Monday, May 21, 2012

Bankers Gone Wild! – Watch Them Flash Your Cash!

Cue some wild party music …..

Host 1:  Welcome to another exciting episode of “Bankers Gone Wild”.  Today we are going to follow the wild hijinks of J.P. and her two banking buddies Morgan and Jamie as they party in the exotic Derivative Islands.
Host 2: Yes, the Derivatives are a dangerous, yet exciting, place for wild bankers to frolic.  There are shark infested waters and many places for naughty financiers to get into trouble.
Host 1:  Looks like the girls are getting very drunk on a combination of cheap money and greed.
Host 2: Wow, that’s a lot of loose cash.  I just hope they are able to control it!
Host 1:  Oh no!  They’ve started buying!  Whoa, look at them buy.  It’s like they are just buying anything.  Buy, Buy, Buy! 
Host 2:  Those girls are really moving that cash! They are awesome!  They are totally out of control!
Host 1: Oh no! They have started to really lose it.
Host 2: Yeah, they are really wasted. Isn’t it great?
Host 1: No, I mean the cash.  They are losing it. They are wasting it big time. This often happens when investing in the Derivatives.
Host 2:  Wow, they are losing every time!  Lose, lose, lose.  Those loses are really racking up!
Host 1:  They’ve just blown through a billion dollars!  Maybe we should say something.
Host 2:  Girls, you’ve lost a lot. Maybe you should slow down a bit.
Host 1:  Oh no!  They don’t care. Now their flashing us their assets!
Host 2: Hey, they’re right back at it.
Host 1:  Look at all that cash. It’s flowing right down that rat hole! Lucky rats!
Host 2:  Here we go again. Lose, lose, lose!
Host 1: These bankers have gone super wild!
Host 2: Look, they just blew through their second billion and now they are lying exhausted on the beach.
Host 1:  Hey, girls.  You just lost two billion dollars in the Derivatives. Aren’t you even a little embarrassed?  What do you have to say for yourselves?
Host 2: What’s that? You say it doesn’t matter because you still have plenty of cash.  Oh great, here we go again.  Now they are flashing us their balance sheets!  Look at that bottom line!  Look at those TIPS! (Treasury Inflation-Protected Securities)
The Solution
The simple solution is to revert back to how the banks were structured in the past. Banking operations were separate from investment firms.  This set-up worked fine until it was changed and it has not worked well ever since.
Making this change would:
1. Reduce the size of the major banks in a logical, non-disruptive, way.  To reduce the size of the banks in other ways would require wise government choices and that of course is an oxymoron.

2. Really eliminate “too big to fail”.  First, the banks would naturally be much smaller.  Second, and more importantly, the banks would not be able to make the risky investments that could cause them to fail.  The banks would again be safer and depositors could be confident that their banks would not take major risks with their money.

3. Allow the investment firms to invest in whatever risky investments they choose with the money they are able to receive from investors (their customers).   Investors would be well aware of the risks.  If the firms make bad investments, they lose all their money and go bankrupt.  No government bailouts, no congressional meetings, no hand wringing, just turn out the lights and close up shop.  This is the way it is supposed to work.  
This would be so simple but the Democrats don’t understand the financial markets so they are intent in punishing the banks.  And the Republicans understand the financial markets too well and want to write the rules with enough loopholes so that nothing really changes.

The French Connection
Those stupid Frenchmen.  They are in the middle of an economic crisis and they just elected a socialist to lead them out of it!  Who do they think they are, California?  Ha Ha Ha Ha Ha!  That is just totally ridiculous.  A socialist!  How dumb.  The only thing worse than electing a socialist in that situation, would be to reelect a socialist during a time of economic calamity. That would be insanely idiotic. Bwahaha, Bwahaha, Bwahaha, hey wait a minute …..

Monday, May 7, 2012

The Stock Market Will Fall In February 2014! (Yes, I am serious)

Smells Like 2.2%, Not 3%
The initial Q1 GDP growth estimate was lower than my forecast.  It smells like 2.2% rather than 3%, but to the Obama administration it just plain smells.  My estimate was high, not because of inventory, but because of a reduction in government spending. If this component had stayed constant, GDP would have been 2.8%.

Proponents of smaller government believe it is worth limiting economic growth in the short-term to free up more money for the private-sector in the long-term.  Fans of big government will complain that you are limiting important spending when the economy needs it most.  But that means you should spend more money when the economy is bad because you need to and you should spend more money when things are good because you have more money to spend.  That philosophy is how government got so bloated in the first place.

However the worst news of the GDP report is that the growth of non-residential business investment is continuing to slow.  This should be increasing in a healthy, growing, recovering, economy.  A reduction in business investment is how most recessions start.  Business investment is still increasing, but the trend is ominous.   If you looked at this statistic alone, you would expect a recession to start by the end of the year.

The weak GDP combined with very disappointing April jobs numbers and weaker retail sales means that Q2 GDP will be lower than Q1. This is consistent with my Kentucky windage reading last month.  The problem is growth is decreasing from 2.2%, not 3%.  This means GDP of 1 point something, you fill in the blank because it really doesn’t matter.  I’ll say 1.8 just for reference (or a .4 drop from wherever the revised Q1 ends up).

2012 Model T Forecast 

Last year the Model T predicted an S&P 500 Index high of 1400 for 2011.  The Index peaked in April at 1370 (around 2% lower than the target).  This year the model forecasts the 2012 peak at 1435.  The index hit 1422 (within 1% of the target) in March.
The Model T forecast would indicate that there is a good chance that the stock market has already hit its peak for the year or that it will do so soon, provided the current rally has one more surge.  The economy is mirroring last year, so it is logical that the stock market will do the same.  If this is true, look for the market to dip to around 1245 later in this year. 

In calculating the bottom, I am assuming there will not be a “Greek Tragedy” this summer.  I know there could be a “Spanish Disposition” or some “Italian Ice” but I have to inject some degree of optimism into this ugly post.

I do not advocate timing the market with your entire portfolio.  However, if you are thinking about buying stocks, I would wait.  If you are considering harvesting some profits, you should consider doing it now.  It may be a good time to reduce the risk in your mutual funds, IRAs and 401-Ks.

Long-Term Model T Forecast 

The original purpose of the Model T was to predict long-term peaks and valleys of the S&P 500 Index.  For the first time since I began writing this blog, the Model T is predicting the next “major” peak. The model forecasts the S&P 500 will reach 1480 in January of 2014 before the start of the next bear market.  Of course this forecast will change as the inputs to the model change, but you are getting this forecast 20 months in advance.  I’m sure that you will consider this the “Most Interesting Stock Market Prediction In The World”, so plan wisely my friends.