June's slide into July

Waiting for the next round of US consumer banks to report a rise in credit card and other loan defaults, may take the market months; news of the entire market in derivatives seizing up like so many smaller markets have failed over the past year is interesting. This is cut throat, and people want to survive. The degree to which a U.S. "consumer" is struggling will dictate advertising, investment, production purchases, raises and expansion. With consumer sentiment at now a 16 year low, and CNN reporting the worst June since the great depression - whatever that means - the chances of a major selloff are mounting with the market skirting bear territory. Goldman Sachs has made their first embarassing move, revaluing U.S. stocks lower just weeks after issuing market performs, admitting they made a mistake: now Goldman reports that bank losses will mount into 2009, as a second batch of resetting mortgages move to higher rates in July, pushing a new set into bankrupcy, and undermining a new set of interest bearing securities held in the billions by mostly banks and a some other large investors. It is de ja vu all over again from what happened last year.

The financial headlines make inflation and energy out to be the number one issues. Food comes close behind. Gas and milk is over $4 a gallon. U.S. federal bank rate cuts are seen by the street as impossible and a weak economy may induce conservative investors into selling for this reason alone. Citigroup is now indicating it may have further losses (of course, as they still are not solvent), so it is a third quarter of losses? Securities insurer MBIA announced over $7 billion in insurance payments this month on failed insured derivatives. Another round of payments for MBIA might be coming. Housing is sending mixed signals, prices plateau and then sink again, and there are indicators foreclosures are creating supply overloads, so as buying picks up price may still decline more.

China who sells 16% of its exports to the US, has announced it will increase fuel prices 16%, which, if it doesn't slow all consumption, may push inflation even higher. India having already announced cutbacks in fuel subsidies to accomplish similar ends, sees dilutory debt pressures on its currency deflating its stockmarket and fueling inflation, making some wonder if India will play the game France once did of inflating its currency to repay creditors. Europe assumes it will raise interest rates, and the Fed and the US Treasury are discussing the matter of a fall raising which must worry markets. Along with five months of declines in U.S. employment and rising delinquencies in all types of "loans", the jittery Olympics are here in a month, and may well see the market crossing the nadir I've waited for. Wallets ready.

The US economy cannot quickly recover, but if it is true the supply and demand have been met in the purchases of homes, then a significant indicator now has visibility which will reach a second climax in fear going into the fall when July mortgage resets hit the market in the form of nonpayment and foreclosure. So long as we continue to see the bottom of mortgage and consumer wealth deflation, a bottom riding price lets us plan for the future, and by october it is indeed time to buy. Of course we should but before the headlines reveal AMD cut jobs for a reason. Already in the news, semiconductor shipments are down. When the Olympics come, will no one stage an event?

There may be the opportunity to cheaply buy companies poised to profit from medium-term BRIC growth and their own business ability in a stable economy. Now everything is unsure, but profits will maintain through the sheer momentum of building project alone in many of these nations. India has no notable infrastructure plans, but China definitely does. KLAC ($35 buy), who has a price going down is very well positioned for the up-cycle in chip development that may be out as far as 2010 now, and GS ($178) who has just bought a $7 billion SIV from Cheyenne who was also not diluted like the other banks but can benefit from the low rates. On the domestic front I like the long term dividend of depressed WellsFargo, WFC ($19 buy) who is buying banks and investing again - i see this as a bet on the competitiveness of the american business model. WAG ($34) is another long term drug dispensary now out of favor. Even with the ongoing downturn in the economy, customers cannot stop taking their medications. Which brings us to medical...

Obama is said to be receiving large amounts from Wallstreet, as well as in the future's market. If Hillary or Obama reignite the health care debate, there could be further fall-off and ample opportunity to purchase UNH,WLP, or HUM, which have already fallen significantly due to healthcare uncertainty; Warren Buffet's purchase of UNH and WLP shows confidence in the long term growth of this medical service industry, which is a concern. Defense stocks are dangerous with Obama likely winning the presidency (how long has it been since a democrat could write that), and an interesting medical stock to consider is hip and knee replacement... And finally, midterm, new energy stocks would politically and popularlly possibly rally, like ACPW ($1.3).

