2009 Outlook, Part 1:

Nightmare on Main Street

by Ty Andros, Editor, Tedbits Newsletter| January 22, 2009

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Introduction

I remember growing up in Nebraska as a time of ups and downs that any child encounters growing up. Even though I was born in 1955, I was too young to be drafted into the Viet Nam war and my college years were very carefree as my parents were sending me through school to gather the tools that set the table to prosper and grow as I matured and aged. I was aware of the issues, but for the most part saw them on TV or in the news as an observer and student, safely tucked away in school and amongst friends. I am very grateful for what God has provided me to maneuver through the challenges of life.

As an avid movie buff I learned to dream of the future and visualize myself in many of the worlds I saw on the silver screen. Only one genre held nothing for me: Horror films!
I didn’t like them, go to them or relate to them in any way. Hurting others and being hurt by vicious human animals was nothing I could ever relate to. I never understood how anyone could enjoy them; Friday the 13th, Freddie Kruger and Nightmare on Elm Street, Texas Chain Saw Massacre, and today’s SAW series. These movies became less and less commercially viable and now are a fraction of what they were in the late 1960’s through the late 1970’s. Now they are set for a comeback, only they won’t be on a movie screen, they will be in REAL life! Economic life.

Nightmare on Main Street

I speak of these things because to know is to be prepared and forewarned. For most people this is going to be the biggest nightmare conceivable and for that I am sad. But being an optimist, I see the opportunities and they are immense. EVERYTHING is mispriced to reflect the coming economic debacle and the policies which will be implemented to address it. Hyperinflation looms in the emerging WEIMAR G7.

Stocks, bonds, commodities, currencies, natural resources are ALL mispriced for what’s unfolding. The VOLATILITY created will be enormous and “Volatility is opportunity” for the prepared investor. You must learn to make money in RISING and FALLING markets. Buy and hold is DEAD for now!

The world is not going to end as so many doom and gloomer’s contend, it is going to CHANGE. It has needed to do so for a great while, and while it will be painful going to our new destination, once there the future will brighten as day follows night. The changes are unbelievable opportunities for those who recognize them and the demise of those who don’t. The greatest transfer in wealth in history from those that store their wealth in paper to those that don’t is unfolding right before our very eyes. It will continue until the G7 reforms its monetary system to reflect SOUND money.

In the last several months I have begun to prepare you with the “Crack-up Boom” series for the maelstroms that are unfolding. A massive paradigm shift away from everything we have known for all our lives to something we have read about in history books, with numerous twists; history never repeats itself but many times rhymes. As we have watched the credit crisis unfold over the last 2 years, most peoples’ lives have been largely unaffected as residual momentum and habits, built up over decades, have crested and reversed, but now the slippery slope downward is set to accelerate VISCOUSLY.

Let’s take a brief look at the “2008 Pattern of the Year” from last year’s outlook entitled Wolf Wave, which is a chart of S&P 500 earnings going back to 1950, and is a proxy for the earnings in the private sector of the G7:

Now in 2009, the wolf is in plain view to the public as INCOME and business are collapsing. The earnings per share are now slicing through the bottom of the mega phone and ACCELERATING to the downside. At the beginning of last year I projected 2008 earnings on the S&P 500 of $50 dollars, when most analysts were calling for $70 to $80, now the verdict is in and probably looks to be $48 dollars when the final tally arrives.

That line has now sliced below the mega phone formation and IS NOT going to turn up anytime soon. Now my expectations for the S&P 500 is $30 and if you include unfunded pension obligations it falls to $22 dollars, and at 10 times earnings that translates into 220 on the S&P 500, an approximate 70% decline from here. I expect GDP to decline AT LEAST 10% year over year and potentially up to 20% in 2009 and early 2010. In the recent manufacturing purchasing managers survey NO sectors of manufacturing were growing: NONE!

On the service side employment is crumbling as the self employed who provide discretionary services find that their customers are now only buying essentials. The Consumer Product Safety Commission passed a new regulation during the campaign season that required testing of many products for lead during a product scare over the summer. Now these DO GOODERS, but know nothings, are about to VAPORIZE 100’s of thousands of small businesses and jobs in the first two weeks of February as it takes effect.

Look at international trade as financing has DISAPPEARED from the banking industry:

Now let’s look at the collapse in employment and incomes which come from private sector jobs:

This is a reflection of the Wolf Wave as private sector companies lay off workers in order to maintain profitability and solvency. These pictures are of the United States but similar picture are IN PLACE throughout the G7. Look at the average peak-to-trough employment losses associated with the banking crisis:

John Mauldin is reporting that last week’s initial declaration of 524,000 new unemployment claims MASKS the true number of 952,151 (he says it’s not a typo and I believe him). Think of it, almost a million jobs lost in one week and I believe this is just the beginning. He goes on to report that continuing claims rose to 5,832,746 and, if I recall correctly, that is DOUBLE the number from a year ago. Unemployment is set to DOUBLE AGAIN this year in the US and EUROPE.

