-
Fact or Fiction: The 57% rally we’ve seen since March was predicated on solid fundamentals and the beginnings of a real recovery in the U.S. economy.
Sorry, folks, if you believe that I’m afraid you’ve been duped. And you’re not alone. The Street and the even the financial media are not just towing
that line, they actually seem to believe it. We were fed a lot of doozies in 2009, and investors responded by pushing up the market at a rapid and,
frankly, unsustainable pace given the realities this country is facing.On the bright side, lies, when discovered, can point the way to the truth. So I want to share the 10 biggest Wall Street lies of 2009 with you,
and tell you what key lesson each holds and how to profit from them in the year ahead!Next: #1 The Stress Tests Provided Transparency in the Banks
-
#1 The Stress Tests Provided Transparency in the Banks
“The effect of this capital assessment will be to help replace uncertainty with transparency. … We chose a strategy to lift the fog of
uncertainty over bank balance sheets and to help ensure that the major banks, individually and collectively, had the capital to continue lending
even in a worse-than-expected recession.” Treasury Secretary Timothy Geithner, May 2009These tests did NOT bring transparency to the banking sector. They were practically designed to prove the banks were fine, and simply ignored
off-balance-sheet and other dodgy assets. It was as if they were saying, “We will do whatever it takes (even lie) to make sure the big banks do not
fail since Congress won’t give us more money to fix them.”Since this “new wave of transparency,” the banks have only raised a small portion of the capital they really need. What’s more, the “worse-than-expected
recession” Geithner spoke of assumed 8.4% unemployment. We are now looking at 10%.Lesson for investors in 2010: The banking system is still, by historical norms, insolvent, led by big money-center banks such as
Citigroup () and Wells Fargo ().
-
#2 New Accounting Rules Show Banks Are All Right
Earlier in the year, U.S. lawmakers and financial companies pressured the Financial Accounting Standards Board (FASB) into changing its rules to
help out the banks. “Changes to fair-value, or mark-to-market accounting … allow companies to use ‘significant’ judgment in gauging prices
of some investments on their books, including mortgage-backed securities,” . “Significant judgment” really meant “whatever the hell the banks wanted to do.” And these are the same banks whose “judgment” led them
to buy toxic assets in the first place and took the world to the brink of financial collapse.According to analysts, under the amended rules, banks such as Citigroup ()
could cut their reported losses by an estimated 50-70% — on paper, that is. How’s that? Well, if a bank says they cannot sell a security because
the market is illiquid, they can keep it on their balance sheet at a value they decide it is worth. Not only are they picking their own price,
the banks are determining the definition of illiquid. I get that the market is illiquid, but that does not mean their assets are not still there,
or that they won’t strangle the banks over time. It just means the banks have been able to produce legal-but-false earnings quarter after quarter … but
they can’t do this forever.Lesson for investors in 2010: Expect to see more writedowns from big banks than currently forecast, which will impact their earnings.
(Learn two ways you can go about .)
-
#3 The Recession Has Officially Ended
The recession “officially” ended in the third quarter with 3.5% GDP growth. Time to start celebrating, right? Not so fast.
Analyst and editor of , John Williams, wrote: “The estimate
of 3.5% annualized real growth for third-quarter GDP included a 1.7% gain from auto sales, a 0.6% gain from new residential construction, and a 0.9%
gain from a largely involuntary inventory buildup, which appears to be understated … In aggregate, those one-time stimulus or inventory items
represented 92% of the reported quarterly growth.”What’s more, in November, the 3.5% Q3 GDP growth was revised down to 2.8%. If you consider Williams analysis in light of the sharply lower GDP number,
I’d say we’re looking at real GDP growth of zero — or worse.Lesson for investors in 2010: You can trade headlines, but I expect we will see a double-dip recession in the real world no later
than the second quarter of next year.
-
#4 Unemployment Will Bottom Around 10%
Sure the unemployment rate fell from 10.2% in October to 10% in November, but the November data (and the December number when it is reported) are
hopelessly skewed by seasonal adjustments. And another statistical adjustment, known as the birth/death adjustment, assumed 800,000 new jobs were
created this year by the birth of companies compared to the number of jobs lost due to the death of companies. Really? If it were not so sad, it would
be funny.Beyond the adjustments, the number does not include people who want a full-time job but are only working part time, or those who have been unemployed
for more than a year and still have not found work, because it is determined that they must no longer be looking for jobs. If you take these people
into account, the real unemployment number is closer to 20%.So the . And the temp agency Manpower Inc. ()
just reported that they expect to see more job losses in Q1 2010. My guess is the headline number hits 12% by year-end.Lesson for investors in 2010: Unemployment and the size of the workforce drive national income, and that will be lower in 2010
than in 2009, which will kill off any chances of sustainable economic growth. Invest accordingly.
