Been out of the country for the past week, so a little behind in some writing. No matter where we go on the planet of course, we are always tracking the market. Last week was colourful indeed. Bailout package scraped through. Now we will wait to hear details re the plan expected Wednesday on how to help homeowners get principle reductions on their outstanding mortgages. I think team Obama is on the right track with this theme. Until debt is reduced spending cannot rebound. Even with reductions in debt service payments, spending will be weak for a good long while. And so it should. People bought way too much, and so now they will spend very little for longer than many can imagine. Might as well get used to it. Consumers have come to their senses at last, and there is just no tricking them out of this new wave of frugality. We must just accept it and look for the opportunities this new era will bring.
As for the market, no verdict yet. Weakness last week, but held above the November lows. I note there is plenty of pessimism to go around though. Dark, dark, dark. Maybe this is the darkest before the dawn. Governments of the world are all moving mountains to get the system inflating again. They will be successful one of these days. In the meantime, we continue to guard our capital very carefully. We are recently long a little, but will continue to watch it very closely.
I read two good books this week. Obama's “The Audacity of Hope”, and Al Gore's “The Assault on Reason.” I recommend both. Even for Republicans it seems to me that reading the worldview of the new President is insight worthy of our time. “Audacity” covers the main themes that will be relevant to how Obama leads. My take is he is a disciplined, thinking man with a very tough job. Gore's “Assault” itemizes the horrors of the Bush Administration. Want to talk about dark? Undoubtedly history will grade the last 8 years as some of the darkest times in the life cycle of democracy. North Americans need to re-ignite a passion for reading and thinking, enlightened debate, personal responsibility. Media has to retract from sponsored show biz and sound bites and get back to professional journalism.
The silver lining though is that now that we have “hit the wall” so to speak, there is probably more chance for meaningful, productive change today than there has been in decades. As my Irish Granny used to say, “’Ta hell with poverty.” Onward we go.
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Cory’s Chart Corner
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Amazing that you advocate principal reductions for deadbeat borrowers. What about responsible borrowers who lived within their means and are working hard to stay afloat?
Regardless, it won't work to reignite credit growth. At best it will slow the rate of decline.
I don't think anyone can really say with any kind of certainy at all where the market is headed right now because it is being driven almost entirely by news out of Washington which is an abnormal situation. Somebody says something the market likes – stocks go up, somebody says something the market doesn't like – stocks go down. US markets were headed to within an eyelash of the november lows last week before Washington – again – made an announcement they liked and they came back up a bit. I understand that markets will improve ahead of the actual economy, but there is still just too much negative data out there which is largely still worsening and not showing many signs of at least leveling out. On top of that, with earnings estimates continually being slashed, stock valuations may not be as attractive as they appear to be.
I've noticed some people here refering to Buffet, and if he is buying stocks then it must be a good idea, however people should remember that he can afford to wait for years if necessary for his investments to pan out. How many billions has he lost over the last few months? Thing is, no matter how much he has lost, he is still a billionaire and it really has no impact on his life – for the average person to see their investments drop 10-20% or more, it is a severe kick in the gut. Unless you are in Warrens tax bracket,or those of his ilk, follow what they do with caution.
For my two cents worth I think we at some point will drop past the November lows, and be looking at something around S&P700. I could be right, I could be wrong, but regardless I don't have any desire to get involved in this murky market anytime soon, until there is something reasonably concrete to build off, and not a Washington built house of cards. If I ultimately miss out on the first 20-30% of the next bull, I can live better with that than with the possibility of taking a 10-20% (or more) whacking getting back in too soon. Money is too hard to make, too easy to lose.
You advocate “personal responsibility” and yet are in favor of principal reductions for delinquent homeowners.
How do you reconcile those seemingly opposing ideas?
A sobering reminder that the p/e ratio for the S&P 500 index has actually risen in recent months:
http://www.investors.com/breakingnews.asp?journalid=87868979
The author notes that “even after an incredibly punishing bear market, we're not even close to the undervalued end of the valuation spectrum.” While there are always trading opportunities, I agree with Danielle that caution is advised. Plainly, this is no garden-variety recession.
The present mess was caused by willing participants on many sides. The homeowners who borrowed too much were just as foolish and guilty as the lenders who lent them too much. Now the lenders are in pain with the homeowners. The solution must lie in finding a compromise where possible that helps both. The lenders have an incentive to re-work terms of their loans where they would rather have borrowers in the homes than out. Creative motivation is there for both sides if they can work out solutions. It wont be possible in many cases where people literally have no job, or income, no ability to carry too much house. Those cases will go through foreclosure and the lender will be left re-couping what they can. Pain and hassel, lessons learned hopefully. But they made a bad loan, that is the way bad loans go.