(click on picture to enlarge)
I last opined on March 14th (in an email blast prior to opening this blog), when the Fed and JP Morgan bailed Bear Stearns out of defacto bankruptcy. I said then, "don't rush to buy anything here, it's too soon. Even if the Fed finally arranges a short term market rally or perception of a better real estate market, the final bottom has likely NOT been seen, and won't be until 2009-2011. You'll know it's close when no one is talking about buying cheap real estate or stocks", which is still the case.
The market has risen since then, but not due to the problem being solve. More likely, the Fed took so much historic action surrounding that bailout that a short term selling purge ran out of supply. In other words, temporary equilibrium was restored (at much lower and worse levels). This is ironic, since our tax dollars are being used to fund the bailout, as risk is being transferred from Wall Street to Main Street. The Fed's PPT (Plunge Protection Team), groups of undercover floor traders that get to "goose" the market with newly printed cash, has been in full force, trying to hold off the coming debacle that will be the next wave of realization…"uh oh, it's worse than we thought !" We still hear that the economy is slowing, but not in recession, but new home sales were reported on April 24 to have declined to a level not seen since 1981. Last week, the government reported that 18% of all homes in the US have negative equity (are worth less than the debt held on them). In the last two weeks, Intel, Motorola, Starbucks, Amazon, Microsoft, Google, Apple, Citigroup, Wamu, BofA, and hundreds of other companies have reported earnings, and have either missed their estimate, or had reduced their estimates so much that they were able to beat their massively reduced estimates. Either situation has resulted in most company's stock prices falling, some below their March or January lows.
Imagine what the recession (or worse) is going to look like. In Seattle, we're blessed with many things including diversity of industry, natural geographic beauty, relatively clean air and water (usually 56 rain-free days per year), but we all know that the golden real estate days are no more. This Spring will be the test, as most have kept their pricing high, allowing homes to remain on the market longer than in recent years by a factor of 3 or 4 (two months vs. two weeks in the glory days of '05 and '06). Under the surface of for sale signs, just getting financed is at least twice as hard as it was a year ago. One needs twice the assets for half the loan amount now, not to mention actually having to put up the down payment these days. We actually flipped a house in Clyde Hill recently that should have taken six weeks, but took six months. It was in foreclosure and we did a short sale on it. We got the bank to take an $800k loss on their loans, which is another sign of the times, especially in Seattle, one of the top two markets in the country, behind only Manhattan. We did another transaction in Oklahoma City that is more indicative of the national scene. We bought a single family house on a full acre, that was appraised at $70k, from the bank for $43k. We're currently working on several deals in Sonoma County, California for around 60 cents on the dollar vs. the current market value. We fully expect to be able to get closer to 40 cents or lower on the dollar by the time the bottom shows up, closer to 2010. In Florida this week, huge bank auctions were held where 4 bedroom houses went for $80-100K, just to get them off the banks' books. Thousands of homes were moved in a matter of hours. Again, as restated above, the bottom won't occur until those auctions are attended. And, it's not just an American issue either. While our housing market is collapsing nationally, but not yet in Seattle, many countries are still flying high. Ireland, Netherlands, and Britain lead the world with double digit growth nationally. Soon though, global recession will take hold in those market too, just like eventually in Seattle.
Remember not that long ago when Alan Greenspan was a hero? The Maestro was his nickname. Now, he's being blamed for ruining the economy, and when he speaks, the media calls it "promoting his book and speaking career". It's no longer glorious to be a CEO either, as all the blame for problems falls on them. Kerry Killinger at Wamu is the only one that has avoided the exit (so far). Kerry has personally overseen $30 billion of shareholder wealth destroyed under his guidance, and in a very short time. Congrats Kerry, but you had better renew the Teflon on that suit of yours. Speaking of blame, by the time the election arrives, the sentiment should be at the worst levels in years (even worse than the Bill and Monica event). The "throw the bums out" mentality will likely make it impossible for the GOP to be voted back into office, setting up a historical win for either the first woman or the first black President, or some combination thereof. The only way for the Repubs to save their party would be for an immediate admission by President Bush that he has been suffering from advanced dementia and was out of his mind for the last seven years, apologizing for everything that has happened, and asking for forgiveness from the country.
