Mark’s Market Commentary – September 12, 2002
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I apologize for the absence yesterday. Thanks to the fans concerned about my welfare. But unlike other commentators who issue some type of blanket excuse like “due to unforeseen circumstances”, I am going to explain to you guys what happened.
Unfortunately, I was dealing with flying mud, not flying Spanish Erotica at some 5-star resort.
This particular windsurfing spot is 275 miles south of the border. The last 41 miles is an unimproved dirt road. There is no phone. There is no hotel. There is no running water. There is no Internet. There is no cell phone service. There is no Maria squealing or screaching at the open each morning. The place is desolate, and lucky to get a half an inch of rain each year. Anybody who is curious about this place can check it out here.
The remnants of Hurricane Hernan decided to throw a Pineapple Express to the Baja peninsula, and we got 6 inches of rain in 12 hours.
The campsite was soaked to the bone. The road we drove in on turned into a quagmire. Luckily the waves were cranking and the wind was blowing, because we had to wait it out a couple of days to allow things to dry out.
Yesterday, we made a run for it. Huge running starts to blast our way through the mud fields. Flying mud turned my truck into a rolling Stoolmobile.
And as usual, once I was back in the States, I was overwhelmed with the large number of young North San Diego County, 24-year old girls driving brand new BMW 330’s with the dealer plates still on. Chatting on their cell phones. Perusing all the potential husbands on the freeway.
“Look at that truck. All that mud. Looks like a rolling turd. And those surfboards on top. How disgusting!”
“Aren’t you glad we don’t have to date jerks like that? He’s probably a construction worker or something.”
“Yeah, nothing like my current boyfriend. He’s the top closer at New Century (NCEN), and just purchased a 2003 BMW 745.”
“I’ve got my eyes on this hot guy at the gym. He’s a financier. Something about running a hedge fund dealing with exotic securities. He’s driving a new Porsche 930 Turbo.”
“Yes, those loser surfer types with the big trucks might as well chase the big hair chicks in Costa Mesa. Little do they know that high finance is the future. How else could we have afforded these new cars with so little down?”
“I can’t wait to see the gigantic houses we will be living in when we finally reel in some high powered husbands. Just imagine the giant loans we’ll be able to qualify for.”
Recovery From What?
Over the last six months, we have heard the constant drumbeat of the “recovery”. First, it was the “v-shaped recovery” which was sure at hand after March Madness. When that rally failed, then the discussion was adjusted to the “coming recovery” which was supposed to happen in the second half. After the rebound off the July lows, the economists are now harping on the “delayed recovery”. And now people are talking about the “bumpy recovery”?
Recovery from what?
Recovery from the greatest money supply expansion ever? A 15-year expansion by Uncle Al which exceeds the expansion of all other Fed Chairmen combined?
Recovery from the longest and largest percentage increase in consumer retail spending of all time?
Recovery from record auto sales, month in and month out?
Recovery from the top of a great real estate bubble?
Recovery from a record 265 days of 40-year low interest rates?
I’d say that one day we will look back at September 2001 to September 2002 and view this time “As Good As It Gets” for the American consumer.
And as for the rest of the world’s U.S.-centric global economy, if you can’t make it now, during the greatest money supply explosion of all time and record consumer spending, when are you going to make it?
When the consumer retrenches?
When housing prices collapse?
When the 265 day low interest rate streak is broken?
When Uncle Al is 82 years old and Andrea has already left him?
The Lending Collapse
Out here in the trenches, things have taken a dramatic turn for the worse here in Southern California. In just 5 business days, we have gotten some “material adverse change” notices from some of our business borrowers. One aircraft supplier has told us that business has “stopped cold” the last two weeks. The metal fabricator who got cornered by his employees last month because of the lack of overtime told us things continue to get worse and layoffs are imminent.
But the big shocker came from one of our local hardware distributors. Just last month, he said business was soft, but he was optimistic about improvement. Yesterday, we just got served with a notice that the company is in the process of liquidation. Yes, liquidation. Not sale of the business. Not sale of assets. An auctioneer is now conducting a full scale liquidation of all accounts receivable and inventory. The bank will recover about 85% of its money. But over $1 million in vendor credit will be wiped out.
