18 Reasons We'll Pull Back From Current Levels
May 27, 2009
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RELATED TICKERS: C
, GM
18 Reasons We’ll Pull Back From Current Levels
I’ll never think of myself as a perma-bull or a perma-bear but I definitely think of myself as a skeptic 100% of the time. The way I see it right now, we have 18 reasons that just give me that sinking feeling….
1) Unemployment rates are at their highest levels in memorable history at 9.2% and they show no signs of slowing down. This one is sort of a no-brainer as we need people to be employed in order to have money to spend to drive further economic growth. Even if we look at past recessions, the unemployment peak often comes after the recession has officially ended according to the census bureaus, so we’re still a long way off from finding the unemployment plateau. Don’t even make me get into how unemployment only factors in those looking for work over the last 12 months and not those out of work for longer than that time period still seeking work!
2) Housing prices fell 19.1% for the first quarter of 2009 and represents the largest decline ever recorded in the 21 year history of measuring housing prices. It’s no secret that the record increases in housing prices that we saw over the past five years is what fueled most of the wealth production in this country. The problem here is that we still have such a huge surplus of homes on the market, and using simple supply v. demand, it’s extremely likely we haven’t seen a bottom in housing prices.
3) Credit is simply not available to those who need it and new credit laws are only going to hamper the ability for those individuals to obtain credit. Sure, the new credit laws enacted by the Obama administration are going to protect individuals with decent credit scores from getting uncalled for massive rate hikes, but it’s killing any potential hope for sub 650 credit scores to obtain the financing they need to get things done. All I’ve seen from credit companies recently is a stricter tightening while lending only to those with scores of 720-750 and over. It’s not that this is a bad scheme from a lenders perspective as an excellent rating provides a better chance of receiving payment, but what I’m finding is that these high scorers are not the people looking to spend right now and excess credit to this arena isn’t doing anyone any good. You have credit being lent that isn’t being used and potential creditors not getting their fair chance to help out the economy.
4) We have a massive amount of Option ARMS and ALT-A loans set to re-set, starting right about now and lasting for the next 30 months. It is absolutely insane how many billions of dollars worth of loans were generated in the mid 2004 to late 2007 time period which were subject to Adjustable Rates. If you thought the subprime mess was horrific, wait until this next set of ARM’s begins to reset. Based on figures from the housing industry, it appears the value of loans set to adjust looks to be about 25-30% higher than what we saw in the subprime arena, and you think foreclosure rates are high now?
5) Historically speaking, the S&P 500 has bottomed out with fundamental earnings per share around 5 to 9. With the most recent spike downward we saw the S&P near about 12 times earnings and although I’m not saying history writes itself in stone, based on historical perspective, we are still riding a pretty pricey train. Now we do have to factor in that most of the companies in the S&P are growing at phenomenally quicker rates than they were in previous recessions of the 20th century (which is my main basis for comparison), but after our recent bounce, we’re treading around 15 times earnings and I’m simply not comfortable with that figure based on the economic information we’re receiving daily.
6) Energy prices are rising at dramatic rates despite any real indications of an economic recovery. Oil, lets face it, over-corrected itself to the downside. Oil as a commodity is perfectly priced (in my opinion of course) around $57-$72 a barrel. We’ve seen petroleum refiners working more efficiently than ever. Oil doesn’t even need to rise for gasoline to see an uptick. Any sort of energy price increases are going to hamper our recovery and I clearly feel we’ve seen that base in oil. Oil should never have traded down in the $33 range and we’re likely never going to see it there again.
7) Short covering has been one of the major drivers of this bear market rally. Although I don’t have any of the recent figures in front of me, it doesn’t take a rocket scientist to deduce that banks were being heavily shorted up until mid-March upon which we saw a dramatic reversal. Margin calls and massive short covering triggered a massive rally in banks which in turn churned the rest of the market higher. It’s been years since I’ve seen a short covering rally have legs that took it higher for more than 3-4 months and news for everyone, we’re on month 2½.
8) Insider buying has been absolutely anemic. I wish for the life of me I could remember the online source where I read this but the figure stuck with me that insider buying has been roughly 50-55% lower than it was in the year ago period. Although we are seeing stocks down 30, 40 or even 50-60% below last years’ figures, the management of these companies are clearly not stepping up and buying their own stock. Earnings visibility is clearly not there right now and I don’t blame these leader for not buying at the moment.