Recent news stories highlight spikes in rice prices fueling anger and fears of unrest in Asia; truckers pulling their rigs off New Jersey highways to protest fuel prices; and food price rioting breaking out in Egypt, Cameroon, Ivory Coast, Senegal, Ethiopia, Pakistan, and Thailand (per Wall Street Journal). English Prime Minister Gordon Brown calls the growing food crisis a threat to world stability. Those that know history know the last time food rationing was seen on a large scale was here in the 1930's. Current circumstances, however, are affecting the entire globe.
To make matters worse, The Wall Street Journal says that unfunded pension liabilities now exceed $1 TRILLION, with a T, nationally. How does that matter to me, you might be saying? Well, if a bunch of retirees don't get their pensions, where and how will they live and spend? Clearly, they'll put their houses on the market, which already has 11 months of national supply, not seen since 1981. They won't be buying stuff they don't need, like is our national pastime, and since they're all related to us, will become our dependents, like we were theirs 30-50 years ago, when they used to SAVE money, which we no longer do.
Ready for the bad news? The glory, cheap money, days are over for municipalities. Cities, Counties, and States have not only run out of money, but out of credit worthiness to get more. California says it's cutting $200 billion from its budget. Schools across the state are closing and sharing campuses as programs are being slashed. Jefferson County, Alabama (where Birmingham is) is already defacto bankrupt, and is the largest County to become insolvent in US history, surpassing Orange County, California in the 1990's. If you have or know those that have large portfolios of Muni Bonds, this is the time to sell or reduce the size of their holdings, as yields are about to skyrocket to attract new investors. Rising yields means falling prices. If you want to know what that will mean in value? The Bond Buyer 25 Revenue Muni Bond Index currently yields 5.25%, and could easily reach 10% (with potential for its 1982 high of 15%), the value of a current bond portfolio of similar high quality munis would fall to half its current value, and to 1/3 if the 1982 level was tested. And those are highly rated muni bonds. Here's the thing to avoid at ALL costs…as times get really tight for municipalities, they will try to float bonds to finance their "current" expenses. This is the last step before they file for bankruptcy. NEVER buy these bonds, no matter what yield they "intend" to pay, or you could be left holding an empty bag.
What about the recent deals where huge investors bought into Citigroup, Wamu, Countrywide, Bear Stearns, Merrill Lynch, City National, etc.? You guessed it, some are going to be very disappointed, since if last quarter was not THE low, by definition, some of these deals will either not happen, or happen and make the buyer wish they hadn't done it. The window is closing on easy money opportunities even on Wall Street, as the IPO market has closed. In the first quarter of '08, 83 companies pulled their IPO's and 24 delayed sales of secondary shares. Why? Because the public doesn't want to share other peoples risk right now, since we all have enough of our own.
April 30th, the Fed cut interest rates yet again to keep from disappointing the markets. It's interesting that after 325 basis points of rate reduction, the economy still entered recession, despite what the government says, and conditions are worsening by the week. Stock indices are still relatively high, especially compared to where they have the potential to go in the next few years. If you can't live through a Dow near 5000 or Nasdaq near 1000, it might be prudent to lighten up on some holdings. Real potential exists for those levels in the next few years. Just think of the opportunities that will be available if that happens though. You just have to preserve your capital so you can take advantage of it. Cash remains king, and Tbills are still risk free.
Okay, here is the good news. The dollar is no longer falling off the face of the earth, even though the media is still on that bandwagon. If you have overseas exposure of business or are paid in other currencies that get converted, this is the time to lean TOWARD the dollar for several months. Unfortunately, it likely hasn't reached its ultimate bottom either, since the government hasn't cleaned up its mess yet. Six to twelve months of relief from global dollar bashing is in order here though. Rising dollar should mean reduced foreign sales for US companies, so further earnings deterioration is in store for the remainder of 2008, and likely 2009.
