Bloomberg reports:

Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

These are wonderful promises, but we see little substance to back up Geithner’s “targets”.   More concerning was the sell-off in bonds yesterday indicating that foreign central banks may be anticipating a ratings cut in the U.S.A itself and are selling on the rumor.  While concerns over inflation through quantitive-easing have risen over the past weeks, the far greater concern is the threat of a serious bond-market meltdown should Bernanke’s dreams of low interest rates crash against the rocks of inflationary fears  — forcing rates ever higher.

What then of our “green shoots”?   With America’s deficit exploding almost 30% to over $2 trillion in a matter of months, America’s circle of creditors are sure to be casting nervous sideways glances at one another.  Growing international concern that the US may not be a reliable debtor were hightened yesterday, as Britain’s AAA rating was called into question by Standard & Poors, who lowered the nation’s outlook to “negative”.  (It does not take a particularly keen observer to note that the USA may be next in line.)

Also concerning is the “rot within”, as municipal defaults around the USA threaten to place an impossible burden on the shoulders of the Federal government.  One must concede that the concept of “too big to fail” has not yet been truly considered until one grapples with the issue of defaulting state and local governments.    There exists no framework, or precedence for these massive stormclouds forming on the US horizon.  Policy makers everywhere are deeply troubled with the prospective issue of whether the federal government should run to the rescue of state and local budgetary fiascos:  Fiascos brought about by irresponsibility, fraud and the very same ingredients that made up the subprime scandal itself.   To take on these burdens at the federal level would seriously call into question the financial health of the USA itself, and yet allowing local governments collapse under their own financial burdens will have deep and extraordinarily painful repurcussions.

Bloomberg reports:

Also yesterday, Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.

The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington. Among the hurdles: money from the Troubled Asset Relief Program was designed for financial companies, he said.

Geithner said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

The municipal bond markets are “starting to find some new balance and equilibrium,” he said.

No, Mr. Geithner, they are not.  But while Treasury is correct in not extending TARP support at this time — Geithner’s promise to “work with Congress” hardly sounds like restraint.  The US is sailing swiftly into a scenario which will demand significantly higher interest rates.  While we are fuly cognisant of the pain and hardship that accompany a laissez-faire response to corporate and municipal financial failures — such pain is deeply preferable to the broad systemic collapse that will follow if the federal government tries to backstop our entire bathtub of bursting bubbles.

The Pension Benefit Guaranty Corp., a government agency that provides insurance for corporate pension funds, recently reported to Congress that its deficit has tripled in the last 6 months to $33.5 billion as it takes on payment responsibilities for underfunded pension plans of companies going bankrupt in the current economic crisis.

Acting director, Vince Snowbarger, commented:  “Long term there is going to have to be some resolution of that deficit. I think at some point in time it’s going to require congressional attention.”

“How soon depends on what happens in the next several years,” he added.

Well, according to the PBGC’s own estimates, pension underfunding in the auto sector alone is $77 billion, so it looks to us like that ‘congressional attention’ may be required sooner rather than later.

AP Reports:

A flurry of pension plans that have either been terminated or probably will end up being taken over by the PBGC is the largest reason for the agency’s rising deficit. Declining interest rates was listed as the second-largest reason for the shortfall. Investment losses from the stock market were only the third contributing factor.

“Despite ongoing deficits, the PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly — spread over the lifetimes of participants and beneficiaries, not as lump sums,” Snowbarger said.

In a televised speech by Thomas Woods,  author of the New York Times bestseller “Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse“, had some gems of concise insight that we thought we’d echo here:

“The recession is just the economy trying to re-adjust after all the mal-investment and misdirected resources caused by the Fed in the first place.”

“When you’re the “Soviet commisar” in charge of money and interest rates, when you’re Alan Greenspan, you can create money out of thin air and now the banks have a ton to lend and can keep the illusion going.  But it’s an illusion all the same.”

