Autism, Vaccines and the CDC

No need to debate whether science has been held hostage for eight years, but we can ask what areas of science suffered the most and what can we do about it now? This article discusses one of the greatest harms flowing from a combination of failed policies in medical science tainted by greed, willful blindness (or worse), and political collusion, to the detriment of a generation of our children.  – Ilene

Autism, Vaccines and the CDC: The Wrong Side of History

Courtesy of Robert F. Kennedy Jr. and David Kirby, in the Huffington Post
Even as the evidence connecting America’s autism epidemic to vaccines mounts, dead-enders at the Centers for Disease Control (CDC) — many of whom promoted the current vaccine schedule and others with strong ties to the vaccine industry — are trying to delay the day of reckoning by creating questionable studies designed to discredit any potential vaccine-autism link and by derailing authentic studies.

On January 12, a cadre of mid-level health bureaucrats left over from the Bush administration ignored Federal requirements for advance notice in order to vote to quietly strip vaccine research studies from funding allocated by Congress in the Combating Autism Act (CAA) of 2006. Members of Congress had said that this money should be used to study the vaccine-autism connection.

These rogue bureaucrats — members of the Interagency Autism Coordinating Committee — held an unannounced vote to remove previously approved vaccine studies from funding under the CAA. Nearly all of the “Federal” members of the panel voted to remove the two studies, whose estimated cost was $16 million – or 1.6% of the billion dollars authorized by Congress for autism. The panel’s civilian members, in contrast, voted nearly unanimously to retain the funding.

IACC’s action to halt vaccine-autism research flies in the face of congressional intent. The bill’s authors clearly stated that vaccine research should be funded. Even the esteemed Institute of Medicine has condemned CDC’s methods. In 2005, an IOM panel condemned CDC for its “lack of transparency” in vaccine-autism research.
The bureaucrats responsible for this scandal are on the wrong side of history and it’s hard to not attribute an obstructionist motive to their act since vaccine-autism research has already entered the realm of mainstream science. Serious scientists (except those tied to the vaccine industry) no longer debate whether vaccine-autism research should be done, but rather how it should be done, and by whom.
And Congress concurs: “I want to be clear that … no research avenue should be eliminated, including biomedical research examining potential links between vaccines, vaccine components, and autism, pronounced Sen. Mike Enzi (R-WY), Chairman of the H.E.L.P. Committee at the bill’s passage. Sen. Chris Dodd (D-CT) said the bill should fund “environmental research examining potential links between vaccines, vaccine components and autism. And last week, Dodd called the potentially illegal maneuver to shut down vaccine research, “contrary to the spirit of the bill.”

These days, being opposed to vaccine-autism research puts one outside of the “mainstream” (and let’s be clear, supporting such research in no way makes one “anti-vaccine” — that charge is a tired, diversionary charade — an ugly lie perpetrated by vaccine industry allies and their blind supporters.)
Recognizing this fact, the vaccine industry and its CDC allies have continued to fund a series of deceptive and badly flawed studies designed to dispute the connection between vaccines and the epidemic of pediatric neurological disorders. The latest of these is the controversial Italian study released this week intended to allow Thimerosal’s defenders to argue that the preservative is safe. The study comparing two groups of Italian children, who received a moderate level of Thimerosal vs. a moderately higher level, is so poorly designed it could only find one child in 1400 who tested with autism. The researchers did not include in the study the records of children who received no Thimerosal. For years, a cadre of vaccine officials at CDC has vigorously opposed funding for epidemiological studies that include both vaccinated and unvaccinated cohorts that might give us useful information about causation.

The evidence of a potential link between vaccines and autism is now so compelling that every national autism organization firmly supports research into vaccination as a possible trigger for the disorder, including Autism Speaks, the world’s largest, most well funded, well connected mainstream group.

Autism Speaks was co-founded by Bob Wright, former CEO of NBC-Universal, former Vice Chairman of General Electric. Autism Speaks, a staunchly pro-vaccine group, supports vaccine research. Its statement on the issue is right down the middle.

Why has vaccine-autism research gone mainstream?  The reasons are many:

The Hannah Poling Case – A year ago, medical personnel at HHS determined that this girl’s autism was caused by, “vaccine induced fever and immune stimulation that exceeded metabolic reserves.” Hannah had low cellular energy related to her underlying and mild mitochondrial dysfunction. Many children with autism claims in Vaccine Court have almost identical mitochondrial dysfunction.

Mitochondrial disorders are not rare in autism — Research suggests that dysfunction may affect 10-to-30% of all kids with autism — perhaps more among “regressive” cases.

Mitochondrial disorders are probably not rare in the general population — Such disorders were thought to affect 1-in-5,000 people. But new research suggests that genetic mutations that might confer mitochondrial dysfunction might be found in 1-in-400 to 1-in-50. A study by the United Mitochondrial Disease Foundation (UMDF) found mitochondrial DNA mutations that might cause disease in up to 1-in-200 people.

Children with mitochondrial disorders are at greater risk of autistic regression — A new study by researchers at Cleveland Clinic and elsewhere found that a trigger for autistic regression in kids with mito disorders could possibly come from a vaccine reaction. “There might be no difference between the inflammatory or catabolic stress of vaccinations and that of common childhood diseases,” they wrote.

Children with mitochondrial disorders are at greater risk of vaccine injury — This according to Dr. Douglas Wallace, Professor of Molecular Medicine and Director of the Center for Molecular and Mitochondrial Medicine in Genetics at UC Irvine. A member of the UMDF’s scientific board, he stated, “We advocate spreading vaccines out as much as possible — each time you vaccinate, you’re creating a challenge for the system, and if a child has an impaired system that could in fact trigger further clinical problems.”

The National CADDRE Study — This 5-year project of the CDC’s Centers for Autism and Developmental Disabilities Research and Epidemiology (CADDRE) Network will “help identify what might put children at risk for autism,” the CDC says. Among those risk factors: “specific mercury exposures, including any vaccine use by the mother during pregnancy and the child’s vaccine exposures after birth.”

The Kennedy Krieger Institute — The nation’s premiere autism research outfit is sponsor of the Interactive Autism Network (IAN). Its new questionnaire deals with autism and vaccines. Thousands of families are describing their experiences with autistic regression following vaccination. Top scientists will then use this information, “to conduct additional vaccine-focused studies.”

The Clinical Immunization Safety Assessment (CISA) Network — CISA is a CDC-sponsored group that brings together leading autism research institutions and America’s health insurance companies. Last April, the CDC proposed this research question: “Is immunization associated with increased risk for neurological deterioration in children with mitochondrial dysfunction?” To find out, “CISA has formed a working group to study methods related to mitochondrial disorders and immunization,” the CDC said.

Autism Speaks — Autism Speaks recently authorized three studies on thimerosal, vaccines and autism, and the foundation is considering funding a lot more highly significant research into the possible links between vaccines and autism.

The National Children’s Study — This is not a vaccine-autism study. But the HHS-EPA joint effort will investigate “the effects of environmental influences on the health and development of more than 100,000 children across the United States,” including autism. As part of their work researchers will track medical records, which include vaccinations.

CDC’s Immunization Safety Office — As part of its draft research agenda for vaccine safety, this agency last April proposed looking at several clinical outcomes from childhood vaccinations, including “Autoimmune diseases; central nervous system demyelinating disorders; encephalitis/ encephalopathy; and neurodevelopmental disorders including autism.”

Former CDC Director Dr. Julie Gerberding — who told CNN’s Dr. Sanjay Gupta: “If a child was immunized, got a fever, had other complications from the vaccines, and if you’re predisposed with the mitochondrial disorder, it can certainly set off some damage (and) symptoms that have characteristics of autism. We have to have an open mind.”

Dr. Anthony Fauci, Director, National Institute of Allergy and Infectious Diseases — who told US News, “If we can show that individuals of a certain genetic profile have a greater propensity for developing adverse events, we may want to screen everyone prior to vaccination (for) undetectable diseases like a subclinical mitochrondrial disorder.”

Drs. Richard I. Kelley, Kennedy Krieger Institute, Margaret L. Bauman, Massachusetts General Hospital, Marvin R. Natowicz, Cleveland Clinic, etc — “Large, population-based studies will be needed to identify a possible relationship of vaccination with autistic regression in persons with mitochondrial cytopathies.”

California Department of Health Services/ Kaiser Permanente — This CDC- funded, NIH-published study showed that kids born in the most polluted tracts of the SF Bay Area (mercury was a significant factor) were more likely to develop autism: “Our results suggest a potential association between autism and estimated metal concentrations.”

Many scientists are exploring other environmental factors, including heavy metals:

UC Davis MIND Institute — Authors of this new study say that genetics alone cannot explain the rise in autism in California. “We’re looking at the possible effects of metals, pesticides and infectious agents on neurodevelopment,” said Dr. Irva Hertz-Picciotto, a co-author and professor at UC Davis.

The University of Texas — Two studies led Ray Palmer, Ph.D., associate professor at the University of Texas Health Science Center show increased risks for autism among kids living closest to mercury-emitting sources, such as coal-fired power plants.

Scientists at UC San Diego — They wrote in the journal Autism that children given Tylenol after the MMR shot were several times more likely to develop autism. Tylenol can reduce levels of glutathione – a powerful antioxidant and detoxifier. “Tylenol and MMR was significantly associated with autistic disorder,” the authors wrote. “More research needs to be completed to confirm the results of this preliminary study.”

The new administration of President Barack Obama also seems to recognize the need for independent studies. HHS Secretary Nominee Tom Daschle said in 2002 that, “Mercury-based vaccine preservatives actually have caused autism in children.” And President Obama said on the campaign trail last year, that: “We’ve seen just a skyrocketing autism rate. Some people are suspicious that it’s connected to the vaccines. The science right now is inconclusive, but we have to research it.”

We could not agree more. The government must study the genetic and environmental factors that cause autistic symptoms such as neuro-inflammation and rapid brain growth, immune dysregulation, oxidative stress, glutathione depletion and microglial activation.

Hard science is increasingly pointing to vaccines and heavy metals — among other environmental triggers — as suspects in the epidemic.
After eight years of secrecy and subterfuge by the Bush Administration, it is time to shed light on the government’s abuse and mismanagement of autism research in this country – especially when it comes to investigating evidence of a link to vaccines.

***** 

Robert F. Kennedy Jr. is credited with leading the fight to protect New York City’s water supply, but his reputation as a resolute defender of the environment stems from a litany of successful legal actions. The list includes winning numerous settlements for Riverkeeper, prosecuting governments and companies for polluting the Hudson River and Long Island Sound, arguing cases to expand citizen access to the shoreline, and suing treatment plants to force compliance with the Clean Water Act.  Mr. Kennedy acts as Chief Prosecuting Attorney for Riverkeeper. He also serves as Senior Attorney for the Natural Resources Defense Council and as President of the Waterkeeper Alliance. At Pace University School of Law, he is a Clinical Professor and Supervising Attorney at the Environmental Litigation Clinic in White Plains, New York. Earlier in his career Mr. Kennedy served as Assistant District Attorney in New York City… more here.   Website here.  Related articles:  Deadly Immunity, Tobacco Science and the Thimerosal Scandal.

David Kirby has been a professional journalist for over 15 years, and has written extensively for The New York Times for the past eight years. Kirby was a contracted writer with the weekly City Section at The Times, where he covered public health, local politics, art and culture, among other subjects. Kirby has also written for a number of national magazines. He was also a foreign correspondent in Mexico and Central America from 1986-1990, where he covered the wars in El Salvador and Nicaragua, and covered politics, corruption and natural disasters in Mexico. From Latin America, he reported for UPI, the San Francisco Examiner, Newsday, The Arizona Republic, Houston Chronicle and the NBC Radio Network… He is the author of the book Evidence of Harm, Mercury in Vaccines and the Autism Epidemic: a Medical Controversy.  More here.  Website Evidence of Harm. 

Robert Kennedy Jr. on the Vaccine Autism Coverup 

(I cannot copy the video here, click title for Phil’s Site for the video.  If you have any idea why it’s not working, please let me know.)

Case Against the Fed and Fractional Reserve Lending

Courtesy of Mish

Case Against the Fed and Fractional Reserve Lending

Fractional Reserve Lending (FRL) is fraudulent. Indeed, FRL in conjunction with micro-mismanagement of interest rates by the Fed is the root cause of the financial crisis we are in.

Unfortunately many do not see FRL for the fraudulent scheme that it is. Here are the most common defenses against the allegation of fraud.

Five Arguments Used To Defend FRL

1. FRL is not fraud because the lending is backed by assets.
2. FRL is not fraud because it is allowed by law.
3. Eliminating FRL would require unwarranted "regulation".
4. No one is harmed by FRL.
5. People have a legal right to make agreements with banks allowing their money to be lent with no reserves

Rebuttal

1R. To those who claim credit extended by fractional reserve lending is not fraudulent because it’s backed by assets, I ask: "What assets?" The answer of course is …. 

• Fannie Mae and Freddie Mac debt that would be worthless were it not for taxpayer bailouts.
• Asset backed commercial paper that has ceased to trade.
• Toggle bonds and other such nonsense where debt is paid back with more debt.
• Loans to hedge funds for speculation in credit default swaps and commodities.
• Commercial real estate boondoggles including scores of condo towers now sitting empty.
• A whole array of other silly loans that should never have been made.

Close analysis shows the "backed by assets" claim only holds true as long as asset prices are rising. When asset prices are falling as they are now, the true state of the non-existent backing is plain to see.

Credit extended via FRL is backed by nothing more than thin air and promises. Those promises are currently worth pennies on the dollar, and the entire global banking system is insolvent as a result.

