Sunday, November 30, 2008

Spin is the Name of the Game

Last Friday ran this page. "Stocks have best 5 days in 75 years." Sounds great, but the 1933 market was at about 45 (it had dropped from a high of 380 in 1929). That historic 20% increase was about 9 points up (a real barn burner). Double click for a larger view.

Then they go on to add--- "Citigroup shot up 18 percent. The stock has more than doubled this week, ending at $8.29 a share. Still, the stock is down more than 39 percent for the month."--- If you were to go back a year, it would be more like a 75% decline.

Then we have this gem--- "Auto makers rallied again, with General Motors jumping 9 percent and Ford soaring 25 percent."--- These two companies are walking Zombies. The jump in Ford seems rather spectacular (for a penny stock). Poor GM was at $50 a few years back, it's lost 90% of its value. How much longer will it be a part of the Dow Jones Industrial average?

If this is a rally, would they describe a stopped up toilet as "A forced accumulation of disposable assets?" Do you get the feeling that Wall Street doesn't want the average investor to pick up their toys and go home?

Copyright 2008 All rights reserved

Monday, November 24, 2008

The Fed to the Rescue

So the Fed saved Citigroup—saved it from what, for how long? Unbelievably the stock doubled in price. There is some real value there (if you have been doing designer drugs). I guess that they will shoot anyone trying to make a withdrawal, so there will be no run on this bank; “By God Citigroup is sound and the FDIC even said so.” Do we invoke “A curse of locust on non believers?”

If you know the difference between preferred stock, common stock and bonds, (as far as the feeding order goes in a bankruptcy). The bonds are paid first, then the preferred and what is left over goes to the common stock. I’ve got a real nice worthless certificate of some 2,000 K-mart shares to prove it.

What we are looking at here is not one bank collapse but several big ones in the future. As I have stated in the past, this didn’t just happen. The Fed had to have known about Citigroup’s problem three months ago. People are going to bail out of Citigroup. You don’t fiddle with an unknown. Especially if the Federal Government is propping it up.

The real issue here to understand is that banks run on faith. That is what makes them work. When you destroy the faith, it doesn’t matter that the bank is financially OK, depositors vote with their feet. The Fed can’t bring faith back into the markets with these bailouts. It’s a little like a hooker telling all; at that point, future clients will avoid being compromised.

Citigroup is Toast. Don't expect the Fed to "butter" your breakfast muffin. Just don't choke when they hand you the bill.

Copyright 2008 All rights reserved

It's All Good (Reprinted)

Here's a reprint of mine from over a year ago(October 7, 2007)on banks. Things haven't changed much. Look for Bank of America and JP Morgan Chase to be next in line behind Citi Group. It is hard to believe Paulson and Bernanke when they say, "Everything is under control." They can't possibly be referring to the banks!

The Wall Street Journal came out with an article on write downs tied to mortgage debt Saturday. Their bar graph (left) displays about 20.7 billion in 3rd quarter losses. Washington Mutual with 1 billion of charges this quarter didn't even make the list. The amount shown for the Bear Sterns doesn't really reflect what happened when this mess started (BS had a 1.6 billion hedge fund bankruptcy). Of course Amaranth is long forgotten.

The above chart is mixing brokerage houses with banks. So these write offs or what ever, could be coming from several different places, bad housing loans, credit card debt and hedge fund investments. Don't worry everything is "contained." Yea, right!

Here's a list of the top world banks. The banks in the top picture seem to have a handle on projected losses if you compare their net holdings (left) to declared write downs (top). But this is just third quarter losses. So do we multiply this by four to come up with a yearly total? It sounds logically conservative and nightmarish. [Note: Morgan Stanley in the top pic and JP Morgan Chase in the one at the left are not the same company, the first is a brokerage house and the latter is a bank, they were one entity at one time]

HSBC wrote off 11 billion in March, Citibank plans to announce earnings October 15 and refers to earnings as "abysmal" in their news release last week. Two banks not saying much are Bank America, and JP Morgan. It could be an eye opener when they report quarterly earnings.

Now mix in 2.46 trillion dollars of credit card debt. Here is list of the top ten issuers of general purpose credit cards:

1. Bank of America
2. J P Morgan Chase
3. Citigroup
4. American Express
5. Capital One
6. Discover Card
8. Washington Mutual
9. Wells Fargo
10.U S Bancorp

The puzzle is starting to come together. We know who the players are. Citigroup made all three lists, which doesn't sound too good. They might have company, if Bank of America and J P Morgan "measure up" in the next week or two when they announce earnings. The real problem is the three month time frame this mess transpired in. How can we believe that things are now OK?

The stock market is still going up, go figure. I guess you could call it herd (heard) mentality. Follow your favorite stock commentator over the cliff.

