Monday, December 31, 2007

The Start of the New Year

It’s hard to imagine the coming year. It’s kind of like trying to light a gas stove for five minutes with wet matches and then find a dry one. It could be illuminating.

Republicans and the Democrats are blaming everything that’s wrong in the country on each other. The idea that there can be two ways to get to the same destination seems to elude the politicians and most of the voters. "Right" and "wrong," are concepts that are interpreted differently, depending on the person’s situation. Very few wars are “right,” but there have been a few that I would deem as having been “necessary.” To a Marine in Iraq, “necessary” is also an arguable term.

The new push for health care seems, to be the last straw for the camel’s back. We can’t pay for it now; legislation won’t make it any cheaper. If you ever need to visit the emergency room for treatment and have a credit card, go to Urgent Care (there is no 8 hour wait). The 35 and under crowd would just love a health insurance program; you get taxed for getting old while you’re still young enough to pay for it.

Tomorrow the minimum wage goes up 50 cents and a restaurant with 20 employees has an extra $50k per year in costs. Congress meant well, god bless ‘em, one less employee is not quite what they had in mind.

Real estate is beginning its great decline. Remember that bank foreclosures count as a house sale when you view real estate statistics. This distorts the number of actual buyers. As prices drop, more people will become upside down in their loans. Those that bought into the market in the last five years with ten percent or less down, have real issues (we’re not talking magazine subscriptions).

Unemployment in the coming year could be quite low. Los Angeles is reporting another year of decreasing crime. It more or less suggests a significant drop in adults in the 17-30 age group, not more effective crime prevention. The labor pool is contracting; add to that, the baby boomers reaching retirement. This could force wages up.

Food costs are increasing drastically. A dozen eggs have gone from 99 cents to $1.50 in the last two months with a sign in the window “limit two dozen.” Granted, eggs have been $2.69 a dozen at Ralph’s for years, I just don’t buy my eggs there. The damn chickens got a pay raise and I didn’t!

The big difference between a blog and the news is; we are suggesting what may happen in the future, whereas the Newspapers and TV report what has happened. We are looking forward and they are examining the past. The news media needs, “Who, What, Why, When and Where,” for a story. Without it, it ain’t news. A blog is kind of like little Johnny telling Daddy that Mommy’s been fooling around. Daddy needs a name before he loads the hand gun. When he pulls the trigger you have all 5 W’s. Now that's news!

The good thing about all of this for next year is that this is only a blog. So, "No News is Good News!"

Have a Happy New Year Everyone!

Tuesday, December 25, 2007

The Social Security Medicare Headache

Current financial news suggests the economy is deteriorating. Many institutions are in damage control mode. If an entity is facing an impending bankruptcy, why announce it early? Collect a few more paychecks. People tend to hide problems. Sweep this under the rug and maybe it will go away. The real picture of our predicament is probably still well hidden. Nothing is a clear as it seems. No set of facts describes the whole story. And when you mix and match news reports, there is room for the error of interpretation

People talk about helicopter Ben throwing money out everywhere. It makes a great newspaper story, but it’s way out in left field. All he can do is make the money easier to borrow. The damn problem is you can’t force people to borrow money. If you want to blame Ben for what Congress has spent, be my guest. He is being groomed to take the fall.

Congress is the main player in this game as it unfolds. To get elected they promised the moon and pretty much delivered. This group repealed laws written in the 1930’s that could have kept a lot of this from happening a second time. The country is headed into a deflationary recession but our elected “Cesspool of Irresponsibility” could change all of that. Congress assumed (with good reason) that the tax receipts would increase each year. Even with inflation, they will probably drop next year. Fixed Costs are the real headache. The amount spent on social programs is pretty much set in stone (it isn’t going to get smaller) 56% (See diagram). As tax revenues decrease, the pie gets smaller; the share devoted to social programs increases. A 20 percent decrease in revenues would make the fixed cost rise to 70 percent of the budget.

Congress will have some very unpleasant decisions to face\avoid (choose one) in the near future. Don’t expect them to cut Social Security or Medicare; they want to get re elected. Congress is held accountable for fixing present problems, but responsibility for the future problems doesn’t even enter the equation. From there it is quite simple; the Treasury writes the checks to cover the fixed costs. This is where the money is printed. It’s kind of like a Visa card with no limit on it.

Where will Congress cut when things get worse? There is no answer to that question yet. When FDR was elected, there were no social programs, and by 1948, these programs consumed 10% of the budget. Now where are we? Entitlements are where the cuts will have to be made. To a Congressman, that’s an incredibly stupid suggestion especially come election time.

We are looking at several things in decline; credit, housing, banking and a shrinking tax base. Just think, you got all this, in time for Christmas!

Merry Christmas everyone.

Sunday, December 23, 2007

A Bank that couldn't say No

Let’s take Citigroup and look at their balance sheet. Two trillion in assets, these are customer deposits. The bank has about 127 billion worth of equity (book value $25.479 times the number of shares 4.98 Billion). Don’t confuse this with “market cap” which is the number of shares times the current stock price (152.92 Billion). Market cap could go to a dollar and it would not affect the book value of the company. As a stockholder you could end up with zip. If you hold preferred stock, you are ahead of widows and orphans. Abu Dhabi has preferred stock.

In order to pay a reasonable interest rate, the money has to be invested in some vehicle that has a decent return. It’s a good assumption the bank didn’t invest the 1.9 trillion in Treasury bills or other government bonds; the return is just not there. In three months time, Citigroup has come up with a write-down of bad investments with a total somewhere between 72 billion to 100 billion dollars (see Deutsche Bank spread sheet).These are real estate SIV’s and CDO’s. What happens if we move out another four months? Citigroup’s fiscal year ends in December. How liquid are their assets? The answer to that question is a little like taking a laxative to cure diarrhea. If you think it’s bad now, wait a while.

---Courtesy Deutsche Bank November 11, 2007. Double click for larger image

What did Citigroup invest the rest in? If it wasn’t “invested” in real estate, then where did they put it? Credit card loans or how about hedge funds, both are "real money makers." What ever it is, it is probably not easily convertible to cash.

Can a bank have 100 billion in losses and still be functional? There hasn’t been a peep from Federal regulators. It seems a little like the Donald Trump wing ding of several years back. If the banks had foreclosed on him they would have gotten very little. Instead they loaned him more money and rewrote his loans.

Are the Federal Bank examiners checking the books? They had a rough time with the 125 billion dollar Savings and Loan bailout of the 1990’s. Citigroup is BIG and we are only talking one bank. A bank in trouble is like spotting one cockroach, you know there has to be more.

The amount of money involved in losses is staggering. The amount of money this one bank controls is beyond comprehension. Am I the only one that thinks this needs to be examined more closely? Have I mistakenly reported billions when they actually meant millions? No, the figures are real and big.

Just examine the Federal Reserve handing out banking reserves, without naming names (to keep banks from being embarrassed???) at emergency auctions? We could be looking at money leaving the banks at a rate faster than they can liquidate assets. "Emergency auctions" sounds like “Man the Lifeboats.”

The banking crisis is a little like the Hindenburg. It could go from something to nothing real fast. The only trouble is, who owns the something that's about to become nothing.

Saturday, December 15, 2007

Next Stop Inflation or Deflation?

Where is the country headed? We seem to be on the Sword of Damocles. Is it inflation or deflation? Where to from here?

In an inflationary scenario, debtors would benefit, it would be easier to pay back money borrowed. Those with savings would feel the tax of inflation. Each dollar would buy less than it use to (what’s new about that). Those on a fixed retirement income would suffer the most. Inflation is a way government can tax everyone. The neat thing is that there is no need for a tax collector. Plus you can’t cheat on your taxes. So when the government prints money, it’s kind of like taking a half bottle of whisky and topping it off with water to make a full quart. The buyer ends up with half the buzz at twice the price. Basically government is taxing one dollar and spending two.

Deflation on the other hand is a rough buggy ride for everyone. It tends to feed on itself and get worse (with government help). The economy slows down unemployment increases, bankruptcies and foreclosures increase. Prices drop and money buys more than it use to. Debts become harder to pay off when jobs are scarce. During the great depression, government services suffered greatly. Teachers, firemen, police and other services were cut severely. Congress could have a very serious problem if revenues from taxes collected decrease dramatically.

On the front page of today’s paper, San Diego readers saw a headline “Governor Schwartznegger set to declare fiscal emergency.” The State has a 14 billion dollar budget shortfall. That and all of the foreclosures suggest deflation is the current direction of travel.

