What is wrong with the US economy? Part 2

[Jimmy Snyder]

We're now officially in Obama's bear market. The Dow Jones Industrial Average fell 20 percent since Inauguration Day. In the Bush years, the Dow had climbed to as high as $14164 and never went below $7286. In spite this, Obama has brought the Dow to a level we haven't seen since the last Democratic Presidency. Obviously, even though people say they like Obama, they won't put their money where their mouth is.

 

[Art]

We're now officially in Obama's bear market. The Dow Jones Industrial Average fell 20 percent since Inauguration Day. In the Bush years, the Dow had climbed to as high as $14164 and never went below $7286. In spite this, Obama has brought the Dow to a level we haven't seen since the last Democratic Presidency. Obviously, even though people say they like Obama, they won't put their money where their mouth is.

I take it you meant this to be a satirical comment on the Bush years?

 

[Count Iblis]

We're now officially in Obama's bear market. The Dow Jones Industrial Average fell 20 percent since Inauguration Day. In the Bush years, the Dow had climbed to as high as $14164 and never went below $7286. In spite this, Obama has brought the Dow to a level we haven't seen since the last Democratic Presidency. Obviously, even though people say they like Obama, they won't put their money where their mouth is.

14164 was a huge bubble the investors failed to see. The Dow is back to where it should be, probably it is still a bit overvalued. Obama has nothing to do with that, other than changing course in the correct direction which exposes the reality of the problem, leading to the Dow sinking to new lows where they should have been in the first place.


I've read that the Dow could sink to 4000 or lower before slowly recovering to 10,000 over the course of the next few decades.

 

[Astronuc]

Unfortunately although these figures looked huge they were dwarfed by news the same day that Lloyd's bank may require a handout of £250 billion just to survive.

Despite the fact that ~$1 trillion have already been injected into the financial system in the US, there is still great uncertainty with respect to the viability of several banks and financial institutions. That is weighing down the equities markets, and that has prompted a significant reduction in capitalization.


Meanwhile -

Unemployment hits 25-year high
Jobless rate hits 8.1% in February as a record-high 12.5 million people are unemployed.

The expected unemployment rate was 7.9%. Of course, the number could be revised upward or downward next month.


Jobless rate bolts to 8.1 percent, 651K jobs lost
http://finance.yahoo.com/news/Jobless-rate-bolts-to-81-apf-14564130.html
Jobless rate jumps to 8.1 percent in Feb., highest since late 1983; employers cut 651,000 jobs

Job losses were widespread in February.

Construction companies eliminated 104,000 jobs. Factories axed 168,000. Retailers cut nearly 40,000. Professional and business services got rid of 180,000, with 78,000 jobs lost at temporary-help agencies. Financial companies reduced payrolls by 44,000. Leisure and hospitality firms chopped 33,000 positions.

The few areas spared: education and health services, as well as government, which boosted employment last month.

Actually locally, we're seeing people in education taking early retirement to reduce staff. Layoffs and school closings are still possible.

 

[Astronuc]

We're now officially in Obama's bear market. The Dow Jones Industrial Average fell 20 percent since Inauguration Day. In the Bush years, the Dow had climbed to as high as $14164 and never went below $7286. In spite this, Obama has brought the Dow to a level we haven't seen since the last Democratic Presidency. Obviously, even though people say they like Obama, they won't put their money where their mouth is.

Did Obama Cause the Stock Slide?
Wall Street has soured on the new Administration's policy moves. Can this relationship be saved?
http://www.businessweek.com/investor/content/mar2009/pi2009034_253747.htm

At least on Wall Street, the honeymoon is over for President Barack Obama.

Polls still show the President has strong popularity among the general U.S. population, and Obama continues to command power in Congress. But among investors, fairly or unfairly, there is griping that the new Obama Administration is at least partly to blame for the recent slide in stocks. Since Nov. 4, Election Day, the broad Standard & Poor's 500-stock index is off about 25%, and since Jan. 20, when Obama took office, the "500" is down 15%.

It's never easy to determine exactly why the stock market moves in a particular direction. Plenty of other factors have influenced stock prices since November. For example, the global economy has slowed further and the outlook for corporate profits has worsened.

