Wednesday, November 12, 2008

Unprecedented times

These ARE unprecedented times.
by Eric deCarbonnel


Here is a great blog entry by Chuck from Rebel Traders:



It is getting very difficult to find new words to describe what has been unfolding in our nations economy over the past year. Each day brings more news about declining corporate earnings, economic conditions deteriorating, and a falling consumer confidence of record levels.

And with each bit of news that further points to a bleak economic outlook I find it difficult to find ways to describe it without sounding repetitious. Just how many times can I say “unprecedented” before it becomes ineffective, or it looses its strength? The dictionary defines unprecedented as follows…

–adjective
without previous instance; never before known or experienced; unexampled or unparalleled: an unprecedented event.

Roget’s Thesaurus gives some alternate words such as “
abnormal“, “anomalous“, “extraordinary“, “remarkable“, and “unrivaled” as some other ways to describe unprecedented. But, there is simply no better word to describe what has happened over the past year. So with fear of sounding repetitious once again… we are witness to unprecedented events unfolding at an almost daily rate.

Lets recap:

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The failure of Bear Stearns
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The failure of Lehman Brothers
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The disguised failures of the Goldman Sachs and Morgan Stanley by converting to bank holding companies
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Largest bank failures in US history (Washington Mutual, IndyMac)
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Other banks merging and/or failing
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The failure of Freddie Mac and Fannie Mae and their subsequent nationalization
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The failure of AIG (yes, it is a failure otherwise the Government would not have had to step in and become essentially an 80% owner of the company)
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Record foreclosures on residential properties
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Record losses among many US companies
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Rapidly rising personal bankruptcy filings
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US Government bail out funding of $700 Billion
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Federal Reserve’s creation of numerous “lending facilities”
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Record depletion of reserves among the US banks
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Direct tax payer funds being injected into the banks balance sheets
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$150 Billion Stimulus bill and more to come
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Rapidly increasing layoffs
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Rising number of retail stores filing chapter 11 and others going out of business
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Numerous mortgage companies closed up operations
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Collapse of the credit system
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Drastic declines in US home prices
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The collapse of the economic systems of Iceland
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The increasingly likelihood of entire nations becoming insolvent (Hungary, Argentina, Ukraine, etc)
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Numerous Federal Reserve emergency rate cuts. And now an effective funds rate of near zero
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The near bankruptcy of the major auto manufacturers (General Motors, Ford, and Chrysler)

That is just what comes to mind without going back and looking through my many notebooks. And all of that happened within just the past year. Now you know why it is I use the word “unprecedented” so often. Because it is!

The bear market of 2000 - 2003 reduced the S&P 500 index 47% from peak to trough. That bear market was pale in comparison to the problems that are unfolding currently. Back then it was driven by an over exuberance in the stocks of the Internet revolution (aka ‘tech boom’). When many Internet and technology companies could not survive unemployment went up and the nation entered into a brief recession. There were no systemic risks to the US and global economies like we have now. There is simply no comparison between the previous bear markets of the past 70 years to the one we are in now.

Market analysts in the mainstream media like to keep saying that stocks are a great value currently. They keep trying to draw comparisons to the last bear market and how we are very close the percentage declines from that one. And that in itself they believe is reason enough to think it is a good time to scale back into the stock market for the long haul.

The professional Wall Street analysts have never changed their ways. During the bear market of 2000 - 2003 many analysts kept advising to ‘buy, buy, buy’ as the market kept declining. And they were advising their clients to buy the very companies that were in the most in danger of going out of business… and many did.

You think the professional analysts who work for the major institutions (of those that are now still in business) have your best interest at heart? Well just go back to the last bear market and this news item…

From April 2003…
Wall Street Investment Firms Fined Historic $1.4 Billion in Settlement

In a settlement announced on Monday, April 28 2003, ten Wall Street Firms - Salomon Smith Barney, Merrill Lynch, Credit Suisse First Boston, Morgan Stanley, Goldman Sachs, J.P. Morgan Chase, Bear Stearns, Lehman Brothers, US Bancorp Piper Jaffray, UBS Warburg (UBS Paine Webber) - will pay out at least $1.4 billion and will be required to accept business reforms. No firm or individual has admitted to having misrepresented information presented to investors. Internal emails were used as evidence that analysts had known the stocks were not represented accurately. In fact, while the stocks were being touted in public, they were being disparaged in private emails.

The settlement with its fines, payments, and reforms are geared towards increasing investor confidence. $387.5 million of this fund has been set aside to reimburse investors who were victims of stock broker fraud.

And some memorable quotes following that suit…

William Donaldson, Chairman of the SEC: “These cases reflect a sad chapter in the history of American business – a chapter in which those who reaped enormous benefits from the trust of investors profoundly betrayed that trust.”

