Much has been written of late about how the world escaped a depression due to the actions of the governments of the western world, namely throwing money at the consumers to spend. We are now seeing that all that government spending did little good at all. It has been reported this week that one million homes will be foreclosed this year in the US, not a sign that the economy is recovering.

Yesterday the DJIA lost 261 points bringing the index down to 10098. A large part of this reversal can be put down to the Michigan Sentiment which came in at 66.5. Down from last months 76 and the expected level of 74. What this is telling us is that things are not improving for the average person. There are still 5 people for each job, which means wages are going down. Taxes are going up and there is talk of a GST or VAT (Goods and Services Tax or Value added tax) being applied. This will further reduce the standard of living and make family budgetting even more difficult as people struggle to pay their mortgages – or not pay as the case may be.

The big problem for many cities and states and the US as a whole is unfunded liabilities. These are promises made about retirement funding, health care for the future for which little or no money has been set aside. However you look at it the end result will not be good. What will be inevitable is that at some stage the city/state or government will not be able to meet their promises.

As an example, the State of New York, with its $9 billion budget hole is looking to borrow $6 billion for its state pension fund in order to make a $6 billion payment due to the same fund!  Unbelievable. In the end pensions will be reduced, the age limit raised until the books balance. More will be destitute and living in poverty, relying on their children to help out.

As people come to realise this they are starting to save for the future, reducing spending on things that are not really necessary. This of course is not good news for mall owners and retailers.

Now for a comment or two on the FTSE.

 In April I surmised that 5800 could be the top, that was when the Goldman Sachs saga hit the news. That did indeed start a corection and over the next three weeks saw an intraday low of 4800 being reached.  Since then the market has bounced around between 4800 (suport) and 5300 (resistance). Of note though is the 72 day moving average (red line) has crossed the 200 day moving average (green line). In technical terms this is a bad sign for the bulls. How long it will continue to move between these resistance and support levels is any bodies guess, but in the end I’m still putting money on it eventually breaking out through the bottom.

I have been keeping tabs on the mortgage market in the US for some time now and to my eyes it is not getting any better. In 2006 there were 160 billion CDO’s sold of which 74% have defaulted. In 2007 there were 186 billion CDO’s sold of which 86% have defaulted. Most of these had AAA ratings where the expected default rate is 4%. A lot of money is down the drain, but the banks passed most of their toxic assets to the FED, and I have not read that they have taken any back with their big profits this year.  Part of the bail out for mortgage holders has been an opportunity to “adjust” the interest rate or even the capital owed. But now I read that 47% of those fortunate people that have had their mortgages adjusted are behind on their payments after just six months.

Freddy Mac and Fanny Mae have been the ones caught holding the bag though.  Last week Freddy Mac asked for another 10 billion to cover their losses and Fanny Mae wants 8.4 billion.  The total of taxpayers money these two companies have swallowed up is now 145 billion. Estimates reckon that the total will be 380 billion before it is all over.

Then there is Greece et al. The billion dollar fund (borrowed) to prop up the euro is bound to fail. As I have said before, you can’t borrow your way out of debt.  If the same criteria is used to measure the US problem that is used for Greece, then the US is already bankrupt.  The advantage the US has is that is still the worlds reserve currency and it can print, (create) as many dollars as it wants.

The other problem facing Europe is the Iclandic volcano which continues to throw ash into the atmosphere disrupting air travel.  Today both Heathrow and Gatwick are closed. There is no telling how long it will continue to erupt.  Unlike the oil spill in the US there is nothing you can do to plug a volcano. If this eruption does continue over a year or more it will affect the economy of Europe and even global warming.

With the gap since my post at the end of January and todays post we have not been idle.  We have created three more web sites.  The first is about Solar Power. We now have a 1.5Kw system on our roof.  Then another on herbs and their benefits. Finally a web site on natural anxiety relief. So we have been quite busy.  The next stage is to drive traffic to them and once we have done that to monetise them.

