Email to Investment Partner
I’m not sure that the credit markets are going to be loosened up by the bailout. People still don’t get it. There is no credit available - to anyone. So, we have an entire world economy that has been built on cheap and abundant credit, and now it is gone. Last year I got very bearish, and said that “easy money was gone for good.” What I didn’t think is that all money would be gone (I.e. no credit at all). This is what we have now, just as debt is at record levels.
I see it in the muni market. I believe that local and state governments are going to have to start going to the Federal Government in mass to get loans. Why? Because they have no other place to raise it. The Fed is going to become the true lender of last resort.
We are going to have to see mass bankruptcies on all levels (personal, corporate, and muni government) to wash the debt out. Then people can rebuild their lives with a lower standard of living and less credit. Or we are going to have to inflate the shit out of the dollar so the debt is worth less. As I have been saying, we will not see this easy money again in our lifetime.
…I think we will hit Dow 7000 first. Didn’t I say it was going to 10,000. Nobody was saying that last year - It sounded crazy - but it happened. I also think the NASDAQ is going to 1000 - 1400 range.
Email to an investment partner:
“Dow 10,000. I may even lower my target. Funny that the Dow was over 13,000 just a couple months ago. I was saying to myself “sit tight this is crap and we are going lower.” I think I said to you that the January fallout was not nearly enough to clear out the excesses, and that we are going lower.
Consumer is in big trouble.
$4+ Gas prices
Lower home prices
Negative home equity
Major debt (Credit card debt is going to be a major problem - how many times have we said this)
No savings
Rising unemployment
The American consumer is going to have to completely change their habits. I predict that average consumers will have a lower standard of living in the next decade than they became use to during the past decade. As I said a couple years ago, “consumers were living beyond their means, and will have to start saving soon and reduce their spending.” With no savings and a massive wealth destruction of lower house and stock prices (combined with higher food and energy prices), average living standards are going to fall. My advise to the average consumer and to Congress is to tighten their belts, stop the unnecessary spending (waste), save and invest in the future. Not that hard, but for the average consumer and Congress it seems a Herculean task.
We have been running our lives and our country with no room for error (like a stock that is priced for perfection). As long as everything is good, people (and the country) were spending like bottomless pits. The problem was that lenders and the fed decided to feed the fire. Problem is that things are going bad and without room for error the economy is not going to be able to take it for long.”
Email to an investment partner:
“Housing mess is going to get much worse. Not near over. Job loses will get worse. Banks still don’t know what they have on books. Write downs not over. Consumer spending will slow. Earning will slow.”
Email to Investment Partner
“Unemployment claims were up big. Also Monster.com reported its index of jobs was down big (attached clipping on it below - listed backwards for some reason). This index has cratered since Oct. I think there is another big jobs report tomorrow. I cannot believe this market has rallied back like this. Also, a very interesting bit of info I found today in BMY’s earnings is that it took a big lose because of exposure to CDOs. A drug company taking a big lose because of investments in CDOs. I have been waiting for this with the Insurance companies, but didn’t expect it with others. It tells me that any big company with a lot of investments is exposed to asset write downs.”
Email to Investment Partner
“So, I have been spending time thinking about the 1920s and 1930s. From everything I remember reading the 20s were a time of great excess. Just like the present (well up to now). What concerns me is that a major factor in the crash of the stock market was that people were buying equities on margin. Basically, thinking that stocks couldn’t go down (and if they did they would be quick enough to react). Well, after this period (and the great depression), the government put regulations in place to make sure people didn’t have margin loans on equities for more than they could cover. Seems logical.
Fast forward to 2005. Realtors are telling home buyers that home prices never go down. MR and MRS Joe Blow are making tons of money off flipping houses. MR and MRS Joe Blow are buying the most expensive house they can afford (not afford) by taking out as much margin as they could. The margin was in the form of no money down, negative amortization ARMS, with no verification of income or assets. I even remember talking with you about it - people making 100K and buying $1,000,000 homes. It’s called margin and it makes you rich on the way up and kills on the way down. Well, just like in the 1920s the regulators were asleep during the party. They had effectively protected the system from a margin meltdown in the equity markets by putting protections in place decades ago. However, no one saw it coming with houses. Houses were no longer about making a home, but about making money.
Bottomline: I see an scary similarity between the margin meltdown of 1929 and the coming margin meltdown in housing.
Nothing kills like margin. And what we really have now is a major margin problem.”
Email to Investment Partner:
Markets on the edge of a major breakdown. Next week will be very telling. From what I have read the market is very close to breaking below major support. Dow around 12,850. If this happens next week, technically it should be the start of a major correction (bear market). Other indicators like the transports have already broken their technical levels. I don’t see how this doesn’t get bad. As I have been saying, the credit crisis is just starting (even when many were claiming August was the low). Banks and brokerages have no idea how bad their assets really are.
I still hold to my thought that Dow 10K is coming….. Make sure your money market accounts (cash) is in a bank account (FDIC insured) or in a money market that holds treasuries.
Wealth destruction may be on grand scale between the hit to leveraged houses (mortgages) and stock market loses.
Remember employment is a lagging indicator.
Email to Investment Partner
I saw this coming a couple months ago and it is going to get worse. Credit card defaults are rising, so are number of unprofitable bank loans. People were using their homes as cash machines (as we have said many times) to fund their overindulgent lifestyles. They will try to continue the lifestyle as long as they can (using credit cards now). But, it will eventually pop. Many companies have done the same thing. They were buying back stock and using cheap/easy money (debt) to finance it. As a CEO it was easy to announce a buy back in your stock would pop 10%. But, the cheap money always comes to an end. Private equity, companies, individuals all took out debt they shouldn’t have and banks and brokers were lending to them in many cases without looking at Cash flows and assets, and without getting guarantees. And even allowed them to make payments on loans with more debt (payment-in-kind loans). No way this doesn’t end BAD. Dow 10,000 within 12 months.
Companies with big debt and no cash flow are going to be in a bad position going forward…. Companies with little debt and good cash flow will benefit long term
Email to Investment Partner:
Dow is going to 10,000 w/in 12 mos. I think having a lot of cash is a good thing. One other thought is to make sure your cash is secure. Is it in money market accounts? If so, make sure the money market fund invests mainly in Treasuries and not CDOs, mortgage debt, and corporate debt. Or that your cash is in CDs that are FDIC insured. I think CDOs are in many Money market funds and people don’t even know they own these. Also, if credit problems increase I think some bank failures are possible. FDIC insurance provides safety. Okay, this is worse case, but the whole point of cash is safety - so it’s important to make sure it’s safe.
This credit problem is way worse than most everyone thinks. Just like everyone thought housing bottomed at beginning of year and they were way off. I think most people do not understand how bad and deep the credit issues run. We will see.