Light at the End of the Tunnel

So, Detroit bailout w/o Ch 11 BK: Yes or no?

No. Prepackaged bankruptcy, or the threat of bankruptcy, that's it. Otherwise, it's a money pit.

Companies enter Chapter 11 bankruptcy all the time. It is not the end of the world. They just don't want to take the hard decisions that must be taken to cut costs and production capacity.

But they have to.

Why would you want to bail out Chrysler, when the owners of Chrysler don't want to bail it out? Tell you something?

Right: Prepackaged ch.11. I can't stand the BS about BK killing sales, yet Gettlefinger repeats it w/ a straight face. Mistake often made by unions: they'd rather let the co die than give concessions; likewise, mng must also give concessions. common sense on both sides.

re: Paulson: WTF?????? He's the best & brightest of GS??? This is why we're in deep doo. Geez, a chimp w/ a dart board could have done a better job.

I'm not sure what you mean, dwell. Chapter 11 or the threat of it is the only way to get all creditors and parties-in-interest together and make countervailing concessions. Anyone who thinks otherwise is kidding themselves, and they'd might as well just throw their money into the trash.

A TARP bridge loan would be fine in lieu of DIP financing, as long as it was made clear that without a viable plan approved by an independent party - say, a retired bankruptcy judge - then Chapter 11 it is. In this way I think it's better for the Administration to set up the loan, as Congress can't possibly negotiate something so complex.

Paulson can't even speak a full sentence. I don't know how he got where he did.

I'm not quite sure what you are saying steve. Are you saying that Q1 09 GDP will be above Q4 08 GDP, or just that you now think that it won't go to zero?

This post really worries me. stevejhx is historically the *best* contrarian indicator there is for the stock market. We're doomed...

Respectfully disagree that there is light at the end of the tunnel, especially in 2009.

1) We are only one year into the bursting of a credit bubble built up over 25 years - Peak Credit if you will. No more HELOC piggy bank, credit card lines are being retracted, mortgages require 10-20% down depending on the market, and cheap financing for business is non-existant. The banks are still in full de-leveraging mode which will take a long time to play out.

2) Related to peak credit is the housing bubble burst. We still aren't at inflation adjusted norms and the housing market has shown zero signs of easing anywhere in the country. In many markets it's accelerating (e.g., NYC, which burst late). If banks had this much trouble with a 15-20% fall in home prices, just wait until they fall another 20% in 2009.

3) Unemployment is climbing at an accelerating pace. We are at 6.5% U-3 and 12.5% U-6. Look for the U-3 number to hit 9% in late 2009 as any sector related to finance, consumer spending, housing, energy, etc is going to be pounded. Most of the mass layoffs announced in Q4 won't roll out until the first two quarters of 2009.

"Chapter 11 or the threat of it is the only way to get all creditors and parties-in-interest together and make countervailing concessions"

Yup, that's what I'm sayin. Have Weil Gotshal or whoever do a prepackage

steve,

agreed on manhattan... that's a no brainer except for those who convinced themselves otherwise because they bought near the top of the bubble or have businesses based on the sustenance of current elevated prices.

however, as far as the economy goes, not on the same page.

"The lessons learned during the Great Depression were:

1) Don't let banks go bust
2) Don't balance budgets while you're trying to reflate
3) Don't let markets "sort themselves out"
4) Don't raise taxes
5) Don't erect trade barriers
6) Spend, spend, spend."

That's what Japan did with QE. We all know the terms... zombie banks, 0% interest rates, etc.

Best potential outcome if this path is taken is the L-shape, but remember- the three main differences between Japan back then and us now is:

1. The US is broke whereas the Japanese had massive savings back then to fund QE
2. The USD is the world's reserve currency
3. The size of this beast is vastly larger (a.k.a. the $1.2 Quadrillion notional value of the derivatives market which skyrocketed in the past decade).

Can we hope to have the "L-shape" that Japan manufactured or are we too broke to engineer it successfully?

"This post really worries me. stevejhx is historically the *best* contrarian indicator there is for the stock market. We're doomed..."

Ahh... crap, the class dunce has infiltrated this thread. Say goodbye to it.

don't turn on us Steve...

jgr, I agree that 2009 has all the ingredients to be a very challenging period on the economic front. A credit bubble bust is an economic event that should not be underestimated and neither should be the massive destruction of household wealth. In addition, this recession is being led simultaneously by the investment and consumer sectors which is something we have not seen since 1980-1.

BTW, these views were echoed by Jamie Diamond (JP Morgan Chase CEO) this past week.

oh no...alcove studios are still listing at $400k and one bedrooms well I've given up on that. Now stevejhx says it's over. Look for me in a homeless shelter.

