Deflation, Depression Drumbeat

Everybody Limbo! How low can she go?

• On April 28, 1997, the Dow closed at 6783.02


• November 1, 1996, the S&P closed at 703.77


• The NYSE Composite closed at 4378.48 on February 11, 1997


• The NASDAQ is still above its November 20, 2008 close at 1313, so, after that, the next closing low will be May 2, 1997, at 1305.33

Today's closing numbers, seen below, are close to those levels, so the financial news junkies will be saying the stocks fell to their lowest levels since 1997, or the worst in 12 years.

Dow 6,763.29, -299.64 (4.24%)
NASDAQ 1,322.85, -54.99 (3.99%)
S&P 500 700.82, -34.27 (4.66%)
NYSE Composite 4,360.99, -256.04 (5.55%)

These kinds of comparisons serve almost no useful purpose, except to jangle our memories to recall what life was like back then. Here's an idea. Tiger Woods was in his first year as a professional golfer. Since then, Tiger's done well by simply plying his craft and parlaying his popularity into lucrative endorsement deals.

The point is that investing - especially in times like these - is not for everyone, while working hard and seizing the financial opportunities that may present themselves is probably a more fundamentally sound plan. Saving 10% of your income doesn't hurt either.

What is more useful is looking at the relative price/earnings ratios and dividend yields during boom and bust periods. Conventional wisdom dictates that stocks are risky when p/e ratios are above the 12-15 range and good buys when they are 5-10. The bottom comes when these ratios reach a cumulative 5-7. They are currently around 8-10, so the bottom is close at hand, numbers-wise.

As for dividend yields, a 7% compounded return doubles your money in 10 years, but with interest rates running at or close to historic lows, anything over 7% should be viewed with some degree of skepticism. Either the underlying stock is still falling or the dividend may, at some point in the not-so-distant future, be cut.

Either case will dampen your overall return, so stocks which are paying a dividend yield around 3-5% are likely to be good bets. Their price may improve (or not fall much more) and their dividends are likely to remain intact.

While I think it is still too early to call a bottom of any sort or time period, I am on record for calling the bottom at Dow 5267 sometime later this year, probably between August and November. Noting that, I may be completely wrong. We may be only at the beginning of a period of prolonged economic distress, in other words, a Depression-like decline.

Some are calling for the Dow to fall to 4000, others, below that. Remember that during the Great Depression, which lasted anywhere from 8 to 10 years, from 1929 to 1938, stocks lost 90% of their value. The very worst years of the depression, from a day-to-day "life sucks" standpoint, was from 1931 to 1935, when unemployment peaked and remained high and death, disease and rampant poverty was the order of the day.

Back in the 30s, people starved, froze to death, and suffered from a wide assortment of maladies many of which today have been eradicated by modern medicine. Considering the dynamic economy in which we live and the incredible amount of government aid available, it seems unlikely that many today will stave or freeze, though many will die of heat stroke, especially the elderly who try to save on cooling costs by turning their air conditioning off during the summer.

While I continue daily to paint this "doom and gloom" scenario, be reminded that today's calamity was caused by just one more market event - AIG's announced $61 billion loss in the last quarter and the government throwing another $30 billion at the company. Somebody please tell me how any company can lose $61 billion in 3 months time. On one hand, it's ludicrous and without precedent. On the other hand, how much of these "losses" are merely papering over a bottomless pit of credit default swaps and other cross-party derivatives.

AIG was the king of insurance and the leader in CDS, which are essentially insurance against bond defaults. With defaults still at inordinately-high levels (and growing, according to some), AIG doesn't have to funds to cover their own bad paper. AIG is no sideshow to the banking crisis, it is at the heart of the crisis.

Until AIG's problems are solved, or until the government comes up with a better idea than to just continue pumping good money down a sinkhole, nothing will change. Wall Street banks and AIG blew up the world financial system and there needs to be a fundamental shift in how the system works. Investigations of the CEOs and other executives at the tops of the firms are necessary, and they should lead to prosecutions and jail for the perpetrators, many of them household names by now.

The point is that bad news continues, unabated, nearly every day. This week will be no different. Tuesday, auto and truck sales for February; Wednesday, private job loss numbers are released by ADP; Thursday, new unemployment claims; Friday, Labor Department's Non-Farm Payrolls. All of the figures are predicted to be dire, so any hope for a rally needs to be moved back a few weeks, or months, or years.