There is just one fine wrinkle. Notice how government tax receipts are decreasing? There are a lot of fixed costs to be paid out, Social Security, Medicare and Medicaid. Uncle Sam has been spending the Social Security taxes as well as the regular taxes and even the gas tax on the yearly budget. When FDR wanted to stimulate the economy in the 1930’s with government spending, none of these liabilities were hanging around the government’s neck. The economy went to full power when Japan “remodeled” Pearl Harbor. Today's fixed costs for government entitlements, may force the government to print the funds necessary. That sort of inflation can spiral out of control.

Congress seems to think that spending is good, worry about the bill later. As government receipts decrease notice how the fixed costs consume a larger part of the pie. It’s a little like the foreclosure mess. Congress can barely pay the bills now, what happens when deflation takes hold? The expression “Between a Rock and a Hard place," comes to mind. Will they turn the dollar into Monopoly Money? Abu Dhabi just bought Baltic Avenue (Citigroup). Bye Bye worthless Dollar, Buy Buy our assets (a pun or two).

Sunday, December 09, 2007

Cash Only

When there is a run on a bank or other financial institution, the target has to raise cash to satisfy redemptions. Usually this entity would be fully invested to max out profit for depositors. To raise cash, the institution would sell its most liquid assets, stocks, bonds, money market funds etc, leaving the dogs, on the hope they improve given time. Notice good assets are redeemed for cash; the crap stays in the vault.

The State Investment Pool in Florida started out two weeks ago with 27 billion and shut the doors December 4th. Eight billion left the fund with no penalty. After the doors opened December 7, another two billion hit the exit turnstile. From Bloomberg

Florida schools and towns pulled more than $1.7 billion from a state investment pool in the two days since a freeze on their accounts was lifted, as local governments remained wary of keeping money in a fund with subprime mortgage-tainted holdings . . . . . . . . . . .

BlackRock, hired Nov. 30 to salvage the fund, walled off $2 billion of the weakest investments and imposed restrictions to limit withdrawals, including imposing a 2 percent fee on redemptions that exceed certain levels. Some governments have been willing to pay that price to get their money out . . . . . . . . . . .

Perry, the Jacksonville Electric Authority and Desoto County together paid $1.4 million in penalties yesterday to remove $66.7 million from their accounts . . . . . . . . .

This is what killed the banks in the 1930’s. The banking system collapsed not because of bad bank investments (no denying that there were plenty), they collapsed when depositors lost faith in the bank. Those first in line got their money, those last in line, got an education. The FDIC insurance stops the prospect of a bank run and keeps the depositors’ savings intact. These Fund Pools are not banks and are not insured by the FDIC.

An electric utility company and a county government agree to a 2% redemption fee of 1.4 million dollars. Maybe to act responsibly means you have to do things that are painful from time to time. If the investment pool can change the rules after the fact, whose money is it really? Could it be, these two entities examined their future accounts receivable, and figured out that the local economy has a few issues? They seem to know what they are doing. One turns off the lights; the other auctions off foreclosures.

Thursday, December 06, 2007

The Home Stretch

Lately pundits have been arguing over whether or not we are in a recession. At the same time the housing foreclosure mess is being addressed in the same fashion, as it was during the Great Depression (25 states passed moratorium laws on home foreclosures in the early 1930’s). The phrase “Déjà vu” comes to mind.

This five year moratorium on resets may backfire in a strange but consistent way. In California a few years back, the legislature realized that the spot price for natural gas for the utilities was a lot cheaper than their ten year contracted price. So they decided not to renew the contract and buy on the spot market. When the contracts expired the spot market took off like a rocket. The legislature meant well, it just didn’t turn out like they though it would.

A few years back, Congress passed a law to help farmers write down large farm equipment purchases over five years. Sounded great, every Realtor from here to nowhere bought a Hummer and wrote it off as a business expense.

In essence, teaser/exotic loans are gone, no more 2/28 or 3/27 loans. Everything from here out, is straight missionary style. The banks will draw a red line around California. Financing a home will become more difficult.

The headlines for tomorrow revolve around the five year freeze for home loans. The real story has been overlooked; the banks are in one hell of a mess. The possibility of one million families losing their homes would be tragic but most would be back to the regular old grind within a year. That’s not true for America’s financial banking system. Leave out the FDIC insured stuff. What is left of the rest is probably a USA (Up in Smoke Asset). IRA's and retirement funds come to mind.

I kind of get the feeling that President Bush just held the ribbon cutting ceremony for the Next Great Depression. Notice that you don't need an ambulance for this sort of catastrophe. You go to sleep well off and wake up poor. It's kind of like paying real cash for the hooker you had in your dream last night. It makes absolutely no cents.

Monday, December 03, 2007

Homeowner be Damned

So Henry Paulson is going to freeze the interest rates on home loans and Ben Bernanke is going to lower the Fed discount rate a whole point. It’s kind of like fishing with a shotgun in a glass bottom boat. You get a swimming lesson after you pull the trigger.

What happens when you freeze the interest rates? Go out and try to buy any house with financing, its just isn’t going to be there. What businessman will loan money under fixed assumptions only to be paid under a changing set of rules. Georgia a while back passed a law to protect homeowners and effectively shut down the loan industry in the state. This is the old “Pull the rug out from under the lender routine.”

Then we have Bernanke lowering the Fed funds rate. It doesn't take much thinking to figure out that the exchange rate on the dollar will fall. In this case, smart money will refuse to renew their Treasury Bills. Since it’s competitive bidding, less bidders, means higher prices. There is a couple of trillion dollars that could vote with feet. Foreigners will sell the dollar now and wait. Then buy when it hits bottom. If things don’t go right, this could be like catching a bag of cement dropped from a second floor window (messy to say the least). Treasury bill rates could surge up as soon as tomorrow.

The neat thing about lowering the Fed funds rate, is that any money it does create (ie loans to market makers), won’t be heading for real estate or SIVs, it will be going into the stock market. Google could hit $1000 by Christmas (just a joke, I don’t give investment advice).

So what do we have? A shut down of future real estate financing or the prospect of absurd interest rate financing for home ownership. Flight of foreign capital will raise Treasury rates.

What is really happening at the Bernanke and Paulson level? The banking system could collapse. Unless they can keep the homeowner making payments the game is over. In order to keep the banks from dropping dead, the really bad stuff cannot be allowed to be marked to market.

Step back and think about what has happened in the last two years with Real Estate Bubble Bloggs. Many of them have stopped posting. What they were warning about has happened. It was very obvious even back then. Now, all of a sudden, the Government is concerned about the homeowner? I think not. The banks have a pretty good idea of what’s going to happen three months from now. Citygroup has no equity if you subtract its mistakes from its book value. What’s that mean? The government could be called on to take over an organization that is just about half as big as itself.

Ben and Henry are in that Christmas giving mood, so don’t bend over if you need to refi, just walk away, give yourself and your family some real peace of mind.

Saturday, December 01, 2007

Citigroup is Toast

Several banks are forming a consortium to make a market for SIVs. Citigroup holds about 100 billion dollars worth. Coincidently this is about the amount this group is going to raise. These instruments are a little like intestinal gas. It reminds me of the two immigrants, new to the US, taking notice of several balloons tied to an outhouse door. The one remarks to the other, “I’ve heard them, and smelled them, but this is the first time I have seen one!”

To keep the discussion polite, Citi/Shiti has some balloons for sale. They are rated as Chiti. I know we haven’t lost the short bus group, they all know the “Pull my finger drill.”

Needless to say, where does the 100 billion come from to make the SIVs fungible? The answer is so obvious that it boggles the mind, BAT GUANO FUTURES (Just Kidding). But the people out there that everyone is listening to, expecting a solution from, are part of a certified circus act.

Let’s see, you are a bank and you lost 100 billion dollars. The total cost to tax payers for the S & L fiasco of the 1990’s was only 125 billion. We have one bank with a very bad cough and more obligations on debt than the previous banking brouhaha in total.

What’s a 100 billion? The answer depends on who you ask. The one question not asked, is what bank can survive a 100 billion dollar loss? In my opinion, none. Citigroup is toast.

Thursday, November 29, 2007

Depression 2006 no Travel Agent Needed

This blog “The Depression of 2006” gets a suggestion now and then to change the year until "I get it right." The year picked might not seem like much, but is important. It leaves room for perspective. Everyone can remember the 1929 depression from history class. The fact overlooked by the history books is that no one in 1929 thought they were even in a recession. Prosperity had reached a permanent plateau. The economic machine had been fine tuned and there would be no more economic dips. The word recession had not been invented. Technology had blossomed. New to this generation were, the telephone, the car, electric lights, the airplane and indoor plumbing. It wasn't until 1931 that everyone knew they were in a depression.