2R. Some claim that fractional reserve lending cannot be fraud because it is legal. However, Just because something is legal does not make it right. For example: Slavery was once legal. It certainly never was right. Government decree cannot make slavery right, but it can and did make it legal. By the same token, government decree alone cannot change the fact that fractional reserve lending is fraudulent. Proof of fraudulence will be offered in the rebuttal to point number 4.

3R. Some claim that FRL cannot be eliminated because that would require regulation and such regulation would in and of itself be against free market principles. The fact of the matter is that a free market would quickly shut down any bank lending out more money than it had in the vault. No one would possibly trust such a bank. It is only government decree (regulation) that allows banks to get away with such obvious fraud.

Furthermore, people are confused by what "libertarian" means. Libertarian does not mean anarchy. There are laws against murder, theft, fraud, and slavery that no libertarian I know would argue against.

Indeed, for any society to function, there must be certain laws (regulations) in place. Here are the basic tenants of valid laws.

• Protection of property rights
• Protection of civil rights
• Freedom of religion
• Equal protection under the law regardless of race, creed, color, sex, nationality, wealth, etc.

4R. Proponents of FRL claim no one is harmed by it. In practice, everyone is harmed by it. Here is how it starts. Those with first access to money accumulate assets and those with later access to money bid up those assets. Consider housing. GSE creation of credit out of thin air is a perfect example of what happens. By the time credit was available to those of lower economic status, the bubble was already formed and ripe for a collapse. Even the non-participants were harmed. How so? Via rising property taxes and rising prices of goods and services without the benefit of rising wages.

Ironically, even those with first access to money (the banks and wealthy) ultimately did not fare well because they were greedy. When the bubble popped (as all debt bubbles eventually do) the only winners were the few who made timely bets on the demise of the bubble.

FRL is the enabler for credit bubbles. Given enough time, credit bubbles are guaranteed to implode in deflationary fashion. History is replete with examples. The South Seas bubble, the John Law Mississippi bubble, and tulip mania are prime examples.

5R. People have no such right to agree to commit fraud. Here are more things people have no right to do: Shout fire in a movie theatre, conspire to steal someone’s money, agree to start a toxic waste dump in a location where it would poison every water source in the neighborhood. There is an infinite number of things two people cannot agree to do. The right of people to do things ends when it affects the property rights of everyone else. And as noted in 4R, everyone is affected by fraudulent agreements that allow more credit to be extended than there is money in the bank.

Sweeps

Greenspan authorized sweeps in 1994.

Sweeps allow Demand Deposits Accounts (checking accounts) to be systematically "swept" from checking accounts into savings accounts unbeknown to the checking account holder.

Savings accounts have zero reserves.

So… In actual practice there is almost no money backing up checking accounts, none (beyond what banks THINK they need historically). You can thank Greenspan for this.

This is not "Laissez Faire" economics or libertarianism. This is blatant fraud, something that those blaming libertarianism need to understand.

Such a construct would never flourish in a free market. It takes a regulator like Greenspan to allow it.

Search for Scapegoats

Instead of placing the blame on fractional reserve lending and the biggest regulator of all (the Fed), many claim there is not enough regulation and the Fed needs still more powers.

Please consider Anti-Libertarian Nonsense From Henry Kaufman & Company for a discussion of the so-called libertarian Fed, Fannie Mae and Freddie Mac, Rating Agency Madness, and the Glass-Steagall Scapegoat.

Fed Uncertainty Principle

Inquiring minds should also consider the Fed Uncertainty Principle.

Uncertainty Principle Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Why We Can’t Reinflate The Bubble

Ron Paul explains Why We Can’t Reinflate The Bubble.

Opening Statement:

Transcript:

We have to come to the realization that there is a sea change in what’s happening. This is an end of an era and that we can’t re-inflate the bubble, just as we devised a new system of Bretton Woods in ‘44 which was doomed to fail. It failed in ‘71 and then we came up with the dollar reserve standard which was a paper standard; it was doomed to fail and we have to recognize that it has failed. And if we think we can re-inflate the bubble by artificially creating credit out of thin air and calling it capital; believe me, we don’t have a prayer of solving these problems. We have a total misunderstanding of what credit is vs. capital. Capital can’t come from the thin air creation by the Federal Reserve System; capital has to come from savings. We have to work hard, produce, live within our means and what is left over is called capital. This whole idea that we can re-capitalize markets by merely turning on the printing presses and increasing credit is a total fallacy; so the sooner we wake up to realize that a new system has to be devised, the better.

Right now I think the Central Bankers of the world realize exactly what I’m talking about and they’re planning, but they’re planning another system that goes one step further to internationalize regulations, internationalize the printing press. Give up on the dollar standard, but we have to be very much aware that that system will be no more viable. We have to have a system which encourages people to work and to save. What do we do now? We’re telling consumers to spend and continue the old process; it won’t work.

All We Are Sayin’ Is Give Free Markets a Chance

Paul Kasriel, Director of Economic Research at the Northern Trust weighs in with All We Are Sayin’ Is Give Free Markets a Chance.

Given the economic and financial market “challenges” of the past year, some pundits and politicians are concluding that these challenges are the result of the failure of free markets. I would respond that we cannot determine whether free markets have failed unless we have had free markets. I do not think we have.

One of the most important markets in an economy is the market for credit. We do not have free markets in credit in the U.S. or anywhere else that I know of. The price of short-term credit is fixed by central banks. It would only be by accident that a central bank would fix the price of short-term credit at a level that would obtain if a free market in credit were allowed. It is beyond me why most economists would view with horror some government agency fixing the price of say, copper, but view the fixing of the price of short-term credit by central banks as nothing to be alarmed at.

There is at least one group of economists that realizes the economic mischief caused by central banks – economists who belong to the Austrian school. (For information about Austrian economics, click on this link to the Ludwig von Mises Institute or this link to Leithner and Company, a private investment firm located not in Austria, but in Australia.

I am not endorsing the political views or the investment advice of either of these entities, but I am endorsing their approach to economic analysis.) By holding a key short-term interest rate below or above the unobservable free market equilibrium level of this rate, the central bank creates credit, much as does a counterfeiter, or destroys credit, which leads to distortions in the economy and financial markets.

Typically, the central bank starts out by preventing the short term interest rate from rising to its equilibrium level. This leads to central bank credit creation. In turn, this encourages investments which are profitable only so long as the central bank prevents the interest rate structure from rising to its free-market equilibrium level. All of this manifests itself in the form of higher prices – higher prices of goods/services and/or the higher prices of assets. At some point, the central bank can no longer tolerate what it has wrought, and raises the level of the short-term interest rate above its free-market equilibrium. This precipitates a decline in asset prices, an economic recession and, later, a decline in goods/services prices (or a slowing in their rate of increase). It was recognized by Austrian economists during the sharp run-up in U.S. stock prices in the late 1990s and the subsequent housing boom that the Greenspan-led Fed was especially egregious in keeping the federal funds rate far below its equilibrium level too long. We are now experiencing the economic and financial market fallout from Greenspan’s interference with the free market.

In free markets, risk-takers get rewarded if they are correct in the risks they take, but are punished if they are incorrect. Here, too, Greenspan intervened in the free markets. When it turned out some risk-takers had erred, Greenspan cushioned their losses by slashing the federal funds rate and creating central bank (counterfeit) credit. This central bank intervention in free markets encouraged risk-takers to take on even more risk inasmuch as their upside rewards would seem to be unlimited but their downside punishment would be limited.

Protection of Property Rights Is The Key Issue

The central point in a free market based banking system is to avoid violations of property rights. However, the current system of 100% fractionally reserved banks allows money to be created out of thin air robbing savers, by making those savings worthless over time. A pernicious effect of this system of permanent inflation is that it creates malinvestment and large boom-bust cycles that destroy wealth.

The Fed is a failed institution. Fannie Mae is a failed institution. Freddie Mac is a failed institution and fractional reserve lending is a fraud.

The correct policy decision is to abolish all of them, not to add layer after layer after layer of regulators watching over other regulators, who in turn watch over still other regulators, where some "god-like" super-regulator at the top supposedly has infinite wisdom and knows exactly how to regulate.

Mike "Mish" Shedlock

 

Bernanke Warns of Credit Relapse; Senator Sanders Warns Bernanke

Courtesy of Mish

Bernanke Warns of Credit Relapse; Senator Sanders Warns Bernanke

While Fed Chairman Ben Bernanke Warns of a Credit Market ‘Relapse’, Congress is increasingly willing to stand up to the Fed Chairman.

Please consider Bernanke Warns of Danger of Credit Market ‘Relapse’.

Federal Reserve Chairman Ben S. Bernanke warned that another shock to the financial system would undercut the central bank’s forecast that the U.S. recession will give way this year to a slow recovery.

“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” Bernanke said today in testimony to the congressional Joint Economic Committee. He highlighted that the economic contraction may be slowing and that the housing market has “shown some signs of bottoming” after a three-year slump.

The Fed’s effort at greater transparency in its emergency lending programs is a response to an April 2 nonbinding budget amendment sponsored by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and the panel’s ranking Republican, Alabama Senator Richard Shelby, Bernanke said. That proposal passed 96-2.

The Fed chief did not mention a tougher measure, also nonbinding, sponsored by Vermont Senator Bernard Sanders, an independent, that called on the Fed to identify borrowers. The measure passed 59-39 on the same day.

Sanders, in a statement after the hearing, threatened to pass the measure again “in a stronger form” if Bernanke failed to accept it. Bernanke told Sanders in February that identifying borrowers would be “counterproductive” and result in “severe adverse consequences for the economy.”

“Mr. Bernanke should not pick and choose which amendments he wants to respond to,” Sanders said. “My bipartisan amendment passed the Senate by 20 votes, and we expect him to respect it.”

Pick and Choose

Whether Bernanke is supposed to "pick and choose" is irrelevant. Bernanke and the Fed are going to attempt attempt to "pick and choose" . Meanwhile, as time goes on, the actions of the Fed are in complete alignment with the Fed Uncertainty Principle.

Mike "Mish" Shedlock
 

Breadth Measures Hitting Historical Highs

Courtesy of Rob Hanna at Quantifiable Edges

Breadth Measures Hitting Historical Highs

I’m seeing some breadth measures again hitting all-time extremes. Worden Bros. measures the % of stocks trading at least 1 and 2 standard deviations above their 40-day moving average. I mentioned the 1-standard deviation indicator (T2110) in the blog a couple of weeks ago. At the time it was hitting an all-time high of nearly 81%. Tonight it broke that record registering over 83%. The number of stocks closing 2-standard deviations above their 40-day ma (T2112) also hit a new extreme Monday – and in a big way. Before Monday this indicator had never reached 40%. Monday it spiked up to 52.14%. A chart with the complete history is below.

This suggests the market is incredibly overbought. As I went over a couple of weeks ago, this doesn’t necessarily mean we’ll see a sharp selloff. At such incredible levels, though I’d certainly be careful taking long positions. These overbought levels will be worked off at some point. A selloff is one way to accomplish that.

 

Comfortable with Uncertainty

Here’s John P. Hussman’s weekly market comment. Courtesy of John P. Hussman at Hussman Funds. This excellent article on embracing uncertainty includes a special note on news in autism research for those interested in this topic. – Ilene

Comfortable with Uncertainty

John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy

Are stocks in a bull market or is this still a bear market? Frankly, I don’t put much energy into that question. The S&P 500 has now corrected about one-quarter of its prior losses. Bear market corrections of about one-third are not unusual, but I wouldn’t bank on that. Having failed to do anything effective to mitigate the second wave of foreclosures that is set to begin later this year, and seeing very little sponsorship in trading volume (despite good breadth), my impression is that we most likely are in a strong correcting rally in the context of an ongoing bear market. At the same time, cash-equivalents are yielding next to nothing, so it’s unclear to what extent investors will decide that stocks are their only real alternative, which might allow a continuation of this advance.

Presently, the Strategic Growth Fund is well-hedged, but with enough call options to allow us to gradually and somewhat automatically reduce our level of hedging in the event that this advance continues. In other words, we are open both to the possibility of a bull market and to a continued bear market. To set an investment position that relies on the certainty of one outcome or the other would be courting trouble, in my view.

In his book On Being Certain, neurologist Robert A. Burton quotes F. Scott Fitzgerald – “The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function.” Buddhist teacher Pema Chodron calls it “being comfortable with uncertainty” – being willing to take every aspect of reality as the starting point, without wasting energy wishing things were different, without denying reality as it is (even if your next step is to work toward changing things), and without needing to know what will happen in the future. “The truth you believe and cling to makes you unavailable to hear anything new. The best thing we can do for ourselves is to be open to an unknown future.”

Burton offers the same advice. Tolerating the unpleasantness of uncertainty, he writes, “is the only practical alternative to cognitive dissonance, where one set of values overrides otherwise convincing contrary evidence. Each position has its own risks and rewards; both need to be considered and balanced within the overarching mandate: Above all, do no harm. Science has given us the language and tools of probabilities. We have methods for analyzing and ranking opinion according to their likelihood of correctness. That is enough. We do not need and cannot afford the catastrophes born out of a belief in certainty.”

Our objective is always the same – to outperform the S&P 500 over the complete market cycle, with smaller periodic losses than a passive investment strategy. To that end, we spend much more effort identifying market conditions and their associated return/risk profiles than we spend on predicting them. The difficulty in the bull/bear distinction is that bull and bear markets don’t actually exist in observable reality, only in hindsight, and it is futile to base an investment position on things that can’t be observed.

What we can observe is that valuations are now in the high-normal range on the basis of normalized earnings. Stocks are no longer undervalued except on measures that assume that profit margins will permanently recover to the highest levels in history (in which case, stocks would still only be moderately undervalued). For instance, the price-to-peak earnings multiple on the S&P 500 is only about 11, but those prior peak earnings from 2007 were based on record profit margins about 50% above historical norms, largely driven by the excessive leverage that has since sent the economy reeling.

