate (such as Libor, London Interbank Overnight Rate). Secured = backed by tangible collateral that can be seized and sold if need be to pay off the debt. Senior = top part of capital structure, meaning the first obligation that a corporation needs to pay off.

    The fact that the instrument is floating is critical so that if and when the Fed is raising interest rates to ward off inflation these securities will also raise their rates at the same time.

    Does this make sense??

  • QUEENIE

    Can i ask a question??

    Would it be good or bad to see our banks nationalized?..In all honesty , i do not know, but it seems to me it would be a slippery slope, but I am not educated in finance enough to know if it would be or not. But anything public that gets nationalized does scare me..i just don’t want the government holding ,u money, not with the way the government has been for such a long time..and my fears of losing control of my life if the government can turn off my ability to get my money and get the hell out if I deem it nessesary.
    ( think hitler)

    I do not trust Obama, not one bit and he scares me, so I want to know I can get my money and get out of dodge so to speak..South of France sounds good ..if need be…if you get my drift. But this nationalized banking scares the crap out of me.

    Thanks ahead of time for any replies..I have to go out and will check for the answer later!!

    • LD

      Queenie,

      You can ALWAYS ask questions and I will do my best to answer.

      I actually wrote a piece on Nationalizing a Bank and am going to attach it here. Whether it is good or not depends on how it is handled. I would not be concerned about deposits as long as they are below the 250k FDIC insured level.

      The philosophical debate is one that could go on for a lot more time than either you or I have here.

      I will say that many people whom I truly respect believe that a “temporary” nationalization of banks that are effectively insolvent is critical to our economy turning around.

      Let me know if you have other questions after reviewing this piece.

      http://www.noquarterusa.net/blog/2009/01/23/nationalizing-a-bank-you-really-should-read-this/

      I hope that I attached that properly. If not I wrote that piece on January 23rd so you can go back and check.

      • QUEENIE

        Thank you so much LD for your answer!!! I will do some reading of what you posted to see where ..”we ” stand.

        I knew we were living under a false economy and hubby and i got rid of credit cards and debt several years ago..when i saw Cheney move all his $$ out of the USA and the treasury got rid of the 3 something and just started printing worthless money.
        I just want to know if or when i need to get out of this country i can!

        Thank you!!
        queenie

    • lark

      It isn’t if the bank can work or not. Of course banks work one way or the other. It is if you say something that aggravates the powers to be. If you do so, it would be easy for government to simply freeze your accounts, since the bank belongs to them, and keep you in check for as long as they would like to. So a national bank system simply means that you must be in your best behavior all of the time. No tolerance for a slip of the tongue.

    • lark

      If the police charges you with any type of criminal wrongdoing, just because, they have the advantage of time and money, you have the disadvantage of having to spend your personal assets defending yourself.

      With a national bank, which is probably outside of the Constitution, the government can act against you punitively for whatever reason they deem valid to them, and you are simply at their mercy. Then try to find a Constitutional reason to defend from that and you will find that a national bank system becomes suddenly all powerful. You would be a peon to them.

    • lark

      And it is not only the ‘you’ in the formula. If you belong to any kind of association that the government deems undesirable, then at the right time and proper moment, they will cripple the organization with the strike of a keyboard button.

  • TeakWoodKite

    Great morning read LD, Thank you.

  • obamastolemyboyfriend

    Jim cramer is hoping Geithner hasn’t left the building. Personally, I am ok with him leaving and he can take Obama and the other crooks with him! Maybe some other country would like their “help”.

  • Doc99
    • LD

      The mere fact that I am having avery tough time answering your question is an indication that I think there are merits on both sides. Ultimately our country needs strong leadership and I do not think Santelli’s delivery displays that. That said, I understand his viewpoint.

  • Diana

    You know I have to say this, the more I read. I see. I hear. I’m to the point of saying screw it all, why should I have to pay for the irresponsibility of others?

    Why can’t I just go now that the housing bubble has crashed and buy a bigger cheaper house? Then just walk away from our 3,500 a month house payments. I can buy a bigger home and pay less? Why should I stay and do the responsible thing? So other’s can live better? Why should I continue to donate to charities? Looks like one day my family may be the one needing the charity if this keeps up. I should just quit spending and giving to others, keep more for myself. That seems to be the only way to get ahead today. Just buy groceries, pay the utilities, house payment and pocket the rest. Whatever, I do don’t put it in a bank. No more spending.

    Of course I won’t do that, I’m just expressing how I’m feeling about this whole situation…

  • lark

    I am much more philosophical about it. I think differently. Not an ounce of hope or positiveness. No. I don’t need to. I don’t have any attachments to skew my thinking. Negative is the entire left side of the scale or graph quadrangles and negative is the entire bottom. The positive chart of any graph or scale is the upper right quadrangle. It is 25 percent only of the possibilities. So it takes hard work to be in there.

