by Addison Wiggin & Ian Mathias
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Our “Obama Rally” forecast… will things “get worse before they get better” or vice versa?
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Print in the doghouse… Tribune Co., New York Times and McClatchy looking desperate
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Still no bottom in sight for housing… foreclosure, refi and pending home sales data all down
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Anecdotal evidence of tough times to come… Wiggin house, office burglarized
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Chris Mayer with a sector sell-off that’s gone too far
Enjoy the rally… for now. “Things are going to get worse before they get better,” the president-elect’s been saying all week. We suspect he’s right. But the Obama Rally is likely to have some legs first.
The Dow surged 3.5% yesterday after an equally notable gain Friday. Just about every stock got a boost, but materials, energy and infrastructure players led the way… half because of President-elect Obama’s audacious infrastructure plans, half because these stocks can’t go much lower anyway.
“One thing that makes us think there will be a substantial rally,” noted Bill Bonner in yesterday’s Daily Reckoning, “is that there’s something phony about the ‘gloom and doom’ you read about in the paper…
“For now, people have lost money… but they are still fascinated by it. They still talk about it. They joke about it. They practically wallow in their losses…
“Gloom and doom is the fashion. Apocalypse is the style. Hemlines are set for the end of the world.
“But who really believes it? Who really feels that the end is nigh? Don’t we all still hope that Obama will pull off a really big save? Even if we think the bubble has burst…we still feel as though somehow, everything will turn out all right.
“People are fascinated by the bust…they look upon it as though it was a horror movie…
“But when the real doom and gloom sets in… the last thing they want to do then is talk about the horror around them. Instead, they want to forget about it. They won’t want to hear about stocks… or commodity prices… or bankruptcies and bailouts. They’ll be sick to death of the whole thing.
“We have a long way to go, dear reader. We will have a rally… then another, worse, drop. People will not suddenly give up hope; it will have to be crushed out of them. And then, instead of enjoying the spectacle of the mighty captains of industry and masters of the universe humbled… the show will take on a tragic theme… with ordinary people hung up on the hooks of debt… stretched out on the rack of joblessness… beaten by losses on their houses, their 401(k)s, and so on.
“Then, the jokes will stop.”
Today, we’re seeing some post-rally profit taking. The Dow opened down well over 100 points this morning and is even lower as we write. Lousy earnings forecasts from FedEx, 3M and Texas Instruments are only making matters worse.
No good news for jobs yesterday. Sony, Dow, GM, Anheuser-Busch/InBev, Danaher, Wyndham, Level 3, Sprint, 3M, State Street, Carlyle Group and UBS all announced they’d be kicking workers to the curb.
The Tribune Co. — the largest “employee owned” media conglom in the nation — filed for bankruptcy yesterday …. bad news for our local rag, the Baltimore Sun. We also heard today the highly-indebted-but-not-yet-bankrupt McClatchy Company put the Miami Herald up for sale. And almost simultaneously, The New York Times announced it plans to borrow $225 million against the value of its Manhattan HQ.
Too big to qualify for a Hope Now loan?
And housing is looking as lousy as ever. A record 1.35 million homes were in foreclosure in the third quarter, the Mortgage Bankers Association said yesterday. That’s up 76% from the same period in 2007, when the housing bust was already in full swing. Nationwide, the foreclosure rate is just below 3%.
7% of all homeowners are behind on payments, also a record. Add the two together… one in every 10 American homeowners is either in foreclosure or behind on a mortgage payment.
More than half of the delinquent homeowners who modified their loans this year have already defaulted.
According to the new U.S. Comptroller John Dugan, 53% of borrowers with loans modified in the first quarter and 51% with second-quarter modifications are already behind on payments.
A reader submitted this cartoon, courtesy of Clay Bennett , as emblematic of what’s happening with respect to the bailout plan:
Pending home sales fell another 0.7% in October, the National Association of Realtors added this morning. Despite being better than the Street anticipated, the data forced the NAR to lower its existing home sales forecast for 2008 for the millionth time. The group now expects “only” 4.9 million sales this year, down over 600,000 from 2007.
The dollar index is entertaining traders with some big swings this morning. The measure of greenback strength dipped to 85.6 yesterday, but has already rebounded to 86.4, just shy of its 50-day moving average.
Someone stole a cord of wood from the backyard of the Wiggin household last night. And a catalytic converter was hoisted off a truck in the parking lot of our office on 808 St. Paul Street a couple weeks ago. A catalytic converter? Seriously.
“Times are getting tough,” the police officer we talked to this morning said. “We’re even catching women on breaking and entering charges… that never happens.”
Global credit rates still reflect a tense lending environment. The 3-month dollar Libor stands around 2.1% — more than a full point above the Fed’s target and a tick higher than it was the last time we checked in, on Nov. 21.
What’s more, the Libor-OIS spread, which Alan Greenspan famously declared the best gauge of the credit crisis, hasn’t improved over the last few weeks either. It’s a bit higher as well, at 1.8%.
