Given that the economy faces $15 trillion in writedowns in collateral and credit, the Fed’s $2 trillion dollars in new credit/liquidity is insufficient to trigger either inflation or another speculative bubble.
"Don’t fight the Fed" is supposed to be a strong argument for being bullish on the U.S. economy and stocks. We all know the Federal Reserve is about to unleash a torrent of money into the financial markets via its QE2 (quantitative easing) campaign of buying Treasury bonds directly and pulling various other monetary levers to open the liquidity gates.
But before we succumb to the excitement that accompanies the unleashing of the Fed’s supernatural powers, perhaps we should look at some numbers first.
Size of U.S. economy: $14 trillion. Probable size of QE2: $1 trillion. That means QE2 is perhaps 7% of GDP. Even a whopping $2 trillion QE would equal about 14% of GDP.
In contrast, by some measures China opened the floodgates of credit to the tune of fully 35% of their GDP to combat the contraction caused by the global financial meltdown in late 2008: China’s Creative Accounting.
How much collateral and credit will be destroyed as the U.S. economy rolls over into recession/depression in 2011-14? Based on the latest (September 17, 2010) Fed Flow of Funds, here is my back-of-the-envelope estimates of losses yet to be booked in assets (collateral) and credit (debt):
1. Residential real estate: current value, $18.8 trillion. Estimated value in 2014: $13.8 trillion, i.e. a decline of $5 trillion or 26%. If all impaired mortgages are written down or sold for fair market value, I am guessing the full $5 trillion will need to be written off by somebody, somewhere.
My 26% estimate is conservative; according to the Case-Shiller Index chart, a decline of 40% would be required to return the index to the year-2000 level.
2. Commercial real estate (CRE): The Flow of Funds only reports "nonfarm nonfinancial corporate business" so the CRE number of $6.5 trillion is a few trillion light (that is, we need to add in CRE owned by financial corporations). I am estimating writedowns of $3 trillion--a number others have also guesstimated.
Empty malls, empty office parks, empty warehouses, empty retail: they’re all worth essentially zero. The cost of bulldozing them is higher than their auction value.…
Must see: Phil visits with Money Talk's Kim Parlee on Business News Network. In this great interview, Phil talks about his target price range for oil and presents an options trade idea that he is calling the "Trade of 2015."
Analysts at Oppenheimer initiated coverage of Twitter Inc (NYSE: TWTR) Friday by issuing a Perform rating and setting a $36.00 price target. Twitter is a global social networking platform with over 280 million active users.
While Oppenheimer analysts fully recognize the strength in Twitter as a company, they believe that Twitter’s stock is appropriately priced at current levels. “While TWTR is the best Internet platform for real-time content discovery, we believe that the stock’s current valuation of 10x 2015E sales, a 52% premium to peers, fully reflects future prospects based on current growth rates.”
Between November and December 2014, Twitter insiders have sold more than $...
Those who took advantage of markets at Fib levels were rewarded. However, this looked more a 'dead cat' style bounce than a genuine bottom forming low. This can of course change, and one thing I will want to see is narrow action near today's high. Volume was a little light, but with Christmas fast approaching I would expect this trend to continue.
The S&P inched above 2,009, but I would like to see any subsequent weakness hold the 38.2% Fib level at 1,989.
The Nasdaq offered itself more as a support bounce, with a picture perfect play off its 38.2% Fib level. Unlike the S&P, volume did climb in confirmed accumulation. The next upside c...
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Stocks have needed a reason to take a breather and pull back in this long-standing ultra-bullish climate, with strong economic data and seasonality providing impressive tailwinds -- and plummeting oil prices certainly have given it to them. But this minor pullback was fully expected and indeed desirable for market health. The future remains bright for the U.S. economy and corporate profits despite the collapse in oil, and now the overbought technical condition has been relieved. While most sectors are gathering fundamental support and our sector rotation model remains bullish, the Energy sector looks fundamentally weak and continues to ran...
Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...
I officially bought 250 shares of EZCH at $18.76 and sold 300 shares of IGT at $17.09 in Market Shadows' Virtual Portfolio yesterday (Fri. 11-21).
Click here for Thursday's post where I was thinking about buying EZCH. After further reading, I decided to add it to the virtual portfolio and to sell IGT and several other stocks, which we'll be saying goodbye to next week.
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Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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