Monday, October 26, 2009

I will be taking a long break from this blog

A lot has happened in the past few months, with the most significant being that I have purchased a home. It is my primary residence and is a fixer-upper. I've stayed away from looking at real estate as a major investment in the past, but I believe this property qualifies. It is an 80-year old craftsman bungalow located a mile from downtown, and I think (I hope) I haven't bitten off more than I can chew with the work needed. I will be taking an indefinite break from this blog while I tackle this new project and wait for some intelligent thought to strike me regarding the future of our economy.

To comment on what has transpired in the markets and the economy over the last several months, there are two major things that have happened. First, in my view the Fed realized that the major financial pillars of our country were still in horrific shape and were going to require another major bailout. There are several ways to conduct a bailout, and the method by which the US government directly hands over billions of dollars of cash is seen as extremely unpopular. Because the government wanted to avoid going down that road again, it instead is simply creating a hyper-profitable environment for banks through tools such as a highly subsidized discount window. This has the same effect of bailing out the banks at taxpayer expense, but is less direct and thus is much harder for Mrs. Palin and her proverbial "Joe Sixpack" to understand. Thus, same results occur with the same costs, but without the protests or regime change. It has another side effect which is bankers patting themselves on the back and using more of those profits to pay themselves large salaries at shareholder expense. I would have preferred direct transfers of wealth from the taxpayer and all the anger and regulation that accompanies it, but then I don't have as much money as Goldman Sachs so that battle is over before it begins.

The banks are still in bad shape and are still facing ever-expanding numbers on the liabilities side of the balance sheet, but the earnings side will be growing at a faster rate than the liabilities side in this environment. Thus, many major banks will simply grow their way out of debt eventually, thanks to the taxpayer.

The second thing that occurred (although related to the first) was that we created an ultra-liquid environment. All that liquidity needs to chase something, and so it is chasing assets such as stock, bonds, commodities, foreclosures in California, etc. It is all the liquidity chasing assets that has pushed up the stock market without a corresponding rebound in the economy. It is why so many people are wondering if the market has gotten ahead of the fundamentals of the economy (it has), and it is why people are wondering if we are repeating the last 20 years of Japan's markets (we are). If you consider the fundamentals, the market should still be at levels near March, but it is not. There would be a slight premium added for the fear being gone, but not to this degree.

This highly liquid environment is currently viewed as a positive to people who held bad assets such as financial stocks, but it is soon likely to have some negative impacts on the real economy. If liquidity starts chasing oil, we're going to see oil prices spiking higher even while demand stalls or decreases. We saw this happen in 2007, and it has a very real, very negative impact on the economy (although a positive impact on the environment).

It would be nice if we would preempt this move in carbon-rich energy by taxing it so that - assuming the price will increase anyway - we would get the surplus income rather than Saudi Arabia, but that is another post for another blog.

How should you position yourself? I don't think stocks are going to perform in the future at the level people aged 40 and under are expecting. I think you should buy old world valuables like gold, oil, and property and hunker down against inflation. I don't believe we have a modern-day Paul Volcker who will break the back of inflation, and I don't believe we will get one until we've already suffered several years of severe inflation and are willing to sacrifice in the present to be better off in the future. That doesn't happen very often because the policy cycle tends to be longer than the election cycle.

I personally am hunkering down by locking in a 30-year loan at 4.5% and paying it off as slowly as possible while keeping it tied to an inflation-proof commodity (land). A lot of smart guys (John Paulson) like gold. I personally would prefer other things that have more utilitarian value like oil or trees or land or lithium or whatever strikes your fancy.

I want to thank you for reading my blog in the past. I'm sorry I didn't foresee this method of bailout and the liquidity chasing asset prices above their economic worth. The best I can do is analyze fundamentals and make decisions based on that analysis. I had a very profitable and entertaining time during the liquidity crunch, and a very unprofitable and unpleasant time during the rise in liquidity. What have I learned through all of this? It is a smart move to short segments of the economy when you see a ticking time bomb, but don't hang around too long trying to catch the bottom. Also, never underestimate the motivation of the federal government to keep markets rising at any expense to the taxpayer.

Take care, and thanks for reading.

