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Mark's Market Blog

3-8-09: The long ride down

By Mark Lawrence

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In a stock market price collapse, there is never a smooth ride down. There are always bumps on the way, called bear market rallies. Although it didn't feel much like one, we can now see clearly in retrospect that the period from Nov.20 to Jan 6 was such a rally - the S&P rose by about 20%, a normal bear rally amount, and has since resumed falling. Below, a 1 year chart makes this rather painfully clear.

S&P 500 3-6-2008 to 3-6-2009

The current dismal stock market performance is due to a perfect storm of several factors: Consumer confidence is at an all-time low, so consumers, which account for about 85% of our economy, are going to be staying home and spending less for some time. The paper by Rogoff discussed in my January 6th blog has everyone scared that this recession will continue for at least another year, likely two. Banks are failing left and right, at this instant Citibank and BofA are basically bankrupt and owned by the government. There seems to be no end to the blood loss at AIG, which just sucked up another $30B from the government. And finally, GM is in their end game and is threatening everyone with bankruptcy: they are negotiating with the Canadian government for a bailout; they are talking to Germany about a bailout for Opel; they have recently put their Swedish company, Saab, into bankruptcy, likely to establish to the Germans that they mean business; and they are telling their US bond holders to settle for $0.30 on the dollar or get nothing in a bankruptcy action. If GM goes bankrupt it will likely cost our government $100B, it will likely lead to about 2.5M layoffs total, and it will likely drop our GDP by about 4%. This is soup line stuff. All this drama is going to continue into next week, so the way to bet is that we're looking at another 5% drop in the markets in the coming week.

About one in eight U.S. homeowners with mortgages ended 2008 behind on their loan payments or in the foreclosure process. With unemployment continuing to rise until late 2010, more borrowers will pay late or fall into foreclosure this year. Wednesday the Obama administration detailed a $75 billion plan help homeowners, but that plan could face political challenges because most of the foreclosure problem has been so concentrated in a few areas.

More than half of the nation's foreclosures last year took place in 35 counties. Those counties, spread over a dozen states, accounted for more than 1.5 million foreclosure actions last year. The worst-hit counties are home to about 20% of U.S. households, but accounted for just over 50% of the foreclosures last year. Eight counties in Arizona, California, Florida and Nevada were the source of about a quarter of the nation's foreclosures last year. In more than 650 other counties, about a fifth of the nation, the number of foreclosure actions actually dropped since 2006.

Foreclosures in 2008 by US county

Israel's top military intelligence officer said Sunday that Iran is now capable of producing atomic weapons. He told them that Iran continues to accumulate uranium for enrichment and hopes to exploit the Obama administration's intention to open a dialogue as a cover for developing nuclear weapons. U.S. military chief, Adm. Mike Mullen, said a week ago that Iran has enough fissile material to build a bomb now. Roosevelt used WWII to get us out of a depression; perhaps the Persians and Pakistanis are getting set to volunteer for a similar economic rescue mission.

ABC's consumer index, figured on a scale of +100 to -100, was -14 in June 1990, just before the 1990 recession began. It dived to -31 by March 1991, when the recession technically ended. But it kept worsening, bottoming out at -50 in February 1992. Its recovery was so slow that it regained and held its pre-recession level only in December 1994, four and a half years after the recession began, and three and three-quarter years after it officially ended. That was too late for George H.W. Bush. In 1992 he declared the recession over, but it was not over in a way that was apparent to ordinary Americans, in terms of job security, advancement opportunities, rising incomes, secure savings and the like - a reality that cost Bush re-election.

Today our consumer index is -49 - see last week's market blog. This recession is likely to last until sometime in 2011, meaning confidence likely won't recover until perhaps 2012 to 2014. Obama has been on the job six weeks and already his reelection is in serious question. Already there is concern in Washington that Joe the Plumber sees the Democrats pouring trillions of dollars into the economy, and unemployment and markets just keep getting worse. Voters don't have much of a stomach for uncertain and long drawn-out economic rescues.

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