“This is not just a matter of “We need a little more regulation”.  That is the most irresponsible, intellectual laziness imaginable.  …  If the institutional structure gives rise to this [boom bust cycle], ecourages excessive risks by making credit artificially cheap — you can have all the regulation you want …

…  It is the institutions that are giving rise to this.  It is the money itself.”

And our favorite summary of where things are today:

“What we have here is a slow-motion train wreck as we watch Washington and the Fed trying to put everything back together.  … Who is being held up to us as the people we should listen to?  First let’s talk about Ben Bernanke…  Why be awed by a man whose investigators examined the mortgage market a couple years ago and found that it was healthy as ever?  Why should we listen to a guy who said the housing bust will be over by December 2008?   Why should we have listened to Hank Paulson, who told us in 2007, the world economy was in the ‘best shape’ he had ever seen it?   These are the people we are supposed to care about?  Seriously, you should want to do the exact opposite of what these people recommend.”

“Instead of listening to [Bernanke, Paulson, et al], who have been wrong for years, who have given us the wrong advice, who have contributed to the largest asset bubble in the history of mankind… Instead of listening to them, let’s listen to the people who saw it coming.  … Why don’t we listen to them?  Their phones are not exactly ringing off the hook from the Obama administration.  The Obama administration seems to be of the opinon that the bigger blockhead you were, the more surpised you were by the crisis, the less sensible advice you have — well, the more we want to hear you.   But if you saw this coming?  Forget about it.”

The complete speech (via C-Span) is available here, and is well worth listening to:

http://www.booktv.org/watch.aspx?ProgramId=PC-10285

It’s a rare thing when insiders speak their minds publicly against the powers-that-be.   Today in a global investment conference held in Qatar,  an insider accused the entire US bank bailout of being a “sham”, and said it publicly at a global conference of his peers.   Meet Mark Patterson, chairman of MattlinPatterson advisers, a firm which utilized the TARP program’s ‘matching funds’ to buy Flagstar Bancorp in Michigan.   Patterson certainly didn’t pull any punches in blasting US Treasury Secretary, Tim Geithner’s bailout as being a deeply flawed plan which will not only ultimately fail, but is enriching Wall Street insiders in the process.

The Telegraph UK reports:

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

Well said indeed, Mr. Patterson.  We’d love to hear Mr. Geithner respond, but he’s off skipping through fields of green shoots, and worse yet, seems blissfully unaware that the US taxpayer is bearing most of the cost while seeing precious little of the upside.  Perhaps when the last $100 billion of TARP funds has been magically transferred into private coffers, Mr. Geithner will make the hard choices we’re hoping for.

More from the Telegraph UK:

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.

Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

We couldn’t agree more with Mr. Patterson, and he has our sympathies for exercising good judgment, but bad luck in choosing to short this rally from the start.    As our colleague Tyler Durden at Zero Hedge once said, “Anyone with any common sense is losing money in this market”.   Our only hope is that more insiders speak up like Mark Patterson did before the situation gets any worse than it already is.

In an interesting precedent, which could have significant ramifications for the future, the Judge in the Yellowstone Club bankruptcy proceedings ruled that Credit Suisse engaged in predatory lending practices in its $375 million first-lien debt to the super-luxury country club.  Apparently, Credit Suisse didn’t even request audited financials prior to approving the loan and was solely interested in the $7.5 million origination fee.

The remedy in this case is even more surprising:  CS’s first-lien debt is to be subordinated to even unsecured debt to the bankrupt super luxury club.

“Credit Suisse and the development owners would benefit, while their developments — and especially the creditors of their developments — bore all the risk of loss,” wrote judge Kirscher.

“The only plausible explanation for Credit Suisse’s actions is that it was simply driven by the fees it was extracting from the loans it was selling, and letting the chips fall where they may.”

“The only equitable remedy to compensate for Credit Suisse’s overreaching and predatory lending practices in this instance is to subordinate Credit Suisse’s first lien position to that of CrossHarbor’s super-priority debtor-in-possession financing and to subordinate such lien to that of the allowed claims of unsecured creditors,” wrote Judge Kirscher.