Here we are in 2007. Two weeks ago there was a 10% chance of a recession, now this week it’s more like 50%. Do you get the idea that a recession is only something you can see from the rear view mirror? The government will never make the call that a recession is in our midst. They have to deny it at all cost. Otherwise it could become a self feeding downward spiral.

Right now we have governors running around trying to save over leveraged home owners. This is really hard to figure out. The homeowner today can walk away from a home and probably not even have to consider bankruptcy. Get them to stay in that “home” an extra two years and enjoy the 200K drop in value. That’s an even worse mess. In six months we have progressed from “Canaries in coal mines” to “Horses and barn doors.” To top it off, the politicians are getting ready to pass laws to protect the homeowner from being looted ever again. There is nothing your politician can do to stop people from doing stupid things, that’s how they got elected in the first place!

We have a stock market that’s down 200, up 400, down 200. If you had a car that ran like that, your nose would be broken from hitting the windshield repeatedly. This is what you could label a bear market. Burn the Shorts until they fade away and then it is down we go forever (it will seem like that unless you're under 30 and have some time to burn until retirement).

Now we hear that a Florida State investment pool has suspended withdrawals. They had 27 billion two weeks ago and now have 18 billion, with 3 billion drawn out yesterday. This is where the cities, counties and school districts parked their spare cash before payday to earn a little more. The question comes up, will the teachers be paid this payday? We’re lucky that that didn’t happen in Kalifornia (methinks I should keep quiet). For the short bus crowd, this is a run on the bank. The SIV bailout or the homeowner refi, was going to be done with OPM (other people’s money). Now everyone wants to take the “my money” out of OPM.

So we have “The depression of 2006”, it’s just like 1929. Let’s see, add three years, and that would make 2009 as the year to watch. You will know then that you have arrived. The only damn problem is, no one wanted to take the trip. Talk about ingratitude, the depression of a life time, what an experience! No ticket needed, front row seats for everyone. And you thought you needed a travel agent!

Saturday, November 24, 2007

Bernanke, the Sheep Herder

Through the ages we have had Sages that could read the future from animal entrails. Bernanke does a pretty good job at this, it’s an acquired skill, learn as you go, and go with the flow. If you are not sure, be vague.

There is only one problem. Things are beginning to go wrong and Bernanke is being blamed. That doesn’t make much sense. His interpretation of goat entrails or what ever, is a defined process and hasn’t changed much. The joke is the suggestion that this guy even belongs in the loop. As long as economy was running OK, there was no problem, his wisdom was unquestioned. Now, that things are off course, Bernanke seems to be the guy that could have saved us, if he had only read the entrails correctly.

Today’s new stock trader has been brought up on the idea of the Feds are in control. These "couch experts" are afraid to even question that premise for fear of appearing uneducated or over medicated. You hear a statement that the Feds are pumping liquidity to the banking system. Ask anyone jumping up and down, what that means, or who gets the money, they haven’t got a clue. The visual abstraction of pumping money into anything is kind of vague. You are left with the feeling that things are under control. The Feds supply the who, what, why, when and where, but you can’t drive there. Useless information that's suppose to mean something to everyone!

It’s kind of like your daughter going out on a date, and you ask what they did. The reply, “We went to the movies.” That’s all fine and dandy, until the hotel calls up and says they forgot to pay for the porn movie rental. In this case, the "pumping" is more a visual than an abstraction.

The dollar is dropping in value, and the interest rate on T-bills is decreasing. This is the equivalent of losing your brakes and steering while driving down a mountain pass (minor problem). As the dollar depreciates against foreign currencies, foreign capital leaves the country. Interest rates have to rise to attract capital back. Interest rates won't be attractive to foreigners if the dollar is dropping like a Bear Sterns CDO (the new Confederate Dollar). The odd thing is that "scared money" wants to be in T-bills for security. This is driving rates down. The expected reaction, of interest rates rising, isn't happening. This has to be big. Banks only insure 100K. T-bills insure every depositer. A rich man doesn’t have to stop at 600 banks to insure 60 million. T-bills are the McDonald's equivalent of a drive thru; fast bank insurance, for the super rich.

The only thing that can be deduced from the market right now, is that Economics 101 is not functioning as expected. Business models are falling apart. The estimates as to how bad things are, have doubled in size in the span of three months.

All of this money that has been lost, it doesn’t belong to anyone. It kind of makes you wonder if Bernanke and Company are rewriting our fairy tales for Christmas. Put some "Christmas Cheer" in your tank while you drive your Hummer to the Poor House, stop by Star-sawbucks and order up a "Bernanke Latte" (Ethanol, no cream).

Saturday, November 17, 2007

Deutsche Bank's View on the Housing Crisis

Here is part of an article "The Subprime Mortgage Crisis and its Wake," dated November 15, 2007, that was emailed to me by a reader. It discusses the present housing crisis and appears to have been put out by Deutsche Bank. I'm not sure if this was meant for public consumption. It seems legit.The bank has been accused of being one of the biggest homeowners (by way of foreclosure) in the U. S.

Page 6 displays their view of the future housing problem.

Double click for larger picture. Source: Deutsche Bank.

Page 28 lists the CDO and SIV exposure for banks in US and Europe. Where is Asia????

Double click for larger picture. Source: Deutsche Bank.

It does seem to confirm my contention that the banks know pretty well what's happening three months from now, right now.

Thursday, November 15, 2007

Pipe Dream Bankers

Let’s see it was July and all was well, and then Bear Sterns had two hedge funds go poof. Financial funding for housing dropped dead. Now three months later you read the headline “Bear Stearns Says Worst Is Over After Writedown”. Seems as if the damaged has been contained.

The housing foreclosure rate during the present one year period has exceeded what took three years, the last time these values were reached. The sub prime resets are just beginning. We have Bear Sterns with no problem four months ago now saying that the worst is over. I submit that what we know today they knew three months ago. So to fast forward three months from now, Bear Sterns as well as the rest of the crowd could be going parabolic on losses. What they know now, we won’t read about, until January rolls around (keep quiet keep your job).

Then to top this off, Citigroup, Bank of America and JPMorgan Chase (the Larry, Moe and Curly of finance), have formed a triumvirate to bail out the SIV’s with a 100 billion dollar fund. Where do you get money like that for such a lost cause? (I can think of two sources, Visa and Master Card) It’s kind of like a hooker with VD. You get a great rate today, but you pay later (it gives new meaning to “Share what you have”).

100 Billion, that's more than 5 General Motors Corporations. Where do you get that much money from? It's a little like the joke about the psychiatrist examining a patient who asks "What would you do if a tank came rolling toward you?" the Patient say "I'd hop in my Porsche and drive away." The shrink says "Where did you get the Porsche?" The patient says, "The same place you got the tank."

The only problem I see, is that this might not be Monopoly money when they begin the program, but it could live "up" to our expectations, given time.

Sunday, November 11, 2007

Rose Colored Glasses

The dollar index has dropped from 120 to 75.Doesn’t seem possible does it? No big Presidential announcement like when Nixon devalued the dollar. No wonder Gold, Silver and Oil jumped in price. I’m sure Congress will “Round up the usual suspects.” It’s your regular Bogart movie run amuck staring Bernanke and Greenspan. It has a lot to do with the money we borrowed from other countries.

Japan holds 586 billion in T-bills and China the second biggest holder has 400 billion. The United Kingdom is third with 244 billion. If you add up all the other countries holding our paper it comes to a grand total of 2.231 trillion dollars. The good thing about all of this, it’s not our problem (it’s not our money). The bad thing is we spent it!

Foreigners have “invested” 2 trillion in T-bills. Our banks are holding 1 trillion in credit card debt and maybe another 2 trillion in USA’s (Up in Smoke Assets). And then there is the Social Security Trust Fund (another USA IOU). On the plus side, the stock market was worth 15 trillion dollars last week. Hamburger could be on sale next week (bull burgers).

The 5 year T-bond is trading at 3.75%, the Fed funds are at 4.5% and inflation is roaring in at 4% to 10% (choose your own value, I’m easy). One article suggested that the 2 trillion dollar foreign investment in Treasuries has shaved about a percentage point off of our T-bill rate. That alone indicates to me that not everyone on steroids is in sports.