And another real estate investor who got tired of earning 1.6% on his money market account purchased over $1 million in subprime real estate mortgages last year. Two weeks ago, he told me 3 of them went bad and he had to initiate foreclosure proceedings. This morning, he informed me that all 16 loans had now gone bad, and all 16 were in the process of foreclosure. Needless to say, he’s written off the idea of making any more subprime loans.
The reason this is important is to illustrate how lender sentiment can change on a dime. Just as Doug Noland has warned us, when the lenders turn sour and get scared, the game changes immediately. Just 3 weeks ago, every deal here at the bank was a slam dunk, especially those secured by real estate. Now, the tone is decidedly different. Now its about capital preservation, and all marginal borrowers are being dealt with by a heavy hand. Nothing like the possibility of a major loss to dry up lending enthusiasm. The go-go days of commercial bank lending has now come to an end.
The high degree of lender complacency which still exists in the mortgage market cannot be underestimated. That’s the last market to crack. And it’s the biggest. Once the greed turns into fear, then the liquidity machine stops. And the further the complacency gets extended, then the sharper the reversal. I suspect that we will not get any warning. Once it turns, it will be too late. So that’s why I’m continuing to hold a lot of my shorts on these lenders and absorb the whipsaws.
Today’s Action
It appears that no amount of rehab, 12 step programs, or “pick me up” counseling can drag the Supermodel Index (SOX) out of its funk. Just another example of how the “girlfriend of the month” during March Madness can be quickly discarded. Today’s “girlfriends of the month” (homebuilders, mortgage lenders) appear to be impervious to harm, but one day, that sector will get waylayed also.
Other than dealing with the latest lending crisis which have hit our bank, I haven’t had much time looking at the market internals today. But it doesn’t appear that much has changed since I left. Just the usual short squeezes, buying panics, and kneecap breaking. Too bad for the dippers who bought into yesterday’s gap up, only to get smoked the last two days. Looks like the usual tire spinning and flying mud in the futures pits. Nobody is winning. All the short term traders are getting shafted. The head and shoulders pattern on the broad market looks like it has been completed. The Nikkei also looks like it has successfully retested the breakdown area, and that market will probably break off to the downside after today’s weakness here in the U.S.
We are also starting to see the point of diminishing returns of excessive FEED from Uncle Al. The FEED index is still in a bull market, with no evidence of failure. Yet the faster Uncle Al pumps, the harder it is for the markets to gain traction. More evidence of Doug Noland’s theory that the terminal stage of a credit bubble is the most difficult to prop up. When will it crack?
I am timing the crack of the Credit Bubble with the day that Uncle Al’s Viagra stops working. We’ll hear about that when Andrea announces a “sudden” request for a divorce, followed by rumors of an affair with a young NBC staffer. After all, can you blame her? Who wants to waste time trying to arouse some old guy who spends his time in the bathtub reading economic statistics? What kind of unusual antics are required of her now to get him going? Will Uncle Al and the Credit Bubble run out of gas at the same time?
We’ll have to wait and see.
Position Summary:
The order to go long on BGO at 1.31 was filled. No other changes.
We are 76% short, 2% long, 22% cash.
Half Short:
XLNX at $22
CLS at $25
QCOM at $30
DELL at $28
TOL at $27
MMM at $128
COCO at $37.
T at $13
NCEN at $30
PG at $91
CDWC at $46
LEN at $56
Quarter Short:
FRE at $68
EXPE at $78
MCHP at $33
SBUX at $24
EBAY at $60
NYT at $51
WHR at $78
AMGN at $44
CCR at $49
NVLS at $52
SYMC at $42.
INTC at $31
MBI at $54
PNRA at $34
JPM at $35
YHOO at $19
BBBY at $37
MXIM at $39
THC at $47
KBH at $47
QLGC at $39
Half Long:
BGO at $1.31
Famous Last Words |