But BusinessWeek interviewed a wide array of investment professionals, and many said the first six weeks of the Obama Administration have soured their outlook on the stock market.

. . . .

Well there is a certain amount of inertia in the economy which is beyond the control of the president and the governments. Of course, Obama will get the blame, just like Bush got some blame.

We just have to get through this.

 

[Jimmy Snyder]

Did Obama Cause the Stock Slide?

Of course not, no individual is that powerful. I blame the Democratic congress as well.

 

[Astronuc]

Slump Humbling Blue-Chip Stocks
http://www.nytimes.com/2009/03/06/business/economy/06shares.html

The banking giant Citigroup commanded a stock price of $55 just two years ago. But at one point Thursday, as markets hurtled to their lowest close in 12 years, the shares were worth less than an item at the Dollar Store.

After months of breathtaking declines, this is what Wall Street has come to: Blue-chip companies, once considered safe investments and cornerstones of the economy, are akin to penny stocks.

The bear market is tightening its grip, despite efforts by the government to support the economy and some of its biggest companies. Fears about the depth and breadth of the recession drove the Dow Jones industrial average down another 4 percent on Thursday, bringing its losses so far this year to 25 percent — just shy of the 33 percent decline recorded for all of 2008.

“It borders on unbelievable,” said Glenn W. Tyranski, senior vice president for financial compliance at NYSE Regulation. “You’re seeing companies that are just really suffering across the board.”
. . . .
A share of General Motors stock, which fell below $2 on Thursday as it warned of possible bankruptcy, is now not even enough to buy a gallon of gasoline for your Chevy.

A share of General Electric, battered this week to little more than $6, would not be sufficient to buy two of the company’s compact fluorescent light bulbs. And at its current price of 73 cents, it would take several shares of Office Depot stock to buy a box of paper clips.
. . . .

Of course, this represents a buying opportunity of those who have loads of spare cash.

 

[mheslep]

With Citi under a buck and GM under two bucks, who is willing to buy stock and hang onto them? After the auditors' reports on GM came out today, I don't think I would be buying stock in that company... Citi?... Well, if the US government thinks that bank is "too big to fail", their penny-stocks might be a fun low-risk buy.

Citi is not low risk. If the government eventually nationalizes, and there are many who still advocate this, then you get zero.

 

[OmCheeto]

Did Obama Cause the Stock Slide?
Wall Street has soured on the new Administration's policy moves. Can this relationship be saved?
http://www.businessweek.com/investor/content/mar2009/pi2009034_253747.htm

Well there is a certain amount of inertia in the economy which is beyond the control of the president and the governments. Of course, Obama will get the blame, just like Bush got some blame.

We just have to get through this.

I would point the finger at the people primarily responsible for the whole debacle:

http://www.businessweek.com/investor/content/mar2009/pi2009034_253747.htm"
But BusinessWeek interviewed a wide array of investment professionals, and many said the first six weeks of the Obama Administration have soured their outlook on the stock market.

I get the feeling that this title is going to replace "military intelligence" as the definition of oxymoron.

Investment Professional?

Bwah, hahahahahaha!

Speaking of investment pros, last night I asked my commodities brokerage buddy what I should now invest in. He said invest in another beer.

http://www.youtube.com/watch?v=4qVZwmFZAe0"

... laughing and crying
You know its the same release

 

[turbo]

Things just keep getting worse here in Maine. On Wednesday RR Donnelly announced the closure of its printing plant in Wells. Their primary product is catalogs and promotional materials for retailers, including newspaper inserts. Then Thursday, Domtar announced that it will close its Baileyville plant due to a weakness in the hardwood pulp market. The shutdowns of those plants puts 674 people out of work. An additional 70 jobs will be lost in Eastport at Federal Marine Terminals because Domtar was their biggest shipping customer, sending most of its product to the European markets. The articles in yesterday's and today's papers cited weak consumer demand as the cause for both closings.

