About Those Predictions I Made

A week or two ago I made some predictions about the markets and international stuff. Well, I want to revisit my prediction about the Dow and S&P going into the 6,000 and 600 territory. From Jeff Saut at RJFS, who is clearly beginning to see the ‘earnings collapse’ in the S&P and Dow:

For the record, the Dow’s December closing ”œlow” was 8149.09 and we will be watching the January Barometer, as well as the December Low Indicator, intently over the coming weeks. However, for the here and now we are watching the S&P 500 (SPX/890.35) as it rests marginally above its 50-day moving average (DMA) at 888.75. A decisive downside penetration of its 50-DMA would be a decided negative, causing us to reduce trading positions. A violation of the ”œMaginot Line” at 851 (please see chart on page 3), however, would prompt us to abandon all ”œlong” trading positions and once again look to hedge investment positions to the downside (thanks to minyanville.com and Jeff Cooper for the Maginot Line insight). While since the ”œpsychological low” of October 10th (839.80), and the ”œprice low” of November 20/21st (741.02), we have been suggesting that the upside should be favored into mid-January, we did not like last week’s action one bit. Moreover, up until last week the equity markets were turning a deaf ear to bad news; last week they started ”œlistening” to bad news. And that, ladies and gentlemen, is a distinct change from what we have been seeing for the past few months.

To be sure, the tone seemed to change last Wednesday when ADP Employer Services reported that 693,000 private sector jobs were lost in December. They also revised November’s job loss number upward to 476,000 from a loss of 250,000 jobs. Since we pay more attention to the direction of revisions than we do to the actual headline numbers, this revision was disturbing. Also disturbing that morning was Intel’s (INTC/$14.15/Strong Buy) shocking news of a 23% decline in 4Q08 revenues due to weak ”œend demand.” Both revelations cast a pall over ”œthe street of dreams,” and when banking analyst Meredith Whitney stated that the nation’s banking complex would need another $40 billion the rout was on, leaving the DJIA (8599.18) lower by 245 points. The Wednesday Wilt broke the senior index below a rising trendline that had been forming since late December, causing one Wall Street wag to exclaim, ”œUh oh!”

Uh oh is right. This is one prediction I would really love to be wrong about it. But I just don’t see how the Dow and S&P can trade sideways or up all year.

Oh, and Jeff ruefully adds:

”œIronically, some of the biggest losers from the Pelosi rules changes will be fiscally conservative Blue Dog Democrats. The ”˜pay-go’ rules they fought so hard for two years ago ”“ to require new spending proposals be balanced with additional revenue or cuts elsewhere ”“ have been gutted. And no term limits will mean they will have to stand in line for a taste of real power. ”˜All of those nice pro-life, gun-owning young Democrats recruited by Rahm Emanuel will never have any real influence now,’ says Grover Norquist.”

Anything Grover doesn’t like has to be good for the Republic!

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Sean Paul Kelley

Traveler of the (real) Silk Road, scholar and historian, photographer and writer - founder of The Agonist.

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  • so blue dogs are moderate dems? heee

    Pelosi Turns Back the Clock on House Reform
    Moderate Democrats will be frozen out.


    Every two years the leadership of the U.S. House of Representatives introduces a new set of rules to govern the body. Normally, this event passes with barely a yawn from the public. But the changes pushed through on Tuesday by Democrats will have real-world consequences for fiscal conservatives of both parties.

    Gone are term limits for committee chairmen, a big comeback for seniority over merit. Cost containment measures on Medicare, one of the fastest growing programs, are simply suspended for this Congress.

    Tax increases now will be easier to pass, because opponents will not be allowed to offer a simple motion to strike any increase without making up for the “lost revenue.” In addition, tax cuts are made more difficult, because they cannot be offset with spending cuts. The new rules will mean that the only way to push for a tax cut will be to propose a tax increase elsewhere.

    Democratic leaders said these changes were needed to make the legislative train run faster. “Congress has to accomplish things,” said Massachusetts Rep. Jim McGovern of the Rules Committee. “This is designed to help us do just that.”

    To further grease the wheels, Democrats have also emasculated the “motion to recommit” — a procedural safeguard first given to the minority a century ago after a rebellion against tyrannical GOP Speaker Joe Cannon. It has been used by both parties to offer motions to “recommit” or send back bills on the floor to the relevant committees.