On normalized profit margins, valuations are above the historical average, and prospective long-term returns are below the historical average. Overall, I expect the probable total return on the S&P 500 over the coming decade to be about 8% annually, provided we don’t observe much additional deleveraging in the economy. At the 1974 and 1982 lows, based on our standard methodology, the S&P 500 was priced to deliver 10-year total returns of about 15% annually. While it has become quite popular to talk about 1974 and 1982, the stock market is presently not even close to those levels of valuation.

Meanwhile, market action in recent weeks has been excellent from the standpoint of breadth (advances versus declines), uneven from the standpoint of leadership (where much of the strength has been focused on speculation in companies with extraordinarily poor balance sheets), and rather uninspiring on the basis of trading volume.

From an economic standpoint, the main argument for an oncoming recovery is simply that the knuckles of investors and consumers are no longer absolutely white. A backing-off from extreme risk aversion is certainly helpful, since it puts banks at less risk of customer flight, but the underlying assets of banks are still deteriorating. For the time being, the recent revision in accounting rules has prevented balance sheets from showing negative capital and revealing insolvency, but the reality is that the mortgages underlying bank assets are still defaulting. If this was simply a temporary problem of fluctuating asset values that would recover over time, the problem would not be serious. As T. Boone Pickens once said, “I have been broke three or four times, but fortunately for me I’m not an MBA, so I didn’t know I was broke.” But the assets Pickens owned moved in cycles, and regularly recovered in step with the price of oil. In the case of mortgages, once the loan goes into foreclosure, there’s an asset sale, the loss is taken, and the game is over.

Overall, then, the fundamentals of the market and the economy are not nearly as positive as they are being spun by analysts. Stocks are at best only moderately undervalued if one assumes that profit margins will recover to the historical extremes we saw in 2007, and are otherwise mildly overvalued. The financial system is in cosmetic remission, looking better on the surface, but still deteriorating internally. Still, we can’t discard the fact that the extreme risk aversion of recent months has eased. Breadth has been quite strong, but is also overbought (with over 80% of stocks above their 20-day and 50-day averages). The mixed picture offers neither certainty that the bear market will resume, nor that a bull market will emerge.

Still, we are comfortable with uncertainty, and are relying on neither outcome. When we don’t have a good basis for accepting market risk, we continue to hold individual stocks, and hedge against market fluctuations with offsetting short positions in the S&P 500, Nasdaq 100, and Russell 2000. Our returns in those conditions are driven by the difference in performance between the stocks we own, and the indices we use to hedge. That difference has been the source of the Fund’s returns year-to-date as well.

Cadherin

Two news articles to mention. The cover story of the May issue of Money magazine includes a nice piece on your faithful fund manager, with a very serious looking photo, suitable for a large wall (the photographer, Nigel Parry and his assistants were very professional and great fun to have in the office).

The second piece of news is something I’m particularly excited about. Those of you who know me personally know that autism is a wonderful and challenging part of my life, and that I have been involved in research in neurobiology and statistical genetics for more than a decade, which is how I spend much of my time not devoted to fund management and family (I am the son of two physicians, so I was prepared for Med School as a zygote, and jumped the track in college). The Hussman Foundation has a close collaboration with the Miami Institute for Human Genomics (MIHG) at the University of Miami, including funding, statistical work, and research planning. The team at Miami is an outstanding group of researchers, is led by a great scientist and friend, Margaret Pericak-Vance, and also collaborates with Vanderbilt University Medical Center, under Jonathan Haines.

Last week, in conjunction with a number of other institutions, we reported the discovery of the first common risk locus for autism on a region of chromosome 5 in a little “desert” (probably a regulatory region) between the genes for cadherin 9 and cadherin 10 – which are neuronal cell adhesion molecules that are involved in maintaining synaptic contact and regulating the maturation of synapses.

Deqiong Ma of the MIHG first reported this finding at the 2008 International Meeting for Autism Research (IMFAR), presenting it as the top hit in a GWAS (genome wide association scan) using family-based data. We then validated it using AGRE (Autism Genetic Resource Exchange) data, and approached the Children’s Hospital of Philadelphia (CHOP) under Hakon Hakonarson for collaboration, since they were also doing a GWAS on autism. When all of the data was combined, including case-control data obtained by CHOP, it was highly significant. The results were simultaneously published last Tuesday, in Annals of Human Genetics and Nature.

http://www.medicalnewstoday.com/articles/148376.php

As a side note, you may see reports that say things like “65% of people with autism share this variant” and so forth. This is something of an overstatement. 65% of people with autism have allele 2 instead of allele 1 at a specific location on chromosome 5 (rs4307059), but the associated mutation in the vicinity of that marker is still to be identified, and not all pieces of genetic material with an allele 2 at that location will carry a mutation. So the proper story is not that there is a single gene that causes autism, or that we’ve identified the specific mutation, but rather that we’ve found the first common genetic variant associated with autism, which articulates one of the links by which autism operates, and is a major step forward.

See, I really can write a whole weekly comment without repeating that the bondholders of mismanaged financial companies should be required to accept debt-for-equity swaps or haircuts, with the alternative being government receivership. Didn’t even mention it.

Oops.

Market Climate

As of last week, the Market Climate for stocks was characterized by neutral valuations – modestly overvalued on the basis of normalized earnings, and moderately undervalued on the basis of earnings measures that assume a return to record 2007 profit margins. Market action was also mixed, with breadth being the clearest bright spot, and sponsorship from trading volume being the weakest link. The Strategic Growth Fund remains well hedged, but continues to have about 1% of assets in call options (we trade around this position, and “gamma scalp” the strikes and expiration dates so that we take a portion of the value out on rallies, and add exposure on day-to-day declines). The overall position clearly has a defensive bias, but allows for some amount of participation in further market strength if it emerges.

In bonds, the consensus for an economic recovery has pushed Treasury yields higher on both straight Treasuries and TIPS, while some of the flight-to-safety in precious metals has abated. All of this has contributed to a pullback of a few percent in Strategic Total Return. As might be expected, we responded to the higher real yields on TIPS late last week by moderately increasing our exposure to that area. I would expect that we will bump our precious metals exposure back above 10% of assets on further price weakness if it emerges, particularly if Treasury yields and real yields begin to decline again, but we are comfortable with our position for now. The Fund also has about 10% of assets in foreign currencies, and about 5% of assets in utility shares.

—

Prospectuses for the Hussman Strategic Growth Fund and the Hussman Strategic Total Return Fund, as well as Fund reports and other information, are available by clicking "The Funds" menu button from any page of this website.
 

Technical Analysis Fails to Give You a Pony

Wondering how well technical analysis techniques worked since October 2007? Bloomberg gives one point of view; Condor Options argues it is misleading.  - Ilene

Technical Analysis Fails to Give You a Pony

Courtesy of Condor Options

Bloomberg has this shocking bit of news:

Ever since the Standard & Poor’s 500 Index peaked in October 2007, six of eight strategies — which are supposed to make money whether stocks rise or fall — failed, according to back-testing data compiled by Bloomberg. As the bear market erased $11 trillion from the value of U.S. equities, buy and sell signals from those six technical indicators produced losses of as much as 49 percent, the data show.

“Technical analysis on its own as a discipline does not work,” said Diane Garnick, the New York-based investment strategist at Invesco Ltd., which oversees $348 billion. Using it in isolation is “the fastest way to lose money,” she said.

Of the eight strategies, stochastics, Bollinger bands, relative strength, commodity channels, parabolic systems and the Williams %R indicator generated buy and sell signals that resulted in losses between the S&P 500’s peak of 1,565.15 on Oct. 9, 2007, and its March 9 trough, the data show. They did worse as the index then rallied 30 percent through last week. [link]

It’s actually kind of difficult to respond to this.  In the first place, it’s hardly remarkable that a set of widely known, off-the-shelf vanilla indicators didn’t outperform in one of the strangest and most volatile markets in recent history.  Neither did buy-and-hold, nor value “investing,” nor most long/short hedge funds, nor etc.  And I’m actually inclined to cheer coverage like this, in spite of all its flaws, if it causes even one individual to scorn untestable and subjective forms of technical (or any other) analysis: verificationism may have failed as a standard for academic metaphysics, but it’s an absolute necessity for the analysis of any financial time series.  A prediction that cannot be tested empirically is neither technical nor analytic: it is faith-based finance.

Still, Bloomberg reporters Tsang and Martin have created and destroyed a particularly combustible straw man.  Why did they choose these, out of all the indicators around?  Why opt for the plainest of the plain, rather than indicators with a little more finesse?  Why should anyone – even its most vociferous critics – believe that the set of indicators examined there is representative of “technical analysis” as such? I count myself on the side of the critics, and yet I don’t believe for a moment that any of the sources or indicators referenced in the article represent the gold standard for what it is possible to do with a time series and some basic software.

Moreover, why choose such an odd standard of success, namely, whether or not an indicator anticipated this particular bear market rally?  The standard might just as easily have been whether or not an indicator avoided major losses last fall, or whether it has been profitable over a 1-, 5-, or 10-year period.  One reason the authors might have chosen to focus on the current rally is that the supposedly “failing” technical indicators still managed to beat the S&P 500 over the full October 2007 – May 2009 period examined.  The worst performer, Williams %R, beat the index by 0.8%, while the Directional Movement Indicator gained 9% versus the index decline of 43.9%.  “Quotidian technical indicators still manage to beat S&P 500″ clearly isn’t as exciting a headline, and would give the lie to the Church of Efficient Markets.  Note that the authors insisted on a quote from Pope Malkiel himself, who imputed impure motives to any proponent of price-based predictions.

I eschew both fundamentals-based fundamentalism and the zealotry of credulous chart painting.  Perhaps financial journalists leave those methods alone because it so much harder to hit a perpetually moving target, and easier to aim instead at pointy-headed evidence-based quantitative practitioners.

[This is part 2 in our unintentional n-part series, "X Fails to Give You a Pony," in which we help mainsteam financial journalists do their jobs better. Part 1 is here.]

 

Just A Pause?

Courtesy of Brian at Alphatrends

Just A Pause?

For now, there is no reason to think that today’s minor weakness is the start of a larger selloff, but given the magnitude of the recent rally further profit taking would not come as a surprise (and would actually be healthy).  It is impressive that the profit taking seems to be mild so far but a strong defensive position seems prudent right now.

 

Stress Tests And Commercial Real Estate Loans

Tom Lindmark discusses the elephant in the room - the banking system’s CRE exposure. – Ilene

Stress Tests And Commercial Real Estate Loans

Courtesy of BUT THEN WHAT, by Tom Lindmark

The leaks surrounding the bank stress tests continues this evening. The WSJ is reporting that 10 of the 19 banks that underwent the test will be required to raise more capital.

The Journal didn’t have any definitive list, just more of the same names being bandied about. Despite all of Warren Buffett’s praise this weekend, it still looks like Wells is on the list though the article indicates that discussions are centered around whether it might be allowed to earn its way out as opposed to raising new capital.

All of the leaks are likely meant to diffuse the impact of the actual announcement. There may be a small flurry of activity when they finally pull away the vails but I think that most of the impact has already been discounted. The real test will come when the chosen few have to actually try and raise some money. I truly wonder if anyone in their right mind would dump any meaningful amount of money into one of them.

A separate but related article in the Journal delves a bit into the growing problem of banks’ commercial real estate exposure. This issue goes far beyond the 19 banks that were subject to the stress test. It truly goes to the heart of the regional and community banks across the country.

While bank regulators aren’t immediately applying the stress-test criteria to small and midsize institutions, banks with high commercial real-estate exposures are drawing greater scrutiny from regulators. Nearly 3,000 banks and thrifts are estimated to have commercial real-estate loan portfolios that exceeded 300% of their total risk-based capital, according to Foresight. Regulators consider the 300% threshold as a red flag, although it doesn’t necessarily mean all those banks are in danger of failing. Risk-based capital is a cushion that banks can dig into to cover losses.

While the failure of a single small bank is unlikely to cause systemic damage to the nation’s financial system, such institutions could have a big impact as a whole. Banks with commercial real-estate loan portfolios exceeding 300% of their total risk-based capital have total assets of about $2 trillion, compared with $2.3 trillion in assets at Bank of America Corp.

This truly is the elephant in the room. While it doesn’t threaten the solvency of the system it does represent a significant challenge for the FDIC and a likelihood that the government is going to have to pony up quite a lot of money to resolve these institutions. The FDIC has already this year seized several small and one fairly large institutions that it was not able to sell to another bank. This results in a larger cost to the agency than they incur when a bank buys the deposits from them.

In my opinion, the economy can’t recover quickly enough to limit much of the damage that’s likely to occur. The assumptions underlying many of the deals were too aggressive and the leverage too great thus the hits the banks would have to take to work out the loans is probably more than they can tolerate.

 

 

 

 

 

Motivations Abound for Federal Reserve’s Delayed Release of Bank Stress Test Results

Courtesy of Mike Caggeso
Associate Editor, Money Morning

Motivations Abound for Federal Reserve’s Delayed Release of Bank Stress Test Results

The results of the bank stress tests are in, but instead of releasing them today (Monday), the U.S. Federal Reserve is holding them close to its chest until after the markets close Thursday.

The amount of information awaiting disclosure seems to have grown, as have the reasons to postpone the potentially damaging data.

Not only will the government unveil which banks require more capital, it will also disclose potential loss estimates for certain loan categories and the banks’ ability to “absorb those losses” assuming economic conditions worsen through 2010, a government official told The Wall Street Journal.

Negative results could deal a huge blow to both the banks and government, as a sub-par grade may be viewed as an indictment not only of the failed management of the banks, but the government’s decision to loan them billions of taxpayer money. The banks also are concerned that anything but a tactful release of the results will cause internal and investor panic.

Government and banking industry officials told Bloomberg that both sides needed the extra time to debate preliminary results, as well as plans regarding how banks can recover capital.