However, from every disaster, opportunities are born. There are some stocks that have already been beaten down to level of interest. Amgen and Starbucks offer a safer haven than most at this time. Many others will offer interesting opportunity at lower levels. The picture above shows the pattern of the Nasdaq leading up through the dot.com bubble bursting, the initial decline that sliced 80% off that high, and the six year rise from 2002 that barely regained half the loss . Since the November '07 peak, marked as (B), the initial wave lower of the final wave of decline from the all time highs has begun. The light blue line that ends under 1000, somewhere out in 2011 +/- 1 year, is my hallucination of what is to come. (click on picture above to enlarge)
Reminding those that were at my November Caution Summit, Google was at 740 that evening and I said my indicators showed the price was at risk of immediate decline to the 450 range in the coming months. By March '08, Google had been slaughtered to 415. I put out a near term buy forecast a bit higher at 444, with a target of 550-600 in the near term. As clear as the signal offered at 740 in November'07 before falling 340 pts to 400 in March'08, Google at 580-600 is NOW allowing those that prayed for a bounce to get out at higher prices. Technically, the daily chart has rolled over and the weekly chart is at extreme overbought levels, about to roll over. Certainly a test of 380-400 is coming, with potential for 280-320 to be seen sometime during 2008. Any buying opportunity surrounding 300 should be the opportunity we've all been hoping for since exuberance struck in 2006, taking Google from the 300's to 740 in under a year. If 690 is broken above, odds favor a new high above 740, but this is NOT the best bet.
Starbucks near 15, Garmin near 42, and Amgen near 42 offer long side opportunities currently, with secondary entry levels of 10.5-12.5, 33, and 30 respectively. Minimum upside targets are 23-28, 75-80, and 60 respectively later this year. Almost every other stock that has risen from the lows of January and March are current selling opportunities. Those that like to hedge portfolio holdings, rather than sell, should check into QID. This is an ETF that is an inverse 2:1 bet on the Nasdaq 100 Index. If that index falls 20%, this security will rise 40%.
Believe it or not, crude oil is likely topping and setting up for a test of at least the 80, possibly the 50's in the next 12-24 months, even though 130 could be seen first. Gold peaked around 1000 and should at least test 650-700, if not 580 in the coming 12 months. The Euro has peaked, at least short term, with a test of 1.39 to 1.41 due prior to any new highs above 1.60. There is good chance to see 1.18 to 1.23 within the coming 12-24 months.
30 year yields peaked recently around 3.95% and should at least test 3.00% during 2008. After that level is tested, yields should rise for several years, possibly reaching the high single digits not seen since 1994. Refinancing and/or locking in longer term loan rates around current levels will prove to be one of the best financial moves in the next 10 years, second only to eliminating debt all together.
For what it's worth,
Ken
The market has risen since then, but not due to the problem being solve. More likely, the Fed took so much historic action surrounding that bailout that a short term selling purge ran out of supply. In other words, temporary equilibrium was restored (at much lower and worse levels). This is ironic, since our tax dollars are being used to fund the bailout, as risk is being transferred from Wall Street to Main Street. The Fed's PPT (Plunge Protection Team), groups of undercover floor traders that get to "goose" the market with newly printed cash, has been in full force, trying to hold off the coming debacle that will be the next wave of realization…"uh oh, it's worse than we thought !" We still hear that the economy is slowing, but not in recession, but new home sales were reported on April 24 to have declined to a level not seen since 1981. Last week, the government reported that 18% of all homes in the US have negative equity (are worth less than the debt held on them). In the last two weeks, Intel, Motorola, Starbucks, Amazon, Microsoft, Google, Apple, Citigroup, Wamu, BofA, and hundreds of other companies have reported earnings, and have either missed their estimate, or had reduced their estimates so much that they were able to beat their massively reduced estimates. Either situation has resulted in most company's stock prices falling, some below their March or January lows.
Imagine what the recession (or worse) is going to look like. In Seattle, we're blessed with many things including diversity of industry, natural geographic beauty, relatively clean air and water (usually 56 rain-free days per year), but we all know that the golden real estate days are no more. This Spring will be the test, as most have kept their pricing high, allowing homes to remain on the market longer than in recent years by a factor of 3 or 4 (two months vs. two weeks in the glory days of '05 and '06). Under the surface of for sale signs, just getting financed is at least twice as hard as it was a year ago. One needs twice the assets for half the loan amount now, not to mention actually having to put up the down payment these days. We actually flipped a house in Clyde Hill recently that should have taken six weeks, but took six months. It was in foreclosure and we did a short sale on it. We got the bank to take an $800k loss on their loans, which is another sign of the times, especially in Seattle, one of the top two markets in the country, behind only Manhattan. We did another transaction in Oklahoma City that is more indicative of the national scene. We bought a single family house on a full acre, that was appraised at $70k, from the bank for $43k. We're currently working on several deals in Sonoma County, California for around 60 cents on the dollar vs. the current market value. We fully expect to be able to get closer to 40 cents or lower on the dollar by the time the bottom shows up, closer to 2010. In Florida this week, huge bank auctions were held where 4 bedroom houses went for $80-100K, just to get them off the banks' books. Thousands of homes were moved in a matter of hours. Again, as restated above, the bottom won't occur until those auctions are attended. And, it's not just an American issue either. While our housing market is collapsing nationally, but not yet in Seattle, many countries are still flying high. Ireland, Netherlands, and Britain lead the world with double digit growth nationally. Soon though, global recession will take hold in those market too, just like eventually in Seattle.