    Republicans used the tactic 50 times in the last Congress, primarily to block tax increases buried in larger bills. Sometimes they also used the device to tack on a popular amendment to a bill — such as an amendment in 2007 ending Washington, D.C.’s, then-existing gun ban, which was added to a bill on voting rights for D.C. residents. That made the overall bill political poison, forcing an infuriated Speaker Nancy Pelosi to pull the bill off the floor.

    Her new rules package severely limits the use of motions to recommit. Dismissing GOP complaints about this change, Massachusetts Rep. Barney Frank said the minority was only “interested in game playing.”

    Mrs. Pelosi used to see things differently. Back in 2004, she unveiled a proposed “Bill of Rights” to protect House minority interests. It called on Republicans to allow more meaningful substitutes to bills, give members enough time to read bills before final votes, and stop holding roll-call votes past the normal 15 minutes. She had a point. In late 2003, Republican leaders held open a roll-call vote on the Medicare drug entitlement for three hours until they bullied enough wavering members into voting aye.

    Mrs. Pelosi warned in 2004 that “When we [Democrats] are shut out, they are shutting out the great diversity of America.” We want a higher standard.” In 2006, just before becoming speaker, Mrs. Pelosi reiterated her plans to promote “bipartisanship” and “to ensure the rights of the minority.”

    That was then. This month, she even suggested passing a huge new stimulus package before Barack Obama is sworn in on Jan. 20.

    Term limits on committee chairs — part of the 1994 GOP “Contract With America” — modified a seniority system that entrenched power in a handful of members. Overall, it has helped inject new ideas and merit into Congress. But Democratic bulls wanted their old power back, so now longevity will once again determine who runs the show. Can this really be the “change” that voters wanted last November? Wags are already joking that Democrats are really delivering “senility you can believe in.”

    Ironically, some of the biggest losers from the Pelosi rules changes will be fiscally conservative Blue Dog Democrats. The “pay-go” rules they fought so hard for two years ago — to require new spending proposals be balanced with additional revenue or cuts elsewhere — have been gutted. And no term limits will mean they will have to stand in line for a taste of real power.

    “All those nice pro-life, gun-owning young Democrats recruited to run by Rahm Emanuel will never have any real influence now,” says Grover Norquist, head of Americans for Tax Reform. “They were useful in getting Democrats a majority but now they’ll be in the back of the bus.”

    Barack Obama ran for president pledging to end needless partisanship and to create “a new politics.” He is at least making a stab at that by appointing a couple of cabinet members with Republican ties and consulting with GOP Congressional leaders. It’s unsettling that his fellow Democrats on Capitol Hill seem intent on marching in a completely opposite direction.

    “Go confidently in the direction of your dreams! Live the life you’ve imagined.” -Henry David Thoreau

  • Job losses is bad, but it is also a lagging indicator not a leading indicator. Job losses will continue through the first one or two quarters of recovery.

    So where are the positives?? Long term mortgages are at 4.75% or a whopping 25% lower than just two months ago. The commitment to keeping these low on average can add from $300 to $400 a month to homeowners who refinance. That is huge.

    Interest rates are also the key ingredient in pricing stocks and the very low rates will contribute to pricing support. There is an underlying 25% reduction in the cost of debt right now.

    Gas prices under $2 is adding $1 billion per day to peoples pockets.

    This economy is highly stimulative.

    We are talking about a panic decline more than a collapse of the economic order. Actually, much of the weakness in the fourth quarter can be attributed to the language being used to justify the bailout. Politicians were using extreme language to describe events and sell the bailout, and the effect resulted in healthy players, people with jobs and who are in fine economic shape suspending their spending; and businesses who are doing well freezing hiring as they wait for more information. I mean if things are going to be that bad! So the fourth quarter froze in place, everyone just stopped, not only those who lost their jobs but EVERYONE. In a sense that is what a panic is.

    We will see, but I actually see a market that should trend above 10000 by year end. Remember markets look to the future and not the past, and the horrificness of the past quarter is a net positive for the markets, because it would actually have to be worse for the stocks to go down – job losses are not as bad as economic collapse, all things considered.

