Thursday, February 19, 2009

Whine Whine Whine

Today, the Dow Jones Industrials Average (DJIA) fell decisively through its November 2008 low, reaching its lowest level since October 2002. The broader S&P500 Index is not far behind, though it has yet to test the November 2008 low. Don't bank on that one holding much longer.

For what it is worth, Merrill Lynch has revised its estimate of earnings for the S&P500 down to $42 for 2009. The most pessimistic Wall Streeters that make their livings guessing about such things have been comfy cozy with $60 - $70, as have I.

Back in October, I estimated that we would see market lows in the range of 7,200 on the DJIA and 700 on the S&P500. The basis was a dramatic decline in corporate profits - to that $60 - $70 range on the S&P500 range. While we are only in February, and therefore premature to "accurately" guess about these things, it seems that the likelihood of Merrill Lynch, of all institutions, being close to the mark for corporate earnings estimates is increasing.

7,200 on the DJIA? That's pretty much a "done deal." 700 on the S&P500 Index? That's only about ten-percent lower than the current level. And if corporate earnings on the S&P500 plunge below $60 this year - or are least expected to - well look out below. 600 - 650 on the S&P500 is more likely.

A reasonable person cannot simply abandon equities. Once the market turns, it will turn with a vengeance. But short of equities - high quality ones - cash remains king and queen. Corporate bonds? Forget about them. Just when you aren't expecting, interest rates will begin rising and bond prices will begin falling. It is a losing proposition. I, for one, am avoiding them like the plague.

Now to the whining.

Wahhhhhhhhhhhhhhhhhhhhhhh! To all the politicians - primarily Republicans - and those among us that oppose just about anything that stands even a snowball's chance is limiting this Great Recession, especially Obama's recently revealed mortgage/housing plans, get over it. Yes, there are irresponsible people that irresponsibly took out unaffordable mortgages and purchased larger homes that they really didn't need. There are people that bought rental homes, be it one or ten, betting as businesspeople that they would generate profits. But they bet as businesses, not as prudent homeowners. The current Obama plan does nothing to assist them, and I believe rightly so.

Sure. I'd love to be able to refinance our home at a lower rate and save some money. But I'm not sure that my neighborhood has been hit as hard as others, many others. But if one of my neighbors needs assistance and this program makes it available, hallelujah! Take it. I won't lose any sleep just because someone else is being helped.

Honestly, where is the compassion? There seem to be some folks that have money, are quite comfortable, either have secure jobs or sufficient assets to survive protracted unemployment, have no problem spending $700 a month on a Lexus lease, and they begrudge those that have less a little assistance. They fail to see the greater picture. Every foreclosure negatively impacts the housing market and eventually, if not now, their own neighborhoods.

They complain about government interference in the housing market when, in fact, the government's been there all along. Do they honestly think that home ownership would be as broad-based as it has been for decades if it was not for the tax deductibility of mortgage interest, for example? Talk about a subsidy. Government involvement in housing is nothing new.

We live in extraordinary times, and these times call for extraordinary compassion and action. My fear is that Obama's current plan may simply not be sufficient. But neither is the Stim, round one.