The Economy Guy

Stocks rose today, but in reality stocks are in a sideways trading range.  Bonds went sideways too.

The Euro fell as the inflationary future of Europe is worried about.

Oil and gasoline went up slightly.

Gold regained a little more of its recent loss.

Stock Market Prediction….

At the end of last year I predicted that stocks would go down at the beginning of the year, and then recover somewhat as the stimulus package (or packages) work their way into the economy at the end of the first Q 09 and the second Q 09.  I went on to predict that when the stimulus is done working its way on the economy, the market will continue its downward movement through the 3rd and 4th Q 09.

So far, the prediction is coming true.  January was a very bad month for stocks.  The government is working on a stimulus package, but it’s taking longer to be approved than the President likes.

Look for a modified stimulus package approval sometime in February.  The real question is “What will be in this stimulus package?”  It could be a 100% stimulus package aimed at putting people to work over time, including significate tax savings.  That would be the best we could hope for.  It also could be what the House passed – a payoff to all the groups who got Democrats elected in November.  This will have very little stimulative power, and will evaporate much more quickly than a 100% stimulus package.  

I expect that the actual package will be something between these two definitions – a typical Washington compromise.  If so, I still think my prediction of a mild stock rally followed by declining stock values throughout 2009 will transpire.

In the news today…..

The Jobless Rate his 626,000 last week.  This is biggest that I’ve ever seen, and it is a great indication that people are losing their jobs at an ever increasing rate.  Remember that 400,000 is a high number indicating a downward economy.  If this jobless rate continues, the unemployment rate will be greater than the 10% that I predicted for the end of 2009.

Factory Orders were down 3.9% in December.  Just another indicator of our downward economy.

The 30 Year Mortgage Rate is now 5.70% and the 15 Year Mortgage Rate is 5.31%.  That is a huge 3/4% increase in 6 weeks, as the 10 Year Treasury has also moved about the same amount.  This makes it much more difficult for people to purchase houses, and threatens any bottom in the housing market.

International interest rates: The ECB rate is 2%, and the Bank of England rate is 1% (just reduced by 0.5%).  These are compared to the FED Funds Rate of zero to 0.25% range.

Tonight’s Dinner Conversation…..

The Obama Administration looks like it is going to announce a “Bad Bank” construct this coming week.  The idea of the Bad Bank is for it to purchase “toxic assets” from the existing banks – thereby allowing those banks to have a much healthier Balance Sheet.

Okay so far.  So what’s the big deal??  The big deal is “How do you value the assets?”  Here are some things for you to ponder and to discuss tonight:

1. The banks are currently valuing these toxic assets at about 85% of the face value.  In other words, a mortgage security is considered to have only a 15% depreciation of its value due to people not being able to repay their mortgages.
2. The existing (and almost non-existent) market for anyone wanting to buy these asset is about 30% of face value.  Consider this as a fire sale – in other words, the asset MUST be sold at any price.  By definition, a fire sale is a bargain for the purchaser.  Do you think 30% on the Dollar is a steal?
3. What will the “bad bank” pay for these assets???  It been indicated by the Obama Administration that the bad bank will pay something less than the bank’s valuation, but greater than a fire sale valuation.

In other words, no one can really value this junk.  What happens if the bad bank gets it wrong?  YOU get to pay for their mistake in valuation.  This isn’t really comforting to me personally because we are in such a new world environment that no one has the experience to value anything accurately.  Another problem is that as time goes on, and more people are unable to pay their mortgage – an inevitable situation with declining housing prices and ongoing job losses – the value of these toxic packages is going to go DOWN.  In other words, valuing this junk is like aiming at a moving target – you must aim where the target will be in the future, not where it is right now.  How good are you at predicting the bottom of the housing market?
 

Here are the last numbers:
Dow Jones 30 Industrial – 8063 (up 107 points)
10 Year Treasury Bond – 1.90% (down 0.02%)
Euro – $1.2803
Gold – $914 (up $12)
Oil – $41.17 (up $0.85)
Gasoline – $1.27 (up $0.06)