Bad day for stocks

Of course there's a confluence of bad news - the terrible retail sales numbers, three big Chapter 11 filings, another weak Beige Book report by the Fed, and continued worries about bank obligations. With just a few minutes to go, the Dow was down around 250 points. But all this bad news misses a bigger point: That is, who in their right mind would want to buy stocks or bonds these days? Oscar Schafer, managing partner at OSS Capital Management, had some interesting things to say at the annual Barron's roundtable:

The economy is experiencing a rain delay. Nothing is going to happen for a while. Although the government's spending efforts will help, they won't be enough to cure the two biggest problems. The first is housing. Unsold inventory of houses is more than a year's worth, and prices could go down another 10%-plus. Mortgages have been reduced and prices are down, but 68% of the public still owns a home, versus 64%, the historical trend. The mortgage-equity withdrawals of recent years are over. Consumers spend 14% of their after-tax income on housing, more than they pay for food. No matter what the government does, it may not help housing, and in turn, the consumer.

A stimulus package also wouldn't speak to the consumer's need to reduce debt. Just as "plastics" was the operative word in The Graduate, "leverage" will be the operative word for the next two to three years in the economy. The world is experiencing a giant margin call. The consumer is deleveraging and increasing his savings. The banks are deleveraging. Stories are rife that banks aren't lending, because they don't have sufficient capital. Further write-downs will continue to impair their capital. This credit contraction leads to a vicious cycle of companies doing poorly, layoffs increasing and foreclosures rising. The economy will be pretty punk into 2010.

He doesn't expect the market to do much this year. The bigger story, he and others are saying, will be 2010 and 2011.