It Is All In The Perspective

Today Standard and Poor issued a shot over the bough by saying that the outlook on Britain has gone from stable to negative because of massive borrowing to deal with the recession and bank crisis.  This is not a formal downgrade, but it might as well have been given the impact. The projected Britain government's net debt burden will rise close to 100% of economic output by 2013.  As of April 2009, it was 53.2%.  In my opinion, this is the orange flag that I have been waiting for given my concern about the U.S. increasing debt.

As of early May 2009, the U.S. debt is 80.1% Gross Domestic Product based on the current GDP.  The President's 2010 budget estimates indicates that debt will be 97% by 2010 and stabilize at 100% after that.  Looks like this country is going to finish the race before Britain with 100% debt.  Given that, how are we going to fair with Standard and Poor's rating?

Also, today, there was a statement that the offers for homes for sale in the Northeast are 20-30% less than the asking prices.  The bottom in the housing market has yet to show up with steep discounts like this.

For those who are active investors in this market, be very selective and fully conscious of buying and selling.  Remember, I am optimistic in the long run, but I think we are going to experience a giant bump in the investment road, sooner than later.  

Reality versus Illusion

We are hearing words that the financial system is 'healing' and the housing market has 'bottomed.'

Here are some facts:

*  The national median home price is $169k, falling 13.8% for the 1st quarter of this year, another 6.2% since 4th quarter of last year.  Half the sales were foreclosures and short sales. Both sell for about 20% less than traditional housing asking prices.  This process will continue.

*  Foreclosure notices rose 32% in 1st quarter of this year compared to 1st quarter last year, and the banks are active in moving the process along.

*  Bank of America, Citi, and J P Morgan Chase represent 60% of all unused credit lines. They cut $320B in lines during the 1st quarter of this year.  This is in addition to $408B in the 4th quarter of last year.  The outlook is that closing these lines is gaining momentum, which is really going to put the squeeze on the consumer in even meeting their basics needs, let alone their discretionary spending.

*  The government is borrowing almost $.50 for every dollar spent.  Imagine if we as individuals were leveraging like this.

*  Social Security and Medicare are running out of money faster than forecasted.

*  Recently, a group of General Motors executives sold all of their shares for around $1.60 and up.  Look at what the price is today.  That points to what is going on behind the scenes and as the current CEO keeps suggesting, bankruptcy seems closer than around the corner.  

It is important that we keep our attention on the details versus the words coming out of Washington.  As I have reiterated several times in my blogs, there has to be a level of U. S. debt that when reached will lower our AAA credit rating. I don't know what that number is, but we are moving vigorously in that direction. Invest accordingly and follow your own truth.