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StockBlade Opinion: The Crisis Is Far From Over

October 26, 2008 4:21 AM

toytrain.jpgI have been harping on the fact that people grossly misunderstood what really was going on for a year. The world economy was largely built on not only paper - but leveraged paper. Virtually all of the Talking Heads kept reassuring investors that all would be fine and people were far overestimating the housing crisis. What did I say? They were dead wrong.

This crisis is not over.  Not by a long shot. It has filtered over into all kinds of paper. Companies cannot get loans, even to operate on a daily basis. Consumers cannot get loans and they are losing their jobs by the tens of thousands with virtually all industries announcing layoffs daily. Housing has likely not even hit a bottom. Even if it has, there are millions of homes to be sold.

What does this mean? At the very least it means major uncertainty going forward. Not good for the stock market. At worst, we will face another round of financial crisis that could bring near financial collapse. What people do not understand is the magnitude of the CDS’s (credit default swaps) and what will happen when these unravel.  CDS’s are essentially insurance against losses for these securities. Obviously these are mostly near worthless and whoever holds these CDS’s are in huge trouble. AIG was the largest holder of CDS’s. They obviously collapsed.

The trillion dollar question, probably literally, is are there more AIG’s out there? My guess is yes. Even if there aren’t, the market cannot possibly have sustained moves higher until all of these are gone. Investors have to know, with some level of certainty that the balance sheets they are looking at reflect reality. While I love to go against Cramer in his picks, I completely agree with his complaint that why are companies allowed to pretend there isn’t a problem after Sarbanes-Oxley? Last I checked, companies were supposed to provide real data. Have the brokerage companies provided real data this year? Obviously no. Not even close.

The point being, nothing can be trusted with regards to financials. If companies would have come clean day one, we may have just had company failures and moved on. But that didn’t happen. Now even banks are afraid to lend to one another because everyone is afraid they are liars. If banks cannot trust other banks, then how in the world can an investor. This is a huge problem.

Anyhow, there is a long list of companies and industries trying to get at some of the federal bailout money. What does this tell you? They need it. They would not be after the money while the market is down if they didn’t need it. Buy low, sell high. They are selling low.

Therefore, remain very skeptical of all moves higher. Investors that have been long this market in the face of reality have got crushed, and there is nothing that suggests that will stop. This is a traders market and will remain so, for a long time.

This is how i view the market, for long term investors. The lows of 2002 are still below where we are today.  Is the economy better off or worse than 2002? The economy is FAR worse, and it isn’t even close. While many may argue that balance sheets are far better now than then, that doesn’t consider the fact that earnings were based upon a false economy via paper leverage that likely will not be repeated soon. Probably not in a decade.

While we may not have a total financial collapse and go into a depression, any notion of a bull market is complete nonsense as I see things. I could go on and on that virtually 100% of the forces of a bull market are not in place, and will not be for many years.

Factors That Create Bull Markets:

1. Lowering Tax rates: We have to raise them because the financial mess and grossly negligent Congress over the last 10 years

2. Expanding Economy: Not happening anytime soon. Housing will take 5 years to rebound with the glut

3. Real Incomes Rising: Real incomes in the U.S. have fallen since 2000. i have long said that the economy would eventually fail because real incomes were falling, unlike anytime since the Depression.

I hate to be doom and gloom, but I said 6 months ago the same thing and people ignored it. People had this belief that because we were the United States that all would be fine. Wrong. While I mention often that the scariest words on Wall St. are “it is different this time”, well, it is different this time. And have said so - often. Real incomes rose for over 70 years and led to a multi-generation bull market. That is not the case now, and will not be anytime soon.

The only issue that i am not sure of is the effect of printing money. Stock prices are a hard asset, to some extent. They represent a percentage of hard assets and company earnings. Will the market rise over time because of inflation? This I am not sure of as this has really never happened before. My guess is no as the market is generally a reflection of future earnings, not balance sheets. If all companies were trading just on balance sheets I would buy puts right now as the market would be cut in half tomorrow.

This economic train is likely a toy train, and be careful. This isn’t over.

Written by Tom@StockBlade.com · Filed Under General Investing/Trading Commentary 

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