Today, we are going to go to Bill King, a long time observer of the stock markets. Bill writes the daily “Independent View of the News”, for institutional clients (you can contact him here).

This morning, he wryly observes:

"Despite the braying about the credit crisis being over, the economy about to rebound and stocks entering a new bull market, the fundamentals not only remain crappy, they are worsening.

Months ago, Goldman’s CFO said there was a historic disconnect between the stock market and the credit market.  But that’s not the entire story.  There is also a historic disconnect between L’Affaire Bear and the credit markets and the economy.

Because the US financial system did not implode when Bear was rescued, people assume all is well in the credit markets and financial system.  This is a gross miscalculation.  The Fed proved this last Friday when it expanded its record credit-creation gimmicks and loosed collateral standards to a new all-time low.

Bloomberg: The Federal Reserve said the proportion of U.S. banks making it tougher for companies and consumers to borrow approached a record in the past three months as the credit crunch deepened. A net 70 percent of banks increased loan rates over their cost of funds for commercial and industrial borrowing, according to the central bank’s quarterly survey of senior loan officers released today in Washington. That compares with 45 percent in the January survey, the Fed said.

As we stated several missives ago, there is no way the US economy, which has never been more dependent on debt to generate GDP, can flourish without an enormous amount of debt creation.  If debt is now being curtailed or rationed, there can be only one direction for the US economy.

Morgan Stanley economist Richard Brenner: DISCONNECT – The economic fallout begins: Financial turmoil peaked six weeks ago, but the economic downturn is only beginning. It’s still a recession, in our view, and that’s no longer in the price. Indeed, reflecting higher energy quotes and slipping growth abroad, we see weaker US growth over the next few quarters than we did a month ago

The Times of London: After the crunch, a crisis in banking confidence Credit risk – that of  borrowers not repaying loans – was cited as the next-biggest risk after liquidity. Consumer indebtedness was also a worry.  A senior banker in an American bank said: “Consumers are in worse shape than most observers appreciate … their failure rate will look like a tsunami to those lollygagging on the financial beaches.”

Bill adds a pretty astute trading call each day: Example:

Today – Traders will play for a Turnaround Tuesday to the upside. But S&Ps must hold 1400; oil and  commodity must behave and FNM (-.64 exp) cannot issue a disturbing report…There is no economic news or impact events to worry about.

Great stuff — thanks Bill.


The King Report 
M. Ramsey King Securities, Inc.
Bill King
Tuesday May 6, 2008 – Issue 3869   

Fed Survey Shows More U.S. Banks Tighten Loan Terms
Scott Lanman
Bloomberg, May 5 2008

After the crunch, a crisis in banking confidence
Patrick Hosking
Times Online, May 6, 2008

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What's been said:

Discussions found on the web:
  1. matt commented on May 6


    OT, but I don’t know your email. Some JPMorgan clown has written a defense of the Birth/Death model. It’s a very poor defense that could easily be refuted by showing the adjustments.


  2. Formerly Known As… commented on May 6

    To play devils advocate, what if we do skirt a recession? What does that say about the world economy? Recessions over the past 25 years have become more and more shallow and shorter in duration. It seems for every argument for a coming recession there is a counter point that says maybe not this time. My feeling is that if we skirt a recession this time, then we are truly living in a Golden Age world economy, maybe even better than the one at the end of the 19th century, Hehe!!

  3. D. commented on May 6

    Future earnings for MANY companies:

    Revenues: down (if up probably due to inflation)

    COGS: up
    Interest expense: up
    DD&A: up as companies are forced to invest

    Net earnings: down

    eps: down

  4. Jim Haygood commented on May 6

    FNM (-.64 exp) cannot issue a disturbing report…

    OOPS — there goes THAT bulwark. I hear a giant flushing sound.

    Flush twice … it’s a long way to Washington!

  5. DownSouth commented on May 6

    “While stock prices had been climbing, business activity had been undeniably subsiding. There had been such a marked recession during the latter part of 1927 that by February, 1928, the director of the Charity Organization Society in New York reported that unemployment was more serious than at any time since immediately after the war. During January and February the stock market turned ragged and unsettled, and no wonder-for with prices still near record levels and the future trend of business highly dubious, it was altogether too easy to foresee a time of reckoning ahead…”

    “Anybody who had chosen this moment to predict that the bull market was on the verge of a wild advance which would make all that had gone before seem trifling would have been quite mad-or else inspired with a genius for mass psychology. The banker who advised caution was quite right about financial conditions, and so were the forecasters. But they had not taken account of the boundless commercial romanticism of the American people, inflamed by year after plentiful year of Coolidge Prosperity. For on March 3, 1928-the very day when the Harvard prophets were talking about intermediate declines and the Times was talking about hesitation–the stock market entered upon its sensational phase…”

    “By the summer of 1929, prices had soared far above the stormy levels of the preceding winter into the blue and cloudless empyrean. All the old markers by which the price of a promising common stock could be measured had long since been passed; if a stock once valued at 100 went to 300, what on earth was to prevent it from sailing on to 400?