 

[mheslep]

Citigroup
...
A share of General Motors stock, which fell below $2 on Thursday as it warned of possible bankruptcy,
...
A share of General Electric, battered this week to little more than $6,

Slump Humbling Blue-Chip Stocks
http://www.nytimes.com/2009/03/06/business/economy/06shares.html
Of course, this represents a buying opportunity of those who have loads of spare cash.

Emphasis on spare, cash they can lose, and they might lose it all (well not w/ GE). Low price does not mean low risk. The price is low because there is high risk.

It has happened before, you'll recall:
https://www.physicsforums.com/showpost.php?p=1804413&postcount=60", before the shares were wiped out.

 

[mheslep]

14164 was a huge bubble the investors failed to see. The Dow is back to where it should be, probably it is still a bit overvalued.

On what do you base that 'where it should be' statement?

Obama has nothing to do with that,

As has already been cited in the BW article, investors, that is those who buy into the market and raise the price, are in part sitting out, more than before, because of administration actions:
a) The otherwise capable Geithner's much awaited Feb 11 speech contained little detail, even after Obama T'd him up the day before saying he would have details. 5% immediate sell off.
b) Investors are concerned about future deficits w/ little demonstrated interest in making cuts, and this in the face of apparent ambivalence by Obama comparing the market ups/downs to the vagaries of a political poll.
c) Investors are concerned about the constricting effect of carbon taxes and what it might to do business.

 

[Astronuc]

Emphasis on spare, cash they can lose, and they might lose it all (well not w/ GE). Low price does not mean low risk. The price is low because there is high risk.

It has happened before, you'll recall:
https://www.physicsforums.com/showpost.php?p=1804413&postcount=60", before the shares were wiped out.

I'm being facetious.

Of course, low prices could mean a buying opportunity, especially if the prices are expected to increase. On the other hand, there is certainly a reason the prices are now low, namely the trouble with the US and global economy.

I think 14,000 was way to high for the Dow, based on where things are now and what has happened since. We got here by poor decisions and practices by business and government.

If one builds a weak and faulty foundation, on weak and shaky ground, it doesn't matter how well the rest of the house or building is constructed, it will fall sometime in the future. And the economic future of then is now.

 

[mheslep]

XKCD, always timely.

On the other hand
http://xkcd.com/552/
http://xkcd.com/552/
I believe I could do an entire project presentation now w/ a ~dozen of these.

Edit: Arg, 552 is already a cliché, posted up all over the net.

 

[misgfool]

Citi going under?

http://money.cnn.com/2009/03/06/news/dodd.fdic.fortune/index.htm

 

[Art]

Jimmy - don't you think the continuing slide in the Dow has a lot to do with the fact several of it's 30 constituents are finance companies?? With all the other constituents being dependent on these finance companies.

Do you really think Obama's policies are what has driven the financial sector's share prices ever lower (some down 30% this past week alone) or do you think perhaps it is because of the steady flood of ever worsening news emanating from these businesses revealing problems in their balance sheets created long, long before Obama's inauguration??

The thing shaking investor confidence is lack of knowledge. It is impossible to accurately value these companies as they just will not come clean over exactly how much their <sic> 'assets' have devalued. Until this matter is resolved once and for all only the most risk taking, foolhardy individual would even contemplate investing in equities.

Lloyds bank, which I mentioned above is a good example. Only a few months ago they asked the UK gov't for £18 billion to 'supposedly' cover all of their problems. Today they are finally admitting the truth (at least one hopes) and are asking for an additional £250 billion!

Another element apart from the lack of transparency and out and out lies is that the securities the banks hold are continuing to fall in value.

So having come clean the next requirement for the banks to reach an equilibrium is something has to be done to stop the free fall in property prices. This is one of the issues Obama's policies are addressing.

How to solve the first problem in getting the finance sector to tell the truth about the state of their finances is a real conundrum - perhaps there is a place in society for water boarding after all

 

[Jimmy Snyder]

Jimmy - don't you think the continuing slide in the Dow has a lot to do with the fact several of it's 30 constituents are finance companies?? With all the other constituents being dependent on these finance companies.

Good point. The S & P 500 is only down 19%, not the 20% required for a bear market.