    No. The damage has been done. And the stimulus and the homeowner’s mortgage bailout are not only as artificial as food coloring but they are detrimental to good social growth.

    Lets say it, the direction is towards socialism. Yes, business want to end freedom because without morality there is no one that is deemed trustworthy. So socialism and communism are starting to look preferable than a bunch of untrustworthy hooligans.

    Yes, you are right. The social component and the moral component do in the long run extract a punitive result. I think that is what you have said lately, no? I agree.

    I am a Mark Levine fan.

  • Sassy

    LD, it’s hard to keep your head when you’re losing your a$$!
    We checked our investments yesterday…not good!
    I would be livid but I’m too “peaked” to worry about it right now.
    I really appreciate your encouragement, and respect your knowledge!

  • oowawa

    The market analyst Karl Denninger, who is very pessimistic about the outlook nowadays, has these thoughts today, and I think they are very worrisome:

    From CNBC:

    “We have no evidence to indicate securities were purchased for customer accounts,” said Irving Picard, the court-appointed trustee overseeing the liquidation of Madoff’s assets.
    For thirteen years? . . .
    And you’re wondering where confidence in our markets has departed to, along with why we are staring at an all-on market crash at the present moment?
    Is your brokerage account statement real? When you click “buy” or “sell” did you really? How do you know? Your statement says you did but the industry has in fact recently phased out paper certificates – so you can’t even demand to have actual paper shares of stock issued any more!

    • TeakWoodKite

      oowawa…no paper, no wheel barrels?

      Market confidence is key but in my humble opinion it has been destroyed. As LD pointed out in one of his first post, humility is a rare commodity.

      I really wonder, after Mr Picard makes a statement like that, what the price was for looking the other way.

      • Docelder

        Is your brokerage account statement real? When you click “buy” or “sell” did you really? How do you know?

        How did we get to this place anyway… where this was even a possibility? Is there absolutely no oversight of this in any way at all at this point? Why would anybody want to ever buy stock without the certificates again after this?

        • lark

          It breaks my heart. It breaks my heart. It breaks my heart.

    • oowawa

      I should have gone on to say that Denninger blames “institutional corruption in our government agencies,” and both parties and both houses of Congress for the mess. Oversight was lacking, and he wants to see criminal prosecutions. Anyway, the link is:

      http://market-ticker.denninger.net/

    • lark

      What that says to me is that if you are deemed expendable and seem vulnerable, then you could be crushed like a roach.

  • lark

    You can ALWAYS ask questions and I will do my best to answer.

    This may be a difficult question, I don’t know.

    Do gold price have meaning beyond itself?

  • Chris

    LD: When does it become a good action of choice to remove money from an IRA fund and pay the tax hit. Then convert it to another form of investment like hard assets such as gold. The price and premiums seem to preclude that right now but I’m not sure as it could keep rising with the way the market is moving. I know that the ira monies can be converted to an investment CD to protect against tax bite, but is that even wise? What about money market funds as I do have some of my fund money allocated to that. Move more in there? Just wondering and I know I have to make my own decisions. Not holding you to anything, just respecting your opinions. Thanks.

    • LD

      Chris,

      There is no one size fits all when it comes to managing investments. I always look at a 401K in the context of an overall financial plan.

      Factors that need to be weighed include age, employment, other assets and liabilities, cash needs, …

      From there diversity is critically important but even with diversity there have not been a lot of places to hide simply because of the delevering process.

      Ultimately if you are feeling such anxiety and are losing sleep then I have always viewed that as a reason for reducing risk. I would strongly encourage you, though, to draw up an entire review of your financial position and weigh assets (by sector) and liabilities so that you can make a measured and rational decision. Write the positions down on one sheet and then weight them by percentage so you can measure how much risk you are taking and where.

      Hope that helps.

      • Chris

        Thanks for your input. My only real hang-up is whether to buy gold/silver bullion. Will the tax hit, price and premium to hold more bullion physically be worth it. My only real liquidity would be to take out of my IRA to finance a buy into physical metal. If Gold hits 2000 it might be worth it. But will it get there and should I risk it? Very difficult to decide that’s for sure, for me anyway. I really appreciate your thoughts so thanks again.

        • Chris

          Just a other thought, I will probably need to draw out of this retirement account in about 10 years. Will what’s left recover in the markets in 10 years? That has never really been an issue before historically. But now, all bets are off. I’m pretty much in a pickle about what to risk and when.

          • LD

            Chris….

            I never make an all or none move with investments. I “dollar cost” average into investments that I want to make.

            Are you familiar with that practice?

            • Chris

              I am and have used it quite a bit. I feel as you do about not doing all one thing as much as possible. I would not be emptying out my total account. But I have thought that investing in owning bullion in hand would be a way of at least protecting some wealth because gold has value that fiat money doesn’t. Just trying to cover all the bases in case of a total dollar collapse and high inflation. Just not sure if it is a smart move due to cost and prices at this point. I’ll probably wait to see if gold pulls back but am afraid to miss the opportunity now. Should have done it long before now. Shoulda, woulda. coulda. Story of my investing career, lol.

