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As I write this just before 9 PM Mountain Time on Sunday, stock index futures are pointing to another very weak open on Monday morning, with Dow Jones futures trading well below 7,000.
Asian stocks are getting slammed, with shares of HSBC halted and the market anticipating weak earnings, a dividend cut, and a large sale of stock at a highly discounted price. And that’s a bank that’s doing well.
The market was stung on Friday and appears to continue to be so by a downward revision in Q4 GDP, from -3.8% to -6.2%, far worse than most expectations…but not worse than mine.
As if the overall economic picture weren’t bad enough, we also have the government getting larger just as the rest of our financial picture is getting bleaker, meaning our taxes are going up just as our ability to save for ourselves and our children’s futures is diminishing. That’s right: the only one of the GDP components which did not drop was government spending.
And I’ll bet that this quarter’s number will be about as bad as last quarter’s. Why wouldn’t it be?
I had written last week that I thought there was a chance for a technical rally, that is a market rally driven by brief oversold conditions and massively negative sentiment. But every time government announces what it’s doing next, and as it becomes clearer that Barack Obama intends to destroy American capitalism, we are eliminating the reasons for anyone to buy, and the many billions of dollars of “cash on the sidelines” can find no reason to move off the sidelines.
In other weekend news, Spansion, one of the largest makers of flash memory, has filed for bankruptcy protection. The EU has refused to consider a broad bailout of other European nations, and AIG is about to destroy another $30 billion in taxpayers’ hard-earned money…the fourth time government is letting it pick the pockets of citizens. And as if the AIG news isn’t bad enough, with government taking controlling stakes in financial companies with our money, now we learn that AIG is going to repay recent loans with stock in its divisions rather than pay us back our cash, with interest, as promised.
Of course, the real wet blanket on the market is Barack Obama’s budget and its wishful thinking…bordering on lies…about future tax revenue. First, it assumes a much smaller decline in economic activity in 2009 than we will have, and then it assumes a historically normal growth rate for 2010! These errors alone are likely to make the deficit from Obama’s budget top $2 trillion! In terms of “cost savings", the Obama lie that’s getting the most light shined on it is his claim to be saving money from the Iraq war by assuming that it would have gone on forever, at about $170 billion per year, without him, so any spending less than that is being called budgetary savings! Now you know why Obama seemed so pleased to be bringing the war spending fully into the budget.
Although I thought there might have been a chance for a temporary technical rally, and still may be, I maintain my bigger picture view that stocks are NOT cheap at these prices and that we are not yet at the bottom of this bear market. Furthermore, after we have reached the bottom, we will not get back over 9,500 in the Dow for at least 18 months at a minimum, and probably longer. (If we do, it will not be by much and not for more than a day or two, and it will be a great selling opportunity.) In general, I think any rally of 10% is a sale (but I’ll play it by selling out-of-the-money calls so I have some wiggle room because I don’t ever expect to buy the absolute bottom or sell the absolute top.)
(For those of you interested in an interesting discussion of whether stocks are cheap or not, John Mauldin had a good piece last week making two main points: 1) The p/e at the time you invest is critically important, and 2) Every situation is different, and even though that seems obvious too many people assume that market history will repeat itself.)
Back on the budget, I believe people are finally realizing the smoke and mirrors surrounding Obama’s claim that he’ll get a lot more tax revenue by raising taxes on the top 2%. First of all, the income in that group will be dropping dramatically due to market conditions. Second, that’s the group that can either afford to find ways around generating taxable income, or can afford to work less since their incentive to take entrepreneurial risk is under assault.
And finally, but maybe most importantly, the market is probably realizing the massive tax hike – and a particularly regressive one – that Obama’s “cap and trade” system would impose on the economy. It will make his income tax like look like nothing, and it will destroy what is left of our economy in the short run.
Obama’s budget represents anything but “hope” and “change". It’s more of the same from the Democrats, more of what they’ve done from FDR to LBJ and wanted to do since then but not had the power until now. History shows that it always fails, as it must based on such a flawed model as Keynsian stimulus. But this isn’t about economic success, it’s about government control of our lives. Until the public fully realizes that, we’re in for a tsunami of economic fascism and devastation that will leave many people wondering what happened to their country.