The Office of Management and Budget (OMB) dropped a few bombshells in their announcement today.  First and foremost was the news that after receiving an already mammoth $78.8 billion handout from American taxpayers, Fannie Mae and Freddie Mac would require an additional $92.2 billion in 2010.

We’d like to believe that 2010 will mark the end of taxpayer handouts for the massive failed companies — but somehow we’re not comfortable predicting recovery for these two behemoths whose pain only seems to go from intense to more-intense.

Perhaps more telling than the horrifying 2010 budget requirements was the OMB’s bombshell number two:  One prescription being considered for both GSE’s includes a liquidation of all assets and a “wind down” of the entities.  In other words:  Shut them down?

Bloomberg reports:

Alternatives range from “a gradual wind-down of their operations and liquidation of their assets,” to returning the two companies to their previous status as government-sponsored enterprises that seek to maximize shareholder returns while pursuing public-policy goals, according to OMB’s analysis of President Barack Obama’s proposed federal budget.

…

The companies are coming under increasing strain as the Obama administration leans on them to help refinance and modify loans at risk of foreclosure amid the worst housing market since the Great Depression, Fannie Mae and Freddie Mac have said in securities filings. The government-sponsored enterprises pose a risk to the economy, though the federal takeover and Treasury backing have “substantially reduced” that threat, OMB said.

‘Vital Parts’ of Economy

“The GSEs borrow huge amounts from various types of investors, and the health of the housing market critically affects the overall economic activity,” the budget office said. “Thus, financial trouble at one or more of the GSEs could unsettle not only the mortgage finance markets but also other vital parts of the financial system and economy.”

Fannie Mae and Freddie Mac may be nationalized, dissolved and broken up into several smaller companies, revamped as public utilities with the full faith and credit of the U.S. government or converted into insurers for covered bonds backed by U.S. mortgages, OMB said.

Washington-based Fannie Mae has booked seven consecutive quarters of losses totaling $86.8 billion as of March 31. McLean, Virginia-based Freddie Mac, which is expected to report its first-quarter results this week, has reported six straight quarters of losses totaling $53.8 billion as of Dec. 31.

Like many other U.S. financial institutions, Fannie Mae and Freddie Mac face “market risk, credit risk and operational risk,” according to the budget office.

Forgetting for a moment that we were told repeatedly that the bailout of Fannie and Freddie would ‘not cost the taxpayer a thing’ because their enormous portfolio of assets would cover the cost of the bailout, we at The Analytic think shuttering the companies is the first good idea sprouting from the dimly lit halls of the OMB in many a month.   Not only have these entities failed at their core mission to make housing ‘more affordable’, but they have failed as viable business entities and endangered the overall economic security of the United States.

It has long been our opinion that preserving (let alone rewarding) failures of such historic proportion should only be considered by a people whose goal is to financially immolate themselves. While there will certainly be enormous logistical issues associated with any such “wind down” — these issues should be addressed quickly and confronted head on.  In short — these enterprises are dangerous and will continue to be dangerous if they are allowed to survive intact.

Fannie Mae’s recently published first quarter results offer a resounding refutation of the economic positivity that has been driving the current stock market rally, green shoots, second derivatives and all.

So what pieces of information are probably giving the administrations economic recovery spin-machine the biggest headaches?  How about…

• US home price forecast to decline 7-12% for 2009
• 2009 credit losses predicted to be greater than 2008
• Fannie Mae management does not expect to operate profitably in “the foreseeable future”.
• The company reported a quarterly loss of $23bn, its seventh consecutive quarter in the red.
• Fannie Mae asks the US Treasury for another $19bn in capital

Even more shocking is the revelation that Fannie’s losses are no longer even close to being limited to the subprime mortgages that had previously been identified as problems.  This quote, directly from the report, is via FT Alphaville

Our entire guaranty book of business, including loans with lower risk characteristics, has begun to experience increases in delinquency and default rates as a result of the sharp rise in unemployment, the continued decline in home prices, the prolonged downturn in the economy, and the resulting increase in mark-to-market LTV ratios.