Do you really think Obama's policies are what has driven the financial sector's share prices ever lower (some down 30% this past week alone) or do you think perhaps it is because of the steady flood of ever worsening news emanating from these businesses revealing problems in their balance sheets created long, long before Obama's inauguration??

But I already conceded that these problems go back to the Clinton Administration. It will surely be years and perhaps decades before we get back to the prosperity we enjoyed under Bush. I consider the current Socialist policies to be unproductive and the main cause of the ongoing collapse.

 

[Art]

Good point. The S & P 500 is only down 19%, not the 20% required for a bear market.But I already conceded that these problems go back to the Clinton Administration. It will surely be years and perhaps decades before we get back to the prosperity we enjoyed under Bush. I consider the current Socialist policies to be unproductive and the main cause of the ongoing collapse.

And how many of the constituents of the S & P 500 are finance houses

You really have missed the fundamental point of this crisis. You were never prosperous under Bush. It was all one giant illusion which has now come crashing down.

You can enjoy the same type of prosperity you had under Bush any time you feel like it. Just take your credit cards and go on a spending spree. The downside being of course, that like the US economy now, you will eventually have to pay for it.

 

[turbo]

But I already conceded that these problems go back to the Clinton Administration. It will surely be years and perhaps decades before we get back to the prosperity we enjoyed under Bush. I consider the current Socialist policies to be unproductive and the main cause of the ongoing collapse.

The comedy is quite entertaining, jimmy. Unfortunately for those that might not have been paying attention during flush times, you might be misleading them. When did we slash deficits and run surpluses? (Clue: not the Bush years.)

 

[Astronuc]

The Daily Show
http://www.thedailyshow.com/video/index.jhtml?videoId=215930&title=bethany-mclean
Bethany McLean weighs in on financial corruption and incompetence (2000-2008+).

 

[Jimmy Snyder]

The comedy is quite entertaining, jimmy. Unfortunately for those that might not have been paying attention during flush times, you might be misleading them. When did we slash deficits and run surpluses? (Clue: not the Bush years.)

You forget that those surpluses led the economy down. Will you blame Bush for Obama's mess and Bush again for Clinton's. The truth is that Bush inherited a mess and led the country to the greatest prosperity it had ever seen and will ever see for some time to come. Obama has taken a bad situation and made it much worse.

 

[OmCheeto]

You forget that those surpluses led the economy down. Will you blame Bush for Obama's mess and Bush again for Clinton's. The truth is that Bush inherited a mess and led the country to the greatest prosperity it had ever seen and will ever see for some time to come. Obama has taken a bad situation and made it much worse.

Remember. When you point a finger, three fingers point back at yourself.

I do not know why I love that quote, but I do.

 

[Jimmy Snyder]

I would point the finger at the people primarily responsible for the whole debacle:

Remember. When you point a finger, three fingers point back at yourself.

I do not know why I love that quote, but I do.

Not half as much as I.

 

[Astronuc]

Hmmmmm - Who got AIG's bailout billions?
http://news.yahoo.com/s/nm/20090308/bs_nm/us_aig

NEW YORK (Reuters) – Where, oh where, did AIG's bailout billions go? That question may reverberate even louder through the halls of government in the week ahead now that a partial list of beneficiaries has been published.

The Wall Street Journal reported on Friday that about $50 billion of more than $173 billion that the U.S. government has poured into American International Group Inc since last fall has been paid to at least two dozen U.S. and foreign financial institutions.

The newspaper reported that some of the banks paid by AIG since the insurer started getting taxpayer funds were: Goldman Sachs Group Inc, Deutsche Bank AG, Merrill Lynch, Societe Generale, Calyon, Barclays Plc, Rabobank, Danske, HSBC, Royal Bank of Scotland, Banco Santander, Morgan Stanley, Wachovia, Bank of America, and Lloyds Banking Group.

Morgan Stanley and Goldman Sachs declined to comment when contacted by Reuters. Bank of America, Calyon, and Wells Fargo, which has absorbed Wachovia, could not be reached for comment.

The U.S. Federal Reserve has refused to publicize a list of AIG's derivative counterparties and what they have been paid since the bailout, riling the U.S. Senate Banking Committee.

