Key Challenges Plaguing Today's US Stock Market

Dear Friends,

Most people have a good way of handling bad news; ignore them, or better still, don't even want to know about them. However, in management, it has been said that "It is not a matter of how fast you get the good news, but the bad news that reflects the quality of the management."

Ignorance is bliss, but only for the short term. What we don't know may hurt us badly. Thus, I always adopt the attitude that I don't have a problem sleeping at night, if I know what is the worst thing that can happen. On the other hand, I DO have a problem sleeping at night, if I DON'T KNOW what is the worst thing that can happen.

I also adopt the attitude that good news / events are easy to manage, and thus, do not need much thought in advance. There is a lot more time to respond to good news because the decisions tend to be made easily.

Thus, this blog is skewed (biased) towards analyzing bad news, potential and real. Most bad news and potential problems will never turn into the worst case scenario, but sometimes, it is not a question of quantity, but of the significance in impact should merely a single less probable event hit us with full force. Not to be prepared is pure laziness, which I cannot accept as a philosophy of life.

In my mind, the biggest challenges plaguing the US Stock Market today (Short Term of less than 6 months) is the fear that

• Commercial Mortgage Backed Securities (CMBS) may be in the process of doubling on their defaults in year 2009. Click on the website link to check out MarketWatch Article by Laura Mandaro dated 19 November 2008 , AND
• The Consequences of further Corporate Debt Default from the Auto Industry if it were allowed to FAIL.
  

If General Motors is bleeding losses / burning cash at the rate of US$1 billion to US$2 billion a month, what is the total amount owed by the Auto Industry, i.e. not only GM, Ford and Chrysler, but also the businesses of dealerships, spare parts manufacturing, etc.?

Also, can you imagine 2 to 3 million people out of work and further aggravating the already badly hit housing market with new houses for sale?

There is also an argument by Paul B. Farrell, also of Market Watch, of a coming Great Depression 2, in his article dated 19 November 2008, entitled We'll be in Great Depression 2 by 2011. Farrell provides 30 reasons why he is of such a gloomy opinion. Please click on the website link to read the article.

Farrell mentions US$2 trillion of loans which he claims the Federal Reserve has refused to disclose (how did he know then?), which he calls the Shadow Banking System.

I don't know how far this claim is true, but if it is true that the Fed can loan out US$2 trillion without disclosure, I think this will be the ultimate breach of confidence in the US Banking System.

It would raise important issues like, "How can the Fed loan out such a material amount without Congress approval?" and "If such a big, material issue is covered up, what other cover ups are there?"

However, I would like to emphasize that I don't know and I can't verify Farrell's claim. It is important for us to take note of issues that may arise, but sometimes we have to make our own decisions, rightfully or wrongfully, whether to accept the explanations, claims and assumptions of others.

One of my biggest concern in the medium term (6 months to a year) is the financial health of Freddy Mac and Fanny Mae. Already the two US Government owned mortgage firms have asked for US$200 billion in bailouts. If this is enough, and the bailout money requirement stops here, that's fine. BUT, I fear (without any real evidence, and thus, just an intuitive fear), that US$200 billion is not enough to cover losses arising from around US$5 trillion of mortgage loans.

If we take a default rate of 10%, the total bailout money required may eventually hit US$500 billion.

Of course, one of my biggest concern over the longer term (1 to 2 years) is the effect of various defaults, from housing to commerical properties, to corporate loan defaults, to banking collapses, on the Credit Default Swaps Market and its players, of which the top banks of America are very much exposed to.

And as you would have guessed from my numerous blogs on Hyper Inflation and the consequences of Excessive Printing of Money, that I am extremely concerned with a potential US$ Devaluation Crisis.

In year 2006, I conducted a detailed Scenario Planning Study of the Future of the US for the timeframe of 10 years, i.e. up to 2015. I concluded then that at best, the US Economy would chug along in a lethargic manner, but the possibility of a Depression exist.

However, I also concluded then that only four Key Driving Forces would be strong enough to push the US Economy into such a devastated state.

First, there must be a bursting of an asset bubble. This has happened in the form of the Sub-Prime, Near Prime, and now, Prime Housing Mortgage Default Crisis.

Second, the US Dollar has to devalue significantly. This scenario has happened for a while until the last few months when it unexpectedly strengthened significantly, erasing a large portion of its devaluation.

However, as the saying goes, the story does not end till the fat lady sings. Will the US Dollar experience a devaluation crisis in the future? Some people like Peter Schiff and Jim Rogers think so. Their opinions have been recorded on my blogs.

If there is a US Dollar Devaluation Crisis, due to the excessive printing of money, then, this will eventually trigger an International "Lack of Confidence" Crisis, and there will be no foreign investors' money to fund the irreversible Balance of Payments Deficits, and thus, the economic situation will worsen considerably for America.

This will lead to further Asset Deflation, which is a nice way of saying even more crashes in asset prices like properties and stocks, and even business ownerships, due to foreign investors pulling out their investments in US.

This should do it, i.e. push America into a Depression. BUT, if it doesn't, then the Trade Protectionist Policies that will be pushed for adoption by some Congressmen, to win popular votes, in an effort to protect jobs, will push THE WORLD, into a Depression.

This was THE WORST CASE SCENARIO that I foresaw in year 2006, before all the crisis happened. There is no reason to change any of my earlier analysis / scenarios.

This is why I have been monitoring the situation very closely, and emphasizing what seems like the words of "Doomsday" sayers, on my blog. Our job is to take all kinds of data into account, and then, only then, sift through each one of them with a fine toothcomb, to separate the fairy tales that cannot arise from the plausible situations that can arise, however, improbable.

With that, we will be in a much better position (better prepared) to take advantage of any opportunities that may arise that conforms to our strategic foresight and scenario planning.

Please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

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