So much good news is floating around; the housing disaster seems to have disappeared, the CDO’s are water under the bridge. It seems as if everything is under control, we have decided to live with $100 a barrel oil. I guess that it is the current lack of bad news that makes the financial picture seem so rosy. It’s amazing how, given a little time, we adjust to our new environment and carry on with life.

Just don't try reading your latest 401K quarterly report over dinner. You're going to choke!

Sunday, November 04, 2007

Money From Nowhere Going Somewhere

Private industry and government both contribute to the economy. An economist uses a rule of thumb that private investment has a 5 to 1 multiplier effect on the economy; whereas government expenditures contribute at a 2 to 1 ratio. So, to stimulate the economy, private investment is the most cost effective and transfer payments the least.

Here is where I get shot for simplification again. Divide the government into five areas of financial involvement; administration, infrastructure, defense, education and retirement.

Administrative tasks produce nothing and could be considered transfer payments. It comes from our taxes and goes into a paycheck (government, police, fire etc).

Infrastructure and defense purchases by government create jobs where something is produced for the economy. Congress spends billions dollars on the Iraq war. The money is not shipped off to Iraq. Private companies build new war machinery. This mirrors private investment returns at a somewhat lower scale.

Education is kind of a necessary lubricant for the whole system. It has returns that benefit the economy; they are not as visible. When a sales clerk can’t make change for a $20 bill, the need for education becomes very apparent.

Retirement and government health care are also transfer payments. Our tax dollars go into a retiree's bank account. This stimulates consumption but no new product was added to the economy. I know someone will say, “Hey that Social Security money is mine, I paid into the system.” How about if we cut your benefits off when you exceed what you contributed? The fact is some guy, who died after 35 years on social security, probably consumed all of your contributions and ten other people’s as well.

So let’s go one step further. Home equity loan withdrawals are another form of transfer payments. Notice, the money extracted from mortgage equity withdrawals (MEW) was not earned by building something new for the economy. Housing just doubled in price; it’s free money (this is the way the government does it). Of course, the homeowner is supposed to pay it back. It looks as if that concept has a “few” holes in it.

Step back and look at the big picture. Government can issue checks for retirement and health care costs by increasing the national debt. This is what the homeowner was doing with a MEW. The American consumer has been on a buying binge with US monopoly money. Where did all of this stuff that we didn’t make but we needed to purchase come from? Here's a clue “lead paint.”

Looks like this Thanksgiving, we are giving China the bird. Just maybe they will give us a goose for Christmas (triple pun intended).

Tuesday, October 30, 2007

Jim Roger's Opinion of Helicopter Ben

Here is a seven minute video on Jim Rogers reflecting on the Grand Wizard Ben Bernanke. It's worth viewing. Notice when he says that housing is in more than a recession that suggests things are a lot more dicey than most people believe. The bottom to the RE market is a while away, so it gives one chance to ponder the effects of the next rate cut scheduled for tomorrow. Unfortunatly, IMHO, the last thing we need is a rate cut. Click here to view the video.

Sunday, October 28, 2007

N Y Stock Exchange Changes the Rules

Bloomberg reported Friday that the NYSE eliminated computer trading curbs when the market goes up or down drastically. Last December the exchange completed their conversion over to electronic trading. Then in July, they got rid of the uptick rule which prevented the shorts from piling on in a down market. The training wheels are off.

With all of the computer trading going on, things could get a bit wild. Each Mutual fund, pension plan, IRA etc, probably has a program that will instantaneously calculate and execute arbitrage positions to take advantage of the current market. What we may be looking at is an electronic financial war, your retirement fund against mine.

The computer programming used by the NYSE has been pretty well tested in an up market, but it has never really been tested in a down market. It’s a little like the housing market. No problem going up.

Suppose someone types in a sell order with too many zeros in it by mistake and hits enter. White out isn’t going to fix it. By the time someone says oops, we could have a meltdown. If the herd (seasoned money managers) panics, it’s going to be over fast (speed of light comes to mind). It’s kind of like having a party where you use dynamite sticks for birthday candles; everyone's going to remember that special occasion for all the wrong reasons.

Saturday, October 27, 2007

Perception: Your Point of View Verses Mine- reprinted

This is reprinted from July 15 2006. It may help you look at the world a little differently. I have to examine this issue every time I publish.

After cruising a lot of blogs, I've noticed something that I wasn't really aware of. Ever notice that after you buy that new car, you seem to spot a lot of them on the highway, whereas before the purchase you didn't? The thing that I noticed was, the fact that our minds are sharpened to recognize stimulus that we accept into the model of our perceived world.

The real estate bubble bloggers, see the real estate market falling off of a cliff. The real estate agent sees a return to a more normal market. It's not really a matter of who is right, but rather one of timing. Real Estate has been trying to fall off of that cliff for several years, and yet some real estate agents are making a decent living.

I do believe in the example I have cited with real estate, it will fall off a cliff. The "when" part I am not sure about. What needs to be pointed out is that what you expect to happen, colors how you perceive the markets. It's kind of like the cartoon of two men on a very small island. One puts oar locks to the left and right and puts in two oars and starts to row to the west, the other guy on the island throws his hands up and says "you're rowing the wrong way!"

What needs to be realized is that what we want or expect to see, is far more observable than that what we care little about. Captain Ahab harpooning the great white whale nailed the whale, but the rope was wrapped around his leg--he didn't see it coming.

Our faulty perception of the world can harm us. Real estate could be collapsing and you laugh at the guy that looses his house. With 100% financing, don't laugh at him he's home free. It's the bank that gets hung. And when you trace it back far enough; your retirement fund probably took the big hit.

My point is, you will see what you want to see.

From here, we might just question more critically our observations of the world about us. Reality for the individual is all about perceived perception. It is real and different for each individual. To the group, it may not be. Hence the reality, "I could be wrong!"

It sure feels nice not to have to be right all of the time!

Friday, October 26, 2007

The Solution is Too Simple

Just listening to CNBC again. Some ethanol producer was stating that ethanol production will save the importing of 480 million barrels of oil. The logic sounds great, but what if you were told that it takes more than a gallon of gasoline to produce a half gallon of ethanol. Here is a link to some hard facts. Why don’t we just stop growing corn for ethanol production? That ought to save about 960 million barrels (using his figures).

Why feed cattle? A farmer can make more money planting corn for ethanol production. It gets worse; the price of ethanol has all sorts of government subsidies. There is money to be made. Congressmen are hanging all over this one. They will save America from high priced oil. Notice that no one has ever accused a Congressman of being intelligent (you know they would deny it). But being crafty is a different story.

If everyone decided to take two steps backwards for every step taken forward, we would all be walking backwards to get to our destination. It just goes to prove that economics and common sense don’t mix. The economics floats to the top.

The real neat thing is that you pay more for less and feel good about it.

Thursday, October 25, 2007

The Recession has been canceled

Just finished watching the CNBC interview with the Presidents economic team. After viewing that, I think that its time to seriously start shorting fertilizer futures. The good news is that there isn’t going to be a recession. The bad news is that only one or two economists has ever predicted a recession and been correct.

They claimed the employment figures were good and production was up. What do we produce besides drywall? Everything in our home that we have bought in the last five years has a label with the words “Made in China.” Of course food items don’t count but we do still produce most of them. Instead of stuffing corn in cows, we are making ethanol to put in your car. Your t-bone steak went to $10 a pound so you could corrode the hell out of your fuel lines, go figure!

The funny thing is, if the President’s economic team was to predict a recession, no one would believe them, just as they don’t now.

Housing literally walked into an open manhole. The increase in oil prices is the new Arab income tax. And the financial community claims that the smoke is necessary with all the mirrors they are using.

One of the group, Mr. Hubbard, also stated that inflation was “very, very low.” Here is a link to the interview transcript.

So I’m glad that's out of the way, there will be no recession. The Presidential "Sages" have spoken.

Tuesday, October 23, 2007

Google, Absurdum

I figured that we ought to touch on some real “bat guano” here for a bit. Google has gone hyperbolic and it is reminiscent of another stock back in the last big melt down.

RCA started off in the stock market in 1921 at $1.50 a share and in 1929 rose up to $549 (if you don’t figure in the 4 for 1 split in 1929). Remember that back then Joe Six-NO-pack (prohibition) paid about $15 per month rent. 549 bucks was a hell of a lot of money. RCA did not pay a dividend (you don’t need one with that sort of performance).