Copyright 2008 All rights reserved

Friday, November 21, 2008

The Santa Claus Effect "Something For Nothing"

“The new President will hit the ground running.”
“This will be the smoothest transition of power ever.”
“They will get the country going.”
“The President’s choices of personnel are pure genius.”

The newspapers are full of these quotes. Is this a religious event? Is there going to be a miracle? Who writes this blather?

Three car manufactures just hit the wall. Congress went on vacation. 401K jokes are not funny anymore. There is no housing bailout. The banks don’t have any money and the stock market is behaving like a mad dog.

The consumer can’t be anything but confused. The extreme optimism that the newly elected president and his entourage will save the day, defies common sense. This country has lost a hell of a lot of money so far in this last year and there is more to follow. The easy money times are gone.

Dreams are a great thing to have, but to dream that the punch bowl will be returned to the party isn’t being real about the present situation. You hear people in the stock market saying, “Don’t get out of the market, no one can call a bottom, you’ll lose when it goes up” (talk about greed). If you bought in 1929, you were probably dead before the market returned to the same level in 1954. So yes, the stock market will go up again after it is finished going down.

People fail to realize that the world has changed and the assumptions they use as a measure haven’t. The housing speculators weren’t stupid, the real estate world change while their perception of it didn’t. Things are not going back to the way they were. The country is broke and the people in it are broke (only they don’t know it yet). If you live from paycheck to paycheck, you won’t even feel it; you’re already there.
Who ever is in control, is going to try hard to address the situation. To suggest that we are, “Going to get things going again,” doesn’t mean the same exact thing to the person standing next to you. Each one of us has different needs and that statement will fail a lot of people (like those who end up unemployed). I can see optimism if you are getting married or having a baby, but when they go out and shoot three car manufactures, the warm an fuzzy feeling just isn’t there.

I think that the biggest mistake being made right now is by Congress. They think it is business as usual and it isn’t. “Let’s wait until next year when the new government gets sworn in. They blew it on the 700 billion dollar bail out and the 150 billion dollar tax stimulus. Have you ever heard of spending money you haven’t even collected and pay it to people that you normally tax? Let’s call it the “Santa Claus Effect.” You put nothing in and get something out.

Copyright 2008 All rights reserved

Sunday, November 16, 2008

More Bad News to Come?

Anyone figure out why the upside down home owner must be saved rather than prosecuted? They got free and clear 100 to 400 thousand dollars out of their home. They weren’t stupid when they withdrew the equity and they certainly aren’t stupid by giving the house back to the bank. Now Congress is upset because the banks haven’t taken the bail out money and helped out the homeowner. You can’t accuse the banks of being stupid on this call.

The average bank robber gets a couple of thousand dollars and some prison time. Consider the housing bubble a bank robbery of massive proportions. The reality is, that not only wasn’t the money recovered, it was spent! Let's prosecute these liar loans as grand theft fraud.

In today’s paper they talk about these poor people that are losing their homes. From a realistic point of view they are only losing a mortgage not a home. In a lot of cases, they had more than one to lose. Kind of boggles the mind. One guy had 8 properties that are now in foreclosure. It’s not like you have to pay the money back, just give the bank the house.

What the government is trying to do with REO housing is rather pathetic. Imagine the Dutch government trying to keep the Tulip Bubble going? They could have discounted million dollar bulbs (in inventory) to 100k apiece and provided financing to boot. Such a deal!

The housing boom is over. Somebody’s hard earned money financed these dreams that went bust. There is a hidden story here. We know the money was spent. It’s not where it's suppose to be anymore and we know that also. Just whose savings are gone? Do you get the feeling that the really bad news, isn’t news ---just yet?

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Friday, November 14, 2008

Congress is on Slow Simmer

Listening to the "Congressional Inquisition" up on the Hill, the last two days, it looks like the TARP program is turning into "CRAP." There is hope that Congress may see the light on this blank check bailout.

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Tuesday, November 11, 2008

The Great "Picnic" of 1929

You read about how Ben Bernanke studied The Great Depression. You never really hear him say "Things look similar to 1929", and cite an example or two. Here is a few historical items he has failed to point out.

The Investment Trusts of the 1920’s were the hedge funds of their time. A 1936 issue of Time Magazine stated;

In the twilight of the 1920's, some $7,000,000,000 worth of investment trusts were floated, according to SEC figures. Their total assets were worth about $2,000,000,000 by the end of last year (1935).
That’s a loss of 71 percent!

One of the players of that time was Goldman Sachs a very familiar name today. John Kenneth Galbraith, in his book "The Great Depression of 1929," wrote;

During 1929 one investment house, Goldman Sachs & Company, organized and sold nearly a billion dollars’ worth of securities in three interconnected investment trusts – Goldman Sachs Trading Corporation; Shenandoah Corporation; and Blue Ridge Corporation. . . . . .All eventually depreciated virtually to nothing.

