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Gregory A. Fisher's Morning Commentary
Friday, February 5th, 2010

“The wise man puts all his eggs in one basket and watches the basket”

--Andrew Carnegie

I am sad to report to all of my friends out there in La-La Land… who went to bed last night clinging onto the hopes that today would possibly bring a reprieve to the recent stock market drop, were living a pipe-dream.

So far, at least so far during the wee-hours this morning, it looks as if today’s stock jock action is likely to only add more intensity to the ongoing heartburn that many of them now suffer from. But hey… for us “bond geeks” who have been smartly buying bonds on weakness… it look as if our long endured loyalty to those “safe haven” assets is likely to pay off big time. I’m not really sure where we go from here on a short-term basis… other than down mostly but one thing is for sure, so for in this new year of 2010… our “L-shaped” mantra maybe finally coming home to roost.

Double dip
But trust me when I say that I was hoping that I would be dead wrong from the get-go because no matter what you do for a living… a stalled recovery is not good for anyone. Could we be witnessing the onset of a real “double-dip” recession here?? I don’t have the answer to that trillion dollar question but what I can opine is the fact that everything in Palookasville isn’t all hunky-dory, if you know what I mean.

And listen up… It truly doesn’t matter whether a liberal or a conservative would be currently occupying the White House… not even “Batman” could have prevented this one. Over the past year or so… within these morning lines… I have been professing that our current landscape had in fact been painted decades ago… beginning with the age of the “wild” 80’s.

Cycles
I’m a believer in the cycles of history and right now we are in the midst of one that will be studied and researched for numerous generations to come. What can we hope for going forward? Well, I guess the bottom line truth is that as long as you have perfected your ability to “tread-water” for 4-5 years… you should be in good shape because what we are in the middle of is nothing short of one of the nastiest economic “marathons” that any one has witnessed in more than 50-years.

You think I’m being over dramatic on this blistering-rainy day here in Atlanta? Well… then… maybe you need some more convincing, eh?

Lock and load
So with my usual Friday morning digression out of the way, let’s get down to business, shall we? Pull up a chair… latch on to that needed café of java… and let’s try to break things down a bit as to what has occurred during the past 24-48 hours, okay with you? Good… let’s lock and load.

I’m traveling next week out of the country, so this letter will be the last until one-week from today… so make sure you are paying attention, okay?

When you take a look at the tons of morning headliners appearing on the world-wide periodicals of punditry… you would see that most of the talking heads are trying to convince you that issues’ surrounding the growing European debt situation is why the stock jock’s knickers are in such a wad. For this writer, that’s like saying a patient died because they didn’t feel good… like Duh!!!

No antidote
Nope, this current gig goes far deeper than some event or issue that has risen to the surface just in the past few days. Folks… this current landscape is nothing short of an once-in-a-lifetime case of cumulative and unadulterated contagion that continues to fester with absolutely no antidote in sight.

What do I mean by that? Simple….. As I have professed numerous times before… this is just a cycle that we have to see things thru… plain and simple. Now mind you, I am a believer that our elected officials are the ones that are clearly making this cycle far reaching and more traitorous than it really has to be… but hold that thought because we are going to give you plenty of facts this morning to chew on rather than assumptions and needless rhetoric… after all, this is the Church of the Painful Truth.

Europe
According to the pundits, stocks buckled yesterday under growing concern that the global economy is far weaker than most had anticipated. True: we had a flood of news with respect to numerous European countries that are in a world of hurt but if you are completely honest with yourself… didn’t we already know that?

If you remember some of my morning letters back in December (as numerous banks were paying back the dough borrowed from Uncle Sam), I made it clear that if the “large banks too big to fail” were forced to watch their cash and therefore begin to pull assets out of stocks… meaning it was time to take some gains and book them… that would mean that there wouldn’t be enough players to support a market trading at or near a 20x P/E ratio, right?

Uncle Sam
What’s happening is the same thing which occurred during the “free cash” years that placed numerous Johnny Six- Pack’s in homes they could ill-afford… that same thing is happening within the banking sector as we speak.

Translation: Uncle Sam’s withdrawing from his very giving attitude during 2009 in the form of bailouts is now causing some very serious ripples throughout the global economies. In other words, was the patient truly ready to be removed (or even rumored to be removed) from virtual life-support in the form of an open governmental checkbook.

Indicators worse
The truth of the matter is that despite all the hoopla about ongoing stimulus… the three most important economic indicators to this writer… have not only gone unchanged… they have actually gotten worse. What I’m referring to is this:

1. Unemployment
2. Housing
3. Lending/liquidity

Etch those three things in the front of your noggins, because until they improve… we are stuck in the treading-water position… and big waves are heading our way. Do you know what happens when a big wave hits you while you’re treading-water? Yep; you got it… a lot of gurgling is to be expected.

Thursday
Now, before we move into the specifics we need to quickly go over some numbers for those of you who are still trying to keep score at home:

Yesterday, the Dow dropped -2.6% (-6.7% from recent highs)
Gold dropped about -4.2%
S&P got slammed -3.1%
Bonds are rallying

Bonds & Gold
**Yep… I am still recommending buying Bonds & Gold on weakness. Even though right now Gold is following the dollar down towards the floor, I’m still of the belief that later on this year it will be the new asset class of choice… especially after years of a FED “zero-rate” policy is sooner or later going to cause an insurmountable amount of inflation (but that’s the least of our worries now).

Just know that I still say with conviction that Gold will hit $2,000/ounce by the end of this year. At some point, I will become very bearish on Bonds… but not yet. However, given the fact Moody’s is threatening to revoke America’s AAA status (more on that a bit later)… I would stay very short on the curve.

So where was I? Oh yeah… yesterday’s stock jock thrashing was pinned solely on the solvency issues surrounding countries such as Greece and Portugal as well as the unexpected hike in US jobless claims.

Talking heads
Do I agree with the talking head’s conclusions? Not really. I mean sure… given the fact that newly laid-off workers are filing more claims for jobless benefits certainly shook-up the trading in the pits, but as I hinted earlier, my belief is that our current maladies go far deeper than any single event which just crossed the tape yesterday or even earlier in the week.

Did the fact that both Wal-mart and Sam’s Club announced that more layoffs can be expected make things a bit more dramatic? Sure… no doubt… but let me opine the two main reasons why all of a sudden things have taken a spill for the worse, okay with you? Good. Follow-along because you will be tested on this material at a later date in time…

1. As said in the lines above… when you take out the Bank’s overall market participation as well as threaten them with all-encompassing waves of new regulatory standards which will obviously hinder the way they can make money… that’s not a good thing for stocks, capiche? The markets just ran up too fast to maintain some sort of upside consistency.

2. As said numerous times before within these morning lines, the stock jocks like a President who has power and it is clear that the “Obama enthusiasm” is being depleted by leaps and bounds after he failed to get his “ObamaCare” passed and then shortly thereafter, taking the lion’s share of blame for not paying close enough attention to the economy.

3. The finger-pointing has begun: it seems to this trader that Congress and the Administration is clearly looking for a “fall-guy”. Is it FED Chair Bernanke or the Secretary of the Treasury, Timothy Geithner? And what do folks do when they are being set-up? The tend to wobble on the company mantra and become very verbal with respect to their concerns with respect to the economy as means to deflect “those pointing fingers” right back to their origins.

4. This is the most important issue as to why the markets have suddenly lost their “Mojo”… so read the following with great care as it clearly points out why 2010 is likely to be a bumpy road at best, okay?

The FED is worried… so worried about our current landscape that their fears have recently come in threes. Huh? Just follow the bouncing ball because I promise this will all fall together in a jiffy.

Bernanke tells truth
(4a.) One thing which was astounding that didn’t receive the ink it truly deserved occurred during Ben Bernanke’s “swearing-in” ceremony on Wednesday night. So what’s all the hubbub about, you ask? Simple: The FED Chairman expressed clear concerns about the “recovery” during his Wednesday night speech.

