Investors Shouldn't Expect a Thanksgiving Miracle

One of my favorite movies from my childhood is the made-for-TV tear-jerker starring Geraldine Page, called “A Thanksgiving Visitor.”

Based on a marvelous short story by Truman Capote, it’s sappy yet terrific — it actually won an Emmy. It’s a story about the capacity of an ordinary individual to show compassion and charity bordering on greatness.

I mention this because there are many people out there who could use some Thanksgiving kindness right now.

The Unemployed

Roughly one-fifth of our fellow citizens are out of work or not working as much as they would like to be. Official unemployment is 10.2%, 17.5% counting the underutilized and discouraged, and if you throw in people who have dropped out of the workforce it is north of 20%.

The Underwater Homeowner

Almost 1-in-4 homeowners owes more on their home than their house is worth, according to real-estate information company First American CoreLogic, and if this agency had not just changed the way they calculate the number, it would be closer to 1-in-3.

Americans who own a home typically view it as their primary source of wealth and security. With one-third of homeowners underwater, and the remaining two-thirds worried about the continuing slide in home prices, this wall of worry is not going to end any time soon.

Consumers Who Can’t Get Credit

The Fed is printing money to keep the financial system afloat, but the banks are not lending it to consumers. Credit lines are shrinking and credit standards are impossibly high, so the Fed’s dollars are not flowing to the average American. Instead, this liquidity is simply driving down the U.S. dollar and driving up equities, commodities and almost any other asset market except real estate.

Things Will Get Worse Before They Get Better

I agree with analyst Meredith Whitney, who says the official unemployment number will eventually reach 13%-14%, barring a politically impossible second stimulus that’s bigger than the first one was.

And home prices are not likely to rebound nationally until Q4 2011 at the earliest, but probably not until mid-2012.

And that’s the rub, folks. We are headed for a double-dip recession unless a Thanksgiving miracle occurs and real estate rebounds, and I wouldn’t hold your breath.

Unemployment, the housing market and tight credit will continue to be huge drags on consumers throughout 2010, and they will cut back even more to cope. And some of these changes will become semi-permanent behaviors, lasting for many years after the economy has healed itself.

A Nasty Cycle

With consumer spending accounting for up to 70% of GDP, we’re in for a nasty cycle. Sluggish consumer spending means more unemployment, which means more mortgage defaults, which means more foreclosures, which means more home inventory, which means lower home prices, which means more homeowners underwater, which means reduced spending, which means more unemployment … you get the picture.

The cycle will stop six months before home prices truly bottom — like I said, mid-2011 at the earliest.

When the Kindness Runs Out

The market has ignored these facts since March. The economy and the market have diverged, and the latter has acted in a very Thanksgiving-y way — treating everyone (except short sellers) with great kindness and charity. But, as it goes with individuals, that kindness has limits.

Those limits will be reached not when the pundits say so, or when the technical whizzes declare the charts have changed. Rather, this charitable rally will end when enough traders realize investors are going to shun equities because we are entering the second leg of the recession. I believe this will happen around the end of the first quarter of 2010.

The best thing to do is be prepared. Start looking at puts on the S&P 500 (SPX), credit spreads with a downside bias, and so on. (Check out 9 Ways to Profit From the Market’s Fall.)

One More Thing to Remember …

While we are in for some more tough times ahead, remember that money is a subset of life, and that there are many other more important things.

I urge you to invite the relative you really cannot stand (and no one can) to dinner. Give a fast-food gift certificate to the homeless person you usually shun or, if it’s cold where you live, buy some extra hats and gloves and leave them where they can be found.

Human charity is an amazing thing, and the world would be a much kinder place if we all showed just a tiny bit more of it.

I wish you and your loved ones a very happy Thanksgiving!

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