On the day, one of the most one-sided ever witnessed, declining issues beat advancers by a stunning 9-1 ratio, 6036-675. New lows danced on the graves of new highs, 1479-11. Volume was again very high, as investors scramble to get out of way of the rampaging avalanche of burning paper holdings.

NYSE Volume 1,967,912,000
NASDAQ Volume 2,336,813,000

Not a single Dow component registered a gain. The worst were Citigroup (C) 1.30, -0.20, -20.00%; General Electric (GE) 7.60, -0.91, -10.61%; Alcoa (AA) 5.49, -0.74, -11.88%; General Motors (GM) 2.01, -0.24 -10.67; American Express (AXP) 11.06, -1.00, -8.29; Caterpillar 22.17, -2.44, -9.91% and Bank of America (BAC) 3.63, -0.23, -8.10.

Commodities exhibited all the symptoms of a deflationary spiral. There was no one single commodity higher on the day. From natural gas to coffee to feeder cattle, everything was down. Oil got hammered on persistent demand concerns, down $4.61, to $40.15. The precious metals fared better than most, but still, gold lost $2.50, to $940.00. Silver lost just 2 cents, to $13.07.

Today was one of the most disheartening in a series of such. Nothing, not the government, nor Warren Buffett, nor Barack Obama, nor the Fed can stop the freight train of deflation, wealth destruction and decline.

We might as well accept the facts: We are already in a depression. We are beyond the state of denial. No investment is safe.

The Amazing Shrinking Economy

Prior to the market's open, the Commerce Dept. reported that GDP for the 4th quarter of 2008 declined by 6.2%, much more than the previous estimate of -3.8%, and more than the consensus estimate of -5.2%. Word was also spreading fast that the federal government was about to take a 36% stake in troubled Citigroup, more than quadrupling taxpayer's stake in the bank.

Right out of the gate, stocks tanked, with the Dow down nearly 150 points within the first 15 minutes. After trading in a tight range through most of the day, the markets finally succumbed to the intensely negative pressure in the final hour, sending the Dow, S&P and NYSE Comp. to new lows, surpassing those made earlier this week. As I said in yesterday's headline: GAME OVER!

Dow 7,062.93, -119.15 (1.66%)
NASDAQ 1,377.84, -13.63 (0.98%)
S&P 500 735.09, -17.74 (2.36%)
NYSE Composite 4,617.05, -95.97 (2.04%)

According to this report by Lauren Tara LaCapra, citing credit analysis by Egan Jones, a proprietary firm, Bank of America should be up next to follow Citigroup to the government hand-out window.

Hasn't it become evidently clear to Tim Geithner at Treasury that his plan for submitting the banks to a "stress test" won't even come close to relieving the stress to the credit and finance system?

First, the executives, Citi's Vikram Pandit and BofA's Ken Lewis, haven't come clean as to what's lurking on (and off - as in tier three) their books, awaiting implosion. Second, the government's benchmarks in the stress tests are simply too optimistic. For instance, the GDP worst case component calls for GDP to fall by 3.3% in 2009 and grow by 0.5% in 2010. We're looking today at a fourth quarter of 2008 in which GDP declined by 6.2%, according to the government's own report, issued today, so shouldn't the worst case be closer to a 5.0% decline in GDP for 2009 and a flat year in 2010?

As far as wost cases are concerned, a drop of 5.0% isn't even that bad. It is entirely possible that GDP could collapse by as much as 8 or 9% in the first two quarters of 2009 and get worse from there. The government simply doesn't want to face reality, believing, amazingly, after all we've been through, that the system is still resilient. It's not. The major banks are broken and the government is not only complicit through non-regulation, but now looking wholly incompetent, decrepit and corrupted to its core.

So, when the government finally gets the memo, they should have the FDIC close down Citi, zero out the shareholders, pay off bondholders at pennies on the dollar, recapitalize what's left and sell it off - in parts, if necessary - to private hands - shareholders, regional banks or private investors. Then, rinse, and repeat with Wells Fargo & Company (WFC) and JP Morgan Chase (JPM). anything short of a complete shutdown of the banking behemoths will only serve to prolong the agony in the credit, bond and stock markets, severely crimp lending and prolong the recession, turning it into a depression.

The Obama administration and Geithner's Treasury Dept. must take off the kid gloves, stop treating the banks as sacred cows and deal with the colossal problems facing the nation.