Fast forward to today and we look at Google the "Wunderkind" of the stocks market. If we carry the comparison back to 1929, a Model T ford was $400 so you are looking for a Beamer or better in today's market. That would be a stock price of about $28,000 a share. I guess we are not there yet. The peculiar thing about the Google graph is that the scale is extremely misleading. If you reversed the horizontal and vertical perspectives, it would look like the first graph. (Graph courtesy of

The RCA visual aid also includes another bubble stock called AOL. They bought out Time Warner in 2000. What happened next to Time Warner could be best described as having to do with two well known products Astroglide and Preparation H. That affair pretty much ended after the star crossed lovers meld hit $15 on the stock exchange. Time Warner reassumed its "maiden name" and has AOL stuffed in a closet somewhere.

History describes how Sir Isaac Newton made a bundle on The South Sea Company in the 1620's only to reinvest back and lose it all. Even a year ago Google looked dicey. Here is a link to Googleiots an article from this blog a year ago (nothing much has changed).

When you add up what the company does and how easily it could be replaced for 1/20th of its market cap, its price is absurd. Nobody laughed when AOL bought Time Warner (and nobody has laughed about it since then either).

Maybe Cramer has a prediction for Google to hit $1000. Are we rich yet?

Sunday, October 21, 2007

Economic Turpitude

Banks, hedge funds and what ever are taking billions of dollars in loan loss provisions. I have been suggesting for over a year, that a lot of this money may be coming from our retirement funds. Think about it. If your wife buys a new fur coat with your paycheck, now you can’t pay the rent, that is obvious very fast. If the wife turned a trick with the old geezer down stairs and bought the coat, you are stuck wondering how she did it. The reason I suggest Retirement funds, is that the losses suffered so far appear to affect no one. But bear in mind, retirement income funds deal with the future. Most people are not ready to retire so these funds should have plenty of time to recover losses (keep quiet, keep your job). The write downs are massive. Nobody even blinks an eye. What’s a 10 billion dollar loss? The perspective is beyond comprehension. This money has to be coming from somewhere. Whoever’s money it is, they don’t seem to need it--yet.

The money supply worldwide seems to be contracting. Usually this would imply a rise in interest rates. That doesn’t seem to be happening. Commodities are increasing in value, which could be an inflation indicator. If reserves are being added to the banking system, then this could explain why rates are not rising (using a truck is cheaper than using Ben's helicopter).

A lot of the new earned money entering into the economy is not being used to create new jobs, its being “invested” in financial instruments. Workers are not creating new product, investors are placing side bets on the financial markets. The profit is gone from home building industry. Investment in rental property is a losing enterprise. Consumption seems to be tapering off. Home remodeling appears to have hit the skids. Starbucks seems to be doing OK, you have to draw the line somewhere.

Interest rates are dropping but you can't force people to borrow money unless there is some sort of return (like a house appreciating at 20% a year). That would explain why the stock market as well as the commodity’s markets are still in play. Cramer the other night was forecasting Google at $750. Everything is still going up. The stock market had a little hiccup on Friday. Nothing to worry about, Google kept on ticking just like a Timex watch. Of course it can’t be a bubble, bubbles don’t get that big!

You have a bunch of banks forming a consortium to bail out the CDO and SIV holders . They are creating a new financial instrument called a "USA," which is short for “Up in Smoke Assets.” It ought to be a hot item if they can figure out a way to package it. It’s kind of like selling invisible goldfish. Give the buyer one or two extra for free, so he thinks he’s getting a real bargain and sell him some invisible fish food to boot.

The economy’s current condition reminds me of the embezzler and a millionaire taking a vacation at the same resort. The embezzler knows whose money he is spending. The millionaire has no idea that he is broke, but hey, everyone is having fun. Are we broke yet?

Monday, October 15, 2007

Arbitrage, Free Money

As markets continue to go straight up, arbitrage becomes more profitable. Suppose an oil refiner takes delivery of oil today at $70 purchased 3 months ago. Now on the day they take delivery, futures three months out for oil, are $83. Figure their cost is two dollars for storage and interest per barrel (over a 3 month time). They can make $11 ($83-$70-$2) per barrel without refining it, by selling a forward futures contract 3 months out. In this case, the oil refiner can make more money storing the oil than refining it. The company could still buy spot oil and run their plant at full tilt. Notice, a refinery doesn’t care what the price of oil is; they refine it at a set price.

With low interest rates, futures arbitrage is more profitable. Remember that forward future’s costs are determined by storage charges and the cost of the money (interest) tied up in the contract to its expiration date. In a drastically rising market, it is more tempting to take your current delivery contract and move it forward 3 months. It doesn’t matter what happens to the price during the three months, somebody else owns it at an agreed price. The arbitragers profit is locked in.

If the three months futures premium on gold was $35 dollars above the spot price per troy ounce, the arbitrage play would be to buy the gold and sell the futures on it. $35 times 4 quarters is about $140 per ounce profit. You can keep rolling the futures forward. If the bottom dropped out of the gold market, the arbitrager would deliver the gold and keep the cash. In this example he would buy 100 ounces of Gold for say $70,000 and sell the future contract three months out for $73,500. The $70,000 kept in the bank at 5% would have earned $875. This, plus storage fees, would have been his carry cost for the trade (gold is higher, I just kept the math simple).

The arbitrager would select commodities with high volatility. There will be more premium loaded into that contract. Remember he is not buying gold or wheat or whatever. He’s holding a commodity for promised delivery three months out. The premium is the paycheck. Here is where it gets interesting. A majority of the futures contracts are bought back before expiration. If the commodities stop going up, all of these arbitragers are going to deliver the stored product. This might be more product than the spot market would be comfortable with. Ergo big price drop.

There are three different participants, suppliers, arbitragers, and speculators. The suppliers and the arbitragers have the ability to roll their contracts forward. If the speculators are willing to pay more premium because of implied profits, notice what happens. Instead of the commodity for example oil, hitting the spot market, it is rolled forward three months by not only the arbitrager, but the supplier for a better return. So, if I have this right, you can be knee deep in oil and not have a drop to refine. Isn't that neat, I pay more now, for gas because it's more profitable to deliver raw crude three months in the future. Go figure!

Wednesday, October 10, 2007

Jim Roger's Video

Here is a link to a Jim Rogers video clip from Bloomberg. Its about 19 minutes long. I'm not sure how long this link will work, but it is very funny. The commentators are asking questions, but not listening to Jim's answers. Jim keeps his cool somewhat. I share his views on a lot of issues. The guy is well worth listening too.

Tuesday, October 09, 2007

Futures a Ticking Time Bomb

Suppose you own a gold mine and your cost of production is $500 per ounce and you know you can output 4,000 ounces a month. Let’s say the spot price for gold is $700 per troy oz. As a miner owner, you would want to lock in your price for product mined for delivery in 30 days. You would sell 40 gold contracts which would be a promise to deliver to the buyer 4,000 oz of gold 30 days in the future. In this example the Gold future is being used as an economic tool that guarantees the success of the mine even if the price of gold drops through the floor. The mine owner has locked in a price and taken the risk out of the business.

Suppose you don’t have a gold mine and you want to play the game. No problem. There are two exchanges the Comex and the CBOT. The margin requirement for Gold on the Comex is $2,700 per contract and maintenance is at $2,000 (FYI don’t use the CBOT, they screwed Bunker Hunt when he cornered the silver market in the 80’s by changing the rules).

As a futures trader, $2,700 controls 1 gold future 100 oz of gold worth $70,000. Notice that the buyer and the seller of futures don’t have to be connected to the product in the contract. Usually before the contract is due for delivery, it is closed out. If you went long and bought a contract you sell it and if you went short and sold one, you buy it back before expiration.

This is a zero sum game. For every winner there is a loser. Airlines are known to lock in their fuel prices with futures. So all we need it a buyer and a seller, we don’t even need product. This can be done with bonds, gasoline, wheat etc.

All we are discussing here are commodity futures, pretty basic stuff. Notice that they are created out of thin air. And no product has to change hands.

Take the S & P 500. Why buy all of the stocks and pay a commission? Go buy a future on it. Most futures probably only demand a 6% margin requirement. These are rather abstract financial instruments; there is nothing tangible about them. The margin on an S&P 500 full contract would be about $25,000 (depends on the broker) and it would control $781,000 dollars worth of stock. There is also the CME Mini S&P 500 futures contract, kind of a bike with training wheels for beginner day traders, which has a margin of $4,000. It’s 1/5th the size of the big one.

