Last week, after posting my long term prediction that the S&P 500 would go to 500, I received some feedback telling me what I could do with that crystal ball – although some were nicer and simply questioned my reasoning ability.
First, I stand by last week’s blog posting. Ultimately, I believe the S&P index will get there. However, one thing I didn’t discuss in last week’s posting is the fact markets rarely move straight up or straight down – it’s unlikely this time will be any different.
It’s possible; maybe even likely the stock market rallies after the stimulus (aka spendulus) bill is signed into law next week, but my view is this rally will have a life of only a few weeks to a few months at most, if in fact we get a rally.
The facts are the facts and they’re not pretty.
This past week, Bloomberg reported that state regulators and the FDIC closed 4 banks, bringing the total year to date to 13, already over half of the number that were shut down last year (25 banks were shut down last year equaling the total from 2001 to 2007 (Source: Bloomberg, February 13, 2009).
The cost to the FDIC after selling the deposits of the 4 banks that were shut down was in excess of $341 million.
The news for banks is not getting better – more shut downs are likely to follow.
The FDIC estimates that bank failures through 2013 could cost taxpayers $40 billion.
In the 3rd quarter the FDIC stated that 171 banks were “a problem” a 46% jump from the 2nd quarter.
RBC Capital Markets analysts estimate that as many as 1,000 US banks may fail in the next 3 to 5 years as a result of losses on commercial real estate loans. That’s double the one year total at the peak of the savings and loan collapse.
More than 250,000 foreclosures were filed in January making January the 10th straight month that the number of foreclosures filed exceeded a quarter million. I believe that the foreclosure trend will continue due to the fact that the number of mortgages on which rates will reset will increase over the next few years (see my 1st quarter market update for details).
In spite of the fact that the Federal Reserve is pumping money into the economy, consumers aren’t spending or borrowing. As much as our politicians and the powers that be at the Fed want to avoid a deflationary environment, I believe that we’re currently there. Worldwide economies are shrinking and prices are falling.
According to an article published on Bloomberg today (February 16, 2009), Japan’s economy contracted at an annual rate of 12.7% in the 4th quarter. The Japanese GDP has fallen for three consecutive quarters. (Source: Bloomberg 2/16/09)
The UK isn’t faring much better. The Confederation of British Industry reported that the British economy has contracted for 6 consecutive quarters and revised their estimate for this year downward, stating that the British economy will contract 3.3% rather than the 1.7% estimate in November. (Source: Bloomberg 2/16/09)
A Bloomberg News survey released today ahead of Department of Labor figures to be released 2/20/09 estimated that consumer prices fell over the 12 month time frame ending in January. The survey suggests that the cost of living dropped .1% over the year. Assuming the survey is correct and I believe that it is, it would be the first such decline since 1955.
Debt is deflationary. While the Fed is desperately printing money to try to get folks spending and generate some inflation, it’s not happening.
That’s why I believe the market has more downside somewhere down the road – all these ugly ‘firsts’ make investors nervous.
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