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


Anonymous said...


Did your 2,000 shares of K-mart (KMRT) transfer over to Sears Holding Corporation(SHLD)? Sears wasn't doing to bad up until the middle of September, now NOT looking so good...

Seems like the other shoe should have dropped by now. Probably has a parachute and making a painfully slow decent. Market is down 5,800 points or 41% since last Oct. Where is all of the money? In a holding tank somewhere? The trillions couldn't have just evaporated as money is transferred on the sale of stock into someones account somewhere.

I don't hear many 'investors' coming out of closets doing much complaining, do you?


Jim in San Marcos said...

Hi Tom

No the shares didn't transfer over. You would have to mention shoes! I have another certificate for 5,000 shares of Florsheim Shoes that is also ready to hang on the wall next to it. I loved their penny loafers and wore them for over 30 years. I think that my cost basis on both was less than $3,000. I do a little mad money investing.

No real money is vaporizing. Take a stock that has 1 billion shares selling at 50 dollars. That would be a market cap of 50 billion dollars. Say that day only 100 shares traded at 10 dollars. At the new price, the rest of the shares have a market cap of only 10 billion. In this example you have a loss of 40 billion in stock value. No money has changed hands.

Basically you can sit tight on your portfolio and your neighbor down the street selling everything can give it a new value. It's a rather neat concept that can keep you awake nights. Especially if you bought Google at $700.

This is where many retirement fund got eaten alive. The old value of their stock portfolio is half of the present value and as a result, they are severely underfunded.

I think the reason you don't hear much complaining, is that most people are not about to share their loses with others. I do know of three people that have told me that they have lost around 50% of their 401k's. These losses are not tax deductible which can be a very bitter pill to swallow.

I know I am ready to drop my 401K amounts down to my employer matching amount. Maybe I'll buy some Ford or GM with it;>)

Anonymous said...

I understand that Citi has nowhere near the exposure to derivatives that BofA and JPMorgan Chase have. I think these banks may go under as well.
I have my business and living expense checking accounts with BofA. They are vital for me to be able to live and operate.

I'm thinking that I'd better get out of BofA NOW before I lose my money or it gets frozen or tied up for weeks or months.

Do you think I'm being too alarmist or paranoid or am I making a prudent move?

Jim in San Marcos said...

Hi Anon 10:03

I would expect that the checking and savings would be no problem with either of those two banks, that's all FDIC insured.

I suspect that payrolls are currently a problem in that if they are big, like over 200k there is a liquidity problem. I am guessing that a lot of this money from heaven is being used to keep payroll accounts fluid.

The thing we might have to worry about in the future is if the government restricts the amount you can withdraw from an account(they've done it in the past). Considering what the banks are paying in interest lately, you might be better off with cash in a safety deposit box.

I don't think you are being too alarmist, preserving your options keeps you in the game. The government can and will change the rules.

Anonymous said...

Bear Market Conditions at Open:

Market Cap – 1b
Total Shares Out – 1b
Cost of Single Share – 1

Dumb Buyers: (only buying)
Avail to Invest –1/2b
Shares Purchased –1/2b (blks of 5k)
Final Share Price - 0.50

Smart Sellers: (only selling)
Total Receipts: - 1/2b
Shares Sold – 1/2b (blks of 5k)
Final Share Price – 0.50

I understand wealth evaporation in holding declining stocks. But 1b real dollars have just changed hands. They say smart money leaves the market well in advance of a bear market.

In the conditions above, smart money purchased shares when they were selling at 0.25/share. When the smart guys flee the market with all their cash, where does it go? This is why I stated that ‘investors’ (real ones) are not complaining.

I believe they exited well over two years ago and made their money. My guess is they put it in gold when selling at 400/oz waiting for the peak and a market bottom.


Jim in San Marcos said...

Hi Tom

I don't think you can separate this market into smart sellers and dumb buyers. Neither one exists. People do sell for a gain and make a dollar or two.

For the last 30 years the market has only gone up, so any inferences gained from that can be very misleading.

The market volume has gotten so large that the numbers are beyond absurd. This is pure speculation, the market has lost all references to reality.

After the crash in 1929, the "smart money" bought into the market all the way down to the bottom in 1932. After that, the "smart money" was in the mattress.

Make no mistake, the present stock market is nothing more than a crap game run amok (Consider that just my personal opinion--that leaves plenty of room for disagreement).