Striking a Balance
October 5, 2009
Good morning. Last week the market had its second down week in a row, with the SPY down 1.96 to close at 102.49. That represents a decline of 1.9%, and is 5.2% off the high of 108.06 reached of 9/17. Is it a healthy pause or is the rally over? To be determined, but clearly the “buy every dip” mentality evident in the long run-up has cooled some. Economic numbers in the last couple of weeks have shown uneven progress in the recovery, and those most recent actually seem to indicate that the recovery is stalling in the face of huge governmental stimulus. For instance, the Cash for Clunkers Program increased the pace of car buying to a 14+ million annual rate, only to fall back to a 9+ number at the programs conclusion. The somewhat meager increases in housing prices and sales, with the governmental credit of $8,500 for first time buyers, certainly causes some negative thoughts for that market when that program ends on Nov. 30. Maybe the most troubling was the employment negative surprise last Friday, showing higher than expected job losses, higher unemployment rate, lower hours worked, and lower weekly wage. Even government lost jobs, not a good report.
What is the problem? Of course that, in itself, is a fairly uneducated and ill-informed question. It assumes that there is only one problem, and that the right sound bite solution by the right glib politician will magically put us back on the yellow brick road in a matter of one or two standard attention spans (maybe a few days). The fact is that a sound and growing free market is something that is the result of countless decisions by millions of people to invest, train, produce, see opportunity, etc. It is helped along by entrepreneurial thought, serious energy, education, access to capital, the right rules of the game (regulation), and some failures that only encourage the right people to try again. When running properly it is hard to even keep track of the countless people seeing little cracks of opportunity and moving to fill that void for a profit. That movement, moved along by access to capital (capital being in its own search for ideas enabling it to profit at higher levels), causes the hiring of people and demands for new inputs necessary to create a finished product that others are willing to purchase for a profit. When it works it is a beautiful thing, when it does not, as now, it is very difficult to put your finger on how to get things started at all, let alone efficiently. It is even more difficult when the task is given to elected officials in a seemingly halfway corrupt governmental system.
Is every politician a crook? Of course not. Then why am I so down on their ability to help this economy? There are several reasons, the first being that the same set of skills and motivations that enable a politician to get elected are not necessarily the same that understand the variables that allow a successful economy to operate. It is not that there are no elected officials with a solid business background, in the Senate for sure there are many, there just do not seem to be enough that seem to understand the balance of what makes a strong economy. The inclination is to provide sweeping programs and make government the solution, maybe the right choice sometimes, maybe not. What certainly does happen is to have the Programs for sure benefit certain people who can gain access to government, maybe not at all the people that have been most hurt. In the current case we have spent hundreds of billions on a few institutions to help with a housing problem, but very little on the actual people with the house they now cannot afford. Instead of giving $500 billion (or so) to non-efficient banks with corrupt Boards and greedy CEO’s, we could have sent a $5,000 check to the roughly 100 million households we have with the requirement that they either use it to pay down $5,000 of their mortgage or use it for a down payment on a new house. The money would get to the Bank just the same, but at least the homeowner would have some relief on his or her balance sheet as well.
The second inclination of the political mind is to protect the governmental workers. We have seen over a long period of time that the wages of governmental employees have been increasing relative to private sector employees. I have read recently the numbers are approaching $70,000 government vs. $50,000 private, not sustainable in my mind at all. It is not a question of whether the governmental employees deserve the current structure; it is a question of whether the rest of society can pay for it. How many workers at Wal-Mart does it take to pay for the pension of one hack Chicago alderman? The third dangerous mind set is that everything government does must continue. We have seen outrageous failures in regulation, governmental response to calamity, tax enforcement, you name it, yet the debate is not whether the tasks are even possible, but how much more should they be given to do more of whatever it was did not work before.
What is the danger? The danger is that before the market essentially fixes itself the government will raise taxes and fees, provide onerous and useless regulation to the not guilty, and have the populace so deep in debt that recovery is not possible. When I was a relative ute (Did he say ute? From Fred Gwynn) I was able to finance a fledgling condo remodel business on my credit card for around 8-9%. Last Friday I received a notice from Citi raising my interest rate to 25.4% on a card I have never been late on or carried a balance. These are the guys I am shoveling cash to? What does that do to the guy who may have any sort of an entrepreneurial thought, but is carrying a balance? The population is buried by these people in debt, and in many cases is paralyzed by it. We talk about all the positives of the current situation vs. the Great Depression; we do not mention the negative that this time the average household is carrying a tremendous amount of debt. In addition, we have made the political decision that the refinancing and return to absurd oligopoly returns of the large banks is more important (or at least a higher priority) than the return to health of the average citizen. I think we will regret that decision.
As for the market, I think the furious rally is done for a while. I do not have a real quibble with the level of the market, like “We are trading 102 on the SPY, it should be 92.” I do feel that the solid V shape recovery in the market averages has not and will not match the recovery in the economy, which evidence suggests will not be V shaped. As last Friday’s job report indicated the recovery is very slow and fragile, and experts are pushing the recovery out by quarters and years on an almost daily basis. The recovery seems to be U shaped at best, and I feel the stock market will, at some point, reflect that. Most of you noted a bullish spread put on in your account of Friday in the XLF. I do think that this area will continue to either stay steady or move up, and I feel (not approvingly) that as time goes by the government will relax the terms to the large institutions they have lent money to. After all, you should get something for all that lobby money, and they seem to always benefit. In other words, I really believe that all the supposed pounds of flesh the taxpayers were supposed to receive for the billions in bail out cash will prove illusionary, and we, as investors, should benefit by that somewhat. I also feel that we might be ready to invest a little more in the oil sector in the coming weeks. Other than that, we will continue to try and benefit by the relatively high call prices and make money selling calls as the market slows.
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