On April 24, the government showed the tests’ preliminary results to the 19 U.S. firms it reviewed – from behemoth banks like Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C) to the smaller GMAC LLC (NYSE: GMA) and MetLife Inc. (NYSE: MET). The banks involved in the stress tests hold more than half the loans in the U.S. banking system and two-thirds of the assets. 

“Everybody understands they’ve got a tiger by the tail here,” Mark Tenhundfeld, a senior vice president at the American Bankers’ Association in Washington, told Bloomberg. “If they don’t let him go gently, there will be a lot of mauling going on.”

Already, reports have leaked that two specific banks need more capital, and reaction hasn’t been pleasant.

After showing Bank of America and Citigroup test results, the government told the banks to raise more capital despite receiving a combined total of $95 billion in bailout loans.

At least three more banks need more capital, either from converting common shares to equity and/or receiving more government cash, sources told Bloomberg.

Sensing blowback from Congress, as well as the public, Federal Reserve chairman Ben S. Bernanke said that banks requiring more capital will have to attempt to raise it on their own before receiving another lifeline loan from the government.

Confusion On Evaluation’s Methodology

Debate over the results isn’t the only reason for the postponement. Disputes and confusion over the Fed’s methodology has also erupted.

According to a Fed’s test criterion, common shareholder equity should be the “dominant” portion of Tier 1 capital. Officials favor tangible common equity of about 4% of a bank’s assets and Tier 1 capital worth hovering around 6%.

But The Wall Street Journal reported last week that some bank executives got mixed signals during a meeting with regulators.

The regulators are asking “a million questions” and it’s “very unclear what they’re aiming at,” a senior executive told The Journal. “We can’t discern a pattern.”

Citigroup officials argued that regulators haven’t given the bank enough credit for its efforts to offload large asset chunks, such as Smith Barney and its Japanese brokerage arm Nikko Cordial Securities.

On Friday, Citigroup agreed to sell Nikko Cordial Securities, its Japanese brokerage arm to Sumitomo Mitsui Financial Group (OTC: SMFJY) for about $5.5 billion. The deal, which is to be completed by Oct. 1, also includes a transfer of about $2 billion in excess cash from Nikko Cordial to Citigroup.  

The deal will boost the bank’s Tier-1 capital ratio by approximately 27 basis points.

Individual Result Releases

One insider told Reuters that the government is leaning toward releasing individual results for each bank involved in the stress test – a move away from issuing a summary of results.

The source said the plan “is not very far along,” and that regulators also aim to disclose a lot of confidential supervisory information about the banks.

One analyst says that test results could be so specific to a bank’s portfolio that it’s not wise to use them as a litmus test for the overall health of the banking sector.

“Once you try to take that information and extrapolate it, it gets very complicated and it’s dangerous," Kevin Petrasic, who served at the Office of Thrift Supervision from 1989 to 2008 and is now an attorney at law firm Paul Hastings in Washington, told Reuters.

Whatever the results – or how they are disclosed – Money Morning’s Shah Gilani, a former Wall Street hedge fund manager, said the evaluation process has several flaws.

“What’s missing, unfortunately, is an assumption of how much additional capital would be necessary to facilitate credit expansion – which, in turn, would serve to fuel economic growth. That, after all, should be the ultimate stress-test objective,” he wrote.

And the end result is more stress added to an already stressed banking sector, as too much information and/or misinformation only makes a sound assessment more difficult.

Money Morning’s Stress Test

The government’s pushback of stress test results only made the public more hungry for the their release. But you don’t have to wait until Thursday to know which of the 13 biggest U.S. banks are diamonds or duds.

Last week in “Money Morning’s Bank Stress Test,” Martin Hutchinson highlighted the four secrets that will let you separate the winners from the losers in the U.S. banking system

• Banks that made profits in the very difficult fourth quarter of 2008 and first quarter of 2009 are probably in good shape, especially if their loan-loss provisions exceeded their charge-offs (the amount actually lost.)
• Banks that lost money in the fourth quarter and first quarter may or may not be in terminal trouble; it depends on the amount of those losses and whether the red ink is expected to continue to flow going forward.
• With the run-up in bank stocks in recent weeks, there’s been an accompanying rise in the ratio of share price to book value (stock price per share/book value per share). If that ratio is still below 30% – even after the recent price increases – the market lacks confidence in the bank’s ability to solve its own problems. Unfortunately, the market currently appears to be overly optimistic about some of the banks that still have considerable ongoing problems.
• Management’s dividend policy is less of an indicator than it was just a few short months ago; several banks have sharply cut their dividends in order to repay the Troubled Assets Relief Program (TARP) capital they got in late 2008. Reasonably, profitable banks don’t want the government meddling in their business or compensation structures

Hutchinson also gave an individual analysis of each bank, highlighting their strengths and pulling a curtain on their weaknesses. 

*****

[Money Morning Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation". "The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. Check out the latest report and find out how you can profit.]

To sign up for a free subscription to Phil’s Stock World Report, click here.  Check the circle for the $49/mo PSW Report.  The fee will be waived, no credit card requried. – Ilene

 

And Now For This Morning’s Gloom…

Courtesy of Henry Blodget at ClusterStock

And Now For This Morning’s Gloom…

The market’s on fire, up more than 30% since early March, and there are economic green shoots all over the place.  So what could go wrong? 

Well, for one thing, that "lagging indicator" known as Unemployment, which could still come around and bite us in the arse.

Jim Welsh ofWelsh Money Management, via John Mauldin’s Outside The Box:

In the first three months of 2009, more than 2 million jobs were lost, causing the unemployment rate to jump from 7.6% to 8.5%, the highest since November 1983. The unemployment rate increased in March in 46 states, with California, the world’s eighth largest economy, hitting 11.2%, the highest since January 1941…

As noted in recent months, post World War II recessions have on average caused personal income to fall between 4% and 7%, and this one has further to go. Wages and salaries shrank at a 4% annual rate in the first quarter, and according to Deutsche Bank, payroll-tax withholding receipts collected by the Treasury Department are down 8.2% from a year ago. This suggests that personal income growth will remain weak in coming months, and shave more than $250 billion from total income and future demand. Changes in temporary jobs lead reversals in the overall labor market by 6 to 10 months. In 2007, a continuous decline in temporary jobs and hours worked led me to forecast a decline in jobs in 2008. When non-farm jobs fell in January 2008, most economists were shocked, and the stock market sold off sharply. In March, employers cut 71,700 temporary workers, so any real improvement in job growth is many months away.

Most economists are quick to note that unemployment is a lagging indicator, and they’re right. But the magnitude of the job losses shouldn’t be dismissed so glibly, given the impact they are having on the banking system. The American Bankers Association reported that 3.22% of consumer loans were delinquent at the end of 2008. That is the highest level since the ABA began tracking overall loan delinquency rates in the mid 1970’s. And that was before 2 million jobs were lost in the first quarter.

An average of 5,945 bankruptcy petitions were filed each day in March, up 9% from February and 38% from a year ago. The soaring job losses since last September are certainly behind the increase in bankruptcies.

The surge in job losses are working their way up the income ladder, with an increasing number of middle income and upper middle income workers being affected. This is pushing many of those who previously were considered prime credit risks over the edge. Two-thirds of mortgages in the U.S. are held by the best credit risk, prime borrowers. According to the American Bankers Association, 5.06% of prime borrowers have missed at least one mortgage payment. Since prime borrowers are such a large group, this represents 1.8 million mortgages. Although the delinquency rate for sub prime mortgages is up to 21.9%, it only accounts for 1.2 million mortgages…

According to RealtyTrac, job losses result in a home foreclosure 10% to 15% of the time. If job losses narrow from the monthly average of 670,000 in the first quarter to 325,000, almost 3 million more jobs will be lost before year end. That will translate into another 300,000-450,000 foreclosures, and an unemployment rate of almost 11%. But what if that estimate of job losses is too optimistic?

New research by the Federal Reserve and Boston University of credit spreads of 900 non-financial companies from 1990-2008 predicted changes in the economy ‘phenomenally’ well. Based on their initial research on low to medium risk corporate bonds with more than 15 years to maturity, the researchers went back to 1973 and found the analysis still worked well. With the massive widening of corporate bond spreads last fall, the researcher’s model predicts the economy will lose another 7.8 million jobs by the end of 2009, and industrial production will fall another 17%. In the spirit of optimism, let’s assume this ‘phenomenal’ model is off by 35%, due to the extreme nature of this credit crisis. That still results in another 5.1 million lost jobs, and an 11% drop in industrial production. In that scenario, the unemployment rate climbs to near 12.5%, the underemployment rate breaches 20%, and another 500,000-750,000 foreclosures result.

An unemployment rate of 12.5%, if memory serves, is a tad higher than the Fed is using in those bank stress tests.

See Also:

Roubini: Don’t Believe The Stress Tests Or The Bank Rally

Some Uptight Bankers Finally Taking Chill Pills

How Long Bear-Market Rallies Last

What Has Happened To Buffet…….?

Courtesy of Jan-Martin Feddersen at Immobilienblasen

What Has Happened To Buffet…….?

Sometimes it´s sad to see what has happened to former legends……The following quote is related to Wells Fargo….The same Wells Frago that without taxpayer bailouts ( $ 25 Billion Tarp, FDIC backed bonds, PPIP ), accounting changes ( mark to market ), changing of the taxcode after the Wachovia deal, a different attitude from government on banks ( "no more Lehman´s, too big to fail, no nationalisation" ) etc would have already been gone…… UPDATE: Let Warren Buffett Buy Wells Fargo from Mish.

Buffett says Wells Fargo to ride out credit crisis Reuters

Buffett said at Berkshire’s annual meeting. Noting that Wells Fargo shares fell below $9 (6 pounds) each this year — they bottomed at $7.80 on March 5 — he added that at that lowered price, "If I had put all my net worth in one stock, that would be the stock."

Buffett attacks bank tests Reuters

Buffett said Wells Fargo ($ 20 ), U.S. Bancorp ( $18 ), and a third Berkshire holding, M&T Bank Corp ( $ 50 ), do not need more equity capital, and "we would buy stock in any of the three banks at present prices."

With the promise to pay back TARP ( see this "rant" via Naked Capitalism , only possible with a massive capital hike ) i think he will soon have a very good chance to show his confidence…..

I highly recommend to read What They Want to Know: Our Top Ten List for Warren Buffett from Jeff Matthews ( a real Buffet expert and still a fan ). Looks like i´m not the only one wondering what has changed in his investment style and his investment ethics…..

Buffett, in his most recent letter to shareholders in February, said he supported the U.S. government actions, while predicting bailouts will cause “unwelcome aftereffects” including inflation.

Speaking of ethics & douple standards……

Das meinte ich mit dem moralischen Kompass und Doppelmoral……..

The Buying Stampede: Like Lemmings Over a Cliff?

Mr. Practical’s observation is consistent with the post by Tyler at Zero Hedge, Market Dispersion Has Collapsed – "Systemic Correlation Is At October 1987 Levels". In Tyler’s article, Matt Rothman of Barclays concludes: "Systemic factors are driving stock returns across the market. Stock specific news is largely irrelevant and that this is the case in the middle of earnings season, when stock specific news should be at its height, is truly remarkable. Getting the individual names right in the portfolio has never been less important." – Ilene  

The Buying Stampede: Like Lemmings Over a Cliff?

Courtesy of Mr. Practical at Minyanville

My friend John told me something arcane, hard to interpret, but perhaps meaningful.

Index option prices have come way down. He measures it by “implied volatility.” For example, with an SPX index option trading at a certain price, his model might say that the price implies at 30 volatility. This means the option price is implying that the index will move up or down 30% over the next year.

Now, an index option price is driven by 2 things: The volatility of all the underlying stocks and the correlation between those stocks. The first part is intuitive; the second is not.

Let’s pretend an index has only 2 stocks in it: A and B. If A goes up and B goes down, they cancel each other out, and the index is unchanged. But if A and B go down together, the index moves a lot. So when the correlation is low between stocks, the index volatility tends to be low; when the correlation between stocks increases, the volatility of the index rises.
Based on the option prices of the underlying stocks as compared to the option price of the index, his model can measure the implied correlation between stocks.

He tells me statistically something is happening the degree of which is very rare. Even though the option prices and the implied volatility of the stocks has dropped a lot, the implied correlation has remained near all-time highs.

After saying “so what,” he finally got to the punch line. This means that — to a very great degree — the money coming into the market (as it rises) is almost all coming in through equity index futures.

Even I know what that means: The money coming into the market isn’t picking stocks on fundamentals, etc. It just wants to be in stocks.

You can make your own conclusions on that one.

 

The Bottom

Guess it’s official, we’ve hit the bottom in our ability to process reality, according to Jim Kunstler at Clusterfuck Nation. The emotional side of this rally in stocks is mere hope that’s yet to be crush, but more crushing is coming down the line. – Ilene  

The Bottom

Courtesy of Clusterfuck Nation by Jim Kunstler

      Euphoria managed to out-run swine flu last week as the epidemic-du-jour, with "consumer" confidence jumping and the big bank stocks nudging up. The H1N1 virus fizzled for now, at least in terms of kill ratio, though we’re warned it might boomerang in the fall with a vengeance. No one was surprised to see Chrysler roll over like a possum on a county highway, but the memory of their muscle cars will linger on like a California surfing song. Here in the northeast, where Sundays are not spent at the Nascar oval, the spring foliage reached the tenderly explosive stage and it was hard to feel bad about anything.

