Wednesday, August 23, 2006

bearish viewpoints

Tipping point pops bubble, triggers bear
Ten warnings the economy, markets have pushed into danger zone

ARROYO GRANDE, Calif. (MarketWatch) -- You heard the pop! Forget the happy talk. We just crossed that crucial tipping point, popping the bubble, signaling a bear. Why? The Fed halted interest rate increases.

That's bad news, says economist Gary Shilling. Check the historical data: "With only one clear exception in the mid-1990s, central bank ease since the mid-1950s means the economy is in a recession, or will be within a few months."

My filing cabinets are bulging with all kinds of early-warning signals screaming that we've passed the tipping point. A few are deafening: One by the CEO of Countrywide Mortgage. Another by the CEO of Toll Bros. Then hedge fund losses drove us to pull together a total of 10 warnings that signal the popping of the bubble and the start of a recession and a bear market.

1. Mortgage lender: 'Never seen a soft landing'

When a CEO like Countrywide's Angelo Mozilo speaks, his message is far more important than all the happy talk coming out of Washington and Wall Street: "I've never seen a soft-landing in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen." Investors better prepare too.

2. Housing warns of sustained downturn

Robert Toll, CEO of luxury home builder Toll Brothers reports dramatically declining sales and revenue. Toll says the slowdown "will last for at least six months more, it may last for two years more. We don't know." Reminds us of the 2000-2002 recession.

3. Hedge fund losers the past two months

Hedge funds have been in the news a lot since topping the $1 trillion mark in assets. This unregulated industry is a loose cannon. They've become the new dot-coms now that most retail markets are so volatile and flat, forcing portfolio managers and investors to look for alternatives to the $9 trillion mutual fund market. As a result, hedge funds are chasing anything that hints of higher returns.

For example, the main data tracker, the Hennessey Group, just announced that hedge funds have underperformed the S&P 500 for the second straight month. Other warnings have all been reported in the news lately, screaming risk, risk, risk! Flashing like neon signs on the Vegas Strip:
°Congress is giving hedge funds more access to pension fund money.
°In spite of underfunding due to past errors, corporate and state pension funds are now betting more on riskier hedge-fund deals to increase returns.
°The success of Yale and Harvard has inspired small-college endowment funds to start betting on similar risky hedging games.
°The lure of huge, fast profits for hedge-fund managers has young inexperienced college grads jumping into the business and getting backers.
°Retail mutual funds are asking shareholders for permission to engage in more aggressive hedging strategies, like short-selling and derivative trading.
°Like hedge funds, private-equity funds are now signaling a top; too much new capital is forcing them to chases fewer, riskier deals
°After a record year, IPOs, a hedge fund competitor for new capital, are also topping as many deals are falling below issue prices.

And get this, hedge funds have been making big bets on Hollywood movies, using sophisticated programs to pick winners. This sounds like a sequel to the 1998 LTCM disaster; call it "Déjà vu Dot-coms!"

4. Rentals squeezing ARM borrowers

The cost of renting in Los Angeles is up 88% the past decade according to Realfacts. Santa Monica is up 279%. Potential buyers can't buy so they rent. And owners can't sell to recoup the high costs they paid in the recent bubble, so they're renting out. But they can't make enough to make their mortgage payments.
USA Today estimates that nationwide median mortgage payments are $1,687 while rents are only $868. So now all the cheap money that sucked buyers into ARMs is putting the big squeeze on everybody, owners, renters and lenders, further driving inflation.

5. Inflation hits pickup truck sales

As new construction falls and gas prices skyrocket, pickup truck sales have been falling dramatically. So now, as Americans buy fuel-efficient Asian imports, the Big Three is paying a heavy price for relying too much on profits from gas-guzzlers. No wonder Toyota is now bigger than Ford, may soon pass GM.

6. Corrosive domestic oil policies

Free market? Or surreal? Since 2000 America's energy policies have been made in secret. Last year oil executives didn't have to testify in Congress under oath. This year as gasoline prices skyrocket, so do oil company profits and their executives compensation. So when we recently saw the Alaskan oil fields shut down because pipelines are physically corroded, the symbolism was obvious; America's energy policy is as corroded and corrupt as the oil companies poorly maintained pipes and their executives thinking.

7. Markets 'unfazed' by terror threats

The day after the recent bomb threat against 10 commercial aircraft traveling from Britain to the U.S., headlines read: "Markets unfazed!" Read that "oblivious." Yes, we all know that historically markets are resilient after major crises. But this lack of response reminds me of the happy talk during the 2000-2002 period when delusional bulls grabbed any excuse to deny America's long and painful freefall into a bear recession.

8. Main Street investor sentiment dropping

The gap between the top and bottom of America's economic classes is rapidly widening. Our "ownership society," a small group of investors that control over two-thirds of the stock market may be "unfazed." But the truth is, the incomes of America's middle class have been level, while inflation has been eating away at the incomes of minimum-wage workers. Most Americans aren't party to the drama played at the Wall Street casino, while insiders, corporate CEOs and Congress have all enjoyed substantial increases in personal income the past decade.

9. War costs accelerating

In spite of all the hype about controlling the insurgency, violence is increasing. Iraq can't stand up, so we can't stand down. We're trapped in a no-win, no-exit conflict, policing a civil war. And unfortunately America's domestic partisan politics is creating inflexible strategies that are draining huge resources: The Iraq and Afghan wars are now estimated to top $1.27 trillion amid mounting Middle East tensions and rising domestic terror threats, while a depleted military is unprepared for another major war.

10. Federal deficits grossly understated

Our government spending is totally out of control, no fiscal restraint, no legislative oversight and Enron-style accounting that disguises how bad things are. USA Today says federal deficits reported as $318 billion would actually be $760 billion if standard corporate accounting rules were used. And if we were honest and accounted for Social Security and Medicare costs, the deficit would be $3.5 trillion, 10 times what we're led to believe. Lay and Skilling were rank amateurs.

Bottom line: All these signals tell us the tipping point was crossed, the bubble has popped and we are heading into another bear market and recession




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