In addition, certain loan types have continued to contribute disproportionately to the increases in serious delinquencies and credit losses we reported for the first quarter of 2009. These include loans on properties in California, Florida, Arizona and Nevada; loans originated in 2006 and 2007; and loans in higher-risk categories such as Alt-A loans and interest-only loans.

The substantial portion of our Alt-A and subprime private-label mortgage-related securities were rated AAA when we purchased these securities; however, many of these securities have suffered significant downgrades since we acquired them.

As indicated in Table 22 above, approximately 54% and 74% of our Alt-A and subprime private-label mortgage-related securities, respectively, were rated below investment grade as of April 28, 2009. Approximately 25% and 13% of our Alt-A and subprime private-label mortgage-related securities, respectively, were rated AAA as of April 28, 2009.

Although our portfolio of Alt-A and subprime private-label mortgage-related securities primarily consists of senior level tranches, we believe we are likely to incur losses on some securities that are currently rated AAA as a result of the significant and continued deterioration in home prices and the increasing delinquency, foreclosure and REO levels, particularly with regard to 2006 to 2007 loan vintages, which were originated in an environment of significant increases in home prices and relaxed underwriting criteria and eligibility standards. These conditions, which have had an adverse effect on the performance of the loans underlying our Alt-A and subprime private-label securities, have contributed to a sharp rise in expected defaults and loss severities and slower voluntary prepayment rates, particularly for the 2006 and 2007 loan vintages.

Politically, Thailand is still experiencing a difficult period of conflicting interests — but just as concerning are the nation’s current economic difficulties, and their proposed remedies of fiscal stimulus which could create a potentially dangerous debt to GDP imbalance for the mid-  to long-term.

Xinhua reports:

Thailand’s public debt in the future may exceed 60 percent of the country’s gross domestic product (GDP) as the outcome of the government’s economic stimulus packages to shore up the sluggish domestic economy, Prime Minister Abhisit Vejjajiva said Thursday.

However, the public should not panic since foreign countries still have confidence in the Thai economy, he told participants of the National Economic and Social Council meeting, the Thai News Agency reported.

Abhisit made the remarks after Pongpanu Svetarundra, director-general of the Public Debt Management Office, said earlier this week Thailand’s public debt at ending of February stood at about 3.59 trillion baht (101.85 billion U.S. dollars), or 40 percent of GDP.

During 2010 to 2012, the Thai government plans to spend 1.57 trillion baht (44.54 billion U.S. dollars) in investment projects to jumpstart the economy.

This is of course, a dangerous game:   Massive infrastructure spending to the tune of 1.57 trillion baht could indeed provide much needed economic stimulus in the short term, but debt created from such fiscal policies could just as easily become  a ball and chain around the ankle of the Thai economy for years to come.  Foreign financiers remember only too well, the rapid depreciation of the baht in 1997 which precipitated the Asian financial crisis.  Abhisit’s call to “not panic” because foreign financiers still have “confidence” in the Thai economy may indeed be true for the time being, but one has to ask “for how much longer?”, particularly when public debt represents the lion’s share of GDP.

While we watch Thailand’s economic health with deep concern, we do see a potential silver lining within the proposed stimulus:  A possibility for a return to social stability within the kingdom and a reconciliation of the  political differences which have flared in recent months. (Especially if a portion that $44.5 billion stimulus is spent to the benefit of less developed areas of the nation, which have participated less fully in the past decade’s economic growth).

While economic conditions grow worse across Western Europe, Spain’s woes are particularly acute.   Coming down from housing and credit bubbles that dwarfed those of  neighboring nations, Spain’s deflationary collapse is now hitting levels of intensity which will soon have profound repercussions on greater Europe.  In Spain, no one is talking about a potential recovery in 2009 — or 2010.