Eliot Spitzer, New York State Attorney General, speaking about Salomon executives awareness of manipulating research to benefit investment banking business: The executives “fully grasped and understood the way research was being manipulated.” Reimbursement fund for “small investors lead astray…because of fraudulent research”.

John Markese, President of the American Association of Individual Investors: The settlement “brings home just how rotten this thing was.”

Dick Grasso, New York Stock Exchange chairman: “This historic settlement establishes a clear bright line – a banker is a banker and an analyst is an analyst. The two shall never cross.”

Today nothing has changed. The professional Wall Street firms always have, and always will, continue to look out for themselves and their ‘big money’ interests, not yours.

The problems we face today have been greatly amplified by the greed of the very same Wall Street firms who recklessly sought to capitalize in every way possible in the credit and housing growth of the late 90’s and early 2000’s. Their creation of securities that were all tied right back to the mortgages of the average home owner was done without any regard for the dangers and perils of what they were doing. And in order to get even more mortgages to ‘play with’ the mortgage industry loosened their lending standards so that more and more people could obtain a mortgage. All ingredients for a major disaster which we now have.

And now that these same firms are in serious financial turmoil and they are begging the Government (tax payers) to keep them alive. They want you and I to kiss their wounds and make it all better. Well you know my position on this.. I say “kiss off’. No more tax payer funds to keep companies that made bad decisions alive. We have become a nation of rewarding bad behavior with rescue packages, bail outs, and low interest loans. The companies that got in over their heads, and lost Billions, need to fix their own problems… or fail.

Now we have the automakers at the brink of collapse. The CEO’s of the largest automakers all went to Washington last week to cry and whine about how bad business is. Now you and I will be asked forced into bailing them out too.

You might be asking yourselves just where the hell are all of my tax dollars going when these companies get handed checks by the Government. Well your not alone, people have been trying to get data out of the Government to see just what they are doing.

From the Wall Street Journal:

November 7, 2008, 5:09 pm
Bloomberg News Sues the Fed

Bloomberg News is going to court to compel the Federal Reserve to disclose securities the central bank is accepting as collateral for its raft of new lending. The company is filing its suit based on the U.S. Freedom of Information Act.

Bloomberg says:

Bloomberg News on May 21 asked the Fed to provide data on the collateral posted between April 4 and May 20. The central bank said on June 19 that it needed until July 3 to search out the documents and determine whether it would make them public. Bloomberg never received a formal response that would enable it to file an appeal. On Oct. 25, Bloomberg filed another request and has yet to receive a reply.

The Fed staff planned to recommend that Bloomberg’s request be denied under an exemption protecting “confidential commercial information,” according to Alison Thro, the Fed’s FOIA Service Center senior counsel. The Fed in Washington has about 30 pages pertaining to the request, Thro said today before the filing of the suit. The bulk of the documents Bloomberg sought are at the Federal Reserve Bank of New York, which she said isn’t subject to the freedom of information law.

“This type of information is considered highly sensitive, and it would remain so for some time in the future,” Thro said.

The information is considered “highly sensitive”… Just a convenient way of hiding the facts from the people. There is only one way to end this problem. And it begins with the immediate disclosure of all assets and their mark to market values. Let the losses be realized in full. This way the strong will survive and the weak will die. Flush the system out in the open and then, and only then, can the problems be dealt with.

Right now the Government is trying to apply bubble gum to a dam that is springing numerous leaks. They need to open the emergency flood gates. By opening the flood gates it will likely destroy some innocent companies downstream, but it is easier to rebuild some as compared to rebuilding everything should the dam fail completely which is becoming increasingly likely with each passing day.

The S&P 500 index is has declined 37.5% from peak to trough during this current bear market. Do you think that it is over and we are beginning a new multi year bull market? I have bad news for you… Take the 37.5% experienced so far and double that for starters. There will be the occasional ‘bear market rally’, but the long term picture remains very bleak.

These ARE unprecedented times…

My reaction: Reading this entry reminds me why I started this blog. After a year of "unprecedented" events, I got tired of hearing talking heads on the radio predicting market bottoms and new bull markets. There is only so much delusional optimism I can tolerate.

We are not near a market bottom or a new bull market. Those historical examples analysts love to talk about (ie: historically municipal bonds have had a low default rate) mean nothing In unprecedented times. Those "great valuation" you hear about are pipedreams based on optimistic earnings estimates. Finally, the nightmare scenario, a deflationary and dollar collapse, is the likeliest outcome at this point (if you know how we can avoid it without an act of god, I would love to hear it). So please, ignore the optimism oozing out of Wall Street and go buy some gold instead.

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