Professor Elam

Saturday May 1, 2010

Happy Days are Here Again

Cullen/Frost Bankers Inc. surpassed
profit expectations for the first quarter, crediting Texas' resilient economy
for the performance.

“My colleagues and I believe the
worst of the recession is now behind us,” Cullen/Frost Chairman and CEO Dick
Evans told analysts in a conference call Wednesday. “The economic headwinds are
no longer pushing people back.”

The
Texas economy continues to outpace the rest of the country, Evans said, citing
job growth and the housing market.

This is precisely the sort of comment that one would
expect at this point in the stock market recovery.   Actually the best of the Wave 2  recovery is  behind us, the worst of  the real adjustments to failed promises
lie ahead.  The worst of the Wave 1 move down was behind us March 9, 2009. Remember our analogy to this period is 1968-82. Let’s examine where
we are now.

March 9, 2009 was the bottom of the stock market sell off.
The S & P, oil, and previously, gold in November 2008 had all
bottomed.   Worried investors
had dumped stocks at the wrong time and scurried into bonds. Bond yields
dropped below 3%.   It makes
sense then that the next turn will exhibit precisely the opposite behavior. We
should expect stocks, metals, and oil to make tops, bond prices should be
making a bottom.   Social mood
should be the opposite of gloom and doom, confidence should blossom, just as it
did from the fall of 2007 to the summer of 2008, prior to the Fall 2008 crash.

So the quote from Chairman Evans fits perfectly with this
scenario. I would agree that Texas will weather the storm ahead in better
fashion than perhaps anywhere else. 
The State has a surplus and is properly cutting back on spending. The
economy is well diversified and not hamstrung with impossible union contracts
and promises.

Elsewhere there are problems that are unsolved.

Most stock exchanges have rebounded about the same 50%
that the Dow did in 1930. Everyone thought the all clear had been sounded then
as well.

The EU is coming apart. Greece has been in default more
than not in the last 150 years this time is no different.   It will be easier to leave the
EU, pay 50 cents on each dollar of debt and start over. At least it will be for
the politicians in Greece.

Protestors are on the march, worldwide.  Google protests in Thailand, Portugal,
Britain, Russia, and you will receive plenty to read.  This replicates the dissent of the late 1960s. Everyone is
unhappy they will not be paid pensions or salaries.

Congressional hearings continue non-stop.   The stimulus has only gone to the
international banks that were the biggest contributors to the President’s
campaign.  As the social mood
sours, expect some Wall Street types to be skewered as Nixon and Milken were in
their respective eras. The result is , as with FDR, the failure to stimulate
any private hiring or investment. Indeed, mandates for health care and endless
unemployment will only send more jobs offshore. Ten percent unemployment with
16% U-6 unemployment is here to stay.

States like CA, NY, NJ, IL have done nothing to solve
their grandiose promises to government  unionized employees.  Just yesterday the AFL CIO held a Make Them Pay rally on
Wall Street demonizing  those same
Wall Street types that the President bailed out of course. Tea (taxed enough
already) party protestors are happily clicking photos of the SWAT teams called
to monitor their potential rebellious behavior.

The price of oil peaked in June, 2008, stocks peaked in
October 2007. The same pattern is holding forth now, stocks are up and while
oil is up, potentially higher prices lie ahead. There is always a fundamental
event to validate such predictions. And now we have the Big Leak in the Gulf.
This will no doubt hamper oil deliveries and lead to more  measures that will only make oil
production and delivery more expensive, think Exxon Valdez. That should boost
oil over $100 short term.

Gold peaked in March 2008, so metals and oil lagged stocks
and recovered before stocks. So, expect a final run up in stocks, metals, and
oil. They will not all peak together. Bond prices should have a final dip.  That should set up the exact opposite
of the March 9 2009 picture. This summer on exiting stocks metals oil and
parking some money in government bonds. 
We warned of the danger of $145 oil in the summer of 2008, here we go
again.