One of the reasons the economy is in such a staggering decline, is how lucrative not working has become. A woman caller to the Rush Limbaugh radio show today said she recieved $459 per week in unemployment insurance benefits and the government has just added an additional $25 per week, courtesy of the stimulus bill. That equates to $25,000 per year for not working. There clearly needs to be more incentive to find work, as being on the dole has now become better than the wages of 30-40% working Americans.

Elsewhere, General Electric (GE), slashed its annual dividend, from 32 cents to 10.

Market internals confirmed the headline numbers. Declining issues ran ahead of advancing ones, 4131-1390. New lows overwhelmed new highs, 815-7. Not a single NASDAQ issue made a new 52-week high on the day. The daily advantage for new lows over new highs has now run a full 16 months, since October, 2007. Volume was the highest of the week, in a week which was probably the highest it has been all year.

NYSE Volume 2,248,907,000
NASDAQ Volume 2,457,442,000

Commodities were quiet. Oil lost 46 cents, to $44.76. Gold lost a dime, to $942.50, while silver gained 13 cents to $13.11.

The major indices closed lower for the week, for the 7th time in 8 weeks in 2009.

In closing, I want to take this opportunity to lay claim to the coinage of a new socio-economic terminology, by announcing the advent of the Post-Government Era, a spawning global movement of rampant avoidance and non-compliance of the various laws, taxes and decrees of governments around the world. As the myriad levels of government lay deeper and deeper burdens upon the populace in the large majority of industrial nations, people will naturally revolt, and that revolutionary fervor finds its roots in non-compliance, civil disobedience and outright rejection of authority.

It's deserving of the current rostrum of national governments to receive treatment of this sort, as they have, individually and as a group, compounded the problems of the people, overtaxed them to extraordinary levels and continues to treat them as worthless fodder. The Post-Government Era has begun.

You heard it here first.

Game Over! Stocks Swoon on Stress Test Suspicion

Stocks opened higher despite more sour economic news, but ended the day in the red as the reality that Treasury's "stress test" for the ailing banking sector was more smoke, mirrors, politics and PR than an actual remedy.

Secretary Tim Geithner's "plan" to resolve the banking and financial crisis has good probability to extend the recession by not addressing the core problems. (See earlier post below for details on Treasury's plan.)

Blow by blow, here's how the day went, as interpreted by Wall Street's desperate price discovery process (at least somebody's working).

8:30 am: The Commerce Dept. issues monthly Durable Goods Orders report for January, citing a deep decline of 5.2% from the previous month, the sixth straight monthly drop. It's evident that Americans have their wallets and purses closed tight. Some even have forsaken carrying such.

The Labor Dept. announces 667,000 new weekly unemployment claims nationally. The 5.1 million currently receiving benefits is the highest since the department began keeping records in 1967. The federal government celebrated the occasion by adding $25 to the weekly benefit. Each week, an additional $127,500,000 of taxpayer money will be spent, beginning immediately.

9:30 am: The markets open with sharp gains, ignoring the dire economic reports. The Dow is up 80 points in the first ten minutes. the other major indices are up more than 1%. Bank of America is up 0.69 at 5.85.

10:45 am: The Dow reaches what will eventually be the high of the day - 7400 - up 130 points. 26 of 30 Dow stocks show gains. Bank of America peaks at 5.89, up 0.73.

1:13 pm: Having given up all of the day's gains, the Dow briefly falls into negative territory. Bank of America is up only 0.24 at 5.40.

3:15 pm: Stocks are in full retreat, with the Dow lower by 97 points. Bank of America is down 0.05 at 5.11. There are now only nine Dow components with gains. Most have completely rolled over.

4:00 pm: Markets close with all indices near the day's lows. It's the 8th losing day in the last 10. The Dow closes below 7200 for the second time this week. 22 Dow components close with losses, 8 with gains. Bank of America finishes with a cheerless win of 0.16, at 5.32.

Dow 7,182.08, -88.81 (1.22%)
NASDAQ 1,391.47, -33.96 (2.38%)
S&P 500 752.83, -12.07 (1.58%)
NYSE Composite 4,713.02, -40.15 (0.84%)

Market internals verified the session's finish. Declining issues outgunned advancers, 3755-2761. New lows: 460; new highs: 4, the lowest number of new highs I have seen since October of 2007. Volume was high once again, as investors alternately test and flee from equities.