    And why not ride with it for 50 or 100 points, with Easy Street at the end of the journey?

    By every rule of logic the situation had now become more perilous than ever. If inflation had been serious in 1927, it was far more serious in 1929, as the total of brokers’ loans climbed toward six billion (it had been only three and a half billion at the end of 1927). If the price level had been extravagant in 1927 it was preposterous now; and in economics, as in physics, there is no gainsaying the ancient principle that the higher they go, the harder they fall. But the speculative memory is short. As people in the summer of 1929 looked back for precedents, they were comforted by the recollection that every crash of the past few years had been followed by a recovery, and that every recovery had ultimately brought prices to a new high point. Two steps up, one step down, two steps up again-that was how the market went. If you sold, you had only to wait for the next crash (they came every few months) and buy in again. And there was really no reason to sell at all: you were bound to win in the end if your stock was sound. The really wise man, it appeared, was he who ‘bought and held on.’

    “Time and again the economists and forecasters had cried, ‘Wolf, wolf,’ and the wolf had made only the most fleeting of visits. Time and again the Reserve Board had expressed fear of inflation, and inflation had failed to bring hard times. Business in danger? Why, nonsense!

    Frederick Lewis Allen, “Only Yesterday”

  6. Vermont Trader commented on May 6

    I read this bearish piece and then I read that he is calling for a bounce today?

    On the day FNM, the cornerstone of our asset backed housing finance industry, reports?

    Does he not trust his own opinion of the fundamentals?


  7. Barry Ritholtz commented on May 6

    It was written yesterday, and his clients are professional traders.

    He is talking about a turnaround Tuesday as a weekly calendar kinda trade

  8. noob. commented on May 6

    Vermont trader,

    I actually scroll down to look for your comments. thnx for many enlightening inputs.

  9. cjc commented on May 6

    This is just an observation. Showing I can remember what I read. A few entries down, you highlighted that 401k withdrawals are increasing.

    “If debt is now being curtailed or rationed, there can be only one direction for the US economy.”

    So, putting two and two together, I can suggest– that is where some funds will come from. One more little punch bowl left, the employer sponsored defined contribution retirement plan.

    I read a few years ago, that America has done several things over the decades to maintain standard of living. First, the women went to work, then we increased the work week//lessening vacation time, then mortgage equity withdraw and credit cards….
    but the article stated that the sources of additional cash, had been expended. There was not another adult in the house to send to work, or work longer, or equity to tap. Thus, without real wage growth, things were going to …”get worse”…. Standard of Living would fall.

    Something that does not get enough traction is — Real Wage Growth, or lack thereof.

  10. michael schumacher commented on May 6


    fundies have meant NOTHING up to now…

    why would they matter all of a sudden.

    When media point to January lows and march lows they fail to mention the amount of money thrown at the market to achieve those “lows”….I laugh when I here we’ve “tested those lows”..

    with what?? a PH test kit????


  11. flipper commented on May 6

    Now awful report from FNM and the stock is up 3%!

    Guess the market is pricing hyperinflation.

  12. Vermont Trader commented on May 6

    Thanks Nobi, MS hear from you..

    From Reminiscences of a Stock Operator –

    “I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job,” cut in old Turkey. “I said I’d lose my position. And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don’t feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It’s a bull market, you know.” And he strutted away, leaving Elmer dazed.

    What old Mr. Partridge said did not mean much to me until I began to think about my
    own numerous failures to make as much money as I ought to when I was so right on the
    general market. The more I studied the more I realized how wise that old chap was. He
    had evidently suffered from the same defect in his young days and knew his own human
    weaknesses. He would not lay himself open to a temptation that experience had taught
    him was hard to resist and had always proved expensive to him, as it was to me.
    I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.

    And right here let me say one thing: After spending many years in Wall Street and after
    making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock
    operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.

    The reason is that a man may see straight and clearly and yet become impatient or
    doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat
    themselves, because though they have brains they cannot sit tight. Old Turkey was dead
    right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.
    Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can
    catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see or if you prefer, until you think you see the turn of the market; the beginning of a reversal of general conditions. You have to use your brains
    and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.”

  13. Vermont Trader commented on May 6

    meant to say MS nice to hear from you..

  14. Alan Greenspan commented on May 6

    Another legendary stock trader, whose autobiography can be googled up online, is Jesse Livermore, and he would offer the same advice…as most of you know he was legendary for playing shorts, and made and lost fortunes several times….

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