THE BLOG
03/06/2009 05:12 am ET Updated May 25, 2011

Wall Street Gives Obama Thumbs Down

The words are not pleasant, but veteran San Francisco money manager and stockbroker Gary Wollin probably best captures Wall Street's rapidly mounting concern about Barack Obama.

"It looks to me like the Obama market is fast becoming an Obuma market," he says. Relating primarily to the sagging economy, Wollin observes that "we're literally asking the guy to turn the Titanic around overnight, a Hurculean task, and no one really knows whether he can stop the sinking."

No two ways about it. Obama wowed the voter, but the stock market, judging from its initial 2009 showing, clearly worries that he's a lightweight. The fact is our 44th President has gotten a chilly reception from Wall Street, which is unhappy over his failure to clear a meaningful market-boosting stimulus package through Congress and his criticism of the Street's billions in bonuses.

Making matters worse, the most telling signs on the economic front suggest the relationship between the two, despite some periodic market rallies along the way, could chill even more as the year progresses, especially if stocks, as some Wall Street experts fear, continue to falter in the wake of an ongoing economic downturn.

The market's bleak performance in early 2009 -- stiff losses of from 4.4% to 12.9% in the major stock indices -- signal that further significant wealth destruction likely lies ahead following 2008's shoddy stock market. Last year's showing was the third worst in the history of the market, wiping out roughly $7 trillion of stock values as the leading equity averages, such as the Dow and S&P 500, dived between 34% and 40.5%.

Wollin is one of a number of skeptics I've chatted with who sees no letup in sight. "Obama, he believes, is in the wrong place at the wrong time, that economically, he's over his head because he inherited a mess that is likely to take years to resolve.

From an investor's standpoint, there's also a political equation because of the media's overwhelmingly glowing reaction to Obama's presidential win and its almost universal belief that a new day could be dawning. Such sunny thinking, though, is greeted by some market watchers with a great deal of disbelief since Obama's skills in managing a deepening recession are a big unknown. So, too, is his ability to cope with some worrisome overseas problems, especially those related to the Middle East, which could also play havoc with the market.

At the moment, invariably bullish Wall Street is in denial. Its dominant party line -- which is enticing many bloodied investors to at least hold fast or even fatten their stock portfolios -- is that the second half of this year should produce a significant recovery on the economic, housing and credit fronts, leading to a substantial market rally.

The chief catalysts for such a rebound, so goes the party line, are a mounting number of government bailouts of troubled companies, repeated Congressional promises to address the burgeoning foreclosure mess, a major stimulus package and puny interest rates.

In turn, argues Wall Street's bullish contingency, such a scenario should reinvigorate consumer confidence, beef up a sagging economy and help allay the fears of an ultra-jittery stock market.

The skeptics say the bulls are chasing a pipe dream. One such bull is Berkshire Hathaway chairman Warren Buffett, the nation's leading stock market guru. In mid-October, he announced to the world that he was once again buying U.S. stocks, in particular citing such favorites as Goldman Sachs and General Electric.

His rationale: The fear factor has been way overdone in the stock market and the bad news is more than adequately discounted by the bevy of depressed stock prices, which includes the best known names in Corporate America.

As the world's richest man with a recent estimated net worth of $62 billion, Buffett's views surely merit a respectful hearing, but his latest fling with U.S. stocks is hardly one of his shining moments. For example, he loved GE when it was around $25 a share. It's now less than half that in the low teens. He thought Goldman was a steal at around $125. It's now even more of a steal in the low $80s.

Some investment pros, among them veteran investment adviser Martin Weiss, insists a second depression is on the way. So he's convinced Buffett's rosy market outlook is presently out of touch with reality. Before any credibility can be given to Buffett's sunny assessment, the skeptics insist, the country's major financial woes -- such as a deteriorating economy, swelling credit risks, ballooning unemployment, non-stop bank losses and further decay in the housing market -- must demonstrate clear signs of material improvement.