One curious Libor note: Even though the longer-term rates are still higher than normal, overnight lending rates have plummeted to record lows. The overnight Libor has declined six days in a row, to a record 0.19% today.
Gold is holding steady today. You can still pick up an ounce for $770. Oil too has kept to a tight range since its weekend rebound. It’s trading for $43 a barrel as we write.
“This oil price collapse is overdone,” our Chris Mayer declared to readers of Special Situations yesterday. “At these prices, you could practically throw a dart and do well in oil companies and oil field services…
“Yet the building consensus is that oil is going lower. Seems as if the big houses are in some sort of competition to see who can come up with the lowest price target. Merrill Lynch most recently said $25. If that happens, you should buy oil stocks with both hands, and then some.
“The cost of producing oil is way above $25. The marginal cost of producing oil is somewhere around $70-80, and even higher for some tar sands, deep-water and other unconventional plays. The average break-even for the industry as a whole is somewhere around $40 a barrel. (Research firm Sanford C. Bernstein puts it at $35-40.)
“So that means the average player loses money at anything less than $40. The price won’t stay there for long. For me, investors in oil stocks win unless they own oil stock that has to do some kind of dilutive financing to keep going or goes out altogether. For that reason, what happens on the old balance sheet is the key thing to watch, companywise.”
“Barton Biggs is no doubt a great moneyman,” writes a reader in response to a Biggs essay we published last Tuesday . “His assertions — ‘authorities have learned from the policy errors of the past’; ‘valuations are cheap’; ‘We must be pretty close to maximum bearishness’ — may well be correct, but they sound like wishful thinking, or even cheerleading, to me.”
The reader then goes on to tackle each assertion, one by one.
“The monetary authorities have learned from the past? Ha. They may have learned to stave off deflation, but have they learned how to do it without igniting inflation? History repeats itself differently, and centralizing our assessment on what has happened before, rather than what could be the effects of monetary policy, means that you end up labeling likely and forecastable scenarios as black swans.
“Stocks are cheap? Based on NAV, earnings yield and dividend yields versus the past 40 years perhaps! But that totally misses the fundamentals and possible scenarios.
“Take one possible scenario: Inflation hits 10% (highly possible given rate of money creation — ask the Germans or Zimbabweans — and easy to laugh until you remember that they are running on exactly the same set of economic and monetary principles). High-quality bond yields will hit 12-14% (say 13%). Then equity investors will start looking for 18-20% from the S&P 500, and they won’t be expecting much real growth.
“What prices deliver that? P/Es of 8 will be all the norm, and that will be fair value. The bargain-basement stocks will be down to 4. And this scenario is not even incompatible with your fears of deflation, we can see asset prices (what people don’t have to buy frequently) deflate and consumables prices (things people have to buy every day/week/month) inflate.
“A 10% inflation environment is not even modestly unrealistic. Money seldom goes to the same place twice. It’s gone to high-tech stocks and got burnt, it’s gone to ordinary stocks and got burnt, it’s gone to safe houses and got burnt, it’s even gone to commercial real estate and got burnt. It’s gone to commodities. Why should it not go try out labor prices?
“We’ve hit the point of maximum pessimism? The point of maximum pessimism can only be known in hindsight. People will get more and more pessimistic as their personal conditions/news get worse. If you are saying it’s not possible for people to be more pessimistic than they are now, I disagree. Whether or not they do become more pessimistic is another argument and will depend on what happens to them. (I have a couple of friends who left Liberia at the start of the civil war. They were really pessimistic then. In fact, I was so concerned, I recommended counseling, but they still felt they would be back in Monrovia before Christmas. Ha. Somewhere over the next five years, they hit their point of maximum pessimism.)
“Markets are oversold? So what? Any technical analyst will tell you that buying a stock or index based on it being oversold is no guarantee of anything.
“I don’t know the future anymore than I know what the weather will be like next week Friday or even if I’m going to have a great day tomorrow (or today, for that matter). These are complex systems that don’t bode well to mechanical analysis. I daresay perhaps only he knows, he that looks down from great lofty heights, or perhaps even he knows not.
“But I can say those best prepared for the future will be looking at all the likely scenarios, of which 10% inflation is one of only the mild ones (for the economy, that is, not the markets). Few scenarios support higher asset prices (including stocks, bonds and real estate) over the next five years.”
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. I.O.U.S.A. was nominated for a Critic’s Choice Award today. We’re in some pretty prestigious company, as you can read about here. Not only are we honored by the selection, but Kate tells us that these nominations have a reputation for predicting Oscar nods. That would be something else, eh?
P.P.S. “I’ve been a Reserve Member for a couple of years now,” a reader recently told us, “and pretty quickly got my initial capital back… it paid for itself.” Watch his story here , and learn how this year new members will get a $1,500 dividend check up front.