People might wonder at why we would write three such disparate types of sites – well it is part of our policy of learning how to fail fast. We have the core understanding of how to make money online. Now it is a matter of trying out a range of types of sites. Some will work, some will not. The more we do the more likely we are to find a type of site that people buy from. There are some sites which develop a big following, have lots of traffic but don’t monetise well, such as magic sites.

And there are other types of products which monetise well. Internet marketing is one of those, but it is very competitive. I’m not interested in trying to heavy my way in to teach people how to make money – we wnat to know how to do it in another market where we are providing real value.

It has been a while since I made a post. I thought at the end of Janurary that the next down leg was starting, but no, the markets just kept going on up.  Greece has bought more time to try to get their expenditure under control, but it is almost impossible to put the “genie back into the bottle.”

Then early this month came the news that the US job market added 162,000 jobs for March.  This was the first increase in two years. But when the analysis is done we find that if you remove the tempory employment of the census workers and the other adjustments there was some 66,000 jobs lost. It is recognised that there has to be 100,000 jobs created each month just to keep up with the population increase, not counting the millions who have lost their jobs over the last two years.

Now to the FTSE, when I made my last comment it was just below 5200. Before Friday and the Goldman Sachs fraud announcement it was touching 5800. As the saying goes, there is never just one cockroach. Will this be the start of a correction?

There is an added factor which could play out to hurt the markets and that is the volcano spewing out ash in Iceland. This is causing major disruption to air travelers. There is hope that things will improve in a week or so, but don’t count on it.  I was listening to a radio program with a volcanologist speaking.  He was saying that the last time that volcano erupted it was 300 years ago, and it kept erupting for a year.  This caused a lowering of the temperature and crop failures.  It was one of the contributing factors to the French Revolution.  Just imagine what would be the consequences if air travel was disrupted for a year or more! So what with the banks in trouble again and nature throwing a fast ball it may put an end to the bulls party.

It had to happen. The market was overpriced and just waiting for a “trigger” to start the correction.  President Obama provided the trigger with the announcement on Banking reforms, starting a slide in financial stocks.  Then to add momentum to the slide China announced that it was tightening credit.  Suddenly importers to china could not get letters of credit, commodity prices fell and the Australian dollar fell.  All this started a flight to safety and the US$ gained strength, (though for the life of me I find this hard to understand – why would anyone think the US$ was either safe or strong?)

Last year 140 US banks failed, an average of 11.6 per month.  So far this year 15 have failed, if this rate were to continue we are looking at 180 to fail for the year! At the moment everybody hates bankers. They brought a lot of it on themselves by paying out big bonuses after being bailed out, and not to mention that it was the financial industry that has coause the mess in the first place.

Looking at the FTSE chart it has been a sudden drop off the high reach on January 11th. It burst through the 5200 support, now the question now is how low will it go? The next significant support level is 5,000.  There are many who are saying the ultimate bottom will be below the lows reached in March last year. 

Certainly reading of the problems of Greece and many other EU countries that are not as bad as Greece, but on the other hnd are not healthy either, it does not bode well for the euro.  The US is not much better with the budget deficits current and forecast.  There is a quote from Charles Dickens David Copperfield, which put in dollar terms goes like this, Income $10, expenditure $9.50 result happiness, Income $10, expenditure $10.50 result misery. This applies to Governments, Companies and individuals. 

As it applies to Governments, you cannot borrow your way out of a recession, and this is just what they have attempted. Sooner or later the unpleasant choices have to be taken.  Already 40% of americans receive food stamps. The poverty level has reached 37.9%.  If 40% are on benefits that leaves 60% earning, of that 60% a large proportion work for the government or military and are therefore a cost to the country, leaving just a small proportion of earners to pay for all this expenditure.  And this number of workers has been shrinking month over month for two years.   This Friday’s non farm payrolls will be revealing.