Let’s now take a look at the outstanding borrowing and UNFUNDED obligations which must be serviced by these declining incomes:

Wow, debt to GDP of 350%, almost 100% higher than when the great depression started. Now let’s look at the value of the assets by which this borrowing is underpinned in the United States:

As housing is set to decline another 20%, keep in mind my projections for the S&P 500. Keep in mind also that government debt is serviced through taxes and as incomes and asset values collapse so do government revenues. Just for fun, let’s take a look at the UK, and see how it compares to US liabilities from the www.Marketoracle.co.uk :

Future borrowing and ultimately money printing to finance these obligations, or to repair the lenders’ balance sheets (American and European Banks), is set to SKYROCKET! Cumulatively the sum as of January 1, 2009 is almost 5 trillion dollars and RISING as the bank bailouts are woefully under funded, as was demonstrated in last week’s BAILOUT of Royal Bank of Scotland, Bank of America and Citigroup; Unrealized losses are piling up at record rates (see below, Europe is worse), the US Bank rescue has consumed $350 billion and the next tranche is being detoured into rescuing new sectors at a rapid rate such as autos, credit cards, mortgage holders, commercial real estate and the list keeps on GROWING; lobbyists are lining up like pigs at the trough to get in on the giveaways. Meanwhile, unrealized bank losses just keep on piling up as this chart illustrates:

In December alone over $320 billion was vaporized off the balance sheets of the nation’s BIGGEST banks! Only we haven’t been told yet… After almost a year of DE-LEVERAGING nothing has been accomplished as income and BOOK value have shrunk FASTER than the money can be shoveled in. Europe is the same boat or worse, depending on the country.

BKX-PHLX/KBW Banking Index

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Throughout the US and Europe the BIGGEST banks are TOAST and will have to be nationalized. You can expect this to happen in all ways but NAME, merely because the public only understands RESCUE language. Bankrupt and insolvent will never be used in a headline. Look no further than the rescues of AIG, Citigroup, Bank of America, Royal Bank of Scotland and more. Shares of these companies are headed to Fannie Mae and AIG territory near 1 Dollar. Want to know where the financial sectors (BKX-PHLX/KBW banking index) are headed? Take a look at the weekly charts which are on a sell signal as they SINK to new lows and break out to the downside of the downtrend channel established over two years ago:

Brand new sell signals on the weekly charts and the “falling out of the BOTTOM” of the trend channel signal the POTENTIAL for a crash: RSI declining, slow stochastics on new sell signal, MACD on new sell signal and ADX trend gauge at a healthy 37 (rarely do trends change when ADX is at this level.)

The financial sector shareholders will be left with nothing, and rightly so, as management has failed to protect shareholders and shareholders have not exercised proper oversight and KICKED the bums out. The losses this year by the biggest banks in the EU and US project to over 2 trillion, and either the government RECAPITALIZES the banks or the FINANCIAL systems will CEASE TO EXIST. I predict that most of the top 50 banks in the world will be RESCUED to the tune of at least another 2 trillion dollars in the coming year.

2007 2008 2009

Let’s take a quick tour around the world’s major stock indexes on the weekly charts……

Read the continuation of this article by clicking here.

A PDF version is also available – download PDF

Look for Part Two of the 2009 Outlook coming in the next issue!

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Copyright © 2009 Ty Andros
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Tedbits is authored by Theodore "Ty" Andros, and is registered with TraderView, a registered CTA (Commodity Trading Advisor) and Global Asset Advisors (Introducing Broker). TraderView is a managed futures and alternative investment boutique. Mr. Andros began his commodity career in the early 1980's and became a managed futures specialist beginning in 1985. Mr. Andros' duties include marketing, sales, and portfolio selection and monitoring, customer relations and all aspects required in building a successful managed futures and alternative investment brokerage service. Mr. Andros attended the University of San Diego, and the University of Miami, majoring in Marketing, Economics and Business Administration. He began his career as a broker in 1983, and has worked his way to the creation of TraderView. Mr. Andros is active in Economic analysis and brings this information and analysis to his clients on a regular basis, creating investment portfolios designed to capture these unfolding opportunities as the emerge. Ty prides himself on his personal preparation for the markets as they unfold and his ability to take this information and build professionally managed portfolios and developing a loyal clientele.

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Ty Andros TraderView.com | (800) 253-7689 | Chicago, IL USA | Email | Website