Great News For The Young Generation

One of the best things to come out of this depression (the depression has only been delayed or at best case spread out of multiple years) for the young generation is that the problems of Social Security, Medicare, Medicate and practically any government guarentee has been moved forward by at least 5 if not 10 years.

This article from Bloomberg elaborates: Here

The only result of the stress test is:

Keep in mind that the end result of the stress tests, the banks converting their preferred to common, is that the banks can lower their interest expense. That’s it. The only thing that does for them is buy them time to try and earn their way out of the hole in their balance sheet. The government is giving them the chance to try and do this which in turn is just the continuation of the zombification of banks. The problem is the losses on their balance sheet are going to be larger than their earnings for the next 12 months.

The only decline the government has succeeded in stopping is the decline in stock market. I doubt they can keep it that way much longer.

Here’s why:

• Technically
  
  
  
  • Just like the longs will capitulate on the way down, the shorts will capitulate on the way up. After a 40% rally it’s safe to say that many of the shorts have capitulated.
    
  • Volume, as seen in the SPY ETF, has not been increasing.
    
  • The market has gone up for almost 2 months straight.
    
  
  

• Fundamentally
  
  
  
  • Many employees are hanging onto their jobs by a thread. This would include:
    
    
    
    • Car salesmen
      
    • Farm equipment salesmen
      
    • Investment Bankers
      
    • Realtors
      
    • Stock Brokers
      
    • Mutual Fund Managers
      
    • Reporters
      
    • Journalists
      
    • Retail Cashiers
      
    • Pilots
      
    • Hotel managers
      
    • Travel agents
      
    
    
  • Many other employees are running around like turkeys, not realizing that thanksgiving is coming early this year and their job will be cut off:
    
    
    
    • Mortgage brokers (How many people are left to refinance?)
      
    • Waiters (Restaurants have barely kept afloat on coupons. The coupons have to end sometime.)
      
    • Nurses (Believe it or not, less people are going to the Dr./Hospital)
      
    • Pharmacists (People can’t afford their drugs.)
      
    • Teachers (Wait till that tax levy fails)
      
    
    
  • More homeowners are hanging onto their houses by a thread. Why?
    
    
    
    • More homeowners are losing their jobs.
      
    • More homeowners that aren’t losing their jobs are taking a pay cut.
      
    • More homeowners that are unemployed will lose their unemployment benefits.
      
    • Taxes are increasing on things like license plates, sales tax, state income tax.
      
    • This isn’t getting much attention, but gas prices have increased recently too.
      
    
    
  
  
• Valuation
  
  
  
  • If after tax earnings on the S&P 500 will only be $50, then at 920 on the S&P 500 that’s a 18.4 PE. An 18.4 PE is 5.5% yield. If the growth rate going forward is only going to be 2%, then that’s a 7.5% rate of return.
    
  
  

None of these reasons will come as a surprise. Unsurprised investors won’t sell in a panic, but instead will sell because they are discouraged at the results of the market. That will be a slow steady decline. Slow declines aren’t great for shorts and are best for bond investors.

Events to Anticipate in the Next 6 Months

If everything below seems negative to you, then maybe this would be more your liking: Here

• GM shutting down plants for 9 weeks if not longer. This will ripple through the supply chain. Anecdotally I can tell you that companies with great credit cannot get a loan at any interest rate if the majority of their business is tied to the auto industry.
  
• A second wave of layoffs is taking place now. The first wave was the “lets get rid of anyone that we don’t absolutely need.” The second wave will be “lets trim this thing down to a skeleton shift.” The third wave, which is a ways away, will be “we can’t even profit on the bare minimum, lets shut it down.” This results in the unemployment rate rising to 10% and staying there.
  
• The first wave of unemployed people will start to lose their unemployment benefits.
  
• States will run out of money for the second wave of unemployed people.
  
• Higher interest rates. The 10 year treasury is well on its way. 30 year mortgage will follow. Somewhat bittersweet as this is great for savers, bad for borrowers.
  
• Hurricanes in Florida.
  
• No summer vacations for the kids; at best going out to dinner.
  
• No bullets.
  
• Increased foreclosures now that the moratoriums have been lifted.
  
• Increased violence from the large number of unemployed people. This is especially true for young males, which happen to have the highest unemployment rate of any demographic. Of all the things out there I hope that something like this doesn’t get out of control.
  

Myth’s to Dispel

• Experts like to quote the statistic that 1 million households are created every year and this should bring the housing supply down quickly. What they’re not factoring in is how easily households can be combined, which can more than offset the new household that are created. My point here is that the housing bust still has years to go, not a year.
  
• Similar to “1 million household created per year,” experts like to quote a statistic that 12 million new cars are needed each year. There a few things they are not factoring in. Unemployed people can share a car with their spouse etc. College kids that live at home can share their parents’ car. Households already had about 2.5 cars per drive and can consolidate. Drivers can drive the same car longer.
  
• I haven’t heard this one year, but I’m sure the same can be said for computers. However, the basic computer (word processor, internet, video) is so advanced that I can’t see needing to replace one for a decade.
  

Warren Buffett Disappointments
It’s unfortunate, but he’s done a few things to disappointment me lately.

• He changed the format of the annual meeting so that the early birds don’t necessarily get the worm in regards to being able to ask him a question.
  
• He suggested that he would buy Wells Fargo and didn’t actually do it. I’ve never in my life read/heard him say anything like that.
  
• He continues to hold newspapers even though their fate is sealed. Would he have held a buggy whip company until it’s last day?
  
• He worked so hard (thinking about investing and having the patience is hard work) his whole life only to give it away to a charity that he has no control over. He won’t even be sure the charity uses the money wisely. He won’t live to see hardly any results either.
  

Lastly, if the DJIA (which I don’t follow at all, but goes back much further than the S&P 500) goes from 100 in 1915 to 10,000 2015 that’s only a 5% annual rate of return. I’m afraid that’s all the stock market can produce. Why not just buy bonds?