      For now, the "bottom" is in — that is, the bottom of this society’s ability to process reality. It may continue for a month of so, even after the "stress test" for banks is finally let out of the massage parlor with a "happy ending." But events are underway that are beyond the command of personalities. We’re done "doing business" in all the ways that we’ve been used to, but we just can’t get with the new program. Let’s count the ways:

      1. The revolving credit economy is over. It’s over because we can’t increase energy inputs to the system, which is one way of saying "peak oil." Of course hardly anybody believes this right now because the price of oil crashed nine months ago, along with global manufacturing and trade. But nothing has changed on the peak oil scene — except perhaps that ever more new oil projects have been cancelled for lack of financing, which will boomerang on us (even if swine flu doesn’t) in the form of much lower future oil production. In any case, the credit fiesta is over, and the "consumer" economy with it, because industrial growth as we have known it is over. It’s over globally, too, though all regions of the world will not experience its demise the same way at the same rate.

      The Asian nations may swap things around a while longer but China is basically screwed. They have less oil left than we have (which is saying, not much at all) and they won’t corner the rest of the global oil market without starting World War Three. Meanwhile, they’re running out of water and food. Good luck becoming the next global hegemon. Oh, and Japan imports 90 percent of its energy; India over 80 percent. Fuggeddabowdit. 

      Credit will not vanish everywhere overnight — even in the USA — because it is not distributed equally everywhere. But it will vanish in layers, and here in the USA a very broad layer of the lower and middle classes are now losing their access to it in one way or another — personally, in small business — and they will never get it back. Anyone who intends to thrive in the years just ahead had better plan on doing it on the basis of accounts receivable — and what they receive might not even necessarily come in the form of US dollars. It may come in the form of gold or silver or in the promise of reciprocal services rendered. 

       This has enormous implications for two of the items in which our credit-dispensing operations are most deeply vested: houses and cars. Unfortunately, these are exactly the things that economic life has been based on for decades in our nation, which leads to the next categories:

     2.) The suburban living arrangement is over, along with all its accessories and furnishings. Taken as "all of a piece," the suburban expansion was one sixty-year-long orgasm of hypertrophy. We did it because we could. We won a world war and threw a party. We had lots of cheap land and cheap oil. It made lots of people lots of money and all its usufructs have become embedded in our national identity to the dangerous degree that the loss of them will provoke a kind of national psychotic breakdown. In fact, it already has. The completely unrealistic expectation that we can resume this way of life is proof of it.

      The immediate problem is that we can’t build anymore of it. The next problem will be the failure of the stuff that already exists. The first stage of that is now palpable in the mortgage foreclosure fiasco and, just beginning now, the tanking of malls, strip centers, office parks and other commercial property investments. The latter will accelerate and become visible very quickly as retail tenants bug out and weeds start growing where the Chryslers and Pontiacs once parked. The next stage, which involves large demographic shifts in how we inhabit the landscape, has not quite gotten underway.

     3.) The Happy Motoring fiesta is over. You’d think that with Chrysler crawling into the bankruptcy court, and GM just weeks away from the same terminal ceremony, the news media would begin to suspect that the foundation of everyday life in this country was cracking. Instead, all we hear is blather about "market share" shifting to Toyota. News flash: not only will we make fewer automobiles in the USA, but Americans will buy far fewer cars made anywhere. We’ll keep the current fleet moving a while longer, but when it’s too beat to repair, we won’t be changing it out for a new fleet — despite all the fantasies about hybrids, plug-and-drive electrics, and so on. The masses will be too broke to buy these things. What’s more, they will be very resentful of the shrinking economic "elite" who can afford them. And, anyway, our roads and highways are destined to fall apart very quickly because there is no way we can sustain the necessary rate of normal maintenance. Meanwhile, we remain completely un-serious about public transit — even about fixing the vestiges that still exist. The airline industry, of course, will be toast inside of five years.

      4.) Our food production system is approaching crisis. There’s no way we can continue the petro-agriculture system of farming and the Cheez Doodle and Pepsi Cola diet that it services. The public is absolutely zombified in the face of this problem — perhaps a result of the diet itself. President Obama and Ag Secretary Vilsack have not given a hint that they understand the gravity of the situation. It is probably one of those unfortunate events of history that can only impress a society in the form of a crisis. It also happens to be one of the few problems we face that public policy could affect sharply and broadly — if we underwrote the reactivation of smaller, local farm operations instead of shoveling money to giant "agribusiness" (or Citibank, or Goldman Sachs, or AIG…). I maintain that this may be the year that the crisis gets our attention, because capital is suddenly harder to get than fossil-fuel-based fertilizer.

     All these epochal discontinuities present themselves, for the moment, as a season of muted "hope" and general apathy. The days are suddenly mild. We’ve resumed old and happy habits of grilling meat outdoors and motoring to those remaining places that were not blanketed with franchised food huts and discount malls. We have a new, charming president with an appealing family. Newly-minted dollars are flowing to the "shovel-ready." The new bad news is less bad than the old bad news (or seems to be). And the year just past has been such a bummer that our hard-wired human nature tells us that good things must be just around the corner.

       Personally, I think a lot of good things await us, but not the ones we’re expecting — not a return to buying slurpees on credit cards. It will be very salutary to leave behind the junk empire we’ve accumulated and move into an epoch of quality and purpose. For the moment, though, our hopes reside elsewhere.
____________________________________
My 2008 novel of the post-oil future, World Made By Hand, is available in paperback at all booksellers.

 

SEC Studies Restoring Uptick Rule That Could Have Mitigated Bear Market in U.S. Stocks

Courtesy of Martin Biancuzzo, Contributing Writer at Money Morning

SEC Studies Restoring Uptick Rule That Could Have Mitigated Bear Market in U.S. Stocks

At a roundtable discussion tomorrow (Tuesday), the U.S. Securities and Exchange Commission (SEC) will talk about restoring a rule that some believe could have mitigated the bear market in U.S stocks. Tomorrow’s meeting, which will focus largely on short-selling, follows recent internal discussions in which SEC officials have talked about restoring the so-called “uptick rule,” a fairly straightforward securities regulation that many experts say could have blunted the steep stock-market sell-off that U.S. stocks experienced in late 2008 and early 2009. The uptick rule was abolished in 2007. U.S. Federal Reserve Chairman Ben S. Bernanke is a proponent of the uptick rule’s restoration. “If the rule is to be restored, it should apply to all equally, including market makers as well as professional traders and individual investors,” Bernanke said during a question and answer session with the House Financial Services Committee. “If the rule had never gone away it may have been helpful during this current crisis that we face.”

Rule Replacement Proposals

The old form of the uptick rule that Bernanke referred to basically held that a short-sale transaction had to be entered at a price that is higher than the price of the previous trade. The rule, which was introduced in the Securities Exchange Act of 1934, was actually implemented four years later. It was designed to prevent short sellers from adding to the downward price momentum of an asset whose price was already under pressure and undergoing a sharp decline. The uptick rule was eliminated in June 2007. On April 8, the SEC voted unanimously to open a 60-day public comment period and is now seeking investor input “on whether short-sale price restrictions or circuit-breaker restrictions should be imposed and whether such measures would help promote market stability and restore investor confidence.” The agency developed five new proposals related to short selling and wants the public to file comments. The 60-day commenting period ends June 19, said Mary L. Schapiro, chairman of the SEC.

Two of the five proposals would involve a market-wide institution of the old uptick rule. The three others would create a “circuit breaker,” which is sometimes also referred to as a “collar.” These three would set restrictions on trading activity due to a freefalling stock price. As proposed, circuit breakers would be established for when the security has fallen 10%, 20% and 30%. The five proposals consist of: Proposal No. 1: Described as a “market-wide short-sale price test based on the last sale price or tick,” this proposal calls for a simple restoration of the uptick rule that had been in place for 70 years. This would help prevent short sellers from ganging up on a weak stock and pushing it down as far as they’re able. Proposal No. 2: Described as a “market-wide short-sale price test based on the national best bid,” this proposal represents a slight modification to the uptick rule by making it more stringent. Proposal No. 3: This proposal is similar to “limit days” in commodity markets. It prevents short selling on stocks that are enduring severe stress. If a stock drops significantly in a trading session, then it cannot be short sold for the remainder of the trading session. This rule would put a halt on short selling and prevent that stock from being pushed down even further – which could have the effect of crippling it, in a sense. Proposal No. 4: A short-sale price test based on the last sale price of a particular stock for the remainder of the trading session. This would be imposed for a stock that has fallen a certain percentage during the course of a day. Proposal No. 5: If a stock falls significantly in a trading session, this final option would call for the introduction of a “bid test.” This would mean that, for the remainder of the day, a short seller would have to place a transaction at the highest available bid.

The Fallout of the Rule’s Removal

The uptick rule (rule 10a-1) was established in 1938 – in the depths of the Great Depression that followed the 1929 stock market crash – during the administration of SEC Commissioner Joseph P. “Joe” Kennedy Sr. Kennedy, the first commissioner of the SEC, implemented the uptick rule after examining what role short-selling played in a 1937 stock-market break. Short-sellers are essentially betting that a company’s stock will fall in price. They “borrow” the shares from another investor and sell them, reaping the proceeds at what they believe is a “high” price. If the price falls, as they expect, they can buy the shares back at a lower price (which is known as “covering” their short sale) and replace the block of stock that they borrowed. Their profit is the difference between the proceeds from the initial short sale higher price and what they then had to spend to cover their short sale (as well as brokerage commissions). With the uptick rule, the objective was to prevent groups of short-sellers from, in effect, ganging up on a stock for the solitary intent of driving it down as far as possible. In such a gambit, the short-sellers hope to create a steep enough sell-off to cause panic selling by the other shareholders, which would lead to a total freefall in the stock price. Short-selling restrictions were removed from about one-third of the major listed stocks in a year-long study conducted in 2004. This test was conducted to see how much of an impact there would be from the uptick rule’s removal. After a roundtable discussion about the results in September 2006, the SEC decided to eliminate rule, which it did the following July. According to the SEC, the uptick rule wasn’t really needed to prevent manipulation and actually seemed to reduce a stock’s liquidity. “The general consensus from these analyses and [from] the roundtable was that the commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation,” the SEC reported. “In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test.”

However, when the uptick rule was eliminated, the U.S. stock market experienced a massive surge in volatility. Hedge funds took extreme advantage of the ability to not have to wait for an uptick in the price of a stock before they moved to sell it short. Almost immediately after the uptick rule was abolished, investors began to clamor for its reinstatement. Indeed, throughout much of last year, politicians, investors and other public figures began pushing for the rule to be put back on the books. In 2008, there was outcry from top public figures such as CNBC-TV’s “Mad Money” host Jim Cramer, as well as such elected officials as U.S. representatives Gary Ackerman, D-N.Y., Mike Capuano, D-Mass., and Carolyn B. Maloney, D-N.Y., as well as presidential candidate and U.S. Sen. John McCain, R-Ariz., who all pushed for reinstatement of the uptick rule. The heavyweight mergers-and-acquisitions law firm Wachtell, Lipton, Rosen, & Katz may have best-summarized proponents’ desire to see the rule reinstated. “Short-selling is at record levels,” the New York-based firm said in a statement. “We ask the SEC to take urgent action and reinstate the 70-year-old uptick rule. Decisive action cannot await a new SEC chairman – there is no tomorrow. The failure to reinstate the uptick rule is not acceptable.”

The groundswell of support for reinstatement of the uptick rule spilled over into the New Year, and even escalated as the markets whipsawed U.S. investors. On Feb. 25, for instance, Bernanke, the U.S. central bank chief, declared his support for the restoration of the uptick rule. On March 10, the SEC and U.S. Rep. Barney Frank, D-Mass., (and the chairman of the House Financial Services Committee) jointly announced plans to restore the uptick rule.

*****

[Note from Money Morning Editor:  Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses... Investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as The Golden Age of Wealth Creation. "The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out the latest report and find out how you can profit.]

 

Swine Flu Strategy Update

Here’s a balanced, well-informed analysis of the Swine Flu situation by David R. Kotok at Cumberland Advisors.  We’ll learn more in the future, but as it stands now, there’s reason to be prepared. – Ilene

Swine Flu Strategy Update

Courtesy of David R. Kotok, Chairman and Chief Investment Officer of Cumberland Advisors

Type A, H1N1 “swine flu” responses range from complete complacency to proactive prevention. We see both in the United States and elsewhere in the world. Some of the leading epidemiologists at the Milken Institute Global Conference give this version of flu a 50-50 chance to be a large-scale killer, according to Barron’s journalist, and my good friend, Jim McTague (see Barron’s, page 34, May 4, 2009).

Cumberland is in the “take this seriously and hope we’re wrong” camp. In our market actions we raised a cash reserve last week. This was easier to do after an eight-week, 30% stock market rally. So I guess it’s fair to say that the swine flu timing was opportunistic. Selling and raising cash at 850 on the S&P 500 index at the end of April is a lot easier than selling and raising cash when the S&P 500 is 666 and the date is March 9.

So far, AH1N1 “swine flu” is looking like the SARS outbreak when it comes to economics and market impact. Swine flu (so far), SARS, and avian flu (H5N1) were and are limited to a few thousand worldwide cases that have been documented and confirmed by lab tests. So far, they have triggered deaths counted in the hundreds.

SARS in 2002-3 had a death rate of about 9.5%. Swine flu (so far) has a death rate of about 6.5%. Avian flu has not jumped to an easily transmissible form. It is still a bird disease. It is also a killer. The cumulative 421 cases in the 2003-9 period have a death rate of 61%, according to the confirmed lab tests. Remember, when it comes to flu, the statistics only count those cases in which a certified lab was able to confirm the virus as the cause of death. Epidemiologists believe that there are many unreported cases in third-world countries and emerging economies.

There are three references for big flu shocks.

The first and the most infamous is the 1918-20 period involving the “Spanish flu.” That was also a variety of the H1N1 strain. Global deaths in 1918-20 attributable to that flu are estimated at between 40 and 100 million, or somewhere between 2% and 5% of the total world population. In the US about 25% of the population was infected with “Spanish flu” and about 500-700 thousand died. In 1918 the first outbreak came in the spring and was as small as the current flare-up of H1N1. The real killer phase occurred in the subsequent flu seasons of late 1918-1920.