Remember not that long ago when Alan Greenspan was a hero? The Maestro was his nickname. Now, he's being blamed for ruining the economy, and when he speaks, the media calls it "promoting his book and speaking career". It's no longer glorious to be a CEO either, as all the blame for problems falls on them. Kerry Killinger at Wamu is the only one that has avoided the exit (so far). Kerry has personally overseen $30 billion of shareholder wealth destroyed under his guidance, and in a very short time. Congrats Kerry, but you had better renew the Teflon on that suit of yours. Speaking of blame, by the time the election arrives, the sentiment should be at the worst levels in years (even worse than the Bill and Monica event). The "throw the bums out" mentality will likely make it impossible for the GOP to be voted back into office, setting up a historical win for either the first woman or the first black President, or some combination thereof. The only way for the Repubs to save their party would be for an immediate admission by President Bush that he has been suffering from advanced dementia and was out of his mind for the last seven years, apologizing for everything that has happened, and asking for forgiveness from the country.
Recent news stories highlight spikes in rice prices fueling anger and fears of unrest in Asia; truckers pulling their rigs off New Jersey highways to protest fuel prices; and food price rioting breaking out in Egypt, Cameroon, Ivory Coast, Senegal, Ethiopia, Pakistan, and Thailand (per Wall Street Journal). English Prime Minister Gordon Brown calls the growing food crisis a threat to world stability. Those that know history know the last time food rationing was seen on a large scale was here in the 1930's. Current circumstances, however, are affecting the entire globe.
To make matters worse, The Wall Street Journal says that unfunded pension liabilities now exceed $1 TRILLION, with a T, nationally. How does that matter to me, you might be saying? Well, if a bunch of retirees don't get their pensions, where and how will they live and spend? Clearly, they'll put their houses on the market, which already has 11 months of national supply, not seen since 1981. They won't be buying stuff they don't need, like is our national pastime, and since they're all related to us, will become our dependents, like we were theirs 30-50 years ago, when they used to SAVE money, which we no longer do.
Ready for the bad news? The glory, cheap money, days are over for municipalities. Cities, Counties, and States have not only run out of money, but out of credit worthiness to get more. California says it's cutting $200 billion from its budget. Schools across the state are closing and sharing campuses as programs are being slashed. Jefferson County, Alabama (where Birmingham is) is already defacto bankrupt, and is the largest County to become insolvent in US history, surpassing Orange County, California in the 1990's. If you have or know those that have large portfolios of Muni Bonds, this is the time to sell or reduce the size of their holdings, as yields are about to skyrocket to attract new investors. Rising yields means falling prices. If you want to know what that will mean in value? The Bond Buyer 25 Revenue Muni Bond Index currently yields 5.25%, and could easily reach 10% (with potential for its 1982 high of 15%), the value of a current bond portfolio of similar high quality munis would fall to half its current value, and to 1/3 if the 1982 level was tested. And those are highly rated muni bonds. Here's the thing to avoid at ALL costs…as times get really tight for municipalities, they will try to float bonds to finance their "current" expenses. This is the last step before they file for bankruptcy. NEVER buy these bonds, no matter what yield they "intend" to pay, or you could be left holding an empty bag.
What about the recent deals where huge investors bought into Citigroup, Wamu, Countrywide, Bear Stearns, Merrill Lynch, City National, etc.? You guessed it, some are going to be very disappointed, since if last quarter was not THE low, by definition, some of these deals will either not happen, or happen and make the buyer wish they hadn't done it. The window is closing on easy money opportunities even on Wall Street, as the IPO market has closed. In the first quarter of '08, 83 companies pulled their IPO's and 24 delayed sales of secondary shares. Why? Because the public doesn't want to share other peoples risk right now, since we all have enough of our own.
