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Bear Hat Back On



May 03, 2009 – Comments (12)

It has been a very long time since I have actively made much in the way of picks.  My expectation of the market is that it would go through a series of ups and downs and the downs would be bigger then the ups so even though there would be short periods when one can gain, like right now, ultimately I think it is still heading lower.

One of the ways that I think of the housing bubble, and the huge overhang of homes it created, is that it borrowed from tomorrow in more ways then people think about.  It is obvious that the debt is borrowing from tomorrow, buy now and pay for it later. 

What is less obvious is that it borrow tomorrow's jobs.  So people were working and making good money, and in some cases because of the false demand for labor some wages were probably much higher then if tomorrow's jobs were not being done yesterday.

Big Picture has a post that estimates the amount the rise in profits can be attributed to the bubble, 388%.  To me that means that sustainable profits are probably in the range of 25-30% of the peak, which suggests the market is still quite over valued. 

The other thing in that post is a more accurate look at the home owner equity for people with mortgages.  The data that has been used includes all home owners, but, as the post points out, people who have paid off their homes are not going to be a problem for the banking system and the equity of people with mortgages is what you need to be looking at to properly assess the health of banks. 

Take out the clear title home owners and equity declines from 43% to 15%.  So, housing goes down another 10% and homeowners with mortgages have 5% equity?  What a disaster.  From the post:

More likely, she sniffs, it has something to do with the fact that “an overwhelming portion of some $8 trillion in mortgage debt (or 80% of the total) is teetering on the edge of, or in some state of, negative equity.”

There is no question that when I compare today's bubble with the bubble that cause the depression, well, today's bubble is simple much bigger.  For the depression somewhere I read that 12% of debt was never repaid once the banking system sorted itself out.  That would have just been stuff in the banking system.  Today there is so much off balance sheet stuff, and the bubble is bigger and lending standard weaker, well, I suspect that a lot more will never be repaid.

And business is straddled with massive debt as well.

12 Comments – Post Your Own

#1) On May 03, 2009 at 12:40 PM, dwot (28.95) wrote:

Yves has a post on lending and how it changed from knowing the customer to models.

That is interesting to me because I briefly worked in credit and I had a wonderful mentor.  Lending was done with what makes sense.  So, for example, we had a guy that wanted to pay for xmas over 2 years.  My mentor basically said no, if you can't pay for xmas in 3 months, you can not afford it.  In a way, good financial values were imposed on people.  I doubt she'd have loaned for a vacation if you didn't have at least half paid for up front.

But, my mentoring in credit included discussing that in 3 months that guy is going to want to buy something else despite what he says today.

Old fashioned lending protected people from themselves and it probably is a good very good idea to go back to character.

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#2) On May 03, 2009 at 12:59 PM, Rehydrogenated (33.26) wrote:

I think character was left out of the equation on the business side too. The idea was take out as many loans as humanly possible and expand expand expand to catch some of the ever expanding market. No competition necessary, just buy the machines, produce your product, and some idiot will buy it. In the industry I work in, all of our top 10 competitors followed the above model. Three have went bankrupt and we just got applications from employees from 2 other ones who say they are going down the toilet too. This is great for us at the moment but I'm really afraid of our suppliers and customers failing. There are huge opportunities to fill in the gaps but it is a huge risk as well. I don't like it.

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#3) On May 03, 2009 at 1:13 PM, amassafortune (29.15) wrote:

Leverage did borrow from tomorrow's jobs, and the multi-trillion dollar solution borrows from our children's jobs.

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#4) On May 03, 2009 at 1:36 PM, awallejr (34.04) wrote:

Too many positives popping up (reluctant to use the term "green shoots" ;p).  I've blogged about Libor a couple times with little interest by the readers, but it is an extremely important rate since it impacts lending and cost of borrowing.  It has dropped a ton and is still falling (think 3month libor peaked around 4.5 % last year and is now near 1% and still falling).

We are now coming into the seasonal selling season for Real Estate, so it remains to be seen how it plays out. We really won't know until the summer.  If it ticks up then that too is a positive.  And if business does pick up you are then looking at rehiring in the banking department since they are shorthanded as it is.

We are no where near what things were like during the Great Depression.  Alstry likes to compare U6 numbers today with U3 numbers during the Great Depression.  Had they used U6 stats back then the Depression numbers would have been alot higher. Also you had a nasty decade long dust bowl which culminated in one of the largest Black blizzards that started midwest and went to Washington DC.

This is an "interesting" time in the market.  It just could go either way.  I can see a May correction, followed by a summer rally then an October crash on the one hand; or see a steady summer rise, followed by a correction through October then an extended rally.  It is all going to depend upon how all these Fed, stimulus and Treasury moves play out.  Personally I think they will prove positive.  But that is me.