"Are you saying that Q1 09 GDP will be above Q4 08 GDP, or just that you now think that it won't go to zero?"

I'm saying that actions are being taken to correct the situation. I don't know the lag. I do know money supply is way up but velocity isn't. Given the bubble in treasuries, though, I tend to think it's a short-term problem.

jgr, those are good points, but I would rather have slow, steady growth than false growth through the creation of asset bubbles, which is what the investment-bank model did. Bubbles are a zero-sum game: as many winners as losers, so in the end no real wealth is created, just transferred. Slower, steady growth will lead to the creation of real wealth through added value. There is no value added packaging subprime loans.

MMAfia, one difference is that Japan is not a consumer-driven economy. Another - more important - is that the reduction in interest rates in Japan did not lead to an increase in the money supply or an increase in the velocity of money. Japan DIDN'T flood the market with liquidity - that's what its mistake was. It thought that low interest rates alone were enough.

So your analysis, with all due respect, is fundamentally wrong.

"1. The US is broke whereas the Japanese had massive savings"

But they didn't deploy those savings. Yes the debt is a long-term issue, but nothing we can pay attention to now, and we're not. Spend, spend, spend.

"2. The USD is the world's reserve currency"

I thought gold was?

"3. The size of this beast is vastly larger"

And so is the size of our economy, and the cleverness of the Fed.

Is that what tech_guy said, MMAfia? I have him ignored. He thinks that if I say stocks will go up but they go down tomorrow, that I'm a contrarian indicator. LMAO.

"Look for me in a homeless shelter."

Will you be the one with a carnation in your ear?

steve,

The light at the end of the tunnel is the D train coming at you. Get out of the way before its too late!!!

"Why would you want to bail out Chrysler, when the owners of Chrysler don't want to bail it out? Tell you something?"

Excalty! Can someone please explain to me why we are bailing out Cerberus Capital Management?

Stevejhx - how can you reverse on the economy when 75% the cov light corporate bonds have to be refinanced in the next three years? A large percentage of which will have to be restructured in court?

"Cov-lite" bonds - just another example of too-easy credit.

Why restructure in court when lenders have virtually no rights?

"the D train coming at you"

Can you pick a better line?

The light you see at the end of the tunnel is the Acela coming at you.

Steve, I tend to agree with you. My concern is, how will our economy grow if we are going to go through what may be a lengthy deleveraging process. I saw Whitney interviewed, and she said the next shoe to drop is people getting their credit cards cut off, this while unemployment continues to increase. I have made no secret of the fact that I have been building positions in certain companies over the past 8 weeks, and have added some new ones as well, e.g. MO and PFE. I was early on some companies, such as FCX and BAC, but I made some nice trades, such as FDX and AA.
I would welcome your response, Steve, because you are one of the few posters on this site that has a real understanding of the issues, and some true foresight into the future (e.g. Manhattan real estate implosion, BAC buying Merrill (you were the first person anywhere to predict that one)).

"Acela"

Does the Acela move?

Thanks, mh23, but I'm also the first to say that past performance is no indication ... ask Bernie Madoff. :0

I maintain my 2x long China position - painful, but not as bad as it was a few weeks back. China has reiterated its support for the stock market. Read Plunge Protection Team into that.

My next foray will be into FAS, a 3x financials ETF. Very volatile, very scary, very much going to wait until January and limit my exposure, but the upside is huge, and right now the downside (after disastrous results from GS and MS - impending) is very small. Plus the ETF structure makes it easier to get out of. Had I had ETF's instead of mutual funds after Lehman, I could have gotten out before EOD, and would have saved myself a fortune.

my point on the cov light bonds HAVE to refinance when they mature -- the interest rates will jump beyond a level they can afford and they will have to restructure in court...

For me, I am just deliberately building positions in companies that I believe have tremendous upside at some point in the future. I can't pick a bottom, but I can look at certain companies and decide, based on a variety of factors, that there is value there at my entry level pricing:
AA, GE, BAC, CAT, DOW, DD, NWL, MHP, FCX, MO, PFE. I sold my V and FDX for a nice profit, but I plan on buying both back at a certain level. For V, that would hopefully be at 47, and for FDX, anywhere south of where we are now. I am also comfortable buying more of all of my existing positions if they hit certain lower numbers, except for BAC.

manhattanfox, I see. I don't know enough about the issue to opine.

mh23, BAC could be the best investment of all of them, but I would wait till after their 2nd quarter, unless you see an upswing after 1st quarter earnings. I don't know what MER will charge of in its last independent quarter - probably everything so BAC won't have to show it, and which will force MS and GS's hands. The problem for me is Countrywide and MBNA....