April 30th, the Fed cut interest rates yet again to keep from disappointing the markets. It's interesting that after 325 basis points of rate reduction, the economy still entered recession, despite what the government says, and conditions are worsening by the week. Stock indices are still relatively high, especially compared to where they have the potential to go in the next few years. If you can't live through a Dow near 5000 or Nasdaq near 1000, it might be prudent to lighten up on some holdings. Real potential exists for those levels in the next few years. Just think of the opportunities that will be available if that happens though. You just have to preserve your capital so you can take advantage of it. Cash remains king, and Tbills are still risk free.
Okay, here is the good news. The dollar is no longer falling off the face of the earth, even though the media is still on that bandwagon. If you have overseas exposure of business or are paid in other currencies that get converted, this is the time to lean TOWARD the dollar for several months. Unfortunately, it likely hasn't reached its ultimate bottom either, since the government hasn't cleaned up its mess yet. Six to twelve months of relief from global dollar bashing is in order here though. Rising dollar should mean reduced foreign sales for US companies, so further earnings deterioration is in store for the remainder of 2008, and likely 2009.
However, from every disaster, opportunities are born. There are some stocks that have already been beaten down to level of interest. Amgen and Starbucks offer a safer haven than most at this time. Many others will offer interesting opportunity at lower levels. The picture above shows the pattern of the Nasdaq leading up through the dot.com bubble bursting, the initial decline that sliced 80% off that high, and the six year rise from 2002 that barely regained half the loss . Since the November '07 peak, marked as (B), the initial wave lower of the final wave of decline from the all time highs has begun. The light blue line that ends under 1000, somewhere out in 2011 +/- 1 year, is my hallucination of what is to come. (click on picture above to enlarge)
Reminding those that were at my November Caution Summit, Google was at 740 that evening and I said my indicators showed the price was at risk of immediate decline to the 450 range in the coming months. By March '08, Google had been slaughtered to 415. I put out a near term buy forecast a bit higher at 444, with a target of 550-600 in the near term. As clear as the signal offered at 740 in November'07 before falling 340 pts to 400 in March'08, Google at 580-600 is NOW allowing those that prayed for a bounce to get out at higher prices. Technically, the daily chart has rolled over and the weekly chart is at extreme overbought levels, about to roll over. Certainly a test of 380-400 is coming, with potential for 280-320 to be seen sometime during 2008. Any buying opportunity surrounding 300 should be the opportunity we've all been hoping for since exuberance struck in 2006, taking Google from the 300's to 740 in under a year. If 690 is broken above, odds favor a new high above 740, but this is NOT the best bet.
Starbucks near 15, Garmin near 42, and Amgen near 42 offer long side opportunities currently, with secondary entry levels of 10.5-12.5, 33, and 30 respectively. Minimum upside targets are 23-28, 75-80, and 60 respectively later this year. Almost every other stock that has risen from the lows of January and March are current selling opportunities. Those that like to hedge portfolio holdings, rather than sell, should check into QID. This is an ETF that is an inverse 2:1 bet on the Nasdaq 100 Index. If that index falls 20%, this security will rise 40%.
Believe it or not, crude oil is likely topping and setting up for a test of at least the 80, possibly the 50's in the next 12-24 months, even though 130 could be seen first. Gold peaked around 1000 and should at least test 650-700, if not 580 in the coming 12 months. The Euro has peaked, at least short term, with a test of 1.39 to 1.41 due prior to any new highs above 1.60. There is good chance to see 1.18 to 1.23 within the coming 12-24 months.
30 year yields peaked recently around 3.95% and should at least test 3.00% during 2008. After that level is tested, yields should rise for several years, possibly reaching the high single digits not seen since 1994. Refinancing and/or locking in longer term loan rates around current levels will prove to be one of the best financial moves in the next 10 years, second only to eliminating debt all together.
For what it's worth,
Ken
3 comments:
doesnt matter over the last decade dip buyers have always
comeout on the top. if your
predictions are correct
all the more reason to jump
in with both feet and buy.
good point about the last decade, but most people that say they are buy and holders lose their conviction at the worst time, bailing out at the bottom and missing the monster move that follows. If you are the exception to the rule, God Bless. Those that know they don't have the stomach to watch their portfolio decline by 40-60% will do much better waiting until conditions are in historical alignment with lows, rather than today's highs. Thanks for your thoughts, keep them coming.
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