Friday, July 10, 2009

When Will We Begin To Improve? 7 / 10 / 2009

The Stock Markets - what's up there? Frankly nothing. The government's bail out program of banks has not restored confidence. It has merely created a back stop. Value investors then grabbed onto the recent bottom created by the bail out and propelled by the "green shoots" commentary from Bernanke. And the market moved from its march lows of 6500 to June highs of 8800.

But I think he made a classic mistake, and spoke optimistically, not factually. Facts are valuable to investors. Optimism is valuable to speculators. The program he engineered with the Treasury has done only one thing - back stopped a financial markets slide into 1996 levels (5000).

This economy is still in clean up mode - this is anything but a recovery mode. And the equity markets are telling us precisely that. These markets are jumpy but will not advance until they can comfortably project growth.

The drag is big, its the biggest anchor the financial world has ever seen. Its a combination of a surplus of the asset that America once coveted (real estate)and a surplus in the basis of its value (US Dollars), topped off with more leverage than even PIMCO cares to guess at.

On that subject, ask yourself why PIMCO is making positive statements about the economy and the performance of high grade debt instruments every day? Because if they step out of line, the debt market and their portfolio will tank. They are compromised and begging for a recovery that can support interest payments. You think California is in bad shape now? In technical if not actual default? Who do you think holds the biggest slug of California Debt? (PIMCO). What conversations do you think they are having with Geithner?

Ask yourself, why is it that employment and consumer price indexes meet or beat (positively) expectations every month only to be revised negatively the following month..Because if speculators and investors both knew the truth - that the economy is still in decline - the capital markets would slide back to the March lows very very quickly.

I agree that the problem created was so large that only the government could have stopped the process of a reset in values that may have wiped the last 12 years of growth and value off the world's balance sheets. I agree that this government was heroic in its efforts to stop or stall this decline. But their job is not done by a long shot. The same characters who were in charge of this fiasco are still, for the most part, in charge. And they are now afraid to make further mistakes, afraid to take any risk because the government is watching them very carefully. All of a sudden their business models which propelled their stock prices to 2006 - 2007 highs are not functional in a regulatory enviornment with real oversight.

Our economic system depends on the ability of our best (in general) and brightest (in general) entrepreneurs and business men getting together and compelling lenders to give them a chance to develop their business.

Now, unfortunately these methods have been forgotten. The people who were competent in lending to growing businesses have been removed, down sized. Middle Market banks and local business lenders are still reducing their loans outstanding to businesses and the loans they are extending are refinancings of performing loans. Worse, the equity markets are languishing. So equity investors are very cautious about putting money into growing companies. In the past, tough lending markets led to accelerating private equity markets as investors searched for a return. Those days will return, but given the current economic enviornment, companies need to be cleaned up first.

They still have a long way to go. At this rate, November seems a likely economic turn around estimate -

Build Value Every Day

Brad van Siclen

No comments: