Markets: Are We Done Yet?
New York: January 19, 2009
By John R. Stephenson

An historic-sized stimulus package may be just what the doctor ordered and clearly the U.S. public is solidly behind the notion that the government will need to run big deficits to get America back to work. The problem facing the new administration is not one of an unsupportive public, but rather that of unrealistically high expectations about what the Obama team can do in the short-term.

The promises and pledges that Barack Obama has made certainly sound good, but are they at all realistic? No. One such promise that was reported by the New York Times was to spend $15 billion a year in renewable energy to create five million new green energy jobs over the next decade. Oh really? That will be a nifty trick to pull off in this current downturn, especially when you consider that the renewable energy industry presently employs about 100,000 Americans. What government program could possibly create this number of jobs with the problems that America is currently facing? While his promises are no more ridiculous than those of most politicians, they certainly aren't grounded in the reality of the current economic tsunami.

The U.S. economy is in completely unchartered waters, yet many economic forecasters are still calling for smooth sailing in the second half of the year. That looks about as realistic as Obama's call for five million “green jobs” in an emerging clean-energy industry. There is no doubt that there are plenty of Americans out of work that could fill these roles if, by magic, they could be created

One glance at the “official” unemployment rate in the U.S. and things seem to be okay, since the unemployment rate appears to be well below the double-digit levels recorded in the 1980s. Unfortunately, these statistics may obscure a more ominous trend. If you add the numbers of workers toiling away in part-time work and marginally attached workers to the official unemployment statistics, you come to a broader measure of unemployed workers in America which already stands at a staggering 13.5 percent.

These ugly unemployment numbers will only serve to accelerate the slowdown in consumer spending. Already, shell-shocked U.S. consumers are beginning to padlock their wallets, as they begin to embrace the notion of actually saving a little money for a rainy day. The personal savings rate that has been hovering around zero for some time may well rise to over 3 percent this year, creating even greater headwinds for many retailers. The death toll for American retailers is only going to increase as unemployment numbers continue to be eye-popping and those with jobs begin to hoard a little cash.

The latest Case-Shiller Home Price Index showed house prices in the twenty-largest metropolitan areas in the U.S. was down 28 percent from the peak. Most forecasters are calling for house prices to fall an additional ten to fifteen percent. The slide in house prices will continue for a while to come, likely bottoming in 2011. While government programs to help people stay in their homes sound like a good idea, over 50 percent of the mortgages that have been rewritten and reduced in the past year were delinquent within 6 months time.

General Motors or Chrysler are unlikely to survive unless a boatload of government funds wash up at their doors and soon. The industry is just far too uncompetitive and needs to shed at least 20 percent of its capacity to move in-line with the current sales volumes they are experiencing. No bailout, no matter what its size, will be able to address the systemic problems facing Detroit .

The U.S. banking sector is going to be back at the trough looking for a bigger bailout. Citigroup's experiment in creating a financial services supermarket appears to have gone caput and will surely be split up. Bank of America is in serious trouble, even after it lapped-up $20 billion in government bailout money. Just last week, Merrill Lynch, Bank of America's newly acquired subsidiary, floored the investment world by announcing a $15.3 billion loss in the fourth quarter of 2008. Bank of America has yet to consolidate these results into their financials, but the aggressive and flawed acquisition strategy that CEO Ken Lewis has undertaken has surely failed. Bank of America will be back looking for more government money to fix a badly leaking and listing ship.

U.S. consumers have lost over $5.6 trillion by September 2008, through the erosion of their stock portfolios and with house prices getting clobbered. By the middle of this year, the losses will exceed $12 trillion. The U.S. banks and other financial companies have wiped out more than $1 trillion so far in this unholy mess. Obama offers hope, but even if he does incur deficits of $1 trillion or more for a few years, will it even matter? The U.S. debt to gross domestic product (GDP), now stands at over 300 percent and is climbing fast. America is in a big hole and the new game plan will only make the hole digging deeper.

The stock markets will likely react positively to this new administration and Obama's promise of change. For my money, I would look to these rallies as an ideal time to sell stock. There will be lots of opportunities in the stock market — they just won't be appearing any time soon.