Clouding up for Consumer Recession

A consumer driven recession is arriving in conjunction with broad based price increases, a weakening dollar, job-losses, stock and property price declines, a lack of credit from banks, and high consumer debt levels. Like an attack from multiple angles, this will take out of the box navigating. GE, a bellwether for the world economy missed its earnings. Semi-conductor manufacturers have begun large layoffs in a year they are supposed to begin investing –worrisome. The only sectors in the US economy that added jobs were health-care and education. Also, corporate defaulted debt sales increase, suggesting banking problems have spread to companies at large, and it was with good reason companies stopped trading debt six months ago. UK home prices recorded their largest drop since 1992, showing housing trouble on the shores of Europe. The UK consumer, like the US consumer, has a lot of debt, which means UK may follow US more closely than other nations. Both the US and the UK are cutting FED rates. The Euro, meanwhile will not cut rates because of record inflation, however inflation now is a global event, especially food inflation. Slowing down Europe may not help this. Commodities are at all time high prices. And the US dollar is diluted adding to inflation and weakening any action the US government could take. So house prices and stocks will go down while everything else gets more expensive. People have less cash as prices go up. So people will stop spending, and ultimately, the economy is based on people. So a consumer recession is the worst even if it is a pride filled slow progression.

2QBank earnings are still not all in, but no one has had good news. Some suggested we will be in a downturn for the next year. Many announced still more large sales of debt to prove they are at the federally mandated level of loan/loss. It seems as though nvestors feel that they will not go bankrupt. Morgan Stanley reported that the financial downturn will last well into 2009, but they also claimed to be making record profits on trading. I believe a sell-off should be evident shortly simply because the situation is getting worse, not better. The new lows to come, however, will be a time to buy, but it might be a protracted struggling affair.

But what to buy? Most industries finally tie into consumer spending, so getting out of highs like YUM are a no brainer. If a consumer driven recession sets in everything from clothing to electronics, from airplanes to commodities will go down too, however. The US government doesn't have much money left to spend on defense. Maybe health: medical expenses are mostly covered by insurance, and they are not always what one needs, but often health is least related to pleasure. Adding to health-care's upside potential, stocks here have been depressed since the dot-com bubble. Especially if Hillary does not get the nomination, health-care stocks could become a safe repository for cash. And they could be hit with speculative inflows. Especially in the rich world, a large swath of baby-boomers are retiring now.

Leading the banks' earnings reports, one becomes insolvent and vanishes

Financial instruments have become liabilities such that the fifth largest US bank was sold for $250 million. I’m not sure the sale was even legal (especially as China owned 10% of the stock, and the FED set the price at 2% of its already depressed market capital the last day of trading, March 14^th, 2008). JP Morgan claims to have not wanted to buy the bank. That Bear Stearns could carry such liabilities to sell for a quarter the cost of its New York headquarters alone shows the degree to which nobody no one would lend it money. I mentioned before that no corporations would buy others debt obligations for the last few months. Now people are asking if other big banks are also bankrupt? One of the most connected private finance groups, Carlyle, has just had its hedge fund foreclosed on by investors. So the mortgage crisis spread to a credit crisis and now has become a financial instrument crisis as people take their money out of all investments, willing only to invest in treasuries returning below inflation. All financial instruments, derivatives, papers, and stocks are declining in value as the fundamentals of the complex financial sector are being questioned, as they should be: from housing alone, Standard & Poor's has now admitted to $285 billion in losses among financial institutions, but the total collateral damages may be more than the iraq war (AEI, Nouriel Roubini). How big is america's economy, 9 trillion? The losses could be over $ 6 trillion. This will spread everywhere. $100's of billions of the initially and now worthless sub-prime mortgage related investments may still be unaccounted for, and everyone wants cash.

So as the FED puts billions of extra dollars into the system, but people only buy commodities, the over-leveraged dollar continues to dilute and sinks to record lows. Food and energy inflation has picked up, while salaries go down for US consumers who have been spending 130% of income, while also property prices continue to sink and new credit is not available, and China’s costs rise, pushing world product prices higher. These trends indicate consumer spending is approaching a cliff. Foreign governments and developing nations still have spending power, but they are already seeing international trade drop off, and the degree of the American plummet may be unprecidented.

One international indicator, the semi-conductor industry which should be beginning an upcycle, is now seen slowing. Many companies are putting off investment spending, as they did in 2001, but this time consumer spending is also drying up and with it government funds. This three way pinch is beginning to show in the greater economy as Gold is over $1000 and Oil over $100. Whether or not global growth slows, all time high commodity prices could also retreat, and oil with it – the next bubble to deflate? Medical stocks still hold their own, but healthcare debate could destabilize them if Hillary wins the nomination. Elsewhere, wherever, get ready for a downhill ride. There is bad news to come. The secrecy surrounding first the insolvency of Citigroup in August 2007 and now the inside sale of Bear Stern only increases investor fears as it shows any company could vanish over the weekend, its stock along with it. How America's recession will affect China and South America and India remains to be seen, but it cannot be good to lose your best customer.