What will 2010 bring?  That is the question occupying many minds as this decade begins. Certainly the markets started with a hiss and a roar, to reach heights last seen in September 2008. I fear this bout of enthusiasm for the new decade is misplaced.

Before the market opened yesterday (Friday 8th Jan), Marketwatch’s main headline was about how the non-farm payroll number would be zero. (No jobs lost for December). Instead at 8:30 the number came in at minus 84,000. Yikes, how could they be so wrong? But after a drop at the opening the market decided to focus instead on the “better than expected” retail sales.  Of course those that have survived are going to have better sales than last year, half of their previous competitors have gone bankrupt. Shoppers have no choice but go to the survivors.  The real test is whether sales tax has risen, and the answer is NO.

States and major cities are running out of money.  California is seeking Federal aid, so far without success. Cities are hurting because of reduced revenues, leaving them little option but to cut jobs or services (or both). There are record mortgage defaults which are likely to get worse as many adjustable rate mortgages reset to higher levels. More defaults mean less money to the city in rates etc., making a bad situation worse.

To add to the woes of the average American there is the real possibility of tax hikes at local, state and federal level. There will be a double dip recession, its just a matter of when. Last post I said the 2nd quarter, I think I’ll make that the 2nd or 3rd quarter.

The FED having handed out money hand over fist is now trying to work out how to reduce, stop the stimulus without unforeseen consequences. Unfortunately there always seem to be unintended consequences.

On the 9th of March 2009 the FTSE hit its low of around 3450.  Since then it has been an upward path, except for a dip for a month from mid june to mid July, from wence the upward path resumed.  On Christmas eve, on a shortened trading day with very little volume the FTSE manages a close of 5354. Just a hundred points off a 2,000 point move in nine months. But has the economy really improved by 2,000 points worth?  I think not.

Massive stimulus all over the world produced the bounce, but at massive cost, all borrowed.  I can remember attending a seminar in 1998 when there was great concern that the US deficit, counting the unfunded obligations was 6 trillion dollars, and how this was unsustainable and the US dollar would crumble. Well 11 years on and the US deficit is now around 12 trillion dollars, and the purchasing power of the dollar has dropped in those 11 years, but it is still the “reserve currency” of choice for most central banks. Though an article on Bloomberg says “Central Banks Avoiding Dollar to Kill 2010 Rally”

During the year 140 banks failed. There could be a few more added to the total by the 31st.  If the recovery is so robust why is the FED keeping interest rates close to zero for an extended period?  It was low interest rates after 911 that caused the housing bubble. There is still a way to go before the bubble is fully deflated. The new year brings the greatest number of adjustable mortgage “resets” to higher interest rates. Already there is a record rate of “strategic defaults” where the owner can afford the payments but chooses not to as the property is “underwater” (worth less than the mortgage), and the reset to a higher interest rate makes the choice to walk away easy.

Then there is commercial property,the value of which is at its lowest level for 7 years.  With the consumer in saving mode, retailers are doing it tough, just how tough we will find out in the next few weeks when the results of the Christmas spending are reported.  It seems though that increases in sales come from reduced prices, hence margins and t herefore profits will be down. 

The banks are still reluctant to lend. Credit is tight.  The FED and the government is trying to withdraw the stimulus. Look for the US to fall into recession again in the 2nd quarter with a corresponding fall in the markets.

This is my first post for three weeks, due to a combination of not much to talk about and returning to work after a months holiday.  But this week could be a turning point. The rise in the markets since March 09 has been remarkable.  I feel it has been due in a large part to all the liquidity created by the governments. The banks did not want to lend it out so they traded with it.  The Banks are not out of the woods yet and this request from Dubai has reminded people just how fragile the recovery to date is.

Over the last couple of weeks the FTSE bowled over the 5300 level and in this last two weeks came close to breaking the 5400 mark.  But that was all before Dubai asked for an extention of time to pay their repayments on some 80 Billion dollars.  This happened while the US was closed for Thanksgiving.  Asian and Europe fell by arount 3%.  The US fell by a lesser amount by the end of trading on Friday (1.5% to 1.75% in round figures).