    The job market typically bottoms four to six months after the stock markets bottom, and the stock markets recover an average of 30% at the point the job market bottoms as a rule of thumb since 1974. If we take the market bottom as being in November, the job market would not likely hit a bottom until March or May. With the stock market having recovered 30% by that point or be in the mid 9000’s. The market has already tested a top that reached 9100 and now it is testing a bottom that is staying above 8000. That is becoming a pretty good trading range right now.

    Here is another stat: Since 1900, the U.S. stock market has experienced six panics – defined as a price decline within one year that is 40% or greater, including the Great Depression that was a 90% decline. On average a panic decline took an average eight years to achieve a full recovery in these six panics (which in this instance would be 14500 on the Dow), but 75% of the recovery occurred within one year of the panic event – and the sharper or faster the decline the faster the recovery. This average would argue for a Dow at 12000 by year end.

    I remain in a bracket of 10000 to 12000.

  • Is this a recession or an economic collapse?

    The jury may still be out out on this. But the Fed, Treasury, other CB’s and international agencies are acting like an unprecedented economic collapse seriously threatens not only the US but also the world.

    Will this turnout to be just another YK2, and a recovery will begin this year? Or will it be something heretofore unexperienced that stretches much further and causes untold disorder? Or something in between?

  • In the beginning of the year the stock markets had an upside potential of 20% during the 6 first months of 2009. And the stock market seems to be still bullish. (It went down during this week because of banks. Something might still happen during the weekend to them: TED-spread is up)

    This first recovery of the stock market is “easy” compared to what will follow. The market might go sideways for years. When I suspect that Obama’s economic policy will translate to inflation and tax increases, I’m here in good company. I already wrote that this site is full of redneck republicans who do not believe in the economic policies of Obama.

    You should look more micro economy and monetary signals instead of general macro. And the Chinese foreign trade statistics.

    –Storm brings only richness with it

  • This is unforeseen hysteria in the USA. The rest of the world takes this as normal.

    The markets have been indeed as volatile as in the 1930’s but otherwise this seems to be just 1980’s.

    are acting like an unprecedented economic collapse seriously threatens

    Except ECB, but media or “pundits” do not tell that to you 🙂 On the contrary, I read, how a “pundit” wrote rubbish on the balance sheet of ECB. It has expanded only 25% when the balance sheet of Fed expanded 100% and the balance sheet of BoE even faster. The pundit wrote that the expansion speed of ECB was the fastest 🙂 And the pundit obviously knew that he was writing propaganda.

    I think that the economic policies in the USA are aggressive now because it was fashionable during the previous recession. In theory there exists the danger of overshooting in actions, but I do not know, if it is a real threat or just entertaining pundit rubbish.

    –Storm brings only richness with it

  • then the (monetary and fiscal) inflationary implications of current policy are truly scary. The powers-that-be will never be able to raise interest high enough quick enough to contain it. The US will go from the frying pan into the fire.

  • In Japan they failed to start inflation.

    The Fed seems to be tightening already (see balance sheet).

    I wrote earlier a sentence about “supervolatility of dollar”.

    –Storm brings only richness with it

  • This is the 80’s. The residential mortgage default rate in this recession has reached about 4.85%, well below the 7% default rate in 1981/82. Why is it a meltdown?? Because Bush and company changed the sixty year old rule that for every dollar of equity a bank could lend eight dollars of debt which makes banks stable until defaults hit 12.5%. In 2004 his Treasury Secretary got it changed to one dollar of equity allowing for 30 dollars of debt, which allows for only a 3.3% mortgage default level, a laughably low cushion.

    All the $700 Billion is doing is getting the banks back to their 8 to 1 ratio.

    In fact the car sales level right now is not even as bad as it was in 1991.

    Every stat I look at is simply not as bad as other times in our history. Inflation is contained, interest rates are low, unemployment is only slightly elevated, defaults are on the high side.

    So I put it in the camp of panic and hysteria. But also a financial system that was allowed to be woefully unprepared for any kind of downturn. It was the usual stupidity writ large that was the Bush White House.

    They Enronized the US economy, eviscerated all the old sixty and seventy year old rules designed to allow the economy to weather bad times. To say Bush and his cronies were idiots are too kind. This would have been a non crisis if banking rules had simply been left alone.

  • That the meme next year is going to be – Have we overstimulated. But frankly Obama wants to get things moving again fast because he has a lot of other fish to fry and has only eight years to do it.