So the losses in 1930 just from investment trusts would have been about 5 billion. In today’s money, that figures out to somewhere around 500 billion. (I’m using a multiplier of 100 here. Rental housing in 1928 was $20 per month and rent per month in San Marcos (if you’re real lucky) is $2,000 per month).

As for car manufacturers probably a couple hundred bit the dust. The Dusenberg and the Stutz Bearcat were nice little items in their time.

Bank losses from 1929 to 1933 were about 1.3 billion, so that would be about 130 billion in current dollars.

Before the stock market crash of 1929 stocks were valued at 89.7 billion dollars. In 1932 their value had sunk to 15.6 billion. 74 billion dollars vaporized, in today’s money that would be about 7.4 trillion.

Then if you factor in the fact that the population is 2 ½ times bigger today than in 1930 you could realistically double the amounts we are throwing about. So if we look at 1929 in today’s values, they had a loss of between 8 to 20 trillion dollars.

Normally with this sort of discussion there are charts, graphs and tons of supporting documents. Well this was done on the back of an envelope. We have calculated what the Depression of 1929 cost in today’s dollars.

Do you get the feeling that if things get worse, our "recession" could be worse than "The Great 'Picnic' of 1929?"

Copyright 2008 All rights reserved

Friday, November 07, 2008

Car Companies 3 : Government Zero

Let’s see, the car companies have between 50 and 100 billion in retirement benefits to pay out and no one is really in a car buying mood (this is a guesstimate, most current figures are very vague).

The California governor wants to raise the sales tax rate to 10%. That would be $3,000 on a $30,000 car purchase. The sales tax in this state is starting to get toxic. There has to be a tax dodge on this. Maybe the Indians will lease cars off of the reservations (you get to gamble away the tax savings at their slot machines).

The government is in a catch 22. If GM, Ford and Chrysler are not bailed out and are allowed to go bankrupt, the government (we the people) gets to take over their retirement pension plans paying reduced benefits. If we bail them out, we still fund the pension plan and the salary structured business at full benefits (upper management would just love this plan, it keeps Christmas real if you believe in Santa (Uncle Sam))

To put it in very simple terms, it’s a basic case of Blackmail by the car companies. If the government does nothing, the big three get to shed their pension plans to the government and the companies can be reborn anew after bankruptcy. That’s not a bad way to go in theory. It pretty much trashes the support manufactures for the auto industry and unemployment gets worse from there.

Therefore, Congress in their infinite wisdom, will probably want to save the car companies with a bailout hoping to only have to pay out 30 to 40 billion. It kind of makes sense (if the end product sells for about 100K). The trouble is, you can’t force people to buy cars or force banks to loan to people without jobs.

Then we have President Bush and Future President Obama both agreeing that the economy is in bad shape and the government has to act now. It sounds great, but there isn’t much you can do if you’re broke. We have decreasing consumption, increasing unemployment, decreasing tax revenue, and gigantic government expenditures that are buying nothing but bad debts. I wonder if Fannie Mae will be accepting car loans any time soon?

Copyright 2008 All rights reserved

Monday, November 03, 2008

No Winners this Election

It's hard to forecast the election one way or the other for tomorrow, but do get out and vote. The rest of the world has no real idea what the election is all about. It has no meaning to them. They will be waiting to see what our reaction to the election is. That will be Wednesday.

Then you have all of the Federally appointed employees in Washington. If the Republicans lose the election tomorrow, they are all unemployed in 76 days. This tends to make you wonder if this will be like Saddam Hussein pulling out of Kuwaiti, lighting the oil wells on fire. Paul and Ben could leave nothing but scorched earth for the Democrats. Obama would get to be the next Herbert Hoover.

With a Republicans win, the people in power will try to stay the course and that won’t work either. The country is broke, there is no money left to spend.

Whoever gets elected gets a tax base that will probably decrease by 20-40 percent over the coming year. I don’t think Congress will accept the fact that revenues are down. They will continue to spend.

So if you think you are having fun now, just wait a year!

Copyright 2008 All rights reserved

Sunday, November 02, 2008

Parallels from 1929

When the stock market collapsed in 1929 it didn’t just fall off a cliff. There was a large drop October 24th, some more the 28th and then the major plunge October 29th. The market recovered somewhat in the following few weeks. From there on out it was a slow death spiral until 1932 to where most stocks had lost 90% of their value. An investor buying the dips, lost all the way down. When the dust settled, no one was interested in stocks. It doesn’t mean that no one owned them; every stock still had an owner at this low price. The mood in the country changed. Any sort of investment was considered a scam. A dollar invested in the market had returned a dime. The average worker knew his savings weren’t going anywhere stuffed in a mattress.

