Sunday, August 16, 2009

Wall Street vs Main Street

I guess Alan Abelson of Barron's and I are thinking a bit alike lately. I don't know whether to be comforted or scared about that.

I mentioned last week on CNBC that I thought this was coming down to a struggle between Wall Street and Main Street. Aparently Alan (you don't mind if I call you Alan, do you Alan?) agrees with me.

Go ahead, tell me the story about how good things are again. My opinion, for whatever it's worth, is that the market just isn't worth 16.8x next year's earnings. I know all the bulls think that we're going to have company after company guiding earnings upward and that earnings will be like a huge coiled spring that launches us into the next realm of the market. I also know that the market is a discounting mechanism, and that you really want to buy in some cases as much as 6-9 months before we expect to be out of the recession. But someone forgot to tell 70% of the economy that things were better.

Let's look at life for Joe and Jane Consumer for a moment. Not only is unemployment off the charts, but we're seeing people use all their benefits and drop off the backside of the statistic. The backside, you know, the part where there isn't any more money? Yeah. Comfy place. Doesn't tend to inspire a rebound in spending.

Despite there being a slight pick up in the number of homes being sold, Joe & Jane's home isn't worth anymore today than it was a month or two ago. And statistically it's probably worth somewhere around 33% less than it was a couple of years ago. Since Joe & Jane put 20% down (at most), that means it's worth less than they paid for it in many cases. And all those foreclosures going on down the block, not helpful. Luckily, though, their Alt-A mortgage doesn't reset for another few months. Oh, and that checkbook that wrote against the home equity line of credit? Might as well use it for fire starter this winter (especially if you can't afford the traditional heating bill), 'cause it's quite literally not worth the paper it is printed on.

If it comes down to choosing one payment over another, the credit cards aren't getting paid just so the mortgage can be made for one more month. That's not good for the banks or retailers. If they are making card payments still, chances are their interest rates have risen and their credit limits have fallen - can't use the revolving card for spending anymore because the only revolving it's doing is spinning in the grave of consumer spending.

Luckily, in order to help the car companies yet again stimulate the economy and help consumers drive more fuel efficient cars, the government launched Cash for Clunkers. Fabulous idea. Sold lots of cars. Also gave something like 300,000 people who had a paid off clunker of a car a gift that goes on giving - A CAR PAYMENT! So there goes another $400 a month out of discretionary income.

Yes, there's a lot of the stimulus bill that hasn't been issued yet. Why issue it when people really need it? Better to wait so that any positive effects come just a few months before the election... not that I'm saying the government planned it that way... Oh. Wait. I am saying that. I guess I have little skepticism as far as the benefits of this. Sure, our roads out here in the Seattle area are much better now that road construction projects are coming through. But I'm still waiting for the trickle up effect to show through. Geez, even beer isn't selling the way it was. What more of a sign do you need?

I guess the thing that tickles my oh-so-ironic funny bone the most is the belief from the Wall Street pundits (you know, those OTHER people who flap their lips on TV all the time) who think all the money on the sidelines is going to come pouring back in the market. A couple of thoughts on this:

First - if you're a baby boomer who just saw 40% of your savings evaporate before your eyes, you're panicked and not likely to want to jump back in the overheated market.

Second - and I think this is the part that those on Wall Street who never walk around in the rest of the country will never get - when your friends, family, boss, neighbor has their job, savings or future hit by the closing of one of those little banks that is NOT 'too big to fail', confidence errodes really quickly. No, it's not about the deposits so much because the FDIC has those covered. I'm talking about the business and construction loans that are not being picked up by the acquiring banks, leaving projects halfway completed with no further funding. I'm talking about grown men in tears because their lives as they know it have just evaporated. Doesn't tend to make for a lot of trust for those folks that got the bailout money, know what I mean?

If you totally disagree with me, so be it. But remember this one piece of information if nothing else: in a bear market rally it doesn't take a selling climax to end the rally - it just takes a lack of further buyers.

Be careful out there.

1 comment:

Gregory said...

The first half of a "W" shaped recovery is a "V", said someone on BB radio this AM.

I'm afraid I agree with both of you. But still hope I'm wrong.