Federal Reserve Vice Chairman Donald Kohn testified before that committee on Thursday that revealing names risked jeopardizing AIG's continuing business. Kohn said there were millions of counterparties around the globe, including pension funds and U.S. households.

He said the intention was not to protect AIG or its counterparties, but to prevent the spread of AIG's infection.

The Wall Street Journal, citing a confidential document and people familiar with the matter, reported that Goldman Sachs and Deutsche Bank each got about $6 billion in payments between the middle of September and December last year.

Once the world's largest insurer, AIG has been described by the United States as being too extensively intertwined with the global financial system to be allowed to fail.

The Federal Reserve first rode to AIG's rescue in September with an $85 billion credit line after losses from toxic investments, many of which were mortgage related, and collateral demands from banks, left AIG staring down bankruptcy.

. . . .

Apparently, AIG was too big to manage properly, and their counterparties were too big to perform due diligience and observe fiduciary responsibility.

 

[Jimmy Snyder]

Irrational Pessimism? Cheer up people. The last time the Dow was this high, Greenspan was warning us against irrational exuberance. Irrational exuberance is my middle initial.

 

[Vanadium 50]

I think Astronuc's discussion of where the Dow "should" be is potentially quite enlightening.

Historically, the averaged Price/Earnings ratio for the S&P 500 is around 16: one gets effectively 6% on one's money. Today, it's closer to 12: one needs 8% in order to invest. So that would argue that the "natural" value for the Dow, even with the recession being what it is, to be somewhere around 9000. (And pre-recession, it sat for a long time between 10500 and 11000, so being off ~15% from that is pessimistic, but not irrational).

So, why aren't people seizing on this opportunity? Suppose I had a stock trading for $66, and I could tell you with absolute certainty that it would sell for $90 two years from today. You'd buy it, right? But what if I also told you a year from today it would still be selling for $66. Then the rational thing to do is to wait a year, and then buy it. Imperfect knowledge makes prediction murky and smears things out of course, but one can learn something from even a simplified model.

So what you're seeing is a short-term pessimism in the stock market. This will continue to hold prices stagnant or drive prices lower, until the high rates of return appear irresistible. For example, one particular major bank is trading with a P/E around 5: 20% on your money. They're forecast to make a profit of 70 cents per share this year and $1.77 next year. This may not be appealing now, but someday it will be.

 

[edward]

You forget that those surpluses led the economy down

Were all of the republican administrations up until Bush II aware that surpluses could do that? WOW that was a quick 180.

 

[mheslep]

So what you're seeing is a short-term pessimism in the stock market. This will continue to hold prices stagnant or drive prices lower, until the high rates of return appear irresistible. For example, one particular major bank is trading with a P/E around 5: 20% on your money. They're forecast to make a profit of 70 cents per share this year and $1.77 next year. This may not be appealing now, but someday it will be.

What's the return if that bank is nationalized?

 

[OmCheeto]

I think Astronuc's discussion of where the Dow "should" be is potentially quite enlightening.

I'm afraid I missed that post by Astro. Where should the Dow be now?

 

[Astronuc]

Where the Dow 30 should be largely depends on components like Citigroup (C), Bank of America (BAC), JP Morgan Chase (JPM), GE, and others whose earnings and losses have resulted in low value for their stocks.

Remember AIG was a component that got tossed back in Sep 22, and replaced by Kraft Foods (KFT).

The Dow 30 and other indexes could move up - if there is confidence that the companies' are earning - and reducing debt. However, the global recession has cut demand for products produced by Boeing, Caterpillar, UTC.


Meanwhile - Recession finds even those with jobs losing pay
http://news.yahoo.com/s/ap/20090308/ap_on_bi_ge/walking_wounded

In cubicles, factories and stores these days, anxious workers are trying to ease each other's economic fears with something akin to, "Well, at least we still have a job."

Yet for many, that's becoming small comfort as more employers cut hours or hire only part-timers. People paid on commission, meanwhile, are suffering as sales dry up. And state workers around the country have been put on unpaid leaves.

These workers aren't counted in the unemployment rate, which hit 8.1 percent in February. They're not eligible for federal benefits that provide a safety net for the jobless. Yet their pain is real, and their reduced spending is a drag on the economy.