If the DJIA were to drop 2,000 points, which would be a drop of 240 points on the SP500 (forgive me for not calculating the loss) the naked sellers of the futures are toast. The margin maintenance call would be a real killer. Even if the market were to come back, you still have to meet the margin call. But if you read the boiler plate on your contract, you have already been sold out at an unimaginable loss without your permission. Gee Whiz can they do that??

I kind of remember reading that the crash of 1929 couldn’t have happened if the stock margin requirements had been set to more reasonable levels. (Yawn) believe that and I have another for you. The phrase "Parallels in history," comes to mind.

The other neat thing about futures is that they are tax free. But I didn’t say that did I? The government has no way of tracking them, so grab a future and have a good time. Be careful the end is near.

Sunday, October 07, 2007

It's All Good

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.

Friday, October 05, 2007

Models We Build and Use to Interact with our Enviroment.

Reprinted from June of 2006. I apologize, but of the three essays I've written in the last two weeks, they were too unfocused to publish.

A rather long title, and a concept that is almost transparent unless you look for it. Lets start with an example or two.

Clapping your hands keeps the elephants away. Its a valid model as long as no elephants show up.

A rabbit foot is lucky to hold. Also a valid model unless you are having a bad run of luck.

Stocks will always go up and we will get rich. Valid but more like a wish.

Gold is where to put your cash. Valid but arguable.

Mother-in-laws are good cooks. Arguable, but it is your world that you are viewing.

Real estate is a good investment. If it works, you will keep on doing it.

Now when you build your model that you use to interact with the outside world, it might include views on gun control, abortion, the environment, politics, religion and what ever.

In our thinking, (or lack of) each of us is unique. It is from this perspective that we are trying to live out our existence comfortably with the least amount of excess effort.

Some of us, because of the models we use, are becoming more aware of problems that may or may not be of concern anyone else.

Right now, the financial world (to me) seems poised to fall off of a cliff. The models and my perspective suggest that. But just as mine suggest that, another person's model may suggest a different perspective. The one thing that I can guarantee, is that every perspective will differ, some more than others.

Right now we are at a point in time where some of these models are starting to fail. For example, "Real estate is a good investment." This model worked for years, and now it doesn't sound so enticing.

There are two reasons for failure, the model has stayed the same and the environment has changed, or an elephant has appeared and hand clapping doesn't seem to validate the model. If your thinking has failed to recognize the change or your thinking has always been out of whack then the model was never really tested.

What really needs to be realized, what ever model you use, your goals are probably the same, to survive and exist comfortably. The way you go about it can be quite different than everyone else.

We may, or may not be, aware of the present possible failure of our model in the real world. This is just what happened in 1929. People were not stupid, they knew how to "turn a trick," the trouble was the game changed and their model fell apart

Tuesday, October 02, 2007

Perceived Reality reprinted

This originally appeared June 2006 and I thought it worth repeating.

Ever hear the story about the bum in New York City clapping his hands? When asked why he was doing it , he says, "To keep the elephants away." The listener replies, "There aren't any elephants in NYC!" The bum quips, "See, it works!"

In this case, the level of absurdity sets off warning signs and that casts doubt into your mind. But lets get to the not so obvious.
"Why rent and make the landlords house payment?"
"Owning a house is better than renting."
"Investing in Real Estate is the way to wealth."

People don't realize that the value and the validity of statements change over time. What was pure truth in 1964, is not so certain in the world of 2006. The human mind has a rough time with changes in perspective. We get stuck in a rut.

Go into your closet and make a mental note, "Tomorrow I am going to wear something I bought 20 years ago." Try it on. Does it fit? Would you feel embarrassed wearing it? Will it make you feel young again? Do you still like it? Did this exercise change your perspective about time a little bit?

A lot of our mental values fall into the same boat. We need to have the ability to realize that our perspective needs to change as we get older. Values that seem to be constant need to be re-examined.

Remember this, if something is repeated again and again as fact, then it must be true, and society will accept it as such. For 2,000 years people though the common house fly had 8 legs until someone decided to count them.

So how does this tie into The Great Depression of 2006? I am trying to point out, that you could get caught up in the coming mess, if your values don't change to accommodate the times, as they are-a-changing.

Sunday, September 23, 2007

Calculating the Inflation Tax

This bit about government wanting to tax the rich has always puzzled me. In ancient Rome, if I remember my history right, every male was taxed. They had to give one month of labor to the government each year, or pay someone to stand in for them. The Romans were able to build a lot of roads. Notice that there wasn’t the concept “I can’t pay, I don’t have the money.” They wanted your ass and you were theirs for one month. As a government, you couldn’t go out and “print” another tax payer (worker).

When you fast forward to today, Congress’s idea of “Tax the rich,” is tax the guy making over 100K per year. Notice we are not taxing the rich people that don’t have to work. We are taxing people earning money. So if you work 3 jobs and are killing yourself, you pay more tax. If you are pimping, selling drugs or other illegal things, you pay no tax. If you don’t have enough earned income, you also pay no tax. In essence Congress taxes people more for working over 40 hours.

Examine the increase in the price of oil to $80. It is the equivalent of a $1,000 bill for every car owner who consumes 3 gallons per day. The census for 2004 lists 243,023,485 cars in the United States. Extend that forward and we get 243 billion dollars. Our government collected 2.2 trillion in taxes in 2006. This rise in oil prices is equivalent to 10% of our present tax base. With this tax, EVERYONE pays.

When it reaches into everyone’s pocket, it is inflation. The result on the economy is a contraction of discretionary purchases; movies, restaurants, Starbucks, fast food etc. As the price of oil rises, many countries face the prospects of recession. Oil taxes are across the board and affect everyone; especially those that can least afford it.

Notice, this whole computation didn’t take an office full of economists to calculate. It’s pretty basic math. Now, all Congress has to do is re-introduce the $1000 bill into circulation. The phrase “Banana Republic” comes to mind for some reason. “Chiquita Ben” Bernanke to the rescue! We’re going to drive to the poor house in style, mileage be damned!

Wednesday, September 19, 2007

Why a Rate Cut?

Why cut rates? It makes no sense.

Foreign money is flowing out of the U.S because of the excessive borrowing we have done. A withdrawal of capital by foreigners should lead to higher interest rates.

On the other side, the U.S. investor is buying treasuries because of a lack of confidence in the bond markets. This over supply of demand for treasuries drives interest rates down.

Lowering the discount rates increases the perception of inflation, and oil is at $82 Gold is at 723 and Google is at 546.

Every poor person in the United States is now paying $1,000 extra a year for gasoline. Thats $1,000 more than our own government can get out of them at tax time. That group can ill afford it, they get hit the hardest. So if you use 3 gallons of gas a day to go back and forth from work, you too are in the same boat.

Housing is shot, but they forgot to tell the guys holding the paper. A white Christmas with a lot of red ink and no jingle.

Then you have people in Great Britain having a run on the bank. Talk about a loss of confidence.

Bernanke burned the shorts on Triple Witching, I didn't think he would do it. They had to hop in and cover their short positions and the market took off. The short players are necessary for the market. When the market drops, they step in and buy back the stock and realize a profit. So let's see, the next time the market decides to drop there won't be very many shorts buying into the falling market. You could label this "greasing the chute."

Maybe the Fed knows more than they are telling. There could be something seriously wrong with our banking system. A lack of liquidity? Four banks borrow 2 billion. Na, couldn't happen. Believe that I have a house to sell you.

Maybe we have Visa'd, just one too many plasma TV's

Thursday, September 13, 2007

CFC The Home Developer's White Knight

A couple of weeks ago 4 banks went to the discount window and borrowed 2 billion. Then B of A bought a preferred stake in Countrywide Financial for a coincidental amount of 2 billion. Now we hear that CFC has been advanced 12 billion and the discount window shows that banks took out another 8 Billion. The two may or may not be related, but it does raise an eyebrow or two.

Then, there is this guy out there with a real deep tan or a very bad case of jaundice waving a flag at CFC and yelling, "Come finance a loan with us." Here is an eye opener quote from KB Homes financial report:

KB Home operates through its 49%-owned subsidiary, Kaufman & Broad S.A. (KBSA), which also develops commercial and residential projects, such as condominium complexes. It also offers mortgage services through Countrywide KB Home Loans, its 50%-owned joint venture with Countrywide Financial Corporation. Through its wholly owned financial services subsidiary, KB Home Mortgage Company, KB Home provides title, insurance and escrow coordination services to its domestic homebuyers.