In the Asian flu episode of 1957-58, the virus form was H2N2. Estimated global deaths were 1 to 1.5 million.

The third reference is the Hong Kong flu of 1968-9. It was the H3N2 strain and had a low death rate but a high infection rate. Globally it killed about 1 million people.

We have no idea how the current H1N1 “swine flu” risk will play out. We do know that media coverage and information flow is heightened, and that is good thing. Sensitizing large segments of the global population induces many to act preventively rather than remain complacent. We hope that it only takes a few deaths for folks to take this seriously. Preventive actions like closing schools, frequent hand washing, and wearing masks all combine to reduce spread of the virus. A race for a “swine flu” vaccine is underway; scientists now compete with the clock which ticks toward autumn flu season.

At Cumberland, we have distributed masks and hand sanitizers to all our staff; we have a flu pandemic contingency plan and have activated it. I wear an N-95 mask in public places like airports and on flights. We practice risk management in the portfolios we manage and in the business life we conduct. And we hope that the outcome will be inconvenience and not something more severe. It will be another year or two before we know the full outcome of this “swine flu.”

Many thanks to our medical friends who must remain anonymous but who confirm the seriousness of the risk. And also thanks to Barclays Capital, Credit Suisse, Wachovia, and Barron’s for data and concept assistance.

*****

About David R. Kotok:  David is the Chairman and Chief Investment Officer of Cumberland Advisors. To sign up for free market commentary by Cumberland Advisors, click here.

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception… Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs, including Morning Call, Power Lunch, Kudlow & Company, Squawk on the Street, Squawk Box Asia, and Worldwide Exchange.

Mr. Kotok currently serves as a Director and Program Chairman of the Global Interdependence Center (GIC), whose mission is to encourage the expansion of global dialogue and free trade in order to improve cooperation and understanding among nation states, with the goal of reducing international conflicts and improving worldwide living standards. Mr. Kotok chairs its Central Banking Series and GIC’s Food and Water global stability project, a five continent dialogue held in Philadelphia, Paris, Zambia (Livingstone), Hanoi, Singapore, and Santiago, Chile.  Read more here.
 

 

An ‘Inconceivable’ Rally…..

Especially if you haven’t seen the Princess Bride, that was a great clip, watch it. – Ilene

An ‘Inconceivable’ Rally…..

Courtesy of Howard Lindzon

In March, the world was ending. I am proud of my ‘Beach Call ‘ the morning of March 9th.

Today, the stock market will not go down . I am disgusted with my last three weeks of selling and fighting the tape with short sales in the S&P and Retail and my complete miss of the small cap rally.

To most, the decline and the rally have been ‘inconceivable’:

When I get negative as I have the last three weeks, I miss all kinds of opportunity. I know this, I preach this, yet I fell into the trap. Giving back hard earned gains just pisses me off more. The short sellers have been overconfident…’Ghetto Fabulous ‘ as The Fly hilariously recaps.

I am too close to it and although I am paid to make money for my partners, getting too close to the market has always been bad for me. I have pointed out the all-time highs and owned them as I see them, but doing more has just cost me money.

The best poker players WAIT. The best traders WAIT. The best investors pick their battles. April was a clusterfuck for me. Amateur hour. That ends in May.

I have spent the weekend rethinking all what I actually know about the economic landscape as I see it and as usual, I, like everyone else, know little .

There are only Seven themes I feel confident about:

1. The consumer is broke.

2. We are going to be MASSIVELY over-governed for a long-time to come.

3. The US reign as ‘THE’ financial superpower is over .

4. Apple and Amazon will continue to rule consumer electronics and retail for many years.

5. Oil is not going to be replaced in my lifetime or my kids.

6. Inflation in many IMPORTANT areas of the economy – Food, Shelter, Energy and Currency – should continue to be volatile with upward slope.

7. The Commercial Real estate Markets are due for a huge interest rate reset .

What sucks about all three of these themes combined is the shitty mood this country will remain in as we adjust to these realities. Moods move markets. It’s not just supply and demand. No matter how great Apple and Amazon products continue to be, the other themes suck major balls and will DOMINATE.

Here is the good news…if you read this blog you are not the government or supremely wealthy and can focus on being ‘Too Small to Fail’. The global themes, as shitty as they are, are OPPORTUNITIES for us. Price action is all that matters if you want to make money in the markets.

Narrowing down the list of themes to the ONE I feel most confident about is the Consumer is tapped. This scares me. I have spent the last 20 plus years in consumer glee. Now, if I am late with AMEX for a week, they FIND me. Actually, to steal a Twitter term, they ‘BLOCK’ me. This despite the fact I have never spent more, earned more or had a better balance sheet. Despite all the money being pumped into the economy, nobody has cash. I don’t have any REAL data because I am a tad lazy to search and would not believe the numbers anyway, but I trust my instincts. I raise money and I just know these things. I also ‘feel’ broke because those around me that are broke are seeping into my business. Phoenix is nothing but an ‘Open House’. The problem with the ‘Open Houses’ I am seeing is they are a waste of time as prices are out of whack. There remains a gigantic disconnect as sellers hang on. I can’t afford the houses I look at. In 1998, I had nothing but no house was too expensive. That’s a disconnect.

The consumer is not just tapped, but wages are going down according to Krugman at the New York Times. That could mean a tapped consumer that is not able to fill the tank anytime soon.

The government can move stocks, even markets, but the true consumer stocks don’t lie. The Federal Express chart is a mess. Mastercard is warning. American Express is in shambles. Visa is catching a small bid, but I don’t trust it in light of the other heavyweights. I am talking my book, but retail looks like the greatest sucker rally of all time. Tonight I had Chipotle’s and a bill for the three of us was $30. That can’t last.

Despite the fact that we are broke and spending is way down, there are ALWAYS pockets of growth. Not all businesses suck together, even in a shitty bear market. Right now, the truly great growth businesses are showing themselves. Amazon, Apple, Research in Motion, Google, Netflix, but not enough to fill my portfolio or make me up my stock allocations.

As bad as things seem, stocks look poised for more gains as setups and breakouts (not all-time highs) abound. I don’t have the time or skill to trade all the styles and great setups being discussed on Stocktwits, but I am glad that many of you can and are. It is truly a mind blowing opportunity platform.

I am a BULL dressed in bear’s clothing the last 15 months. That was not the case on this blog from 2005-2008 on this blog when I was pretty much a drunk bull living off simple upward sloping price trends. The long bear market has definitely messed with my brain and portfolio, but my themes and money management will get me back on track.

Disclosure – I am long Canadian Dollars, Oil, Gold, Silver, Amazon, Netflix, Nintendo, Shanda, S&P puts and short Retail a little Google ($410 is my uncle point).

 

How Banks Become Condo Rental Agents

Courtesy of Mish

How Banks Become Condo Rental Agents

Last month in a Boston foreclosure sale, John Hancock Tower Lenders Took, a 65% Haircut In 3 Years . Boston is back in the news today with another foreclosure auction. This time it’s condo related, with Chorus Bank in the thick of things.

Please consider 441 Stuart Street: What Happened?

This week, the building at 441 Stuart Street was offered to the public through a foreclosure auction. The property was most recently purchased in 2004 for $37.5MM with the intent of converting the building to condominiums.

Recorded documents show that Corus Bank, a well-known condo conversion lender out of Chicago, placed $42MM in debt on the property in 2004.

The auctioner opened at $30MM and asked if there were any bids. There were not. Next he cut the bid in half and asked for $15MM, and the bids that followed were $15.1MM, $16MM, $16.1MM, and finally $17MM. There was only one 3rd party who bid the $15.1 and $16.1 against the bank. The lender bought the property back at $17MM.

Nevermind the fact that the highest 3rd party bid for the property was less than 40% of the known debt, consider the fact that the number represents only about $100/foot. Remember that this property is in Copley Square. If retail prices for completed condos are $600-900/SF and construction costs run $150-250 per foot then that’s a margin of 40% or better – isn’t it?

It’s interesting that no one wants this building at $100 a square foot with completed condos going for $600 to $900 a square foot.

Corus Bankshares Receives ‘Going Concern’ Qualification

In Bank Watch (Apr. 12-18): CoStar is reporting Corus Bankshares Receives ‘Going Concern’ Qualification.

Corus Bankshares Inc. in Chicago announced that its audited financial statements for the year ended 2008 contained a ‘going concern’ qualification from its independent registered accounting firm Ernst & Young LLP.

Corus, with a portfolio consisting primarily of condominium construction loans, many in the hard hit areas of Arizona, Nevada, south Florida and Southern California, has seen a rapid and precipitous decline in the value of the collateral securing its loan portfolio. Thus, it is experiencing significant loan quality issues.

The net loss of $456.5 million it recorded in 2008 was primarily the result of significant increases in the provision for credit losses.

The company said its board of directors has formed a strategic planning committee to seek all strategic alternatives, including a capital investment, a sale, a strategic merger or some form of restructuring.

The company also reported that there are additional concerns that regulators may take other actions, including placing the bank into conservatorship or receivership.

Here are a few snips of other Banks in the CoStar Article.

Community Bancorp Feeling Heat of Declining Desert Area Real Estate

Community Bancorp, the Las Vegas-based holding company for Community Bank of Nevada and Community Bank of Arizona, is late filing its annual report for 2008 with the U.S. Securities & Exchange Commission.

Community Bancorp said it expects that it will report a loss for the year compared to net income of $20.4 million for a year earlier.

As a result of these losses, the company expects that federal and state regulators will require a formal agreement with respect to, among other things, asset quality, capital and earnings.

Preferred Bank Hit By Declining San Diego Property Values

Preferred Bank, an independent Los Angeles-based commercial bank focusing on the Chinese-American and diversified Southern California market, reported an additional revision to results for the quarter and year ended Dec. 31, 2008, due to the receipt of an appraisal on an impaired construction loan.

The March "appraisal indicates a value deterioration far beyond our estimation for that area and far in excess of published market statistics for that market area," said Li Yu, chairman and president of Preferred Bank.

Union Center National Bank Takes Back Warehouse Project

Union Center National Bank in Union, NJ, announced that for the first quarter of 2009, it intends to establish a loan loss provision of $1.4 million, which covers a charge-off of approximately $900,000 in connection with a $4.9 million commercial real estate construction project of industrial warehouses. It had recently downgraded the loan to non-accrual status and increased its level for loan loss allowance by $521,000.

"At March 31, 2009, the corporation expects non-performing assets to amount to $9.1 million — up from $4.7 million at Dec. 31, 2008," said Anthony Weagley, president and CEO of the bank’s holding company, Center Bancorp Inc.

The bank’s other real estate owned will increase to $4.4 million, with the other asset being a residential condominium project that was taken back in the fourth quarter of 2008. The bank holding company is near completion of that project and has elected to begin to rent the units.

Expect to see more banks completing projects and electing to rent units as the recession wears on. Ironically, you can also expect to see the opposite extreme whereby banks acquiring real estate in foreclosure processes and tear it down because they do not want to become rental agents. For an interesting video of teardowns of brand new homes please see Extreme Home Makeover Depression Edition II.

Meanwhile, it’s just a matter of time for Chorus Bank (CORS) heads into receivership. It was trading at $28 in April of 2006 and you can be a proud owner today at 31 cents.

Mike "Mish" Shedlock
 

Weekend Reading

Tyler Durden’s Weekend Reading

• The DTCC’s CNS naked short selling residue (Deep Capture) – must read for everyone curious about regulation SHO and the gimmickry going on in the equity shorting market.
• How Lehman got its real estate fix (New York Times)
• More glowering optimism from Templeton’s Mark Mobius, who sees an EM bull market, and a boost to Mexican EPS despite H1B1 (here and here)
• "I can only hope this proves to be inflammatory nonsense" (Finem Respice)
• Gold may be off to the races above $950 (Bloomberg)
• Berkshire calls investment 4 replacement candidates’ 2008 performance subpar, to succeed internally (Bloomberg)
• WHO prepares for a pandemic (WSJ)

And a personal note of gratitude for the amazing outpouring of support over the last two days – it has been unexpected, unprecedented and we are very thankful to have such generous readers. A personal thanks for donations by Andre, Barbara, Doss, Elaine, Hassan, John, Kevin, Kiran, Lexy, Mary, Matthew, Mugglenet.com, Scott, Sean and Sebastian.

Chartology:

The upcoming depletion of resources (New Scientist)

 

White House “Directly Threatened” Perella Weinberg Over Chrysler

John Carney follows up on yesterday’s article by Tyler Durden at Zero Hedge discussing the Administration’s tactics in forcing senior creditors holding Chrysler’s debt to agree to terms in the bankruptcy plan. -Ilene

White House "Directly Threatened" Perella Weinberg Over Chrysler

Courtesy of John Carney at ClusterStock

The White House threatened to use the White House press corps to besmirch the reputation of one of the financial firms that holds Chrysler debt, according to a prominent New York bankruptcy lawyer. If true, the explosive charge shows that the White House was willing to go much further than is widely known to have its way in the attempt to restructure the Detriot automaker.

"One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight…That was Perella Weinberg," Tom Lauria, the head of the bankrutpcy department for top New York City lawfirm White & Case, told a WJR 760 radio host.

Perella Weinberg had been one of the firms that was resisting the Obama administration’s plans for restructuring, alongside Stairway Capital and Oppenheimer Funds. The group had argued that their position as senior creditors gave them legal rights to be paid in full before junior creditors were paid. They had put forth a counter-offer under which they would have received far less than the face-value of the debt they held, but more than the Obama adminstration had proposed. This compromise deal was rejected by the administration, and the holdouts were characterized by the president himself as unwilling to make sacrifices for the common good.

