Market Fears

I try not to comment on markets themselves because it is quickly a mug’s game once you begin paying attention to detail. However we are one full year past the 2008 market break. Since then the markets themselves have largely deleveraged. After all, brokers are never fond of extending much market debt in the best of times.

The first primary bottom shows on the charts in October of last year. After that the market deteriorated slowly toward a second bottom reached in the spring of this year a few percentage points lower. The joy got well spread around and during this phase markets consolidated as everyone checked their corporate health.

Since spring we have recovered back the few percentage points to the original primary bottom established during the initial collapse. At this point information is properly flowing again and corporate numbers are slowly improving. I emphasize the word slow here for the moment. The companies are still working with their banking arrangements to restore their own core liquidity.

This process needs a bit of time and we can also expect to see a lot of corporate debt offerings been peddled as companies replace gaps created in their balance sheets.

So the fear mongering presently been heard is a bit of too little too late. People see a rising market and think there is a building exposure while there is nothing of the sort. This rebound is reflecting a simple recovery of confidence to oversold markets. Not everyone is participating but those with strong balance sheets certainly are.

In the meantime, the US continues to avoid resolving the rolling foreclosure crisis by simply letting it accumulate. It will naturally reach the end of the road and we will have a massive inventory unsalable to those folks who have all lost their borrowing power. It will be long road back and we could well have a lost decade in terms of consumer borrowing. Also the consumer will be naturally cautious for a generation because of these events.

There is enough support out there to have a strong market quarter. It just needs a confidence trigger and we seem to be getting all the negatives expressed and eliminated. In short, it is time to be bullish.

DJ Wiltshire 5000

For those who track stock market prices, a general index has always been a good tool.

The one that I like best is the Wiltshire 5000 now named the DJ Wiltshire 5000. With 5000 decently sized compamies, it provides a fair sense of market breath for the core of the market itself.

In short, I feel greater confidence drawing inferences from that chart than any that leaps to mind. That way, when this index shrinks fifty percent, it is a strong indication that the global value of equities has done just that. During the seventies the limited DJ index actually disguised market breath declines by somewhat riding above them all.

We have been treated to two different bubble economies over the past decade. The first was a pure equity bubble, modestly influenced by access to credit and known as the dot com bubble. It was a bubble like most others. Those who played could get destroyed or perhaps get rich. It transferred speculative funds into a slew of start up propositions and in so doing, encourages economic growth even with the many individual failures.

I like to remind the socialists among us that a single Google or Amazon pays for a thousand flops that still gainfully employ tens of thousands of our best and brightest. Today the socialists are been persuaded to bail out GM at taxpayer expense while a few millions of dollars down the street is in the business of putting the global automobile industry out of business by replacing it all with something far better. Who do you want to bet on? Read my blog if details interest you.

The second bubble kicked off in 2003 with the advent of cheap money and has been purely a credit creation bubble that indirectly lifted the markets for the next five years. The creation of this credit bubble was terribly flawed in as much as it quickly ran out of credit worthy borrowers. Once that was apparent, the proper response from the fed was to lift interest rates back to the competitive levels that history has proven will work for decades. I do not understand to this day why this was done. At the time I understood the rational for a short term drop in rates. Inside of a year, I was waiting in vain for a lift in rates. Had that happened, the bubble would have been aborted. And we are not talking about anything but a restoration of a classic three and six percent rate system where good banking can be done and good investing can be done.

It is noteworthy that the index shows us that the markets are operating at a pricing structure that is prebubble for both bubbles. It should stay in the present channel until the foreclosure inventory is completely resolved.

The reason for this is that cheap money is not solving the problem this time around. It is enriching the rest of the world as they finance needed infrastructure and join us in the twenty first century. It is not enriching us because we can not use credit yet to sponge up properties and rent them out at an immediate profit. This is coming since the administration will clearly be doing nothing except blame it all on history.

Most likely our banking system will stay moribund until the foreclosure wave has completely matured and passed through the system. This will likely be by the end of 2010. Once everything has been foreclosed that is going to be foreclosed, it will be possible for cash to cut deals with some sense of confidence that the locked prices will hold. So yes we get to wait and do all this the hard way.

The US government will have to continue replenishing the banking industries capital base until it is all back to a twelve to one ratio. Then these banks will start working off inventory at whatever bottom pricing structure we have arrived at. A couple of years of that and the inventory will evaporate and we may discover that America now has the highest percentage of homeowners ever. Not the way it was originally planned, but what did they expect.

The problem of course, is that modern consumer will be as frugal as the depression generation and not an eager participant in flawed investment strategies like the ones they presently wear.