In the 1929 crash, stock market trading volume tripled. The dramatic increase in trading was a sign of capitulation; people had thrown in the towel and given up. This hasn’t happened in today’s market. Volume ranges just around 5 to 7 billion shares a day. A high volume day of about 20 to 25 billion shares with a dramatic drop in prices hasn’t happened yet. A 900 point swing last week on average volume makes you wonder if the shorts are just being squeezed big time. If you had been short VW you got eaten alive.

The stock market could be compared to a large herd of Buffalo on the run. Go with the flow. When times are good everyone wants a piece of the action. Even if the cliffs are ahead, the herd is not going to stop, greed has blinded them.

To separate the stock market from the other markets, the economy, the housing bubble and the banking fiasco, won’t work for long. It is all interrelated. 401K’s have lost 40% of their value. When the chairman of General Motors proclaimed 60 years ago, “What’s good for GM is good for America.” I don’t think he was referring to bankruptcy.

Markets world wide are dropping and the news is getting worse. What we are looking for in a market crash is extremely high volume and a large drop in the DJIA to say 6000 and then a quick recovery that recaptures 3/4th ‘s of the loss. From there, prices and volume should drop slowly over a protracted period of time.

The present period in time differs from the 1929 era. Real estate had started collapsing in Florida after the 1926 hurricane and was trashed by 1927. The whole country had interest only 5 year renewable home loans (sound familiar). The market crash of that time imploded the investment trusts like the Shenandoah Trust and the Blue Ridge Trust (both created by Goldman Sachs) (these were the equivalent of a mutual and hedge fund combined). From there it got worse.

Look at the visual aid from my April 6, 2008 article. If we compare the 1929 Depression with today,there was one difference; they didn’t have the big green bubble.

I tend to think that Ben and Hank are right, "It's going to be different this time around." The green bubble needs more air.

Copyright 2008 All rights reserved

Saturday, November 01, 2008

Socialism, the Cure for Our Mistakes

The economy and the money supply are contracting. Corporate earnings are abysmal and people are selling assets to raise cash. The government has nationalized the banking system (GM and Chrysler are next). They have loaned AIG 143 billion dollars and now the company teeters on bankruptcy (it could stop being a loan real quick). Incompetent Ben and Hank are the fools in charge. Hundreds of billions in loans will never be repaid, and no one is listening. No jail time here. Ask yourself one question; “What horrific disaster occurred that prompted the government to spend these massive sums of money?” Was it an earthquake, a hurricane or a famine?

The government right now wants to help everyone who bought a house that is left holding the bag (upside down). The Seller is in “Retirement City” enjoying the price they got for that "Fixer Upper." The taxpayer will cover the new buyer’s losses as the home’s value drops; such a deal!

Let’s see if I have it right. It’s OK to make money. But if there are massive losses in the private sector, the government will cover the losses. Free enterprise is for profits and socialism is for the losses. It's so simple even a caveman (Congressman) can understand the principle.

Last month half of all houses sold were foreclosures or REO’s. That doesn’t sound very promising for the economy. Enter the government who now provides “liquidity” to the banks for home loans. There is only one question on the new bank loan applications; “Do you have a job?” This is a tad more selective that the previous “Fog a Mirror” test for a home loan. No need to check the buyer out too closely, the loan will be government insured;

Senator Barney Frank wants to make sure that the banks are loaning the money for home loans rather than fixing their bottom line. "A dollar down" moves you into an REO and of course there is a bonus check up front (for needed repairs). The lien holder [insert nationalized bank name here] gets 50 cents (a guesstament) on the dollar payoff on the old loan. From here, the bank sells the new loan to Freddie or Fannie.

The program makes sense, to those that never did well in math. No closing costs, no money down, cash back and live rent free for 8 months then move back in with Mom and Dad. The people who have lost homes to foreclosure probably don’t qualify yet (Senator ‘Sesame Street’ Frank will probably fix that). Just wait for your kid to come home and give you the good news, “Dad I just bought a home for a dollar down!”

Frank wants the banks to loan more money (pushing on a string comes to mind). You'll need more that a toaster for bait. Nobody, right now, is in a hurry to buy a house, but there are a couple of million people wanting to sell you one before prices drop even lower.

You kind of wonder what we are getting for 4 trillion dollars, besides an education. I guess there is no real reason to worry; no one was ever serious about paying off the national debt, it just wasn't supposed to get this big. It is utterly amazing how this financial meltdown has produced so much destruction with very little physical damage. Nobody saw this coming, but to say the cure is obvious doesn't ring true. Welcome to the world of socialized finance. Our kids get the bill and Congress has exceeded our wildest expectations of gross incompetence.

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