Many problems remain.  Let’s look at the chain of events that caused the markets to rocket to new heights over the past few years: 1) Greenspan lowers rates to the point of making it free; 2) Wild creation of securitized loans makes this free money available to all; 3) Businesses leverage to the hilt increasing their profit margins to historical maximums; 4) Consumers leverage to the hilt allowing them to spend at rates never seen before; 5) Between the consumer spending and the historical profit margins, P/E ratios expand concurrently with earnings. If you do the simple algebra, you’ll see its obvious why stock prices increased big time.

Now let’s look at the current situation: 1) Bernanke is throwing truck loads of money into the wind, but banks are hoarding it, not lending it; 2) Consumers are tapped out with huge debt loads; 3) Unemployed people can’t get loans even if the banks were lending; 4) Profit margins are shrinking as they revert to the mean like they always do, thus lowering earnings; 5) If you do the math on this equation it does not bode well for markets.  We don’t even need to take into account the dismal consumer confidence or the short term technical indicators which also paint a bleak picture.

Housing is still on the ropes: new and existing home sales are still setting new records to the downside.  There is some indication that the rate of decline (Poindexter says: “second derivative”) is easing somewhat, but that’s small consolation as these trends are variable, and a loss is a loss.  The only light at the end of the tunnel is broken.

Barron’s declares that the Dow won’t break 5000 to the downside because the P/E is so low.  Yeah right.  Since when did they obtain an accurate crystal ball?  Their calculations use EABS (Earning After B.S.) The real earnings picture is quite bleak.  Still, we will pull out of this, so if you’re saving for your toddler’s retirement it could be a great time to buy equities.

Japan’s economy is now terrible (squared.)  Exports are sinking and debt is rising. Why should we care?  Their export economy allowed them to finance ours with low rates.  That ability appears to be at risk.  In addition, this World’s Second Largest Economy may fall into third place behind China very soon.

Page 16: The Swiss have devalued their currency, which is not the norm.  The U.S. has accused China of manipulating the Yuan.  Is the Japanese Yen next?  Which currency will be next?  This sort of race to the bottom could bode for an increase in worldwide protectionism, which would make our global recession much worse.

GE took a downgrade from AAA (to AA+) that its held since 1957, which was less than expected. In addition, Bank of America says they actually turned a profit for the first two months of the year. The result? The markets continue to soar. My take? Just wait for the next shoe to drop. Don't forget our economy has been running on cash-out refi's and other types of consumer debt that can't be repaid with the increasing unemployment. I'm sure not betting that this is the inflection point in the recession; then again I never make a bet when the odds are against me.

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The elephant in the room that no one sees: The Treasury has been pumping out new debt at a monthly rate that would have seemed normal for yearly issuance during the boom times: $63B last week, $94B in late February, $67B in mid February.  Unless the Econ 101 lesson of Supply & Demand doesn’t hold anymore, then the debt rates will have to rise. Either the markets will require higher interest rates to attract the debt buyers or the Fed will have to buy the debt, and print the money for it. The question is: When??  Read more HERE

In other news, Roubini says we’re due for a suckers stock rally later this year with new lows after.   Read about it HERE

Finally, the markets took off on the upside today with Citi’s announcement that they turned a profit in the first two months of this year.  Lets see how long this rally lasts, and Citi’s profit trend as well. Read more HERE

Keep your eye’s open for what could be the next shoe to drop: commercial real estate debt defaults. They typically lag the residential defaults by a couple years and they’re just starting to show up in the Ohio area. With the economy tanking, what proprietors are going to continue to pay rent on their commercial space when they can’t put food on the table at home? Read more HERE

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Payrolls fell another 651,000 in February of 2009, which is about what they’ve been falling every month for awhile now.  This takes the unemployment rate up to 8.1%, which is a 25-year high.  Unemployment is a lagging indicator so it won’t affect our investment decisions at this time, other than confirming that the complete absence of meaningful expansion of the leading indicators portends the probability of more misery ahead.

