No response from our number one bull yet, but here's the update as of this morning:
On the bear side we missed some very important ones. I've added the following:
1 The Bear Stearns outcome will most likely led to more regulation of Wall Street. As the hearings heat up in Washington the uncertainty of the outcome will increase the cloud over the markets. Most likely the days of investment banks enjoying being on the right side of 20-30X leverage will be history.
2. Despite continued downward earnings revisions, earnings projections for 2008 and 2009 are still too high and will continue to be revised downward.
3. Uncertainty over the outcome of the elections will continue to be a drag on the markets and the uncertainty will accelerate as we get closer to the elections. The probably outcome of the elections are pretty much all negative (higher taxes, better protection for US jobs, higher capital gains taxes, more regulation, higher deficits, more socialism and less capitalism)
4. Forced deleveraging of the hedge funds will led to more selling which in turn will led to more selling and so on and so on.
On the bull side I’ve added the hedge funds being net negative, but I've not added insider buying or negative sentiment because insider buying (strong earnings/balance sheets etc) are historical and negative sentiment will only led to bear market rallies over the next several years. I’ve also added the fact that I am bearish since Slider believes in reading the players and not the markets.
Here is the revised list:
Pros and cons of being bearish or bullish in today’s market:
Bullish case:
1. Real interest rates are now negative in the US
2. The Fed has been aggressive and very creative so far. The Fed has already utilized methods that have not been used since the great depression and we are still in the first or second inning of this down cycle (this really should scare the $hit out of you instead of being a bullish factor, but I’ll give you this one)
3. The lower USD will reduce imports and increase exports
4. Market has successfully tested the lows twice and held.
5. There is still excess liquidity in the system
6. Hedge funds are net negative
7. Jim_P is bearish
Bear case:
1. Every cycle of extreme over leverage has ended in a period of extreme under leverage without exception. The only other time in history that leverage has gotten this high was back in the 1930’s.
2. The average time period to go from extreme over leverage to extreme under leverage is about 9-10 years and we are just in year one of the deleveraging process.
3. Record energy prices are starting to feed their way into higher inflation and are also reducing the consumer spending power
4. Consumer demand has historically been fueled by negative saving and excessive cheep credit over the last 10 years and we will have the opposite over the next 10 years. (BTW the last time negative spending was this bad was back in the 1920’s)
5. Home equity loans were a primary source of credit in the past and that is not only coming to an end, but many of those lines of credit are being withdrawn or reduced.
6. The BOE and the ECB are both more interested in fighting inflation than saving the economy and the financial system. (1929 déjà vu)
7. The total losses are now being estimated by some to exceed a trillion dollars to the world’s financial systems and the US recession will only increase those estimated losses in addition to the losses around the corner from credit card receivables, home equity loans, other consumer credit and leveraged (LBO) buyouts done in record amounts at the very end of the last business cycle. (BTW if these projections turn out to be are true the bubble will end up costing twice as much as the Japanese credit bubble cost)
8. Bad debt is just now starting show up in home equity loans, credit card receivables, leverage buyouts done before the recession (just wait till the recession get in high gear) and other consumer lending.
9. Food inflation has become a serious problem due to both bad political decisions on ethanol and an increase in demand for better food from the developing countries such as China and India.
10. Grain inventories are at historic lows despite almost perfect weather in the mid west for close to a record time period.
11. We are years past due for a drought in the mid west (just wait till the hungry cicadas wake up from 13-17 years of sleep).
12. The feds ability to deal with today’s problems are limited by the impact it would have on the teetering USD if they are forced to use taxpayer money to bail out the system. All past extreme credit/real estate bubbles ended up costing the taxpayer in the end. So far the Fed has been creative without using taxpayer money, but the odds of them not having to use taxpayer money is about as close to zero as you can get. The 1991 credit bubble in Finland ended up with the government taking control of 31% of the banking sector and supporting 41 of the S&L’s with guaranties and loans costing the taxpayer 11.2% of GDP. The 1991-2002 Japan credit bubble ended up costing the taxpayers $500 billion in public funds for loan losses, seven banks nationalized, 61 financial institutions closed and 28 merged for a total cost of 24% of GDP. The 1987-1993 credit bubble in Norway ended up with the governments taking control of 85% of the banking system assets for a total cost of 8% of GDP. The Sweden credit bubble required the government to guaranty all of the banks losses for a total cost of 4% of GDP. The US S&L crisis ended up with 1,043 S&L’s closed at a total cost of only 3% of GDP. Today’s credit bubble is the largest bubble in history and we are in no position to use taxpayer money to bail out the system given our current deficits, projected entitlement costs and on the going costs of the war in Iraq?
13. The current system of using asset backed securities for the creation and distribution of credit is history and it will take years for a new system to be developed and accepted by the markets.
14. Despite record energy prices demand for energy is exceeding new supplies resulting in record prices.
15. There has never been a period of prosperity in history without abundant and cheep energy.
16. The prosperity over the past ten years was driven primarily by cheep abundant credit and the banks do not have the balance sheet to expand credit in the future. This will worsen as more losses are recognized and the recession progresses. The pendulum always swings too far in both directions and this will be no exception.
17. The average downturn in the economy following an extreme credit bubble bursting has been 8-9 years
18. The mono line bond insurers will either fail or get bailed out before very long.
19. Dramatic bear market rallies are very common and this is the first bear market when IRA’s are allowed to short the market through the use of ETF’s which will make the rallies even more dramatic.
20. The Bear Stearns outcome will most likely led to more regulation of Wall Street. As the hearings heat up in Washington the uncertainty of the outcome will increase the cloud over the markets. Most likely the days of investment banks enjoying being on the right side of 20-30X leverage will be history.
21. Despite continued downward earnings revisions, earnings projections for 2008 and 2009 are still too high and will continue to be revised downward.
22. Uncertainty over the outcome of the elections will continue to be a drag on the markets and the uncertainty will accelerate as we get closer to the elections. The probably outcome of the elections are pretty much all negative (higher taxes, better protection for US jobs, higher capital gains taxes, higher taxes, more regulation, higher deficits, more socialism and less capitalism)
23. Forced deleveraging of the hedge funds will led to more selling which is turn will led to more selling and so on and so on.
24. Uncertainty over the USD
We need the bulls to keep coming up with new ideas, I'm getting myself depressed!!!
Jim |