Several other home builders use CFC. So what happens here? The builders are going to sell new houses at below market price everywhere. Just try to sell an old house. Why not buy a brand new one? “What color granite counter top do you want in the kitchen?” says the builder (AKA Spider) to the buyer (AKA Fly). Sign right here Sir.

Did you see anyone last year waving a flag saying, "I have 12 billion to loan?" The phrase, “Fog a mirror,” was the only pre-qualifier you needed for a loan that I can remember. Now, there is a confidence issue. Can we get the suckers to line up and buy just like yesterday? Probably not. CFC is going to sell new homes. There is no market for used homes at these prices here in San Diego.

What happens next? The "stickiness" (greed and stubbornness) of the homeowners selling, will allow the builder to sell his constructed units below "home owner retail" (cost plus Realtor fees). His markup is probably 100K to 300K depending on the size of the house. The builder has room to deal, the home owner doesn't in most cases.

The thing not readily apparent, is that CFC and the home builders understand the time line delay, the home owner doesn't even have a clue. By the time the home owner is convinced his house has dropped 50K, the data is already 3 months stale. On top of that there is the wish "The market will come back."

Have no fear Congress will save us, once they realize that Fanny-Mae is not the hooker with the big boobs that they were jumping on last night.

Sunday, September 09, 2007

Monopoly, a game from the Depression

I remember as a kid playing a game of Monopoly. One particular time, we ended up with the bank running out of money. So someone grabbed a note pad and made up some $1000 bills for the bank and the game continued. Chance, Community Chest, the Utilities and Luxury Tax were also deeded out and sold. We were putting houses on everything including the Railroads. Soon we ran out of houses and hotels, so we used chess and checkers set pieces for Mega Resorts. The game pretty much ended when two players got wiped out on Park Place and Boardwalk.

It kind of sounds a little like what has been happening world wide financially, doesn’t it? Japan should have been out of the game 15 years ago, but since they pledged to take all of their savings and invest it outside the country, they were allowed to stay (that’s not really what they did, but that was the end result). Now you hear whispers that the Yen carry trade is winding down. This, from my understanding, was a massive migration of cash from Japan to foreign banks.

I’m guessing that it’s far more serious than that. If it comes to pass that the Japanese were heavy investors in CDO’s and Hedge funds, they have a serious problem. It brings to mind the German Weimar Republic collapse where to purchase a loaf of bread, you needed a bushel basket of deutschmarks (Their funds had been sucked out of the country by a repatriation agreement settling World War I).

We will just have to wait and see what plays out in Japan. Will they land on Park Place or Boardwalk? It's time to roll the dice.

Friday, September 07, 2007

Been There Before, (In My Previous Life) Reprint

Reprinted from Feb 1,2007

Today we read that the savings rate in the US has dropped to a negative one percent. It is also mentioned that it hasn’t been this bad since the Great Depression years of 1932 and 1933. The following is an article from way back when, that appeared in the Saturday Evening Post, CCV (November 5, 1932), pp. 3-4 titled" What about the Banks." It was written by Frank A. Vanderlip, former president of the National City Bank of New York. Bear in mind that 1932 was three years into the Great Depression. So if we carry forward to today, this would have appeared in the future year 2009. So we are not really where he was at, when he wrote this.
I had to type this in by hand, no cut and paste. There could be an error or two.

The present economic disturbance has been so severe that it as make even some changes in our language. No longer is it an apt metaphor to say that anything is “as safe as a bank.” The word “securities” has almost become obsolete. An investment that drops in price to a tenth or, perhaps, even to a twentieth of its former range is not a security; it is a jeopardy. The page of stock-and-bond quotations might well be headed Quotations of Risks and Hazards. To call them securities in the light of their fluctuations is ironical.

In 1720, a financial debacle added to the English language a phrase which has persisted in common world-wide use for two centuries. A hopelessly exploded financial venture is to this day called a South Sea Bubble.

The South Sea Company in its time was the rival of the Bank of England. It was the ambition of the Tories that it should supplant the Bank of England. When the bubble burst, the extreme decline in the price of the stock was from 1,000 to 135. The company withstood the shock, however and continued in business for eighty years.

Here is an example from out own times: United States Steel and General Motors stocks, the two leading industrials of the country, declined from the high quotations of 1929 to 8 per cent of that price. The decline in the stock of the South Sea Company was only to 13 ½ per cent of its highest quotation. Take another: The stock of what has long been one of the premier banks of the country declined from 585 to 23 ½. That is to say, it fell to 4 percent of its highest quotation. The decline in the market price of this great American banking institution was therefore more than three times as severe as was the fall in the stock of the South Sea Company.

That illustration is by no means a unique one. There were innumerable American bank stocks which made a more distressing record. Between October 1, 1929, and August 31 1932, 4,835 American banks failed. They had deposits aggregating $3,263,049,000. . . . .

The decline in the price of bank stocks was only a minor phase of our debacle. The quoted value of all stocks listed on the New York Stock Exchange was, on September 1, 1929 $89,668,276,854. By July 1, 1932, the quoted value of all stocks had fallen to $15,633,479,577.

Stockholders had lost $74,000,000,000. This figure is so large, that not many minds can grasp it. It is $616 for every one of us in America. It is, roughly, three times what we spent in fighting the World War (WWI). . . . . . .

Not only did our investments shrivel in the last three years but we even frequently lost our pocketbooks. Cash in hand, left for safekeeping in a bank, often went the way of our investments, and worse. Almost $3,000,000,000 of our daily-used cash funds were sequestered in the doubtful assets of the 4,835 insolvent banks. Widespread communities were left with only the mattress as a safe depository, and with little to put into it. People became so frightened in regard to the safety of the banks that they locked up in safe-deposit vaults, or secreted elsewhere, more than $1,500,000,000.

In the Great Depression there was a very good reason for being negative in 1932 and 1933. The interest only mortgage loan had ruined many banks. If you had any money invested, it was probably gone by then. Age 65 ready to retire, it must have been depressing to some.

Thursday, September 06, 2007

Live Rent Free, Don't give the Bank the Keys

Everyone is talking about all of the foreclosures and how rental rates will rise because of the demand from all of the displaced owners. Maybe there is one item that has been overlooked.

When banks foreclose and get title, there is a year or two wait to complete the process. We are talking about the actual deed, not a note saying that the title was conveyed and it is free and clear. The paperwork takes a while.

In the mean time, the neighbor across the way trades out his broken dishwasher with the one in the foreclosure. In California, the air conditioner would probably grow legs in two weeks. In a year’s time, there might not be much left. I’ve seen places that the neighborhood kids would use and by the time they are finished with it, you really wouldn’t want it at any price.

This can even get worse. Consider a foreclosure in Colorado, the pipes freeze and break. In Florida, a closed up house might mold over like a loaf of bread. Some states have laws on the books that allow the foreclosed owner two years to redeem the house after the event. So, clear title could be a very long wait.

Considering the length of time needed to sell a house lately, a year is not an unreasonable estimate of time. The note holder has a chance to lose big time. His asset could be run through the local recycler without his knowledge, copper pipes and all. It behooves him to have the house occupied.

The foreclosed home owner can’t lose if he plays his cards right. Walk up to the lender handling the foreclosure, and offer to keep living in the house rent free until it is sold, on the condition that you take care of the lawn and the house in general. Sounds crazy, but who the hell is going to buy it in this market? At least nobody is going to steal the air conditioner before you have a chance to sell it. At the present time, things aren't quite that bad, so you might have to pay monthly rent payments.

An impossible pipe dream? People living in foreclosed homes and not being tossed out?? It’s happened before, just not in the last 75 years. States even passed laws so it could happen.

Saturday, September 01, 2007

Carbonizing Bread with a Toaster

I can’t quite figure this one out. Bush got on his soap box and said that we need to help the homeowner and Bernanke says he will save the economy. It kind of reminds me of a Bill Board I read that said in big letters "Jesus Saves" and down below someone had written "Green Stamps."

Let’s face it; the homeowners going into foreclosure are toast. They have pretty much exhausted their finances and ruined their credit ratings. Landlords will refrain from renting to them on top of all of their other problems. Congress mentions a 300 million dollar bailout, and that wouldn’t even cover the fraud stuff in Northern San Diego County. It also wouldn’t cover what they spent getting re-elected either.

How is Bernanke going to save the economy? Is this going to be some sort of religious experience??? Altering the interest rates doesn’t change the amount of debt in the country. If you were to mentally ask the question, “Why did he wait till now?” You have already made an improper assumption, in assuming that he can fix the problem. The Fed is just too small to move the world markets.