But the upside is huge. Only Wells and JPM have equivalent footprints, and JPM doesn't own a brokerage, and Wells doesn't own (or want) an investment bank. I could see JPM buying Charles Schwab (which used to belong to BAC) when Chuck retires. Or perhaps T. Rowe Price. Fidelity and Vanguard are the jewels in that crown, but Fidelity is private and Vanguard is a mutual, so I don't know.

Holy Smokes! Now I understand why steve thinks it can go to 0 with his 3x ETFs and all. Periods of high volatility, let alone periods of off the charts levels of vol, are not a great time to be in a leveraged ETF. A fairly plain language explanation can be found here (particulary important are points 4 and 5): http://seekingalpha.com/article/104703-explaining-inverse-and-leveraged-etfs

Every prospectus for a leveraged ETF will have this explanation in it, although it will be rather less direct than this explanation. And to be fair, the explanation in the link is an oversimplification, but the effect is real and acknowledged by every leveraged ETF prospectus.

Remember folks, this is the same guy who predicted Dow to 6500. And later claimed he was correct about that prediction.

we'll see dow 6500 bf 15,000

Steve, lol, that is indeed what the contrarian-kondratieff master posted...

Good points... but as you knew, i have my own views on them.

"1. The US is broke whereas the Japanese had massive savings"

But they didn't deploy those savings. Yes the debt is a long-term issue, but nothing we can pay attention to now, and we're not. Spend, spend, spend.

>> i would argue that the debt will be a short-term issue as foreigners will balk at buying more treasuries realizing the huge debt the country is running (over a trillion next year) and the negative effect it will have on the USD

"2. The USD is the world's reserve currency"

I thought gold was?

>>LOL! nope, the USD still is... for now =)

"3. The size of this beast is vastly larger"

And so is the size of our economy, and the cleverness of the Fed.

>> the cleverness of the Fed is what worries me. they have only created more monsters by trying to micromanage the economy- Lord knows what monster all this unprecedented machinations will manifest itself in. the Fed is the wild card in all this, and as they have shown in history, they have never every succeeded, except for Volker (he was the anomaly, and it is interesting to note that Obama selected him as part of the economic dream team).

mmafia..comparing Japan and the US is like comparing apples to oranges. The culture is wholly different. let's put it this way. For the Japanese to make decisions you need, not majority, but the whole country to agree. This is why things remain stagnant and change is extremely difficult. In the US we have rapid fire change, in Japan it's very slow and exhausting. It's all about the cultural differences. Also, Americans are 1000x more greedy and individualistic than the Japanese, which are more of a communal society. This is what is causing the stagnation over there.

steveF, yes completely agree. This lack of decision making ability is what really hurt the Japanese auto makers and is clearly why they aren't able to compete on a global level!

"Periods of high volatility, let alone periods of off the charts levels of vol, are not a great time to be in a leveraged ETF"

I didn't say I was in the ETF, I said I would be, later. Yes there is risk, but if you believe, as I do, that once toxic assets are marked to 0 they will be remarked back up, then there is only one way for the index to go.

It's a bet.

steveF,

very true, and that's why it's not going to be the 'same' but perhaps 'similar' outcome.

but to your point, in Japan, the 'nail that sticks out gets hammered back in' whereas in the US, 'the squeaky wheel is the one that gets oiled'.

mmafia...i think Americans are too self centered and greedy to let that be the case.

Steve - interesting post. I think that as time has gone on, I have become more in the camp for a prepackaged bankruptcy deal for the Big 3 as time has gone on. I also agree with you that letting Lehman fall was the dumbest decision. That is making this a bit worse.

"That is making this a bit worse."

A bit worse? You understate. Look at any stock market chart or interest-rate spread chart from September 17 onward. They move precisely in opposite directions. Look what happened to unemployment, consumer spending, etc. It was a disaster.

None of this had to happen like this. The Dow would likely be at 11,000, and the Big 3 wouldn't need a bailout loan. #1 lesson - never let a bank fail. They are too intertwined into the economy, the counterparty risk is too high. They should have taken it over and unwound the deals over time, just like they're doing with AIG.

Penny rich, pound foolish.

Oh - this is a must-read:

http://www.nytimes.com/2008/12/14/magazine/14wwln-lede-t.html?ref=business

The Remedist

Keynes is back, and in a big way. Objectivism is dead. Friedman was right on the quantum level, but wrong on the relativistic level. Demand is king. Long live demand!