The numbers are grim.  Once a primary engine of growth in Europe, Spain is now one of the leaders on  the way down.  Official numbers on unemployment are a staggering 17.5% and are expected to top 20.5% this year.  Bankruptcies have quadrupled this year, and industrial production has withered by an alarming 25%.  The construction industry, so vital to their economic health over the past 5 years, has imploded as construction projects are scrapped nationwide.

Zapatero has pledged 50 billion in stimulus, but there is widespread sentiment that such efforts may not be sufficient, given that the economy has contracted by 3.2% even with efforts to kickstart the economy.

Bloomberg reports:

“This has gone on a lot longer than a lot of people expected,” said Ben May, economist at Capital Economics in London. “There is much further to go in terms of the labor market downturn.”

Spanish bonds erased early gains after the report. The yield on Spain’s benchmark 10-year bond due 2019 rose 1 basis point to 3.92 percent, after falling as low as 3.89 percent in early trading.

Government Response

The number of unemployed industrial workers rose 62 percent in April from a year earlier, data showed yesterday, compared with 56 percent in the economy overall. Prime Minister Jose Luis Rodriguez Zapatero plans to hold a special cabinet meeting today in Madrid to discuss ways to curtail the rise in unemployment.

Zapatero’s government has already committed 50 billion euros ($66 billion) to stimulus measures for this year, wiping out three years of budget surpluses and putting it on track for a shortfall of 8.3 percent of output this year, according to the Bank of Spain.

The greatest number of companies that were in bankruptcy proceedings were construction or real estate firms, while 324 of the companies were industrial or energy businesses, the report from the National Statistics Institute showed.

Housing Bust

Spain’s housing boom had been the main driver of economic growth and allowed the economy to expand faster than the EU average for a decade through last year. Home prices, which almost doubled over about a decade, have fallen for five quarters, as banks rein in lending. Mortgage lending fell 37 percent in February from a year earlier, the 19th monthly decline.

Enagas SA, Spain’s natural-gas grid operator, said demand for gas fell 17 percent in the first quarter from a year earlier, led by a 31 percent drop in consumption from power producers. Acerinox SA, Spain’s largest stainless-steel producer, made a loss in the first quarter as sales tumbled 61 percent. The company said in February it planned to cut working hours at a Spanish plant by 50 percent.

Automakers are also cutting output and laying off workers as new car registrations, a proxy for sales, fell 44 percent in April from a year earlier. Ford Motor Co. said on March 16 that it plans to drop a production shift at its factory in Valencia, affecting 1,000 employees, even after the government pledged 800 million euros ($1.1 billion) in aid to the industry.

This Thursday, the European Central Bank purchased an additional 60 billion Euros worth of Eurozone covered bonds in an effort to shore up the rapidly deteriorating housing prices in Spain and Ireland.  At this point, national debt levels within Spain are past reaching critical levels and additional capital required to mitigate the economic downturn is becoming harder to come by.  Where the bottom is, nobody knows, but there are certainly no green shoots breaking ground in this corner of Europe.

Spain remains a critically weak pillar in the Eurozone.  We continue to watch this issue closely.

We finally got to see the results of the so called “Stress Tests” which were conducted on America’s banking system. As expected the tests marked all participants to be “solvent”, but in need of additional capital in the event that financial conditions deteriorate more severely in the future.   On the very same day that these results were released to great public applause and an enthusiastic equity market,  a largely ignored Fannie Mae press release hit the newswires which conclusively shows the Stress Test assumptions to be grossly inaccurate and dangerously unstressful.

The results of the stress tests are as follows:

_Bank of America Corp. must raise $33.9 billion. It would lose $43.5 billion on home mortgages and $24.1 billion on complex securities and derivatives deals.

_Citigroup Inc. must raise $5.5 billion. It would lose $27.5 billion on home mortgages and $22.4 billion on complex securities and derivatives deals.