After intense political pressure, Perella Weinberg defected from the dissenters and agreed to the administrations plans. The majority of senior creditors, including several large banks such as JP Morgan Chase, had already agreed to the plan. Some critics charge that the administration used its leverage as the provider of TARP funds to force banks to comply. Lauria’s charges suggest that the administration had to get even rougher with financial firms that haven’t taken bailout money.

The suggestion that the adminsitration would direct the White House press corps, composed of newspaper reports and other journalists who cover the Whtie House, to ruin the reputation of holdouts is sure to raise the ire of people who prize media independence. It’s not clear whether this was an idle threat or whether the White House believes it exercises this level of control over the journalists asigned to cover it.  It harkens back to the dirty tricks tactics of past administrations, and suggest a cavalier attitude toward the exercise of political power to control the actions of private citizens.

One test of whether the White House press corps is as compliant as the White House seems to believe will be how they handle Lauria’s charge. The story has not yet been picked up by the traditional media. The blog Zero Hedge, a new but well-read financial blog, picked up the story and posted a downloadable excerpt from the radio interview. (You can download the clip below.)

The charge also undermines a key administration claim about the Chrysler restructing plan. It has insisted that the plan was reasonable, and held up the fact that the majority of senior creditors approved it as evidence of this reasonableness. If the approvals were obtained through threats, however, that would indicate nothing more than a fear of crossing the administration.

Click the button below to listten to the radio clip.

FileDropper Free File Hosting

 

 

Its source of funds comes from issuing cash

Courtesy of Tim Iacono at The Mess That Greenspan Made

Its source of funds comes from issuing cash

Sometimes it’s funny to read how economists describe what the Federal Reserve is doing in their ongoing quest to save the world from the effects of global deleveraging which they both enabled and condoned. This story by an anonymous economist at The Economist blazes a new trail in describing the massive increase in the Fed’s balance sheet – how it’s a good thing.

THE Federal Reserve does not set out to make bumper profits. But its 2008 annual accounts, released on April 23rd, would turn many a hedge-fund manager green with envy.

Like Wall Street’s finest, the Fed makes money on a spread. Its main source of funds comes from issuing cash, since currency in circulation is, in effect, an interest-free loan by the public to the central bank. The interest it earns on its loans and securities is almost pure profit, or “seigniorage,” most of which it remits to the Treasury. Last year the central bank reported a whopping $43 billion in operating income.

That should make you all feel better – the Fed’s turning a profit.

The fact that it buys Treasuries with money it borrows from the Treasury Department shouldn’t minimize the importance of the central bank’s bottom line, nor should the idea that a good portion of the central bank’s $1.4 trillion increase in assets has been purchased with money created "out of thin air".

*****

Here’s the story in the Economist, and here’s the press release from the Federal Reserve discussing their finances.  Do we have any economists/accounts that can resolve or explain the two views? – Ilene

 

Geithner’s New Bank Fix Is Bogus, Too

Courtesy of Henry Blodget at ClusterStock

Geithner’s New Bank Fix Is Bogus, Too

Tim Geithner has a clever new way to recapitalize the banks that failed the stress test: Convert the taxpayer’s preferred stock to common stock. 

From Geithner’s perspective, this technique has several advantages:

• The banks will suddenly seem healthy, because their assets-to-common equity ratios will rise.
   
• Geithner doesn’t have to ask Congress for more baillout money yet.
• Taxpayers won’t understand that they’re giving up a nice dividend and a safer security just to make the banks look better.
• If Geithner is right that what’s wrong with the banks is just a temporary liquidity problem, the taxpayer should do well when the stocks rise. (We don’t think he’s right.)

Unfortunately, the plan also has two major flaws:  First, it’s smoke and mirrors. Second, the taxpayers are even more exposed than they are now.

Why?

Because the banks will still have the same amount of crap assets on their balance sheets, and they’ll have no more capital available to absorb these losses.  The only thing that will change is that the taxpayer will now get hit first as these losses flow through the balance sheet, instead of getting hit second, as is the case now.  The banks’ bondholders, meanwhile, will still be protected to the tune of 100 cents on the dollar (by administration policy).  Which means that if the common equity is wiped out by the losses, the government will have to dig into the taxpayer’s pockets to cover any shortfall.  (See Paul Kasriel’s detailed explanation below).

In other words, Geithner has hatched yet another plan to avoid dealing with the bank problem once and for all. 

How would he do that?

As we’ve argued, we think the best way would have been to seize the banks and restructure them.  Since Geithner has opted against the route, however, the next best way would be to convert unsecured bank debt to equity, not just the taxpayers’ preferred stock (the taxpayers’ preferred stock should have been senior to all the bondholders, but that’s spilt milk at this point).

Doing that would give the banks a much bigger equity cushion with which to absorb losses.  It would split the bank ownership up among current common shareholders, taxpayers, and current debtholders, which would help Geithner avoid having to take full control.  It would also, finally, stop exposing the taxpayer to further losses.

The idea that bondholders should share the bank pain is finally gaining some momentum.  Let’s hope that continues in the coming weeks.

---

Why is Geithner’s new plan just "accounting alchemy?"  Paul Kasriel of Northern Trust explains:

Consider Balance Sheet One of hypothetical Gotham City Bank. Assets equal liabilities plus
common equity.

 
But suppose the Treasury believes that Gotham should have a ratio of common equity to total
assets of 10% rather than the 5% it currently has. No problem. Treasury will just convert $5 of
the preferred shares it owns in Gotham to $5 of common equity. This is shown in Balance
Sheet Two. Now Gotham is well capitalized, right? Wrong.

The depositors and the bond holders always were in line in front of the preferred shareholders in case Gotham had to be liquidated. So, moving $5 from the preferred equity category to the common equity category does not make the depositors and bond holders any better off. Are taxpayers any worse off? Not really. If Gotham’s original $5 of common equity was not going to be enough of a cushion to protect depositors and bondholders, then taxpayers were not going to get all of their preferred-share holdings back anyway.

Now suppose that $30 of Gotham’s loans and investments become uncollectible, as shown in Balance Sheet Three. This means that all of Gotham’s common equity has been wiped out. Infact, Gotham now has an equity “deficiency” of $20. No problem, according to Treasury. It will simply convert its remaining $10 of preferred equity to common equity. That won’t cut it in this case.

As shown in Balance Sheet Four, Gotham still has a common equity deficiency of $10. In other words, if Gotham were to be liquidated, there are only $70 of assets to pay off $60 of deposits and $20 of bonds. Either the Treasury would have to come up with $10 of new funds or bondholders would have to take a 50% haircut. If the Treasury wanted to keep Gotham open and with a ratio of common equity to total assets of 10%, Treasury would have to inject $17 of new funds, all of which would be common equity. In other words, Treasury, meaning us taxpayers, would own 100% of Gotham.

In sum, Treasury’s plan to enhance the capitalization of some financial institutions by beating
preferred equity shares into common equity shares is accounting alchemy.

See Also:

Bailouts Of Bondholders Will Sock Taxpayers With $10-$14 Trillion Loss

Hooray! Obama Finally Considering Swapping Bank Debt For Equity*

 

Sell in May and go away: fact or fallacy?

Courtesy of Prieur du Plessis at Investment Postcards from Cape Town - Ilene

Sell in May and go away: fact or fallacy?

Where is the stock market heading? Has the rally that started in early March been exhausted? These are the key questions on all investors’ minds as financial markets remain caught between the frantic actions of central banks to get the cogs of the credit system and economy turning again on the one hand, and a still shaky economic and corporate outlook on the other.

It is therefore no wonder that even so-called “pop analysis”, including some legendary axioms, is resorted to in a quest for direction. And besides “buy low and sell high” few other axioms are more widely propagated than “sell in May and go away”. A Google search revealed an astounding 127,000 items featuring this phrase.

As equities have seen a particularly strong six-week rally, followed by what looks like the start of a consolidation/retracement of some of the recent gains, investors are justifiably questioning the market’s next move. And they nervously wonder whether this May will not only herald longer days in the Northern Hemisphere, but also live up to its reputation as the advent of a corrective phase in the markets.

The important issue, however, is whether this axiom actually has any scientific basis at all. Analyzing historical returns, the figures vary from market to market, but long-term statistics seem to show that the best time to be invested in equities is the six months from early November through to the end of April of the next year (”good” periods), while the “bad” periods normally occur over the six months from May to October.

A study of the MSCI World Index, a commonly used benchmark for global equity markets, reveals that since 1969 “good” periods returned +6.5% per annum while investors were actually in the red by -1.0% per annum during the “bad” periods.

“Sell in May and go away” also holds true for the US stock markets. An updated study by Plexus Asset Management of the S&P 500 Index shows that the returns of the “good” six-month periods from January 1950 to March 2009 were 7.9% per annum whereas those of the “bad” periods were 2.5% per annum.

A study of the pattern in monthly returns reveals that the “bad” periods of the S&P 500 Index are quite distinct, with five of the six months from May to October having lower average monthly returns than the six months of the good periods. Interestingly, May – the first month of the bad patch – is the only exception.

Historical average returns from May to October in emerging markets also tended to be weaker than those from November to April, as shown in the graph below (hat tip: US Global Funds).

But what exactly does this mean for the investor who contemplates timing the market by selling in May and reinvesting in November? Further analysis shows that had one kept the investment in the S&P 500 Index only during the “good” six-month periods, and reinvested the proceeds in the money market during the “bad” six-month periods, the total return would have been 10.5% per annum.

These calculations do not take tax into account. And, of course, every time one switches out of and back into the stock market there are costs involved, which would also reduce the returns for the market timer.

How did the good and bad periods stack up during the past two years? The results are as follows.

• May 2007 – October 2007: +4.52%
• November 2007 – April 2008: -9.62%
• May 2008 – October 2008: -30.1%
• November 2008 – April 2009: -5.1%

Some you win, some you don’t! It seems that the axiom “sell in May and go away” in itself is a rather doubtful basis for timing equity investments. However, it may serve a useful purpose as input, together with other factors, to otherwise rational decision making.

 

The Cause of the Financial Crisis

Jesse’s Café Américain cites Jamie Galbraith’s article The Causes of the Crisis, adding some of their own comments.  - Ilene  

The Cause of the Financial Crisis

Jamie Galbraith leaves out a couple of key component of the ramp up to this crisis.

The corruption of the political process, increasingly dependent on large campaign contributions, by the large corporate interests set the stage for the erosion of public regulation of markets and the rule of the law.

And of course, Alan Greenspan, without whom this disaster would almost certainly have not been possible.

Dr. Greenspan, at the Federal Reserve, with a bully pulpit and a printing press.

Texas Observer
Causes of the Crisis
James K. Galbraith
May 01, 2009

…This is a panel on the crisis. Mr. Moderator, you ask what is the root cause? My reply is in three parts.

First, an idea.

The idea that capitalism, for all its considerable virtues, is inherently self-stabilizing, that government and private business are adversaries rather than partners…; the idea that regulation, in financial matters especially, can be dispensed with. We tried it, and we see the result.

Second, a person.

It would not be right to blame any single person for these events, but if I had to choose one to name it would be… former Senator Phil Gramm. I’d cite specifically the repeal of the Glass-Steagall Act—the Gramm-Leach-Bliley Act—in 1999, after which it took less than a decade to reproduce all the pathologies that Glass-Steagall had been enacted to deal with in 1933.

I’d also cite the Commodity Futures Modernization Act, slipped into an 11,000-page appropriations bill in December 2000 as Congress was adjourning following Bush v. Gore. This measure deregulated energy futures trading, enabling Enron and legitimating credit-default swaps, and creating a massive vector for the transmission of financial risk throughout the global system. …

Third, a policy.

This was the abandonment of state responsibility for financial regulation… This abandonment was not subtle: The first head of the Office of Thrift Supervision in the George W. Bush administration came to a press conference on one occasion with a stack of copies of the Federal Register and a chainsaw. A chainsaw. The message was clear. And it led to the explosion of liars’ loans, neutron loans (which destroy people but leave buildings intact), and toxic waste. That these were terms of art in finance tells you what you need to know. …

The consequence … is a collapse of trust, a collapse of asset values, and a collapse of the financial system. That is what has happened, and what we have to deal with now.

Can “stimulus” get us out?

As a matter of economics, public spending substitutes for private spending. … But it is not self-sustaining in the absence of a viable private credit system. The idea that we will be on the road to full recovery and returning to high employment in a year or so therefore seems to me to be an illusion.

And for this reason, the emphasis on short-term, “shovel-ready” projects in the expansion package, while understandable, was a mistake. As in the New Deal, we need both the Works Progress Administration … to provide employment, and the Public Works Administration … to rebuild the country. …

The risk we run, in public policy, is not inflation. It is lack of persistence, a premature reversal of direction, and of course the fear of large numbers. If deficits in the trillions and public debt in the tens of trillions scare you, this is not a line of work you should be in.

The ultimate goals of policy are not measured by deficits or debt. They are measured by the performance of the economy itself. Here Leader Armey and I agree. He spoke with approval, in his remarks, of the goals of 3 percent unemployment and 4 percent inflation embodied in the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978. Which, as a 24-year-old member of the staff of the House Banking Committee in 1976, I drafted.

US Equity Rally in Context From the Start of the Bear Market

Thoughts circulating at Jesse’s Café Américain on the current rally – bear market rally or something more promising? – Ilene

US Equity Rally in Context From the Start of the Bear Market

Courtesy of Jesse’s Café Américain

So far the rally appears to be 9/10ths short covering and momentum speculation.

In order to proceed further and break through some formidable overhead resistance real buying by insitutions and individuals must appear and the volume adjusted cash flows must turn more positive.

In other words, so far a typically impressive bear market rally that may be getting overextended without a serious revaluation of the ecoomic outlook. Next week’s Jobs Report may help in that assessment.