9) Deflation is beginning to rear its ugly head! Deflation is a nasty little bugger that gets us coming and going. Sure it drives down prices and allows for goods to appear cheaper, but it also kills company profits and tightens up the wallets of the only people who even have money because they’ll simply sit on the sidelines waiting for things to get even cheaper. The cure? Print money like mad and spend it to create inflation which will hopefully spurn jobs creation and drive company profits. The problem with this…. #10
10) Dollar dilution! I know the old adage that a recession usually causes the dollar to appreciate but I don’t see this happening one bit. We have printed off so many billions of dollars during this economic crisis that I am flat out shocked the dollar is still as high as it is. We desperately need to attract investment from abroad but the only true way to do that is to have attractive interest rates in the first place. How attractive are ours? Well, let me tell you that ¼% is simply not going to get it done. This is a catch-22 situation! We either deal with the company killing effects of deflation, or we screw our dollar to hell and scare away foreign investment. I believe our government is choosing the latter and let’s just say, run away, run away!
11) High debt levels! Stimulating an economy comes with a cost and the true costs here are going to be significantly higher than what the government has told us. As interest levels are raised eventually to increase foreign investment in the US, the cost of our rising debt levels is sure to sting. The actions of this stimulus package will probably take 10-15 years to pay off and that doesn’t include any debt pre-existing prior to this crisis.
12) Junk bonds and high-risk stocks are leading this rally higher. I’m not saying that poor stocks cannot turn into leaders, what I am saying though is that the poorer the outlook for the company, the bigger the rebound we’ve seen. There aren’t any real earnings behind the biggest losers in the banking sector yet we are treating them like they posted a 75% earnings increase. Appetites for risky investments are oddly growing but rarely do these investments lead to sustainable results.
13) Bank losses and loss provisions are not shrinking at a fast enough pace. Banks are having to issue shares at an exorbitant rate just to meet capital requirements set forth by the government. These share offerings are highly dilutive to shareholders and banks will seemingly never have enough cash to prevent themselves from a disaster. The riskiest of all banks are still allocating billions per quarter to counter high-risk loan losses. The kicker of it all, Citigroup (NYSE: C) commented that they loaned out their entire TARP funds already! I mean did they learn anything?
14) I don’t care what anyone says, the impending General Motors (NYSE: GM) bankruptcy (and trust me, its impending) will send shockwaves throughout the market. Nothing is too big to fail, no matter how American it may appear. GM and its subsidiaries employ or help to employ roughly 2 million people if you consider just how far reaching their suppliers extend. People want to believe that magically GM will pull through this, but at 15-20 times debt to cash, the possibility of this happening is minute.
15) From a technical perspective gold looks ready to resume its uptrend. If you look back at gold over the last seven years you’ll notice that it has a history of rising for about a year, then basing for a year. It has repeated this pattern a few times and looks ready to resume higher. As you know, gold usually has an inverse relationship with the stock market and rising gold will generally be a signal to sell stocks. To me gold looks like a sure thing to $1135 by fall.
16) North Korea is shaking things up and it reminds us that foreign confrontations are still out there. Have we resolved our Iraq issues yet? No. Have we resolved our Iran issues yet? No. Now we have to deal with the possibility of North Korea demonstrating its nuclear capabilities. The markets really dislike uncertainty and we have plenty of it to worry about right now as our foreign policies really haven’t cleared anything up over the last 6-12 months.
17) Although foreclosures are flattening a bit, they are still rising at a very rapid rate as compared to the past decade. A glut of foreclosed properties on the market makes it incredibly difficult if not impossible to sell new homes and causes potential buyers to steer toward foreclosed units in order to save money. The problem here is that with a lack of credit available to many consumers, these foreclosed homes remain on the market without a buyer and until these units move, new homes pretty much don’t stand a chance.
18) Finally, baby boomers got screwed. I’m not saying we all didn’t feel the pinch of this economic downturn, but we are entering the baby boomer retirement period and their savings were going to be a driving force of economic growth. With many boomers losing 30-60% of their wealth in the recent downturn, its very possible that we could see an economic downturn lasting well into 2012-2013.
I’m not saying we re-test S&P 666, but there is little evidence to suggest that we can maintain a “V” bottom without at least retracing a few of those steps that got us 36% off of those lows in the first place. As of right now, lump me in with the bear clan!
Disclosure: I currently have no positions in either C or GM
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