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Mark's Market Blog

7-11-09: Green Shoots Everywhere

By Mark Lawrence

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It's Spring! There's Green Shoots Everywhere! This week's three big stories: GM exits from bankruptcy, N.Korea shoots off another few missiles, and Lance Armstrong, a geezer in bicycling years, is (nearly) leading the Tour de France. Oh, and the stock market went down a bit. We're in a state where the market wants to go done, and the Fed wants it to go up. In the long run the market always wins.

I believe this market is going down for an adjustment, perhaps to 800 or so; after that I'll tell you what I think next. I don't think it's time just yet for the (in my mind) inevitable next step down in this bear market - I expect this time the market is going down a bit, then back up a bit for a while. I don't think I see a crash this month, things just don't feel desperate enough.

There was talk in Washington this week of a second stimulus. This talk grew to the point where Obama felt required to give a press conference where he denied a second stimulus was being planned or seen as needed. This brought to mind that great quote of LBJ: "I don't care if it's true or not, I just want to see the SOB get in front of a TV camera and deny it."

General Motors CEO Fritz Henderson said Friday the automaker completed its 40-day stay under court supervision far faster than anyone thought it could, saying it would repay about $50 billion in government loans ahead of a 2015 deadline. "We recognize that we've been given a rare second chance at GM, and we are very grateful for that. And we appreciate the fact that we now have the tools to get the job done. If we don't get this right, nothing else is going to work," he said during a morning news conference at GM's Downtown Detroit headquarters. "Business as usual is over at General Motors."

Japan's economy was paralyzed for a decade as banks failed to deal with their troubled loans. That's why it's nothing short of stunning to discover some U.S. banks are doing the same thing now.

Despite all the tough talk out of Washington and Wall Street, banks are granting extensions to borrowers in one key category, commercial real-estate loans, so they don't default. They're betting that economic conditions will improve before the loans come due. This maneuvering is being called "extend and pretend" in financial circles. An average of 20 percent of local and regional banks' loan exposure is in commercial real estate vs 4 percent for the nation's biggest banks.

Most commercial property loans are structured as balloon notes. Borrowers pay only interest for the first five or 10 years until the loans mature, and then the entire amount must be paid back. In the boom years, rising rents and property values made it easy for borrowers to find multiple lenders willing to roll over these loans into new and often larger principal amounts that allowed owners to take out millions of dollars in cash to buy other properties. Delinquency rates on commercial loans have doubled in the past year. Many banks are offering a temporary fix by granting borrowers an extension on loan maturities. This allows banks to avoid having to foreclose or write down these loans as impaired assets. They also can keep the loans on their books as if nothing were amiss.

In addition to the loss of 467,000 jobs in June, economists worry about the impact of stagnating or falling pay and reduced hours of workers. Buried in the June jobs report is this critical bit of information about the labor market: The average workweek for the month fell 0.1 hours, to 33 hours, the lowest ever recorded for data that go back to 1964. Average weekly earnings, meanwhile, actually fell to $611.49 in June, from $613.34 in May. Hourly earnings remained flat. Economists say the combination of reduced hours and pay, along with continued job losses, could significantly slow a recovery as even the employed lack the means to boost their spending.

David Rosenberg also draws gloomy conclusions: "The combination of job loss and decline in hours worked [in June] means there was effectively a decline of at least 800,000 jobs." He says if these trends continue, the economy will enter a downward spiral of lower consumer spending and falling prices, or deflation. What's worse, unemployment may not peak for another two years. In that case, Rosenberg says, we are destined for "the mother of all jobless recoveries."

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