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#5) On May 03, 2009 at 1:43 PM, uclayoda87 (28.54) wrote:

The US government's doubling down on past mistakes suggests:

1.  They are living for the present, because they don't care about tomorrow.

2.  They know that the US debt will become relatively worthless, so why not issue more debt to pay for what they want now.  If countries are stupid enough to want to buy this debt, it's their problem.

3.  They won, so they can do what they want.  Isn't that what President Obama said.

4.  They are not concerned about what the US citizens' think.  Because if they were, none of the bailouts would have ever happened.


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#6) On May 03, 2009 at 2:52 PM, drummnutt (< 20) wrote:

Awallejr. Thanks for Libor post. Pretty sure I gave you a rec on that on (FYI).

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#7) On May 03, 2009 at 4:18 PM, mistermiranga (99.59) wrote:

I agree with the points you bring up on debt & housing. They seem to get overlooked. People might feel like a 20% decline in housing prices is a great deal but if you don't have a job...well how low is affordable? 

I am not much on trying to predict the future based on fundamentals we were experiencing in other time periods because I am just not savvy enough to process all of the variables in play.  

I am involved in a business that has benefitted the gratifying upside of leverage. Over the past few years it has obviously come upon less bouyant times (real estate, advertising & private equity investment are all connected to what I do). Perhaps this is why I lean towards the bearish site in the short-term. 

Companies saddled with debt will keep cutting until the numbers work. The impact ripples through the economy and comes back around to earnings. 

The unwinding of all of this leverage needs more time to play out. The optimism we see lately seems to be based on the best-case scenario playing out. Many people (including myself) have a vested interest in "selling" this scenario at every turn and we hope that we can just return to business as usual with just a few less amenities.

There are many individuals and corporations that made a leveraged bet on indefinite growth and until we can reconcile a significant portion of that I can't see how we can proceed without merely re-inflating the bubble.

Many have no other choice but to believe that the best case scenario will play out because otherwise it will be game over and then truly uncomfortable change will occur.  

Even though I lean bearish I can certainly see the scenarios where we can emerge from this current crisis sooner than later but I am definitely not convinced that it would be sustainable.

Before we just get back to the party someone has got to pick up at least a portion of the last tab to make it look good. And for some reason I don't feel hungover yet...I am still mildly buzzed and searching for the Advil.  


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#8) On May 03, 2009 at 6:52 PM, bammerone (28.99) wrote:

I think Housing, or commercial real-estate for that matter, which DWOT has blogged on probably are still about 3-4 years away from recovering.

My local paper just had a great article  showing median prices dropping about 50% in the past 3 years, at least in the city proper. right now the demand just isn't there. and if it is, coming from flippers who want to turn it, or convert it to rental.

That said, I really agree with awallejr and believe we are seeing a real long-lasting change in public perception, feelings of wealth and "Consumer confidence". the market cannot stay down so long,.companies are still EARNING a PROFIT, P/E's are down and portfolios are creeping back up. As people start to feel better, and realize this ISN'T 1929, global demand will simply pull things back up.

There is so much pent up demand that it is only a matter of time before equities recover. At the risk of being too positive a couple examples; 1) unemployment rates are trailing economic indicators, and having flattened, are still not as sustainably bad as the were in the early 80's, and still 85-90 % of the working age population is still working. 2) US passenger auto fleet is about 250 million, annually adjusted sales are running at 9.32 million, that means it will take 26.82 years to turnover the fleet. is anyone on this board going to keep their current cars until they are 26 years old?

I am keeping my bull hat on, even after the recent 25% or so run up.

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#9) On May 03, 2009 at 7:28 PM, RainierMan (64.86) wrote:

There has been some talk about "the next bubble" in the financial press. It won't be housing, of course. Some say Treasuries, or gold.

Sometimes I wonder if the next bubble won't actually be the stock market.  

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#10) On May 03, 2009 at 9:18 PM, SNHamilton (99.98) wrote:

The hat in your picture is quite inappropriate for a pessimist.  I can just imagine you going door to door saying "sorry little Jimmy, Santa told me Christmas has been canceled this year because the president your mom voted for has been a bad boy."

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#11) On May 03, 2009 at 10:01 PM, ChrisGraley (28.51) wrote:

I put on my bear hat on Friday, Dwot. I thought at first we'd have a bear market rally until about October, when Commercial RE numbers started to have their effect, because most ARMS were reset at lower rates.

Now, I think that we rallied too fast on too little good news and this week alone has a lot of bad news in store..

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#12) On May 07, 2009 at 11:05 PM, SwampBull (81.89) wrote:

To summarize and congeal some of the above comments, volatility and uncertainty in the near term are to be expected.  Which means at its heart, the economic depression (I use this word because it portrays reality more concisely than 'extreme financial recession') has not yet concluded, and the leading sectors for future growth are still indeterminate.


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