  • sunup

    LD,
    Your answer makes great sense. Thanks for what you do here. Speaking for myself, it is the only place I have had financial matters explained without the hype and without an agenda. That I think, is a special talent in itself.
    Most of the time we seem live in a “sensationalized” bubble. Every story must be “bigger” than the last one,factual or not. It would be nice to see it go pop.

    People are in such a flux as to what to do with what is left in saving and investment accounts. It is painful and will be for some time.So keep up the good work!

    • LD

      Thanks for the plug. You’ll be seeing more of me not less!

  • I’m a Linda too

    thank you.

  • cynic

    When stocks were high, how much might their perceived value have exceeded their actual value? In other words, were prices hugely inflated just because investors were thinking about stocks the same way some people thought about collector baseball cards?

    If that’s the case, there could be a point coming where people suddenly realize shares in solid companies have become cheap beyond all reason. A lot of money may not be moving right now just because smart investors are in watching and waiting mode. When the moment comes, the market could turn around almost overnight.

    I wouldn’t want to have a safe full of recently purchased thousand-dollar-an-ounce gold when that happens. The time to buy gold was probably months ago, and I kick myself for not doing it. But buying a lot of new gold now might be like getting in late on the 1634 tulip bulb craze.

  • lizzy

    The way the market has been we feel that we are only losing money. Buying gold is not necesarily an answer. Gold is a market; the price rises or falls according to demand. If people are afraid of inflation or scarcity they turn to gold and the price goes up. It is at a historic high now. When the oil crisis came in the late 1970s gold sold for about $800. an oz. As the price of oil fell and inflation receded gold prices dropped to the $350. price range and floated between that and about $600. until this last oil crisis last summer. The price of oil has now dropped but people are spooked by the economy so Gold prices are staying up. Prices will probably go higher but they could also go lower. At this time if you buy gold you are buying at a historic high so evaluate carefully all factors affecting your purchase.

  • Andy

    LD:

    I was under the impression that the “housing/mortgage plan” just “unveiled” was
    Sheila Bair’s plan….Weren’t for ex. these “cram-down” provisions her idea?
    Our local newspaper (MA) reported it as such as well ….And she was on almost every newscast (on NPR) the day BO announced the plan as saying the she thought it would yield results soon. Or something like it…

    Isn’t it the case?

    (I recall in the Fall, reading somewhere that Barney Frank had asked her to draw up a plan)

  • Larry Doyle

    Andy,

    If these are her plans I will say that she is getting NO credit for them in the NY market. I have not seen or heard from her in over two weeks. I could be mistaken.

    The cram down is currenlty more a “potential stick” than anything else. Many people think that we need some sort of principal reduction in mortgages to make progress in housing. The banks, servicers, and investors though think that principal reduction (cram downs) will do real damage to the secondary market for mortgages and cause mortgage rates to move higher. As that happens we will all pay that much more. Unintended consequences and collateral damage all over the place.

    I will see if I can find some info about Ms. Bair and these plans as I am a big fan of hers.

    Thanks for the heads up.

    • Andy

      Thanks LD. I found a note about Bair’s plan unveiled in Nov. 2008 here:

      “FDIC’s Bair pushes aggressive mortgage plan
      The FDIC chairwoman unveils plan that would streamline modifications to put delinquent borrowers in affordable mortgages.”

      http://money.cnn.com/2008/11/14/news/economy/fdic_bair/?postversion=2008111416

      And she was on NPR, ABC, etc the same day as Obama unveiled his plan speaking positively about it… Here for example:

      http://www.reuters.com/article/topNews/idUSTRE51I2OT20090219?feedType=RSS&feedName=topNews

      http://abcnews.go.com/GMA/Business/story?id=6912589&page=1

      • Larry Doyle

        Wow…you’re awesome. My concern is that while Sheial Bair was very vocal and public during the last few months of 2008 and through the first few weeks of January, she seems to have taken a much lower profile over the last month. Maybe not and it is just me but I have not seen her out on the stump. For me she inspired confidence and determination.

        Thanks agin for the links.

        • Andy

          LD:

          I also admire Sheila Bair and have quite a bit of respect for her ideas.
          I think she’s incredibly smart.

          Bair was dutifully making the rounds reassuring people on Feb 19th, the day Obama unveiled his plan. But I agree that she had been in the background since November and I was not pleased by the Adm. not
          bringing her ideas more vocally to the forefront. On retrospect I feel like they might have used her ideas and not giving her, her due credit…
          (not good) She is a republican so maybe that’s the price they made her pay to keep her at FDIC? I certainly thought she was going to have a higher profile in the housing plan and in this Adm. altogether…

          Reading Ms Goodman at Bloomberg it seems she and Bair are at odds
          in who to help in the mortgage restructuring plan?

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