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Saturday, 4 July 2009

Courtesy of Conrad: The Camel’s Back Slides

The worst jobs data in 26 years, the worst pre-4th-of-July performance in 100 years, 5 more bank closures to bring the year’s total to 51 banks gone bust, the lowest close on the DOW since May this year, a second round of soon-to-be-useless stimulus programs after the first round did nothing but waste money, interest rates to remain low, the start of the year’s worst quarter and the worst earnings quarter is upon us next week … can we expect any worse?

Yes, we can.

And it doesn’t look any rosier in Singapore either … private housing prices fall more than 5% month on month, unemployment and job losses steadily mounting, shipping slowing down, retail sales taking a hit in spite of GSS, deferred payment defaults have started, more and more are paying minimums on their credit cards debts, government begins raising funds through bond sales made convenient through ATMs and the housing bubble continues to swell unabated as Singaporeans pour their remaining reserves late into the rally … can we get any more ignorant?

Yes, we can.

DOW completed the neckline retest of its Head & Shoulders pattern and confirmed the weekly Evening Star from three weeks ago with three consecutive down weeks. Now it looks set for a short-term downside XOP at 7,900 by mid-to-late August and XXOP at 7,280 by late September. It looks like we’ll get another October stinker this year if this goes on. And if that happens, I might just get my DOW 6,000 to 5,800.

It was always suspected that the March-June rally was not sustainable. As the big players stayed sidelined and fund managers focused on improving their portfolios’ performance, the market’s leadership by Energy and Materials together with the underlying lack of fundamentals was always going to falter that rally spectacularly in the near term. And now we have it, late, like everything else in life.

America’s Recession is now 20 months old. Although they would deny it, they are technically in Depression and have been since half a year ago;

From Wikipedia:

In economics, a depression is a sustained, long downturn in one or more economies. It is more severe than a recession, which is seen as a normal downturn in the business cycle.

Considered a rare and extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression.

America is in Depression. There can be no doubt about it except that they haven’t officially acknowledged it just like they did not acknowledge their Recession till a year after the fact in December 2008. (America had been in Recession since December 2007.)

Singapore is no better except that we’re cash rich from the outstanding 2003 to 2007 rally that saw us reap in and stack up cash reserves that are currently keeping us comfy and safe. But the truth is in the pudding, as they say and the pudding I am looking at every week is the amazing rate at which the government is discharging bankrupts. Discharge rates are outpacing new bankrupts by about 3 to 2 as seen in today’s Classifieds. And that trend is picking up in pace.

What is even more obvious (and disturbing) is the obvious fact that those getting discharged were from the previous recessions (1997 through 2005) with the bulk of discharged individuals coming from that most painful time in the last recession between 2001 and 2002. A distant Aunt of mine was even discharged without paying up much of her debt.

Although speculative, I am looking at a situation that is out of control with regard to credit in Singapore. It’s a funny thing but it would seem the banks have shot themselves in the foot on this one. To me, it’s a good thing because it tells me how much pain the banks and our economy are in.

Imagine this; just looking at the number of bankrupts being discharged today alone (79, plus one annulment), you have to wonder just how many more there are out there. And if more than half of these bankrupts are through credit defaults, then it’s because the banks put them into bankruptcy in the first place back in 2001 and 2002. I know because I was one of them. So here’s the irony …

Banks have been and are still dishing out Credit facilities to everyone and anyone who vaguely qualifies for one. In most cases, you only need to have a salary of $4,000 and you get a credit line of $20,000 (per bank). This means you get up to five times the leverage on your current outlay. This increases your chances of over-spending by five times. Now do the math by the number of banks you can apply to for the same credit leverage.

And when you can’t afford to pay the debt, you can choose to pay the minimum to cover the interest. What happened in 2001 and 2002 is that many people who used these facilities ended up losing their jobs and were unable to even pay the minimum. They were promptly bankrupted.

The numbers and dates of today’s (and the past 9 weeks) bankrupts being discharged and the circumstances of their discharge has prompted me to make an obvious assumption - this profitable line of “credit” is running thin for the banks.

You see … before the banks are able to rid themselves from the mess they made from the last recession, the mess is piling up higher with this recession’s new mess. We know that most of the bankrupts are from credit defaults simply by checking on the Notices pages in the Classifieds. And this is where the banks shot themselves in the foot …

The banks have united to form a database of discharged bankrupts and have a very efficient system to disqualify recently discharged bankrupts from getting financial assistance or certain financial facilities. The government says you are a free person upon your discharge but the banks keep you in financial jail for another seven years. (Strange that they have such an efficient system to recognize ex-bankrupts but is incapable of recognizing and warning their clients of their dangerous and obvious over-spending and over leveraging!)

Now that so many have gone bust, the banks are finding less and less people to take up their credit facilities and continue their profitable minimum payment scheme. And with so many more on the seven year blacklist, their database of qualified creditors is getting smaller every day. You know this to be true because of the increasing number of telemarketing calls you’ve been getting of late. (Strange that their efficient system also fails to disqualify ex-bankrupts from their telemarketing exercise because I’ve been getting quite a few calls lately!)

Thus, the solution is to get more discharged earlier and reduce the seven year financial jail term to three.

There you go … another pain indicator to tell us that our financial system is not all well and doing fine. This recession is going to be longer than we can imagine and if I am right about this, then the banks are going to be hurting to raise funds as their creditors slowly but surely dwindle. (Strange that they cut our savings rate from pathetic to ridiculous but kept mortgage and loan rates at intolerable!)

And now the fireworks display is all set for a great September/October show when no less than 7 condominium projects will T.O.P. and hundreds of new home owners will be expected to shell out the 50% stage of their deferred payment plan. If you’ve never seen shit hitting the fan before, you’d be advised to carry a really big umbrella in October because the Monsoon Season of 2009 is about to bring a new kind of rain that is going to put us deep in it.

So can this economy get any worse? Can we make it any more painful than it should be? Can we drag out this pain for a longer time than necessary? Can we get any greedier than Wall Street? With the “help” of our banks …

Yes, we can.

God help America while we, in Singapore repeat their mistakes.

Happy Independence Day on the 4th of July, 2009.

http://www.conradalvinlim.com/

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