    But the plan is precisely this. Obama’s team have stated that there is no way the US economy has grown over the next ten years as it has over the past thirty years on consumer spending. That is a spent force. BUT. It can grow even faster over the next ten years on the shift to alternative sources of energy.

    The United States spends $1 trillion per year or 7.6% of its economy every year overseas for energy. The goal is to keep that dollar here as much as is possible in as short a time as possible. Keep the dollars here. Every dollar on foreign energy creates two jobs in the US, where every dollar spent here creates eight jobs. And the payback for every dollar here is therefore is more than a tripling of the dollar as a ripple effect through the economy. That is 21 points of GDP growth potential from this issue without even considering other factors that drive growth. That is 2.1 GDP per year.

    Those are the kinds of things they are looking at. It is real this time.

  • While I agree with you that the intention is to bring the petro-dollars home, that is going to be a very expensive challenge.

    However, I am less sanguine about the numbers than you. While the numbers you cite suggest that the crisis in not really that deep, the actions of the Fed and Treasury, and the pols to whom they are taking, suggests that something different is transpiring from what those number imply.

    The problem seems to be transparency. Only a very select few at the top know what the supposed numbers are and are apparently reacting to it. Moreover, no one knows whether the supposed numbers the folks at the top are reacting to are actually the real numbers. Since the markets have been excluded from the process, the actual values are indeterminate.

    What seems to have happened is that the financial sector transformed itself from the staid banking, insurance, and real estate industries into a combined industry that would be more go-go than the gambling industry, with corresponding profits, and comparable transparency and ethical standards.

    The new industry set out create new instruments that could promise extraordinary returns at reduced risk owing to risk spread, justified by complicated models based on faulty assumptions. They also lobbied to loosen restrictions to permit greatly increased use of leverage.

    The result was several fold: excessive use of leverage, mispricing of risk, ignoring of systemic risk, and taking advantage of the moral hazard of being too big to fail. This scenario was facilitated by a lobbied government that reduced regulation and oversight, as well as a compliant Fed. Fiscal policy enabled the new financial entrepreneurs to avoid taxation on their huge profits, salaries and bonuses. All the incentives were in place for excessive risk-taking with other people’s money. That attitude was, We’re making a killing today and tomorrow, IBGYBG. So who cares. Besides, if we don’t cash in on this, someone else will.

    The upshot is that the world is now swimming in debt, those who are overextended are deleverging and when they can’t, going broke, the financial idustry is insolvent, and the public does not yet know the extent of the exposure owing to absence of transparency.

    The tip off here is the total lack of transparency in allocation and use of the TARP funds, to wit, the 350 billion that has already been provided.

    No one other than those behind the curtain know what the numbers really are, what the exposure it and where it lies, and who is involved. Many people at the top are acting like this is a very serious crisis. The conclusion can only be that something is going on behind the curtain that we not only do not know about but also that it seems to be worse than the numbers which are public suggest.

    Meredith Whitney Predicts Banks Need More Capital (BAC, C, JPM, WFC)

  • the US economy has grown over the next ten years as it has over the past thirty years on consumer spending

    It seems that the US economy didn’t grow at all without housing bubble over the last decade.

    It seems that Obama has stolen my ideas about renewing energy.

    But I have still my ideas about health care reform to sell 🙂

    –Storm brings only richness with it

  • A logical argument for creating hysteria were that it manipulates people to accept bail out spending.

    But some types do not seem to get it. They are hysterical and oppose bailouts – LOL.

    –Storm brings only richness with it

  • But some types do not seem to get it. They are hysterical and oppose bailouts

    And, curiously enough, Wall Street isn’t giving them any money. The money flow has now shifted from the GOP “born again” fiscal conservatives who have suddenly “got religion” to the Dems.

  • well, Tina, that sure as hell was untopical…

    and given the Republican’s recent broadcasting of their desire to block any and all legislation just to make the Democrats look bad, I hardly see why this measure is unreasonable.

    Of COURSE you can trust the US Government! Just ask the Indians.

  • We can’t keep the interest rates this low for too long and not stall the economy… I thought the whole point of the Obama stimulus was to create demand for manufactured goods so that prices would stabilize and (maybe) rise again.

    Of COURSE you can trust the US Government! Just ask the Indians.

  • and stagnation is supposedly better than an investment that falls in value.

    the problem with “moving sideways” is that after you adjust for inflation, your investment actually loses value even though it appears to maintain value– i.e. moves sideways.

    hence, in order to move sideways, the investment really needs to grow at the rate of inflation or else you’re losing money.