NYSE Volume 1,482,993,000
NASDAQ Volume 2,348,150,000

Commodities were split. Crude oil for April delivery was up $2.72 to an unsustainable $45.22. Gold continued to correct on profit-taking, losing $23.60, to $942.60. Silver tumbled 94 cents, to $12.98, an excellent buying opportunity for long term investors.

Today's results were startling, stunning, unprecedented in the level of pessimism on display, expressing a remarkable distrust of government and overwhelming lack of confidence in the economic future. There is little doubt among investors that the government has failed to offer reasonable solutions to stem bank losses, job losses, income deterioration and revive - or even stabilize - the economy.

Treasury's Stress Test is Not a Plan at All

Editor's Note: I've had to break today's market coverage into two parts due to a need to provide some clarity on what the administration is planning to do with the nearly-insolvent banking sector. This entry will cover that issue, while the usual post - after 4:00 pm - will cover the day's market activity.

We've been hearing about Treasury Secretary Tim Geithner's "stress test" for the nation's largest banks in shrouded tones for over a week. Finally, late yesterday, some details of the plan emerged - in an exclusive interview with Jim Lehrer on the PBS Newshour - and elsewhere.

What the stress test will entail is having the banks examine their ability to function under a variety of very broad circumstances - first, a "moderate" scenario, in which unemployment

This commentary, by Adam S. Posen, Dep. Director, Peterson Institute for International Economics, lays out some guidelines which the Obama administration is conveniently avoiding.

And here's Paul Krugman opining in the New York Times that nationalization - in other words, having the federal government take over some banks, clean them up and resell the new, functioning, properly-capitalized entities to private investors.

Geithner and the Obama administration isn't listening, despite Krugman having won the Nobel Prize for Economics and other, similarly spot-on economists and commentators urging the government to make the appropriate hard choices, as opposed to the current piecemeal approach which hasn't - and isn't likely to - work.

The assumptions in the stress testing offers banks to look at two different sets of scenarios, a baseline and an extreme, or worst case outlook.

Under the baseline scenario, unemployment is at 8.4% in 2009 and 8.8% in 2010, housing prices decline by 14% in 2009 and another 4% in 2010, and the nation's Gross Domestic Product (GDP) falls by 2.0% in 2009 and rises by 2.1% in 2010.

In the worst case set-up, the assumptions are that unemployment reaches 8.9% in 2009 and 10.3 in 2010, housing prices fall 22% in 2009 and another 7% in 2010, and the nation's GDP falls by 3.3% in 2009 and gains 0.5% in 2010.

The banks will have about six weeks to report back to Geithner with either a confirmation that they're "OK" or a request for more funding from the government. That it will take six weeks to complete what is essentially nothing more than the testing of a theoretical set of circumstances against real world assets and liabilities suggests that the entire plan is nothing more than a politically-motivated cover-up for the banking giants which actually control the government.

This Bloomberg article suggests that the "worst case" scenarios laid out by the government are not severe enough, and that the banks will not not then be looking at what possibly lies ahead for the US economy.

The assessments may indeed be less severe than what's ahead, though the housing price assumptions appear somewhat on the money. Suppose GDP falls by 5% this year and another 2% next? What if unemployment hits 10.2% this year? Then the stress tests won't be testing the banks for reality and the entire plan will fail, meaning we will be sunk into a deeper recession for a longer time by supporting zombie banks which are at the heart of the problem.

In Geithner's interview with Lehrer, a the Treasury Secretary voiced a number of interesting comments, including, on the solvency of the banks involved:

"These banks now have very substantial amounts of capital relative to what you would have seen in the US economy going into previous recessions."

In other words, Geithner seems to be wanting to tell us that the banks are sound, despite what's been reported concerning trillions of dollars worth of bad loans, even more toxic credit default swaps and continuing credit-creation issues.

Geithner would have us believe that all of these pre-existing conditions have suddenly, magically, vanished. It's not a believable scenario.

On "nationalization", Geithner opined, "it's the wrong strategy for the country and an unnecessary strategy." Again, Geithner would have us believe that what's always worked for smaller, insolvent institutions, that being take-over by FDIC, recapitalization and an eventual return to a functioning entity on the other side, is not acceptable for the largest banks in the nation.

This is the kind of thinking which inspires skepticism in the banking system and the government's remedies. This approach would allow the likes of John Mack, Lloyd Blankfien, Vikram Pandit and Kenneth Lewis to continue to run their failed institutions - the same ones which caused the crisis in the first place - with only a limited amount of scrutiny and accountability.