A week when against all odds the market went up. On Thursday the initial unemployment number came in less than expected at 512,000.  Down from the 600,000 plus up until July. But even now half a million workers loose their jobs every week.  That is half a million people stressed out, probably unable to meet their mortgage payments, credit card payments etc.

Then on Friday the much awaited nonfarm payrolls report. Again this came in at less than expected with 190,000 job positions lost. But the kicker was the “official” unemployment number came in at 10.2%  But if one takes the U6 figure, which takes into account those working part time, but are looking for full time employment the actual underemployment and unemployment number is 17.5%

Lets look again at the nonfarm payrolls. The 190,000 figure was a surprise. But this figure is “seasonally adjusted”. If the number was not “seasonally adjusted” you are looking at 641,000. Just a small adjustment of 450,000!

To get back to the level of employment reached in 2006-7  there will have to be 15 to 18 MILLION jobs created in the next 5 years.  That would require an explosion in manufacturing, whole new industries created.  Even without the credit crunch, that is not going to happen.

Mean while the US is still giving away other peoples money.  This week the unemployment benefits have been extended to 99 weeks, and the housing tax credits extended and widened.  This week the vote on Health reform comes up with a cost of a Trillion over 10 years. No wonder gold is at record prices.  Sooner or later a US dollar won’t be worth the paper it is printed on.

As I mentioned at the begining of the month October is historically a down month, and so it turned out. The FTSE finished the month 90 points lower.  On Friday all markets took a hit and the FTSE was 93 points lower on the cash and 112.5 points lower on the December futures.

The week was fairly volatile, one day down, the next up. On  Thursday the markets received a boost as the US GDP came in at a positive 3.5% for the last quarter. This should not have been a surprise though as the government was handing out money hand over fist with cash for clunkers and first home owner grants. Here are some comments from leading economists.  Mish Shedlock said:
“Today the market is cheering over what is actually an ugly report. A misguided Cash-for-Clunkers added a one-time contribution of 1.66 percentage points to GDP. Auto sales have since collapsed so all the program did is move some demand forward. Government spending increased at 7.9 percent in the third quarter which is certainly nothing to cheer about. Personal income decreased $15.5 billion (0.5 percent), while real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent last quarter. Those are horrible numbers. The savings rate is down, which no doubt has misguided economists cheering, but people spending more than they make is one of the things that got us into trouble. The only bright spot I can find is exports. However, even there we must not get too excited as imports rose much more.”

John Williams notes that one-time stimulus or inventory items represented 92% of the reported quarterly growth. The nature of the stimulus-related gains was that they tended to steal business activity from the future. The months ahead are the future. Accordingly, fourth-quarter quarterly GDP change will likely turn negative, again. (The King Report)

And David Rosenberg writes: “Only economists see the recession as being over; the man on the street sees it a little differently, perhaps less enthused by the fact that a lower rate of inventory destocking is arithmetically underpinning GDP growth at this time. Put simply, a Wall Street Journal/NBC News poll just found that 58% of the public believe the economic recession still has a ways to go — and that is up from 52% in September and means that the private investor, unlike the hedge fund manager, is not interested in adding risk to the portfolio even after a 60% surge in the equity market.

Food for thought there. On Friday nine banks hit the wall bringing the total bank failures to 115 for the year to date. Also the report came out that showed that consumer spending contracted during the last month. Raising doubts about the sustainability of the rally.

All eyes will be on the FED this week.  Their comments will be taken apart word by word and analysied every which way for signs that the FED will raise interest rates or reduce the easy money available to banks. Then on Friday we will have the non farm payrolls and the offical unemployment rate, estimated to be 9.9 or 10%. I would pick 9.9% as the administration would not like to see double figures yet.