  • well, you can see why ethanol is popular because the farmers buy foreign oil (two jobs) and then americans buy ethanol (8 more jobs based on your numbers).

    my critic of your analysis is that oil (energy) drives automation and automation destroys jobs.

    moreover, the middle-east is heavily investing in solar and other alternative energies so even if it’s manufactured here, the middle-eastern countries will be patent holders; that means they’ll continue to suck dollars out of your pocket!

    I’d also suggest that if we use alternative energy, that enables energy redistribution; hence, the oil we used to use will go to china so our goods can be manufactured.

  • Rubin worked under Clinton and then went to CITI and destroyed it. Moreover, the stock market grew at 18% YOY during the Clinton administration. That performance was unsustainable! IMO, Bush is taking the blame for Clinton’s mess. Alan Greenspan’s brilliance is being reconsidered!

  • The answer to your question is…, yes. It is a recession and an economic collapse. The Bail Out Bullshit is designed to forestall the economic collapse and save Wall Street and Big Money Boys. It won’t do anything to help the recession…, and I don’t believe it will forestall the economic collapse for long.

    The recession is being cause by the breakdown of The Housing Bubble. As I have said before here…, housing starts drive the economy with all the jobs it creates as well as the raw materials and manufactured products it consumes. The Bubble came about not to “increase homeownership” or to make the American Dream come true for everyone…, regardless of their ability to pay for it. The mortgage regulations were thrown out the window to keep the housing starts and the economy “growing”. Those credit default swaps were allowed for the same reason. That housing bubble has now imploded and there is nothing…, including a major infrastructure spending plan…, that will replace it. Everyone from the logger that provides the lumber to build the house to the Circuit City big screen TV salesman that helps furnish the new house is going to be out of work for quite a while. And just think of all the people in between those two that will be out of work…, concrete workers, carpenters, electricians, plumbers, roofers, window and door manufacturers, is short list. The housing bubble has left a glut of houses out there…, there won’t be much building going forward. No jobs for all those people mean no consumer spending.

    Helping people with mortgage problems is a worthy endeavor but it won’t help heal the recession. Infrastructure spending will be a band aid for a few for a while…, but I seriously doubt that it can go on long enough to be of any real help. The other Bail Out Bullshit money will only help those that have money in leveraged positions heal up before the Big Collapse. And that’s what it is designed to do…, create a big bounce before the inevitable fall.

    Maybe we need The Bail Out. Maybe we need to keep Wall Street and the Big Money Boys solvent. Maybe it would be worse for the rest of us if they went down with us. But I would just as soon take them down with us now. I don’t believe we will be any worse off in The End.

  • Maybe we need The Bail Out. Maybe we need to keep Wall Street and the Big Money Boys solvent. Maybe it would be worse for the rest of us if they went down with us. But I would just as soon take them down with us now. I don’t believe we will be any worse off in The End.

    This bailout will just keep them on top at the End. The fix is in, and it’s total BS.

  • When I originally wrote, “The Crash is Coming…, Bail Out or no Bail Out” I felt pretty sure it bogus and ended the post with this:

    “This Bail Out makes no economic sense. I have already heard little Georgie Bush and his cadre scream, “Mushroom clouds on the horizon!!!!!” I didn’t believe it then…, and sure as hell don’t believe it now. All of us Agonists will feel the pain…, but it will be much less and much shorter than predicted by Georgie. And we will emerge much stronger and sooner without this Bail Out. With it…, I fear for all our survivals.”

    I figured that the rush to push it through was the tip off…, that if time was allowed for examination by others it would be exposed as the fraud I saw. But now…, there just seems to be too many people who see that there is a big problem and that the consequences of doing nothing would result in complete catastrophy. So…, I still believe that the elite will benefit much more than the middle class and the poor…, but maybe…, JUST maybe…, we do need the Bail Out to save the financial system. I still contend that it won’t cure the recession.

  • This one is badly constructed, and does not mimic earlier successful strategies, like (temporarily) nationalizing the banks (or at least taking significant ownership stakes).

    Badly constructed, that is, from the point of view of a reasonably fair system. Perhaps well constructed to maintain or enhance the upper-class’ status quo.

    They sicken of the calm, who knew the storm.

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