Traderbill's Financial Markets Weblog

…but let’s try sorting it out. Despite a better than 50% likelihood of a recession, the bulls insist it won’t happen…that, to TB is denial…denial of the sort that caused them to underestimate the magnitude of the subprime fallout. Last night on Kudlow, Gary Schilling outlined why he sees a recession coming and the arguments against it were the same  tired excuse: the economy is doing just fine and subprime is just 6% of total mortgages. Schilling tried to explain, as TB did that it is not the size of the outstandings but their growth over the past two years that dominated the market and is now being decimated. If there are no subprime loans how does the guy with a starter home sell it in order to move up…eventually to buy your home? Why this concept seems so hard to grasp is way beyond TB: it’s a food chain…plain and simple!

Kudlow continues to blame the market selloff Friday on the Obama/Huckaby wins in Iowa…that is because Larry continues to view the world thru his rose colored glasses and believe in Goldilocks. It is about jobs and they are slipping away…true positive growth but not of the sort that supports an expanding economy.

If jobs are the key to the economy, earnings are the key to stocks and they are slipping. True, some companies are doing well but look at their stock…immediate selling on good news…including Apple, Google, RIMM…even Berkshire…the leaders of last year and now all trading below their 40 day moving averages. Kindleberger might see this as a move to the final stage of a bull market: revulsion…where no matter what the sellers emerge…not surprising as the good stocks are the easiest to sell…in a bear market there are few if any defensive stocks…look back to 2000.  

With the financial sector at 30%+ of the S&P 500 as late as August, are we oblivious to the fact that the stock market should go down…when was the last time you saw three CEO’s of Wall Street firms fired, the latest being Bear Stearns Jimmy Caine who will remain as Board Chairman(?). Don’t believe that this is the end of it either…Morgan Stanley had too much invested in John Mack so they dumped Zoe Cruz  Even the venerable Goldman Sachs is trading well below the 200 day at the lowest level since August 18 and the 40 day is about to cross thru the 200 day moving average ($214.74 and declining vs. $212.59 and rising slowly), that would be a big negative. Look at this:

*Citi, Merrill, Bear, Morgan Stanley have all accepted infusions of capital from sovereign funds…wouldn’t you call that a bailout?…especially when it came at a huge discount to stock price and thus at the expense of shareholders?

*All of the capital infusions have performed poorly (especially BofA’s into Countrywide).

*There are no good financial stocks…only on a relative basis…even the ones who are not exposed to subprime…in the financial sector you never know where the tentacles extend…remember Penn Square?

TB knows the above sounds gloomy…and it is…eventually financials will bottom…but when? 3 months? 6 months?…longer? …after all we just had the worst trading start for a year since 1931! It has also gotten to the point where we are saying the Fed will cut 50 basis points at the Jan meeting in two weeks but the ”stock market will then rally” phrase has been omitted. Even Jim Cramer said yesterday he sees stocks he wants to buy but can’t recommend because he has caused his listeners so much pain…awwww Jimbo…what a guy! But the point there is he is a guy who says there are buys in every market!

So TB repeats his mantra that cash is king (even though the yields are declining). Who cares what you earn for 1 month…3 months…6 months?…not when the alternatives are losing value! Remember that at one point in 1932 US Treasury Bills traded at a slight premium…meaning they had a negative return! Safety trumps return in this type of environment.

What amazes TB is that people like Kudlow continue to say all is well yet the consumer is under pressure…so what if the other 94% of mortgages are sound…how many of them have big home equity loans against them? This is why the Fed has to cut rates and will continue to do so…Schilling believes we will see a 3% 30 yr Treasury Bond…a gutsy call but it could happen. But the real returns will go to those who are patient: buying dividend stocks with attractive yields after prices drop further…this is the first opportunity in years to do so…also corporate bonds will be attractive. TB also agrees with Schilling that too much is being made of the concept that emerging markets (mainly China) are not vulnerable to lower demand from US consumers…TB has said and will say again: the rest of the world cannot carry the US and multinationals won’t fare that much better than other US stocks other than due to currency translation…but Schilling believes we may have seen an end to the dollar’s decline as other country’s slow. Note that the UK is now suffering from a major real estate slowdown. Time is on your side…yest it is…