Walking up Vanderbilt Avenue the other day I noticed that the former Bear Stearns building had been meticulously retrofitted to represent its new owner, JP Morgan. I thought to myself, is that it?
When all the fresh paint dries and thousands of bank buildings and offices are remodeled to fit the plan set out by their acquirers, will that be it? Was this a once in a century land grab for market share in the commercial and retail banking industry? Will there be a Bank of America, Citigroup, JPM Morgan Chase, on every corner? Will all of this simply end in the nuisance of having to sign the back of a new ATM card and creating a new organizational system for our new bank’s statements?
The consumer has been hurt, but with the abysmal economic data point from last week behind us and the fact that four out of the last five bottoms in consumer confidence followed the bottom in the market, buyers are peeking through the peephole again, betting that the worst is behind us.
The markets move last week, a gain of 11% took some of the edge off of October’s frightful downward spiral. In fact the Dow is up over 18% from its intra-day low on October 10th. Such a move might indicate that we are through the worst of the market’s downward pressure. Global government intervention has removed the possibility of markets going to zero, but uncertainty lines the outcome of all of their efforts. Volatility remains extremely elevated.
The effects of the TARP are unknown. Beyond the sub-prime meltdown, there is fear of waves of Alt-A and even prime defaults ahead of us. Credit card debt, student loans, commercial real estate and even municipal debt pressure remain as well. In addition, corporate credit is still tight. Corporate America, just like Americans do, runs on free flowing and cheap borrowing costs. Few if any companies today would be solvent on cash from sales alone. With rampant speculation that this will be a protracted and dreaded consumer lead recession, companies across industries are going feel more than a pinch.
When considering whether this is a good time to buy the market consider its three week 18% rise, and consider these comments from Nouriel Roubini’s RGE Monitor:
Here are the main elements of Nouriel’s outlook: Tsunami of corporate defaults; 2-year U-shaped U.S. recession that threatens to turn into an L-shaped one if policymakers do not regain control of the financial system; global re-coupling to the U.S. will advance from non-U.S. markets to non-U.S. real economies – not even the strongest emerging markets such as Brazil and China will escape global re-coupling; vicious cycle of deflation in goods markets, labor markets, commodity markets, financial markets, corporate and household earnings, and aggregate demand; de-leveraging to reduce excess debt in municipalities, households and some firms; U.S. stock markets declining another 20-30%, bottoming fall 2009 at the earliest, then moving sideways for years post-recession if growth remains anemic as it did in Japan after its 1990s real estate and equities bust; U.S. unemployment rise to reach 8-9%; the demise of the shadow banking system.
According to Nouriel, USD assets, commodities, U.S. and international equities, housing, and the USD are quite risky right now. Seek safety in cash or cash-like instruments such as T-bills and bonds of safe, large governments. Though he believes the U.S. dollar will retain its reserve currency status for decades, its status will gradually erode.
Is there more pain(t) to come? Probably.
RGE Lead Analysts, RGE Monitor, November 1, 2008