Tuesday, July 14, 2009

Rumblings about China

I don't remember where I first read it, but a few weeks ago somebody somewhere in the blogosphere pointed out how China keeps publishing numbers showing that their industrial output is rising, yet China's utilities show that electricity use has been falling dramatically. These two things would not usually move in opposite directions. It was soon after that we found that China's utilities abruptly stopped reporting output data on their power plant generation. Ah. Problem solved. No, wait...predictably the whole debacle then spread to nearly every economics blog on the Internet.

This of course includes Paul Krugman who in his version points out that GDP could therefore be overstated in China in a post entitled "What you don't know...".

The whole storm seems to have blown over, yet the ramifications of what is suggested are frightening and as of yet are unresolved. Who's ready for the double-dip recession?

Monday, July 13, 2009

Meredith Whitney on CNBC this morning.

Talking about Goldman and banking in general over the rest of the year. I was not at all expecting her take on Bank of America which sounded more bullish now than anything. It does sound like she's taking a shorter term (two quarter) view here, but still the bullish sentiment surprised me.

Robert Reich has some great posts on GM.

A bit of a delay here again, but back at the end of May, former labor secretary Robert Reich had a series of great posts on GM which expanded to the larger issue of the future of manufacturing in America. I really recommend that you give them a read.

A preview:
First and most broadly, it doesn't make sense for America to try to maintain or enlarge manufacturing as a portion of the economy. Even if the U.S. were to seal its borders and bar any manufactured goods from coming in from abroad--something I don't recommend--we'd still be losing manufacturing jobs. That's mainly because of technology.

You can find the posts on his blog:
Part 1
Part 2
Part 3

Meredith Whitney upgrades Goldman Sachs to "Buy"!

This is important news. Meredith Whitney is one of the few banking analysts I trust (really the only specialized banking analyst I trust). I agree strongly with her negative outlook on financials (specifically credit card firms), Citi, Bank of America, and the economy in general. She is making this bullish call because of - rather than in spite of - her negative outlook on the economy.

I've watched Goldman for a long time knowing that eventually I would want to be purchasing shares giving their outsized influence on government. I've been waiting for the prudent time to invest. I am still very bearish on the economy as a whole and on banks, but if Meredith is suggesting now is the time to take a stake in Goldman then I will strongly consider it. In all likelihood I will be purchasing a significant personal stake in Goldman Sachs this morning before earnings are released, while still maintaining my numerous short positions on home builders and regional banks.

Notes on Meridith's call are here.

Sunday, July 12, 2009

Wall Street 2 is toying with my emotions.

I've been reading way too much on "Wall Street 2" over on Dealbreaker, and according to them Shia Lebouf (who?) is going to be the lead. The original "Wall Street" has been one of my favorite movies since I was about 11, so I take this sort of thing much too seriously. Given the market turmoil there is a lot of fodder for the movie so it could be a good one, but despite the involvement of Michael Douglas and Oliver Stone I fear the worst. Time will tell.

Wednesday, July 8, 2009

The home sales gap, and why I'm short the home builders.

CR had yet another post on the large (and increasing) gap in home sales activity. From what I can tell over the last quarter, folks read about rebounding sales in the subprime sector and rushed in to buy up home builder stocks for the coming rebound.

There are two problems I see with this. One is that a rebound in sales in subprime is not a rebound in sales in the market as a whole. The more expensive the grouping of homes you look at, the more dire the situation. Inventory levels are still very, very high. Once you get to homes selling above the conforming loan limit (the homes that would require a jumbo mortgage) the inventories get frightening. We're talking years and years of inventory. I've even seen this in my local market, which has been fairly resilient. The homes above $1 million are looking at 4-5 years of inventory.

The second problem is that these home sales you do see are only for existing homes. If I remember my stats correctly, nearly 50% of the homes being sold in California are distressed sales. There also appears to be a very large shadow inventory of homes people would like to sell but are not listing in this market. This tells you to things: one, prices will stay depressed for a long time, and any future rebound in sales will not be met with a rebound in prices (sales usually rebound long before prices). And two, there will be little to no demand for what the homebuilders make (brand new homes at the cost it takes to build a new home) for a very long time.

CR's post is about how the New York Times is recognizing the gap, but they are failling to realize how many of the existing sales are distressed sales.