Thursday, August 25, 2011

Market in decline, positives, if any, and negatives

What was a rebounding market from March 2009 is now rivisiting the late 2008 and early 2009 crisis. It is more complicated than expected. Structural unemployment is endemic due to both technology advancement and to a lesser extent employment benefit fraud - do we need a real war like in 1941 to get people off their couches and into new locations to make money, me included maybe.

There are some positives that are obvious now that should not be overlooked:

---there are very few ways to get a return on money. Stocks, especially reliable dividend stocks, are a clear answer. Abandoning these opportunities in favor of treasuries is not a phenomenon that is long lasting. With recent market action, dividend yield on some great lasting companies are compelling.

---CNBC and other full time media market outlets go with the scare, and have had every known extreme bear highlighted in the past two weeks. Retail has been inundated with the negative. There is, hopefully from this point of view, just pure panic selling. Institutions pick and choose carefully the postions they reduce but overall they hold tight to their diversification mandates. Hedge funds are a question mark.

---Large U.S. corporates, with the exception of some exceptionally strong notable standouts, are generally in good shape with more than ample cash and strong capital positions. With the withering of the middle class and an uncertain regulatory and tax environment they are standing still. The absurd theatrics of the debt ceiling charade ruined any confidence in near term expansion.

---Every savvy investor knows that the rating agencies are second rate players in the capital markets. Unfortunately they are built into some credit agreements as functional components, at least for now and especially in Europe.

If those are the positives, they mostly affect the U.S. equity market's possibility for some revival in the next few months. The financials need to revive, and the viable consumer, now hurt by equity market contraction, needs to step back in. It's possible. Months move like years in the past.

The negatives are sort of daunting.

---U.S unemployment rates are not going away. Under-employment rates are not even counted in these numbers. While off the books work is vibrant, they do not include social security, health benefits, or any job security. The equity market does not necessarly need strong employment for growth, but with an equity market collapse and loss of consumer confidence the consumer spending that was compensating for the unemployment will decline, and that will slow growth and corporate earnings.

---Uncertainty about taxation and regulatory issues on all fronts is especially damaging to small business growth outside of the technology area. Inheritance tax uncertainty is a big issue rarely mentioned, but a really big issue for small business. Why grow to give gains to the government.

---Europe is a mess. Relatively responsible northern Europe, relative even to the U.S. by leaps and bounds, is willing to deal with chronically corrupt Greece and relatively poor Portugal, and they will somehow deal with their English speaking Irish counterparts who supported business development but mimicked the U.S. in their housing bubble, more so with foundling banks who build towers of towheads. The big question is whether German, French, and Dutch voters will form their own "tea party type groups" and reject support of the profligates in the Euro system. Italy and Spain should by any measure remain solvent but the bond vultures may try to take them down anyway, complicating everything and leading to a definite credit freeze up.

---Back in the good old U.S.A., states and municipalites are being forced to either downsize workers and avoid new hires in a way that offsets whatever headway the private sector is making. Longer term, this may be a good thing as municipal worker's collusion with corrupt politicans had led to a system where union dominated workers with limited schdules, significant overtime, and non-market rate pensions related to limited years of service could be called absurd. At the moment, however, these promises must be kept and workers are being reduced. Don't get me wrong, there are plenty of public servants who don't benefit from these mainly urban union contracts and are real mainstays, even heroes, in many communities. Many are even voluteers who with a little insurance, lunch meat, and a ping pong table may risk their health or even their lives for their communities.

As for me, I do believe we can get through all of this with a revival of business, a hiatus of business and banking bashing by the President and his administration, a development of Republican and Demcratic center groups of America and not a politics first mentality. That seems like a long shot now, but if things get worse...

Jackson Hole tomorrow. The Germans must laugh at that name. No real news expected here, because the concept of raising interest rates is off the table. That's the only real solution. Banks will not lend at any rate with such regulatory uncertainty and Congressional dysfunction. High yield debt is at a standsill. Small caps have no options except at the smallest community banks, many being closed by the FDIC.

Raising rates would rewards savers, i.e. retirees who saved their entire life, and would incent housing buyers and car buyers before there are any further increases. This is not 1937 and all historic comparisions are not the same. We don't want a war, we want a recovery.

Solid start, some promising revivals, but then the loss of key players and a slow decline by a still solid team with a hard working but inexperienced manager. With the exception of the manager, it sounds like my Long Island Mets.


Anonymous JR said...

Amen on the interest rates. Would gradual buildup, say to 3 percentage points over the next two years, throttle the housing market, exports and the stock market? I don't think so. It would make cash mean something again. And force government to deal with debt.

8:55 AM  
Blogger John Borden said...

Thanks for the comment. You may be the only person who has ever agreed with me on this. For two years when I have made this point repeatedly it has only been met with silence. John

9:36 AM  

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