When might that happen? "I wouldn't hold my breath," I'm told by Mr. Weiss, Wall Street's grim reaper and the CEO of Weiss Research of Jupiter, Fla., who has been a pioneer in predicting the current financial mess. About a year ago, he forecast a sizable economic contraction, a slew of failures in the financial arena, a housing collapse and a skidding stock market -- all of which came to pass.

His view of the bailout, originally pegged at $700 billion and now widely expected to run into the trillions: "It's too little too late to end the debt crisis."

Accordingly, he rates any stock rally at this juncture "a buying trap." As for the $64,000 question -- how low is low? -- his latest outlook calls for a wicked fallback in the Dow to about 5,500. That's equivalent to another vicious decline of more than 40% from current levels.

Weiss is hardly alone in his view that it's the wrong time to go bargain hunting, that the risks in the stock market still remain enormous and that any market rally is bound to be short-lived.

Here are a number of key reasons that validate such a grim view, according to a cross-section of Wall Street bears.

--A worsening global economic slowdown. Europe, Japan and the United States are all in the midst of a recession and the world's fastest growing emerging markets, among them China and India, are slowing markedly. In the U.S., some economists peg economic growth next year at less than 1%, and some top brokerage firms, such as Morgan Stanley, expect worse -- namely negative growth and no recovery until 2010.

--Much higher U.S. unemployment, now 7.2% and probably headed to 8% to 10% before the current economic cycle is over. Microsoft co-founder Bill Gates thinks it will be at least 9%. If he's right, the unemployment rolls will balloon, rocking the economy even more.

--More hell in housing. The termites refuse to quit. Prices continue to slump and virtually every real estate broker, including those in such pricey areas as Manhattan, Palm Beach and Aspen, reports slowing sales. Uncle Sam and JP Morgan Chase are trying to ease mortgage woes, but delinquencies and foreclosures are sky-high, and Moody's figures 10 million mortgages taken out during the last four years will fail.

--No end in sight to the credit mess. Steve Forbes says our credit woes are almost over, and JP Morgan chief Jamie Dimon said the very same thing about six months ago. The International Monetary Fund thinks they're both off base. It predicts another $500 billion of bank credit losses, which will put increasing pressure on bank balance sheets. To some financial watchers, it means we could see as many as 200 to 250 bank closings over the next few years.

As a result, worried banks -- despite any bailout -- are expected to hoard cash and be a reluctant lender. Many banks are overleveraged, indicating lending restrictions will not ease overnight. Further, it's widely felt many banks will not lend freely if their balance sheets remain clogged with questionable loans.

Adding to financial woes, a new real estate crisis may be brewing in the commercial sector. Banks are taking growing writedowns on commercial mortgages, which nationally total nearly $3 trillion. Further, empty store locations are popping up like crazy in shopping malls across the country and many malls seem graveyard bound. In some cities, commercial real estate sales have dropped sharply. In New York, for example, they have fallen to their lowest level since 2005.

What about the government bailout? One of the most famous global money managers, Jim Rogers of Singapore-based Rogers Holdings and a former sidekick of George Soros, ridicules it, contending "the rescue package will not rescue and probably produce the worst recession since World War 11." He also sees it leading to higher long-term interest rates, higher inflation, higher taxes, a weaker dollar and substantially lower stock prices from current levels.

What about the economic plus from those stepped-up interest rate cuts? Weiss, for one, is dubious. "The Federal Reserve can not repeal the law of gravity," he says. "It can not drop rates below zero, nor can it force consumers to buy and borrow, and banks to lend."

His investment advice: Sell stocks on every rally, cash is now king, and think short-term Treasuries. He acknowledges those two-year Treasury yields are puny -- less than 1%- -- which is a rotten return for playing it safe. "But it's better to be safe than to be dead," he says.

Contrary to Buffett's exuberance -- Weiss's chief investment strategy is asset protection, moving aggressively from risk to safety -- not, he says, from safety to risk. In brief, he believes -- and he's hardly alone -- it's simply the wrong time to play Russian roulette.

The big question, of course, as far as the nation's more than 100 million stock investors go, is when will the Obama market finally begin to stabilize?