Call them the walking wounded of this deep recession: millions of workers whose incomes have fallen even as they manage to hold onto their jobs. Their shrunken pay has forced many of them to make hurtful sacrifices.

"I won't be able to buy to the groceries I need to buy to make sure my family can eat until the end of the month," said Rhonda Wagner, a 52-year-old California state employee who just absorbed a 9 percent pay cut because of a state-imposed unpaid leave.

Before her pay cut, Wagner said her paycheck from the Department of Motor Vehicles was barely enough for her to pay her bills. Now, she says she's facing foreclosure and struggling to pay for utilities.

"I will have to rob Peter to pay Paul," she said. "We're expected to work, even though we're not getting paid."

More than 4.5 million workers last year depended at least partly on variable pay, which includes tips and commissions, according to Labor Department figures. Meanwhile, the number of workers forced into part-time instead of full-time work soared 76 percent in the past year.
. . . .

 

[edward]

Hmmmmm - Who got AIG's bailout billions?

Today Warren Buffet stated: AIG; where taxpayers' dollars go to die.

So is A.I.G. the taxpayer gift that keeps on taking? Sure looks that way. And while no one can say with certainty whether more money will be needed, the sheer volume of derivatives engineered by a small London unit of A.I.G. suggests that taxpayers haven’t seen the bottom of this money pit.

Some $440 billion in credit default swaps sat on the company’s books before it collapsed. Its biggest customers, European banks and United States investment banks, bought the swaps to insure against defaults on a variety of debt holdings, including pools of mortgages and corporate loans.

http://www.nytimes.com/2009/03/08/business/08gret.html?em

Donald Kohn, vice chairman of the Federal Reserve, learned this week about blackmail, Senate style, when he refused to disclose the names of financial institutions benefiting from the bailout of American International Group.

Testifying about AIG (AIG, Fortune 500) before the Senate Banking committee, Kohn respectfully resisted all of its attempts to extract the names. Several committee members grew frustrated and finally got to the point of threatening Kohn with no more dollars for the credit crisis - ever - if he didn't spill the information.

A list of 15, there are more, AIG counterparties is at the bottom of the link.

http://money.cnn.com/2009/03/07/news/companies/aig.fortune/index.htm

 

[Jimmy Snyder]

Were all of the republican administrations up until Bush II aware that surpluses could do that?

How could they? During the economic expansion after WWII, there have been very few surpluses. All of that prosperity was accompanied by debt. Are there any scientists on this board? What does it mean?

 

[Astronuc]

Warren Buffett says economy fell off a cliff
http://news.yahoo.com/s/ap/20090309/ap_on_bi_ge/buffett_economy

OMAHA, Neb. – Billionaire Warren Buffett said unemployment will likely climb a lot higher depending upon how effective the nation's policies are, but he remains optimistic over the long term.

Buffett said the nation's leaders need to support President Barack Obama's efforts to repair the economy because fear is dominating Americans' behavior and the economy has basically followed the worst-case scenario he envisioned.

"It's fallen off a cliff," Buffett said Monday during a live appearance on CNBC. "Not only has the economy slowed down a lot, but people have really changed their habits like I haven't seen."

Buffett said the changes are reflected in the results of Berkshire Hathaway Inc.'s subsidiaries. He said Berkshire's jewelry companies have suffered, but more people have been willing to switch to Geico to save money on car insurance.

He predicted that unemployment will likely climb a lot higher before the recession is done, but he also reiterated his optimistic long-term view: "Everything will be all right. We do have the greatest economic machine that's ever been created."

. . . .

Fear and confusion, or 'dazed and confused'

 

[mheslep]

Warren Buffett says economy fell off a cliff
http://news.yahoo.com/s/ap/20090309/ap_on_bi_ge/buffett_economy

Fear and confusion, or 'dazed and confused'

"..but more people have been willing to switch to Geico to save money on car insurance."
Hah, got to be a gag.

 

[Astronuc]

"..but more people have been willing to switch to Geico to save money on car insurance."
Hah, got to be a gag.

Well, at least he has a sense of humor.