More dark clouds with little chance of sunshine this year

Only 15 days until my first interest rate/economic forecast class of the year that will be held on Tuesday, March 24th and is sure to sell out. The class will be held from 6-9pm and seating is very limited. Registration details: http://www.earlywarningwire.com/PDF/interestrateclass2009.pdf

Friday’s jobs report was the disaster that was advertised and is another reason it will be years before we can rebound from the worst economic crises since the 1870’s. The unemployment rate soared to a 25 years high (8.1%), 651,000 jobs were lost in February, January and December were revised down another 161,000 and temporary jobs declined 78,000 last month. The seasonal adjustment for February (birth/death model) added 134,000 jobs (how could that be?) and made the real loss closer to 1 million jobs. In the past five months the net loss is near 3 million and according to my estimates March could see over 900,000. This is no longer a recession but bordering on the worst economic crises in our history and shows no signs of ending. Spend a couple of minutes with the following chart and you will see why the U.S. unemployment rate is headed for 10%+. The number of people working part time jobs because they can’t find a full time job has risen to record highs and the only category showing growth is the government and health care industry. The good news is that because of population growth the current decline in jobs (-3.1%) is not yet as bad as we saw in 1957 (-4.1%) and 1948 (-5.2%) but fpr those out of work the pain and fear increases daily. Unless the government is planning on hiring hundreds of thousands to help oversee its various bail out plans it will be impossible to overcome the decline in private payrolls this year. Less jobs mean less spending and less spending creates fewer jobs and that is why the “negative feedback loop” that I have been writing about for the past year is so dangerous and difficult to end once it picks up momentum. If you are looking for a job Fed Ex is offering free printing of up to 25 black and white resumes on March 10th.

Will the federal government allow a BIG bank to fail?

Sunday, Alabama Senator Richard Shelby told a national television audience that “I don’t want to nationalize the big banks, I think we need to close them.” Mr. Shelby’s opinion is in the minority but might find a few friends in the next few months as more $$ is injected into banks without any noticeable increase in lending.

Friday Kansas City Fed President diverged from his fellow Fed members with a speech titled “Too Big Has Failed” and addressed the question of whether the government best use of resources is too save institutions whose failure might cause a ripple effect in the economy similar to the Lehman Brothers collapse in 2008.

The country is not suffering from a liquidity crises and banks have ample money to lend but with asset prices declining why would anyone want to borrow to buy something that is declining in price and why would a lender want to take a risk that 70% LTV (loan-to-value) becomes 100% LTV in a couple of years. The banks are NOT the problem, it’s the lack of confidence that prices will rise in the near future. Once DEFLATION becomes part of every day thinking consumers delay purchases waiting for lower prices and investors remain in cash knowing better opportunities will arrive at a later date.

Non-bank mortgage lenders days may be numbered

U.S. House Financial Services Chairman Barney Frank is proposing that mortgage lenders be forced to keep a portion of every loan they sell. This could have HUGE ramifications for the residential lending business that has operated with far less capital than it will need if this proposal becomes law. Mr. Frank is a very powerful congressman and almost always gets his way. I alerted daily readers to an article in the Boston Globe two months ago in which he said the conforming/jumbo limit would be part of any stimulus bill. If you are involved in the mortgage arena you must read this article because there will be very little opposition in Congress to this idea and unless the government is going to give the lenders the capital needed to hold a portion of these loans banks will soon be the only originator of mortgages.

The housing crises is not even close to ending according to a story in Sunday’s Washington Post about FHA loans which appears to be the next disaster for our government that wants everyone to buy a house, borrow to buy the house and then assume the homeowner will make on time mortgage payments. Recent statistics show the number of borrowers failing to make a single payment before defaulting has tripled and is running at a rate higher than the loans are being issued. Another must read for anyone who is hoping that the bottom of the economic contraction is near.

U.S. stocks and a long-term view

Last week President Obama told the country that if investors have a very long-term view then stocks could be a good buy. Not exactly a ringing endorsement of our capitalist system. The only investors with a long-term view today are those that are “frozen” in positions that have fallen 50% or more and failed to use stop losses. Many “experts” pointed out a few months ago that stocks were at a historic point offering incredible opportunity because the dividend yields on many solid companies were now equal to or higher than those on long-term Treasury notes and bonds. Because dividends are not guaranteed many of these dividends have been cut to near zero as corporations realize the world isn’t the way they thought it would be this year. Most business television programs have aggravated a bad situation by constantly interviewing bullish analysts and asking them about their best bets for an upside market. If these analysts bought their own recommendations they would be in line for a government bail out. Hope and denial have become the most popular strategies for those who remain invested and dark days are ahead for the brokerage business. Traders will be using low cost firms to go in and out of the market on a daily basis while “structured products & hedge funds” that were sold to investors the past couple of years become unwanted at any price by individuals that would rather remain in cash under their mattress or in insured CD’s. Commissions on these instruments are virtually zero and many who have made fortunes in the past decade will leave the business searching for better arenas. Unfortunately many will hang on with the excuse many mortgage brokers used a couple of years ago when the business turned down: “I don’t know where else I can make this much money.” They will soon learn they can’t ever make this much money again and be forced to leave or end up in a food line.

Time, time and more time

The amount of damage to the U.S. economy, stocks and other asset values in the past year has been extraordinary and taught many a lesson they will never forget: History does repeat but not when it is expected. Many investors followed the trend of leverage, inflation and seeing the immediate future from their own past experiences. It will be a decade or more before most recover a portion of their net worth and confidence levels. The government is trying to use short-term solutions to fix long-term structural problems and sadly that will only stretch out the healing process. Helping homeowners lower their payment when they don’t have a job is a waste of government funds. Homeowners that have little or no equity are better off renting to preserve their hard earned savings. My solution would be for the government to purchase all of the mortgages that are selling at a discount (60 cents on the dollar?) and sell them back to individual homeowners at that price and then finance the purchase of the mortgage through Fannie and Freddie. If you had an opportunity to buy your mortgage at a discount wouldn’t you be interested? This plan will immediately give homeowners increased equity and a reason to make monthly payments at current market interest rates.

Investors should be in 100% cash or insured CD’s or T-bills and not looking to buy the next dip in the stock market. If and when stocks bottom, there will be plenty of time to take part in the upside action. Bear markets never end until the majority of players stop asking “Is this the bottom?” and this one will be no exception. I wonder if the bottom will appear when one of the business television shows goes off the air because of a lack of viewers but in the meantime readers should remember that 90% of stocks decline in a bear market so why would anyone want to buy. Hasn’t that been shown to be a sure way to guarantee a decline in your net worth?

Can you afford not to be at my class on March 24th? I will discuss my outlook for the remainder of 2009 and give everyone easy to use tools to help guide them through the maze of opportunities available for their savings.