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Governments don’t have much of a record of preventing disasters, but they’re great at running around like Keystone Cops after the horse is out of the barn, waving their hands in the air saying: “We gotta do SOMETHING!!”. Too bad they don’t seem to care if that “something” is the wrong thing. God forbid that our politicians should get accused of not doing anything. They seem to prefer the possibility of being accused of doing the wrong thing, so they can say “Hey we tried”. Well, sorry guys, that’s not acceptable. Our economy should be treated like a sick patient via the Hippocratic Oath: “Above all, do no harm”. The dolts in Washington just don’t get it.  A prime example is the “need” to put salary caps on executive pay. WTF!! Welcome to United Socialist America? If that’s not the tail waggin’ the dog then nothing is.  Just think this through: if banks acted like banks, and therefore required good credit scores, solid down payment from the borrower AND had greatly limited the amount of leverage on the bank’s books, then the limited profit of the banks wouldn’t be able to support outrageous executive salaries in the first place, and the bank would always be on sound financial footing.  Gee, “Financial Strength”, what a concept!  Don’t forget that when a bank is leveraged to the hilt, they only need a few percent of their assets to default for the bank to be insolvent, which just ain’t the right way to run any business, unless of course you’ve got “Helicopter Ben Bernanke” hovering over you, ready to shower you with taxpayer cash at a moment’s notice. Where’s my shower? Thank heaven that porn kings Larry Flynt (Hustler magazine) and Joe Francis (Girls Gone Wild) are requesting a bailout too. At least that helps keep these bailouts in perspective.

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Fed Vice Chairman Donald Kohn is getting spanked by the Senate Banking Committee as to why Mr. Kohn won't reveal the names of the companies that are benefiting from the AIG bailout. AIG insured CDO bets by some really big names (UBS, Goldman-Sachs, Merrill-Lynch, and others), that AIG had to cover, but they couldn't, so you and I get to pay up on those bets. WTF!! - Kohn didn't want to say who was getting bailed out though, and by how much.  It’s about time someone stepped up and got pissed! Let’s hope the Senate Banking Committee doesn't give up the fight.  Feel free to write the members of the committee like Chris Dodd and Jim Bunning with a short note like “YOU GO BOY!!”  As long as you're at it, you might remind them that if they don't bail all these guys out that the stockholders and bondholders will take the big hit, not the average depositor. Shouldn't the guys that took the risk and got the reward get nailed? Heck yeah!!

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Yeah, crazy like a fox. They're called "basis traders". They own bonds in a particular company, and credit default swaps (CDS) on those bonds, all of which were obtained on the cheap, often making it irrelevant if the underlying company defaults on the bonds, and possibly even more advantageous for the bond/CDS holder if the company goes bankrupt (in which case the CDS pays the full face value of the bond).  This has thrown a wrench into the usual death spiral of failing companies in which the company directors often have some leverage over the bondholders in renegotiating the terms of the debt. Now the bond/CDS holders are saying: "What? Me worry?" It just ain't like it used to be. Bankruptcy FTW!! Our take? Expect a lot more bankruptcies going forward!

Our president unveiled his solution to the housing and economic crisis ravaging our country (and the world). Its a $75B USD "bailout" for homeowners dubbed the "Making Home Affordable Initiative" All the details can be found here. It requires lenders to make the home more affordable with lower interest rates, longer mortgage terms or a reduction in the principal outstanding. Will it work? Not in this blogger's opinion. Besides, where will all this bailout money come from? There are only two choices: 1) borrow it through treasury bonds; or 2) if #1 doesn't work then the fed will buy the bonds with freshly printed money. Yeah, right, our country is in dire straights because everyone borrowed to the hilt, and now the solution will be to borrow more. Who elected the people that came up with these ideas? Here's an old saying I just made up: "Those that can't do, teach. Those that can't teach run for office". Obviously those that run for office need to take basic arithmetic over again, because they sure don't know what the heck is really going on.

The DJIA closed well below 7k again today. Are we scared? Hell no; we're happy! Why you ask? Of course Ben Graham's philosophy frames it best: would you rush to the grocery store if they hung out a sign that said: "special today, oranges double price"? Um, no, you wouldn't. You would rush in if they hung out a sign that said: "special today, oranges half price". Well, stocks are now trading at about 1/2 price. The trick at this point is to pick out the ripe fruit and not get stuck with any rotten pieces. Lets see if we can do that.