This would allow the same excesses in the securitization of loans and largely unsupervised lending and investing activity to continue, while failing to address the toxic loans and swaps at the root of the problem.

There will be no accountability for what's already occurred, no civil or criminal charges brought against the bank and finance executives whose institutions already have benefited from taxpayer capital infusions. The same executives who nearly brought the world's financial system to its knees will remain at the controls of their now-defunct banks.

Naturally, the banks have lined the coffers of both the Obama administration and all members of congress with campaign contributions, so there will be no opposition from any government official - elected or otherwise - to this plan whatsoever.

The stress test and Geithner financial band-aid plan should be recognized for exactly what it is: further denial of the root of the crisis and a sure recipe for disaster.

Stress and Confusion on Wall Street

Is this Wall Street's week of reckoning?

Monday, stocks slid near 12-year lows. Tuesday's snap back rally offered some relief, but it was back to selling for most of the session on Wednesday. There isn't a trader alive who can tell where stocks will go Thursday and Friday.

Paramount among the issues yet to be resolved is the fate of the nation's 19 or 20 largest banks (The press and the government can't even agree on a number, that's how confused the condition is.) as the government commits them to various and sundry "stress tests."

According to what's been gleaned from two days of congressional testimony by Fed Chairman Ben Bernanke and the infrequent mutterings from Treasury Secretary Tim Geithner, government authorities will go into banks this week armed with accountants, number-crunchers and statistical models in an attempt to determine the general health of these mega-banks (over $100 billion in assets; are there any left?) and their ability to function normally under severe economic conditions.

Once these stress tests are completed, the government then should have a clearer understanding of what's needed to fix them, or whether they should be taken over by regulators, broken up, forced into bankruptcy or left alone. All of this has left Wall Street in a very confused condition, and the very thing the market appreciates least is uncertainty.

Stocks took on water early on, retracing most of Monday's decline by the noon hour. After that, there were a number of rallies, all of which eventually failed, despite stocks peeking into positive for about half an hour near the close. By 3:40 pm, however, the charade was over, and stocks sold off in a decided fashion.

Dow 7,270.89, -80.05 (1.09%)
Nasdaq 1,425.43, -16.40 (1.14%)
S&P 500 764.90, -8.24 (1.07%)
NYSE Composite 4,753.17, -68.57 (1.42%)

Other factors entered into the decision-making of investors, not the least of which was the report from the National Association of Realtors on January Existing Home Sales, which showed continuing deterioration in the real estate market with both the number of sales and the median price falling - a continuation of trends which have persisted for 14 months.

Granted, the general economy is not pretty, but the global economy is still standing. The questions posed by investors are precisely how well the economy is functioning and how well it will be in the near future. Nobody has yet offered solid answers to those important queries, and that's exactly what's causing investors to flee from stocks.

When the government does finally provide some further clarity, it should cause some soothing, though prospects will still remain mostly uncertain. It's what the government actually plans to do with the banks that will have the most impact, though the field is pretty well split on that judgment as well.

So, get used to wild trading swings, directionless markets, interpretations of news and then interpretations of the interpretations, punditry, thin analysis, politics and more nonsense about how to "fix" things than the market can bear.

Eventually, there will be resolution, but most humans being impatient when it comes to their financial futures, the waiting part is the hardest. And we are waiting. Get ready for at least six to nine more months of this before the market finds a floor (nice word for bottom), washes out the weak hands and moves ahead. Unless the government stimuli are completely worthless, at some point the market will simply revert back to fundamentals and investing can revert to something approaching normalcy.

For now, however, US and world markets are about as far removed from normal as they can be.

On the day, losers outdid gainers, 4193-2341, while new lows finished ahead of new highs, 489-13. Volume was on the high end, owing to the frenetic nature of the trading.

NYSE Volume 1,800,731,000
Nasdaq Volume 2,404,619,000

Oil priced higher by $2.54 a barrel, closing at $42.50. Gold continued to suffer from profit-taking, losing $3.30, to $966.20. Silver presented itself as a buy, losing 12 cents, to $13.91. Other commodities finished mixed, in keeping with the overall tone of the day, which was confused.

If you are in this market, you are on your own. I continue to only buy silver sporadically, on dips, and, despite mentioning that one could not be faulted for venturing into equities at this juncture, I am in no way advising anybody to do so. It's still a very dangerous, still bottomless, environment.