_Fifth Third Bancorp must raise $1.1 billion. It would lose $2.9 billion on commercial real estate loans and $2.8 billion on other business loans.

_GMAC LLC must raise $11.5 billion. It would lose $3.1 billion on home mortgages and $1 billion on business loans.

_KeyCorp must raise $1.8 billion. It would lose $2.3 billion on commercial real estate loans and $1.7 billion on other business loans.

_Morgan Stanley must raise $1.8 billion. It would lose $18.7 billion on complex securities and derivatives deals, and $600 million on commercial real estate loans.

_PNC Financial Services Group Inc. must raise $600 million. It would lose $7 billion on home mortgages and $4.5 billion on commercial real estate loans.

_Regions Financial Corp. must raise $2.5 billion. It would lose $4.9 billion on commercial real estate loans and $2.1 billion on home mortgages.

_SunTrust Banks Inc. must raise $2.2 billion. It would lose $5.3 billion on home mortgages and $2.8 billion on commercial real estate loans.

_Wells Fargo & Co. must raise $13.7 billion. It would lose $47.1 billion on home mortgages and $9 billion on business loans.

_ Nine banks were told they do not need to raise more capital. They are: JPMorgan Chase & Co., Goldman Sachs Group Inc., MetLife Inc., U.S. Bancorp, Bank of New York Mellon Corp., State Street Corp., Capital One Financial Corp., BB&T Corp. and American Express Co.

_ The banks that need more capital have until June 8 to come up with a plan to raise the additional resources and have the plan approved by their regulators.

As an aside, we sincerely hope the efforts to raise capital include a wipe-out of shareholder equity and a transferral of common shares to bond holders.  But such justice may be too much to ask for in an environment which has grown more unjust (and un-capitalist) by the day.

Almost universally ignored by the media was an almost simultaneous announcement from Fannie Mae which gives lie to the primary assumptions made by the so-called Stress Tests, and shows the tests to be dangerously flimsy and unrealistic:

Today we learned that Fannie Mae has requested an additional $19 Billion from Treasury.  This alone would be bad enough, as it is a clear indication that with every assumption of FNM losses there seems to come an  inevitable revision to the downside.  Fannie Mae management has even come forward with an admission that their endless revisions are due to their total inability to estimate losses accurately:

“Because of the existing stress in the housing and credit markets, and the speed and extent to which these markets have deteriorated, our process for determining the adequacy of our loss reserves has become more complex and involves a greater degree of management judgment. The current state of the housing and mortgage markets is unprecedented in many respects, greatly reducing the usefulness of relying on our historical loan performance data in estimating our loss reserves.”

But the most alarming part of Fannie’s admissions is that management cannot see FNM as a profitable entity “for the forseeable future”.

Now let’s look at Fannie’s losses within the framework of the Stress Test assumptions:  The level of debt default being experienced by Fannie Mae at this time is already as bad as the Fed’s “Worst Case” scenario (twice the level of it’s “base line” or expected scenario), and includes an alarming level of defaults in “Prime” mortgages.

Since we are already at the worst-case scenario, it should be noted that there is no provision in the above capital recommendations for any scenario that gets worse from this point forward.   Remember that the banks listed above have been advised to raise capital for a hypothetical possibility that we reach the worst case scenario.   But we are already here, now. Given that we have, after only a few short weeks arrived at the supposed worst case scenario, it does not take a great mathematician to arrive at the conclusion that the worst case scenario was hardly realistic, that the banking system is currently insolvent, and that no contingency plan for a scenario worse than worst-case (ie: worse than now) exists.

Clearly these so-called “Stress Tests” were not stressful at all, and worse yet:  The recommendations listed above, which are intended to provide cushion against future defaults, barely serve to make the system solvent at this very moment, and provide zero safety margin for any increased rate of deliquency.

In our opinion, anyone who thinks that the “worst” has been priced in is dreaming.