The insiders and hedge funds still holding equities would greatly enjoy the stock piggies (institutions, 401k’s and private investors) coming back into the markets so they can continue to unload their increasingly worthless assets.

Here is the big picture. It is ‘possible’ that this is not a bear market which we are experiencing.

However, there is a dramatic spread between ‘possible’ and ‘probable’ that even our mighty Fed and Treasury cannot easily diminish with their printing presses.

Sell in May and Go Away

Courtesy of John Mauldin at Thoughts From The Frontline - Ilene

Sell in May and Go Away?
The End of the Recession?
Is the US Consumer Back?
A Dangerous End Game
A Few Thoughts on Swine Flu

The old adage that one should "sell in May and walk away" has been around for years. I mentioned that bromide about this time last year, urging readers to head for the sidelines if they had not already done so. I was also suggesting a strategic retreat in August of 2006 (after which the markets went up 20% before plummeting). In this week’s letter we look at the actual data and offer up a fresh viewpoint. Then we turn our eyes to the recent GDP numbers, which were awful, though many took comfort in the apparent rise in consumer spending. Are Americans back to their old ways? It will make for an interesting letter.

Sell in May and Go Away?

My friend and South African business partner Prieur du Plessis recently updated a chart on monthly stock market returns since 1950. It clearly shows that the November through April periods have on average been superior to the May through October half of the year. (To read his very interesting blog you can go to http://www.investmentpostcards.com/)

And the difference is quite significant. As Prieur notes, the "good" six-month period shows an average return of 7.9%, while the "bad" six-month period only shows a return of 2.5%. Of course, selling creates taxable events, which can hurt your returns.

Plus, you never know when the markets are going to go down and when they will be up. There can be a lot of variance from year to year. For instance, in 2007 the markets were up during the summer by 4.52% and down during the "good" period by -9.62%, which is opposite the average pattern. Of course, the markets did go down by 30% after May 1 last year and down another 5% since then. That is what bears markets can do.

Which caused me to wonder. The last 59 years have seen two significant secular bull markets (roughly 1950-1966 and 1982-1999) and two secular bear markets (1966-1982 and 2000-??? — the one we are in now). I wondered if the pattern changed during the bear cycles, so I shot a late-night note off to Prieur and came in the next morning and had my answer.

It made a significant difference. May through October in secular bear cycles has been ugly. Look at this graph:

And just for fun, let’s look at the monthly numbers since the present secular bear market began in 2000. So far, this has been a lot worse than the 1966-82 cycle, although we have not yet had the recovery phase from the current doldrums, which will likely make the overall numbers look better in 4-5 years.

As noted above, these graphs simply give us past trends and not an absolute forecast. But they do provide food for thought. There are times when you should be cautious and times when you should throw caution to the wind. I think this is the former. While some pundits are talking about green shoots and the second derivative of growth, this economy may be worse than their rosy forecasts of the end of the recession, as we will see in a few paragraphs.

The End of the Recession?

Let’s revisit 2000 and 2006. The yield curve was inverted in the late summer and early fall of both years. By that I mean that short-term yields were higher than long-term yields. When that happens for longer than 90 days, a recession has always followed within 12 months. (I wrote numerous e-letters on the topic. You can go to the website and search for "Mishkin," one of the authors of a Fed paper on the yield curve.) I wrote in this letter on both occasions that it was time to get out of the market, as the stock market drops an average of 43% during a recession.

There is a YouTube of me on CNBC in August of 2006 on Larry Kudlow’s show. I was forecasting a recession in 2007 based on the inverted yield curve. And if there was going to be a recession, I reasoned, then a bear market would follow. Larry and John Rutledge basically noted that "this time it’s different," because the reasons for the inverted yield curve were different. And the market did rise another 20%+ for over 12 months.

There was a recession, but it did not come until 15 months later, in late 2007. The yield curve was right in forecasting a recession, but the timing was different this cycle. If you had gotten out in August of 2006, you were not terribly happy 12 months later; but today you are still way ahead, plus the gains on your bonds and alternatives.

On October 5 of 2007 I wrote about what I saw coming as a "Slow Motion Recession." I was more convinced than ever we were either in a recession or soon would be. As it turned out, we were. But at the time there was a lot of criticism from a lot of analysts. Christopher Amberger did a particularly scathing piece (which was at least witty) on YouTube on October 10, suggesting that the concept of a recession was nonsensical and there were still plenty of opportunities in the market. (Oh, and buy his newsletter to find out what they are). http://www.youtube.com/watch?v=UjAK0s9I8vA The market topped two days later.

The point is that it is more important to get the general direction right than to be right on the specifics. In August of 2006 I was seeing a modest recession in the future. As time went on, I became increasingly bearish. But whether it was to be a mild recession or a major one, the advice would have been the same. You do not want to get caught long the market before a recession.

Today, there are those who say the stock market will start rising six months before the economy does. And maybe it will. I don’t know. The predisposition of this market is down. Valuations are not at a level that has spawned major bull markets in the past. At the beginning of real bull markets, volume is strong and rising. Now it is weak (modest at best) and shows no real sign of becoming strong, especially going into summer.

Further, this rally has all the earmarks of a major short squeeze. Regulators have recently (and correctly) been enforcing short selling rules that require stock to be delivered and settled on short trades. This may be a one-time event. When the short squeeze is over, the buying will stop and the market will drop. Remember, it takes buying and lot of it to move a market up but only a lack of buying to create a bear market.

Corporate earnings are likely to go even lower, as consumer spending is likely to get weaker in the coming months. Capacity utilization is at its lowest point since they began tracking it. The National Federation of Business says a recent survey shows none of the responders plans to raise prices, which is not a sign of business strength.

Banks are not yet lending, and the past quarter’s positive performance was mostly accounting gimmicks. Citigroup, for instance, said they made $1.6 billion. They did this by booking a one-time gain of $2.7 billion, because the value of Citigroup bonds have fallen (!), giving them the theoretical possibility of buying back their debt at a discount. And with consumer and credit card loans showing more weakness, Citi decided to REDUCE its loan loss reserves, allowing it to show another $1.3 billion in profit. And then there was the profit of $400 million from the new mark-to-market rules, which allowed them to produce a profit on "impaired assets." Without all these games, there would have been a loss of $2.8 billion.

Maybe this time it’s different. But when I survey the economic landscape, I see lots of opportunity for disappointments and missed targets. And bear market rallies are killed by disappointments and missed expectations.

To be long this market going into summer you need to be brave or have very serious stops on your portfolio. I think the possibility of missed expectations at the end of the second quarter is high. It could be ugly.

Is the US Consumer Back?

The headlines told us that even as the economy fell an annualized 6% in the first quarter, consumer spending rose by 2%. Given that consumer savings climbed to 4.2%, unemployment rose, and income was down, how did consumer spending rise? To get the real picture, you have to dig into the numbers. (Thanks to 82-year-old, long-time reader Paul Miller for doing the slicing and dicing of the data at his excellent blog http://musingsbymiller.wordpress.com/.)

First, the headline numbers are inflation-adjusted. Consumer spending in actual dollars rose $28 billion. But since prices went down (deflation), the "real" or after-inflation/deflation number shows up in the headlines as $44 billion.

But where prices went down makes the real difference. Gasoline and other energy costs were down $50 billion, allowing consumers to spend on other items. Over the last two quarters energy costs are down almost $200 billion from the second and third quarters, making a huge difference. But now the "tax cut" from energy is largely gone, as prices have stabilized.

Paul notes, "But … now … the gasoline tax cut has dissipated, and coming to the rescue are the Obama administration’s tax cuts. In fact, the cuts began to be felt in the first quarter. Personal income declined modestly in the first quarter, by $60 billion, or a 2% annual rate. But personal taxes were down by $193.5 billion, some part of which was the result of the tax cuts, so that disposable income rose at a 5% annual rate. Putting taxes and lower gasoline prices together gave consumers $143.5 billion more to spend or save than they would otherwise have had, which accounted for the rather amazing performance of consumption in the face of immense job losses."

And going further into the GDP numbers, there is an interesting statistic. Imports fell more than exports, mainly due to oil. The net trade deficit was only about $26 billion last month. Falling prices in imports, and especially oil, actually added about 3% annualized to the GDP number. Without that boost, the number would have been far more ugly.

That being said, we are very likely to see better numbers in the future, and maybe even a positive one in the 4^th quarter. But a large part of that will be statistical. For instance, housing construction is now down to 2.5% (or thereabouts) of GDP. Drops in housing construction have contributed almost a negative 1% a quarter for the last year. Even if housing construction goes down another 10-20%, it is becoming a very small piece of the puzzle and is not likely to be a big drag on future GDP.

Inventories, though, have been a large drag on the economy for the last two quarters. While we could see inventories drop somewhat this quarter, as the ISM manufacturing number is still significantly negative, they will probably not drop a lot more in the third and fourth quarters.

There are more stimuli and tax cuts on the way, and they will start to have an effect, as individuals will have more disposable income, whether to pay down debt, save, or spend.

But that positive will be balanced by rising unemployment, likely to hit 10% or more by the end of the year. If you count those who are part-time workers wanting full-time work or who are discouraged workers, unemployment is over 15% today.

A Dangerous End Game

The Fed and the Obama administration are playing a dangerous game. The Fed is going to print trillions of dollars to forestall deflation and try to re-ignite the economy. But for a variety of reasons we will go into next week, a real, sustainable recovery may be a few years away. What happens when the market starts balking at high and unsustainable national deficits? What happens when inflation (finally) does return? Can the Fed remain independent and take back the money it is printing in the face of what will likely be a tepid recovery? And if they don’t, what happens to the dollar?

Next year, we will be entering what will certainly be the most dangerous era in my lifetime for the US economy. It is not clear what will happen. There are a lot of paths that can be taken, though some are more likely than others. For those who are convinced that high inflation and a falling dollar are absolutely, unequivocally in the future I have just one word: Japan.

Yes, there are differences, but there are a lot of similarities. While I think the most likely outcome is a long Muddle Through recovery, the likelihood of a lost decade of deflation a la Japan is a very real potential outcome. And the possibility of stagflation and a seriously impaired dollar is also quite real.

Investors, businessmen, and entrepreneurs need to be as nimble as possible. A free market will figure out what paths to take, and I am still optimistic about the long term. But we have some very dangerous times in front of us, and we need to be realistic.

And before I close, let me make a few comments about the Chrysler and GM issues. I tell my kids all the time that actions have consequences. If I hold senior secured debt of a company and the government tells me I have to take less than unsecured junior debtors, I am not going to be happy. I may have been dumb to make the loans in the first place, but I did it under a very specific contract and the rule of law.

If the Obama administration arbitrarily changes those rules to favor a political class (unions), then that is going to have a chilling effect on future lending to all corporations. As an aside, they are spending $12 billion to save 54,000 Chrysler jobs (at $22,000 per job). With 600,000 jobs a month being lost, why are these 54,000 jobs more special than those of the rest of the unemployed, who get a fraction of that amount in unemployment benefits?

Actions have consequences. The lenders who are forcing the Chrysler deal into bankruptcy court are not all "predatory hedge funds." They are mutual funds, pension funds, and other financial firms with small stakeholders as their investors.

Cerberus, the hedge fund that originally bought Chrysler, deserves to lose their money. They made a bad investment. But those who lent money deserve to be treated in accordance with the contracts they signed.

Demonizing investors and businessmen is hardly helpful. They are precisely the people we need to help get this economy moving. Governments don’t create true job growth, businesspeople do, and mostly small businesses. I am not certain why small business owners, the job creation engine of the country, should see their taxes raised in order to protect bond holders of automobile companies or banks, or for union jobs to be preserved in companies that are clearly not competitive. But that is just my final thought late at night, before I hit the send button.

OK, one more thought. If Chrysler couldn’t figure out how to make efficient cars from their partnership with Daimler-Benz, are they now going to become viable through a partnership with Fiat, which has been on the verge of bankruptcy for the last decade? Really? GM paid $2 billion in penalties to Fiat in 2005 so as to not be forced to buy them. And Fiat gets 20% for no cash?…

A Few Thoughts on Swine Flu

Intellectually, I know that flu is something that we live with every year. According to the Centers for Disease Control, seasonal flu infects between 15 and 60 million Americans each year (5% to 20%), hospitalizes about 200,000, and kills about 36,000. That comes out to over 800 hospitalizations and over 250 deaths each day during flu season.

Worldwide deaths from "regular" flu are between 250,000 to 500,000 a year. In the last SARS virus "epidemic" in 2003, there were around 8,000 deaths worldwide but none in the US.

Swine flu has been diagnosed 160 times in ten countries, plus several hundred more in Mexico. The toll is almost sure to rise a great deal, but will it reach the level of normal, everyday flu? I hope not, and I rather doubt it, at least based on the recent SARS scare.

But that is all an intellectual, distanced, nuanced concept. The real world is a little different. This morning I went to wake up my son to get ready to take him to school. For a real change, he was already up. He had been throwing up, he had a sore throat, and his head was warm. We finally found the thermometer and took his temperature. It was 100, and 20 minutes later had risen a degree.

We got into the car and went to the local "Doc-in-the Box." (For non-US readers, that is a local private-care clinic that will take walk-up patients without an appointment.) After a few tests, which they can now do in a few minutes, they determined it was not flu or strep throat. It was just some bug he had come down with that needed a course of antibiotics. We got the medicine and went home.

On the way back I asked him if he was worried about whether he had swine flu. The day before, his school had cancelled a field trip, and a local large school district (Fort Worth) had simply closed for a week after one diagnosed case.

"Yeah, Dad, I was worried a little. Glad it’s not the flu." And Dad was, too. Statistics, whether financial or medical, become meaningless when it’s personal.

Have a great week, and stay healthy!

Your planning to enjoy his May through October analyst,

John Mauldin

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