-
#5 The Housing Market is Recovering
Moody’s reported that the rate of defaults on home mortgages has fallen to roughly 6.5% of all mortgages, and that the number will be slightly lower
throughout 2010. They neglected to mention that the historical default rate is one-third that, or that the 2010 default rate on mortgages will be
300% higher than the historical rate.Housing sales in 2010 will be worse than expected, and home prices will continue to fall as more and more foreclosed homes enter the market. There
are currently more than 800,000 foreclosed houses that the banks have yet to put on the market, and another 1.5 million homes are expected to go into
foreclosure in the next 18 months.Lesson for investors in 2010: Don’t bet on a housing market recovery next year. And realize that this sector will create a .
-
#6 The Credit Crunch is Easing
The headline consensus on Wall Street is that the banks are stable and no markets are melting down. (See why you shouldn’t write off ). In short, things are returning to normal.
But we’ve seen a $1.5 trillion reduction in consumer credit during the past 18 months, and another $1 trillion (at least) is likely to be pulled
back in the coming year, according to uber-analyst Meredith Whitney — someone I wouldn’t bet against. And almost no one is getting a home equity
line. The credit crunch will continue in 2010, as lending standards remain high and banks horde their cash to keep themselves afloat.Lesson for investors in 2010: Less available credit means reduced spending in 2010 and beyond. Invest accordingly.
-
#7 Consumer Spending is Returning to Normal
With 70% of the GDP driven by consumer spending, Wall Street wants to believe this lie so badly that it has convinced itself it’s true. Even worse-than-expected
Black Friday sales haven’t forced the Streey to give up this inane hope.Real consumer wealth is down more than 40% in the past two years; credit is contracting and unemployment is rising. That is not exactly the recipe
for increased consumer spending.Lesson for investors in 2010: Companies that are dependent on discretionary consumer spending are going to get whacked. ()
-
#8 The Fed Only Buys AAA-Rated Bonds and Securities
This is a cornerstone of the Fed, a true shibboleth (Google that one). But one of the first set of bonds the Fed bought under the TALF program were
bonds backed by motorcycle loans made by Harley-Davidson () to its
customers.The Fed program was designed to provide loans and capital to businesses that were shut out of frozen credit markets, which is a good thing. But
loans to Harley made to boost the sale of motorcycles to people who could not get loans elsewhere? C’mon, Dr. Bernanke, you should know better.Lesson for investors in 2010: The Fed will not continue to pursue this nonsense (who needs a hog in a recession, anyway?), and
Harley has $5 billion in debt on its balance sheet that will become very expensive in the coming quarters. Take a look at put options on this little
piggy, as they are quite liquid.
-
#9 The U.S. Dollar is Dead
Monetary neurotics, led by the polite, appealing and economically brain-damaged Ron Paul, believe the U.S. dollar is dead because of our growing
debt and the Fed running the printing presses, which must lead to inflation, which, in turn, will kill the dollar. Recent falls in the dollar seem
to confirm this, uh, shibboleth (look it up again) of the monetary right.In actuality, though, the dollar is no weaker than it was a few years ago. And it is the only currency in the world for the foreseeable — and I
mean long-term foreseeable — future that can serve as a reserve currency due not just to our economic and political power, but our political system.
We pay our debts. Ultimately, Japan will default on theirs and the EU will continue to argue within itself about debt levels and inflation, making
eruo currency unpredictable.Lesson for investors in 2010: The dollar will turn — and when it does, commodities will fall.
-
#10 China Experienced Double-Digit Growth in 2009
If you think China saw double-digit growth this year, you may also believe swine flu is spread via flying pigs.
The London-based , using
energy data from the International Energy Agency — which we can assume is a bit more accurate that the nonsense printed by the Chinese government
— shows GDP growth may have been just 2% in the first quarter rather than the reported 6.1%. And even that growth is being held up by government
stimulus and state banks lending money to anyone and everyone to build capacity no one needs or to invest in Chinese equities no one can fairly value
since Chinese accounting is as good as Chinese government data.Lesson for investors in 2010: Although it’s likely going to be a while before it happens, the . Keep some powder dry, because this will be the best shorting opportunity since the financials blew up in 2008. ()
-
#11 The Palm Pre is the Ultimate iPhone Killer
This little gem was perpetuated by tech guru and investor Roger McNamee. Of course, Mr. McNamee is a member of the Palm ()
board of directors, and his firm is an investor in the company.Did I mention that PALM shot up after his comment, before the mediocre and overpriced Pre hit the market? The company then issued shares a few days
later? You and I would go to jail for doing this.Lesson for investors in 2010: If you can handle volatility, short PALM and anything else that tries to get in the way of the Apple
() iPhone.Related Articles:
3 Cheap, Must-Own Recovery Stocks to Double in 2010
Get the names of the best cheap stocks to rebuild your wealth in 2010. Each stock sells for less than $10 a share and is set to
double (even triple!) in the next 12 months — download your FREE report here.
