Worst may be yet to come (Economy)

ECONOMY | Prognosticator with a remarkably good record says stock market gains won't last

Last week the stock market heaved a sigh of relief. The gains were widespread. The broad-based Wilshire 5000 is up 38.66 percent or $3.2 trillion from the market low of March 9.

There's a growing consensus that the worst of the economic news is behind us, and that a rebound in the economy can't be far behind the rebound in the stock market. File all of that under the heading "Everything is Relative."

The unemployment numbers were bad. But not as bad as expected. (Tell that to the 539,000 people who lost jobs in April.)

The banks need to raise "only" $75 billion in capital. (Tell that to the taxpayers who have already come up with billions in TARP money, and to the shareholders whose stake will be further diluted.)

Consumer confidence has rebounded from its all-time low at 37.7 in January, to 39.2 in April. (Tell that to those who confidently purchased homes or stocks back in June 2001, when the index stood at an all time high of 118.9.)

Home prices fell "only" 19.6 percent last month. (Tell that to a homeowner trying to refinance a mortgage that is larger than the value of the house.)

When it comes to the economy, everything is relative. We are relatively a lot worse off than we were a year ago. But some of the statistics are relatively better than they were a few months ago, when so many people feared another depression. Bull market? Bear market rally?

The stock market has chosen to focus on those relatively better numbers, because the stock market always looks ahead. But is this a new bull market -- or just a temporary rally, an opportunity to sell stocks before another collapse?

A well-known Wall Street money manager said on Friday: "This is a "once-in-a-generation opportunity to get in at prices that haven't been as good since 1982." One stock market sentiment indicator has gone from only 2 percent bulls to more than 80 percent bullish in just the past two months.

The bulls are running. But two legendary traders beg to differ. They each correctly timed this "bounce." But neither feels it will last much longer. Elliott Wave Theory: lows ahead

Bob Prechter is a stock market technician, meaning he charts historic stock prices and patterns using the "Elliott Wave Theory."

Lest you think this type of analysis is like reading tea leaves, Prechter gained fame predicting the stock market crash of 1987. In 2002 he wrote a book titled Conquer the Crash -- You can Survive and Prosper in a Deflationary Depression. In it he correctly forecast a huge credit contraction, brought on by all the mortgage and debt issues that we're now facing.

Reading this book today, it seems as if Prechter had a crystal ball. That's why his current view of the market is so compelling. After forecasting this current rally in February, Prechter suggests traders should be looking for an exit point soon, an opportunity to sell short. He laments: "On the major trend, there's such a long way down to go."

Pressed to put that into numbers, he said that a normal rally from the 667 low on the S&P 500 would take that index back up to the 1,000-1,100 range. (It's around 900 right now.) After that, he expects the next wave down to be larger than the initial drop of 58 percent. You do the math!

Prechter calls it a "C" wave in Elliott Theory -- and notes: "Declining C waves are usually devastating in their destruction." He says the "credit implosion" is not finished. Much like Japan, he predicts, we'll have to live through a long period of declining asset values, summed up in one word: deflation.

Traders can follow these volatile waves, but where do long-term investors hide during an extended deflation? Not in stocks, or real estate, or commodities -- even though today's prices seem like bargains. "Until the credit implosion is over, the only place to hide is cash -- safe equivalents such as Treasury bills. Holding on to your money will give you a chance to buy the real bargains when the bottom eventually arrives -- several years from now."

I had just finished digesting this forecast from Prechter when I received the latest issue of Bert Dohmen's Wellington Letter. (dohmencapital.com). Regular readers know that I value Bert's perspective highly, as he uses both technical analysis and an insightful view of both politics and the economy.

Noting that bear market retracements can be deceiving, Dohmen pointed out that the first rally after the historic 1929 crash extended into 1930 -- and produced a 52 percent gain. And then the market plunged another 64 percent!

As for the current rally, Dohmen says time is running out. He advises: "Bear market rallies are usually eye-catching and make the casual investor believe that it's a new bull market. Don't make that mistake and fall into that trap."