Was he trying to protect his rear from being “the fall guy”? I’m sure… but I also believe that given the recent pounding the FED chair has taken publicly… he decided to just do something way out of the box… Bernanke decided to use his swearing-in platform to just tell the truth.

“The FED ‘cannot hope’ to solve the nation’s economic problems on its own, Bernanke said. Both the nation and the central bank as an institution face ENORMOUS challenges, he said”. (Ref: AP Newswire)

Wow… I don’t know about you yahoos… but I certainly don’t see the word “recovery” in that quote, do you?

Concerned
(4b) NY FED President, William Dudley chimed in by saying that he “was concerned about the strength of economic growth”. He even told the AP press that the FED might extend its mortgage purchases!! Well, that moratorium certainly didn’t last too long, did it? Nope… it sure didn’t.

(4c) FED Reserve Governor, Kevin Warsh said that granting the regulators new powers to shut down failing banks won’t be enough to stop a FUTURE crisis.

“The too-big-too-fail problem, exacerbated by recent events, could undermine our financial system and do long-term harm to the real economy” (Ref: Bloomberg News)

And finally… after the 3 FED officials put a real kibosh on the “recovery”, here comes America’s embattled Secretary of the Treasury out in the open… in an effort to fend off his probable “fall-guy” stigma… to say why he is not too excited when it comes to our global prosperity in 2010.

Bulls head for the exits
Geithner, during a speech a few nights ago, opined that long-term budget deficits endanger the US economy and must be “curbed” at once if this country is to recover economically.

“If we fail to do so, we risk driving the economy back into a recession, causing immense additional harm to the middle-class families and making it even harder to fix our fiscal problems” (Ref: Bloomberg News)

Translation: This country’s economic bulls… the eternal optimists… just headed towards the exits themselves!!

Geithner hedging
Why did he say such a terrible thing? Well, yes he is enacting a “put” on his reputation but he also knows that today’s revised employment data might unexpectedly send shivers down the spines of the most bullish of the bulls.

He also sees that the Untied States’ service industries are also in a sad shape for sure… after the recent terrible read of the ISM Manufacturing numbers…so in-truth… Geithner is hedging himself!!

You think these above issues are worrisome to the players out there on the Street? You bet!!!!

L-shape
Let’s move on… Some issues that support our “L-shaped” thesis:

1. With no more help in sight, more and more homeowners are simply walking away from their mortgages. When you have some home values fall more than 75% of their original purchase price… sometimes its best just to walk away.

By the 3rd-quarter of 2009, an estimated 4.5 million US homeowners had reached the “critical” threshold, with their homes dropping a whopping 75% below their current market values. Folks… it’s not over… it’s getting worse out there in real estate land!!!

2. More borrowers are paying their credit cards before their mortgages. Folks, this is new… it is usually the other way but cash liquidity is all the Johnny Six-pack cares about in order to survive this mess.

It’s all about preserving cash-flow and the mortgage responsibilities get tossed right out the door as a result. It’s either one or the other and right now, the consumer is focused on keeping his credit-cards alive more than paying his mortgage.

3. More bailouts coming: think Social Security

“A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking less in that it is actually spending on benefits” (Ref: CNN)

By the end of this year, Social Security is expected to be in the hole to the tune of about $28 billion. Ooops. You need to be reminded that Social Security provides more than half the income for all retirees and given their recent stock portfolio losses… their might not be any such thing as retirement anymore!!!!

Bottom Line:
Here is what Moody’s said about the United States yesterday: “Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the President’s budget will at some point put pressure on the AAA-government bond rating” (Ref: WT)

Right now projections of the overall debt to GDP ratio for the US are seen rising from the 53% level in 2009 to 73% by 2015!! If you do the math that means the US is likely to reach the 100% debt to GDP level by as early as 2020… God help us!!!!

Translation: Political expectations do not equal economic realities. Folks hand on… and please keep both your hands and feet inside the ride at all time… let’s hunker-down!!! Buy bonds and Gold on any weakness and stay on the short-end of the curve when it comes to the Govvies!!!!

See you in a week… Yee-ha!!!

Gregory A. Fisher
Managing Director - Investments
Oppenheimer & Co. Inc