Sorry to spoil your day with these unpleasant forecasts. We'll only know in hindsight if the bulls or the bears are right. But it's always dangerous to get caught up in the euphoria of the bullish crowd. We learned that lesson already, didn't we? And that's the Savage Truth.

Business thrives in bad times

(http://www.southtownstar.com/news/1567566,050809trashout.article)

May 11, 2009
Chicago

BY MIKE NOLAN staff writer

For his current career, Don Lockman’s name suits him well.

Over the years, he’s worked at car dealers and rehabbed homes, but now the Alsip businessman is changing locks - lots and lots of them.

The owner of Tri-State REO Services, he’s making a living at what is called “property preservation” - securing and cleaning up foreclosed homes. REO is an acronym for real estate owned, meaning banks and mortgage companies have taken ownership after a foreclosure.

The company is less than a year old, but Lockman estimates he’s already worked on more than 1,000 homes, from Kankakee to Rockford.

“I would probably be considered one of the smaller players (in the Chicago area) in this business,” Lockman said.

He and his eight employees haul out whatever the former occupants leave behind. Called “trash-outs” in the lingo of the foreclosure aftermath crowd, Lockman said that, at one home in Chicago, his crew cleared out a whopping 100 cubic yards of garbage.

“Some of these places, you just wouldn’t believe it,” he said.

Some homeowners take more than just their personal belongings.

Lockman recently bid on a job at a Matteson home where the kitchen cabinets had been yanked out, and he said it’s not uncommon to see homes stripped of things that might have scrap value, such as copper pipe.

“We’ve had homes where the furnace, water heater and kitchen counters were ripped out,” he said. “Even those plastic switchplates you can buy for 19 cents at Menards were gone.”

Keeping tabs on vacant properties

The owner of a 1-800-Got-Junk? franchise, Frankfort resident Sam Schick has been toting away unwanted items from Southland homes since 2004. Lately, he says, more of his calls are for trash-outs.

“During the last six months, we’ve been doing a lot more,” he said.

Stuff that’s in decent condition is donated to the Salvation Army or Goodwill Industries, Schick said.

“Most of the time, the (prior) owners have moved out just what they can carry, so there’s often a lot of furniture and appliances left behind,” he said.

With banks and mortgage firms now in possession of huge inventories of foreclosed properties, they’ve hired big national firms to keep watch over them.

“We have our eyes on a million properties a month,” Diane Fusco, a spokeswoman for Safeguard Properties, said.

Located outside of Cleveland, Safeguard is the nation’s largest privately held mortgage field servicer, she said. It works on behalf of lenders and mortgage servicers, and about a fourth of the homes it’s currently keeping tabs on are vacant, and the rest are in the process of being foreclosed on, Fusco said.

One home it’s safeguarding is in Orland Township, next door to Jeanette and Norm Karczewski.

It’s been vacant since last August, and portions of a large wood retaining wall in the back yard have collapsed, leaving exposed nails. A decrepit-looking above-ground pool is filled with murky water.

“We have to live next to this,” Jeanette said. “It’s just ruining our property.”

She said she and her husband have called Safeguard to find out the status of the property. Fusco said that while it’s in foreclosure, it’s not yet owned by the bank, so Safeguard is limited in what it can do.

The company will correct anything that’s viewed as a health or safety hazard, she said.

Portions of a decaying deck around the pool have been removed, and the company also will maintain the home’s exterior, including cutting the grass, she said.

“We want that home to be just like every other home in the neighborhood,” Fusco said.

No quick turnaround

Founded in 1990 with a handful of employees, Safeguard’s payroll now exceeds 700 and has experienced business growth rates of between 10 and 15 percent each year, Fusco said.

“With this foreclosure crisis, the business has grown for everybody,” she said.

Lockman says he’s often hired to work on homes by a company similar to Safeguard, Texas-based Field Asset Services, and expects to be busy for many more months.

“I don’t think things (housing market) will turn around for a couple of years,” he said.

Even when the economy gets healthy again, people will continue to lose their homes, albeit at a slower pace, Lockman said.

“In good (economic) times, business is good, and in bad times, business is great,” he said.

Mike Nolan can be reached at mnolan@southtownstar.com or (708) 633-5952.

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