What we are dealing with is group psychology (i.e. everybody). It revolves around the group’s consensus of the general economy. It’s party time, enjoy yourself. The stock market seems to be the place to be and everyone is there. It's a little like the housing fiasco, 90% of the people in the market, have no idea of what they are doing—yet! Bernanke and Bush will hold your hand. Doesn't it just give you that warm and fuzzy feeling?

Confidence in the economy, that’s the name of the game, without it the game is over. The real game that is being played right now is a political one. Bush is a lame duck; the Democrats don’t want a solution to this mess right now. This is their ticket to getting elected; they will ride to the rescue. FDR gave us Social Security; I guess this time around we get Hillary and free health care.

Here is a cute little ditty from the Great Depression about then Secretary of the Treasury Andrew Mellon and President Hoover:

Mellon pulled the whistle,
Hoover rang the bell,
Wall Street gave the signal,
And the country went to hell

As for last month’s parties, The Jim Jones Kool Aid Party for Lenders was a real knockout. I wonder if Bernanke is going to wear a sorcerer’s costume to the Hedge Fund Halloween Meltdown Party that is underway? He’s going to have to pull more than a Greenspan out of his hat.

Friday, August 31, 2007

The Man who lived through 1929

Reprint from August 19 last year.

Let's go back and picture a man from the 1929 era. He would have been born about 1890 and been about 40 at the time. His world had gone from horse and buggy to the automobile. Between 1908 and 1927 Ford had produced 15,000,000 model T's. In 1904 there were three million telephones, by 1915 you could call coast to coast (the cost was prohibitive). By 1906, the electric light bulb was commercially feasible to produce. Radio came into its own in the 1920's. By 1924 there were 3 million radios in use in the US. The airplane had come on line. It was used to speed up mail delivery; commercial aviation was still a few years away. Technology had turned his life into something new and different.

The banks were loaning money out, 100% financing, interest only, 5 year loans that had to be refinanced at the end of the term. Also, you could borrow any amount you desired from your stock broker just pay the interest. Buying stocks on margin (10% down) was the name of the game.

Another thing to come of age, was installment buying. GMAC was created in 1919 to help sell more cars, and it did just that. There had been a stigma attached to not paying cash and through advertising, it became more acceptable. By the eve of the great depression, it had become a way to acquire the American Dream. You didn't have to wait and save up for what you wanted, you could have it now.

From 1915 to 1930 we had been transitioning from an agrarian economy to a more industrialized economy. Technology had changed our way of life without any perceived realization of it by the general population. A farmer was 10 times more productive with modern machinery. Agricultural prices were dropping because of this over supply. The speculation that had been going on in farm land was unsustainable. A bigger farm did not increase your return on investment, just the opposite.

Things started to go bad in 1926 with the Florida Hurricane, land speculation lost its appeal (severe understatement). Then in June of 1928 there was a mini stock market crash, a precursor to the big one. In October of 1929 the big crash came and "rearranged" the financial markets. In 1930 Congress passed The Smoot-Hawley Tariff Act, which some claim was responsible for the unemployment rate climbing to 25% (over the next two years). Bank failures started to be a problem in 1929 only to get worse in 1930, 1,352 banks failed. In 1931, 2,294 banks bit the dust.

So what happened to our gentleman? If he had a 5 year I/O loan that was due for renewal, it wasn't renewed; the bank wanted and needed the cash. Result, the bank got the house. He stood a 1 in 4 chance of being unemployed. If his bank had failed, he might have no savings left. Anything bought on installment might have to be returned or a payment made on it.

He probably survived with memories of the rough times he had. People from that generation were seasoned with these memories. They acted differently as so to avoid making the same mistakes over again.

Today, in the world of 2007, the "group memory" of these people is no longer with us. Are we destined to make the same mistakes as they did so long ago?

The evolution of the Internet is comparable to Radio of that time. And Google stock isn't quite as high as RCA's stock got to, before the crash. Then, there was the installment buying and interest only loans of the 1920's, verses the credit card of today and the same old loan formula (use their money not mine).

Almost sounds like an eerie episode of The Twilight Zone, doesn't it?

Sunday, August 26, 2007

Liquidity, "A Well Run Dry"

There is a massive call to redeem mortgage CDO’s and there are few buyers. Let’s face it; almost everything is suspect that was written up to the third week in June when Bear Stearns “Roman Candled” into the ground. So if there is some good stuff out there, most investors wouldn’t know how to even recognize it. Even if it was a good deal, liquidity for a security means willing buyers. Finding any buyers seems to be a problem now.

Notice the issue here is not the mortgage itself; you just can’t lay your hands on the individual notes written on each home. The mortgages have been grouped and abstracted into an asset that can’t be broken down, its all or nothing. This new security is full of covenants and restrictions. How do you get clear title to a foreclosure when you’re not sure who really owns it? Purchasing a CDO is kind of like buying a dozen eggs and you notice that 6 are broken. The store owner won’t let you switch the broken ones with some from another container.

Over at Country Wide, the problem is a little different. It’s a catch 22 situation. They can write the paper, but in order to write more loans, they have to sell the loan for cash to some investor in order to have cash to write another loan. In the past, these loans went out the door and were packaged and sliced up for consumption, no questions asked. Now the real estate paper is a hot potato. This stuff is the new Monopoly money. You bought it, keep it and good luck!

Then we have the Yen carry trade that has been going on for years. The Japanese stock market crashed in 1990 and the banks literally went under. To save the banks, they dropped the interest rate to zero and invested in U.S. Treasury bills, which over the last 17 years, have made them whole again. Lately there have been rumors that their banks have been investing in hedge funds of all things (more bang for the buck). There are indications that the carry trade has dried up even though the interest rate spread between BOJ and the U.S. is about 5%. I guess that the futures trading for the Yen to Dollar now has the meanness of a rabid dog. You could say there is a Yen to go home.

Bloomberg on Friday mentioned that worldwide, governments have added 400 billion dollars of liquidity to the markets. If money is water, then this financial crisis is a pretty thirsty critter! Our current situation revolves around the fact that real estate instruments are no longer highly fungible. A majority of financial issues trade on faith. If it can’t be exchanged freely between everyone, then there is a problem. Some of the holders of these CDO’s have no real cash for the next hand of poker. That’s no problem, the discount window is open. Bernanke is catering the event, and you thought there was no Free Lunch!

Friday, August 24, 2007

DJIA Stock Market Math

The DJIA just went up 143 points or did it? Here is an abbreviated re edit of a previous post The Stock Market Game from April 25th. The market at that time was at 13,000 and I am going to use the figures for that date. If you held one share of each stock in the Dow Jones average, you would have had an increase in equity of less than 18 dollars with today’s surge.

The "Dow Jones Industrial Average" sounds impressive. Right now it’s at 13,000. Add up the value of all thirty stocks in the DOW and you get 1,600. Hmmm where does the 13,000 come from?

There is the Dow divisor index which is currently at 0.1248. This is a peculiar animal.

Here is a cut and paste from Wikipedia:

Assume an index comprising on 2 stocks A and B.
A is priced at $100 and B is priced at $200.
Hence the index value in this case is (100+200)/2=150
(where N=2 which is index divisor). So the index value here is 150.

Now assume stock B undergoes 2:1 stock split so its value becomes $100.
Now the index value would become 100 instead of 150.
To correct his irregularity we need to do the index divisor calculation as
(100+100)/N=150 (Since Market Capitalization of the stock is unchanged).
Hence, upon calculation we get the value of N as 1.333.
This shows that a stock split caused the index divisor to be revised
from a value of 2 to 1.33.

Today with the DOW, you would take 1600/.1248=12,820

DOW 30 Stocks---------------Weight %-----Present Value
3M Co.--------------------------4.8746---------77.75
Alcoa Inc-----------------------2.15-------------34.37
Altria Group-------------------4.3605---------69.55
American Express------------3.8245---------61
American International ----4.3593---------69.53
AT&T Inc--------------------- 2.4997---------39.87
Boeing Co. --------------------5.8489---------93.29
Caterpillar Inc. --------------4.5028---------71.82
Citigroup Inc. ----------------3.3492---------53.42
Coca-Cola Co. ----------------3.2659---------52.09
DuPont------------------------ 3.0897---------49.28
Exxon Mobil Corp. ----------5.0007---------79.76
General Electric Co.---------2.2025---------35.13
General Motors Corp.-------1.9862---------31.68
Hewlett-Packard Co.--------2.5937----------41.37
Home Depot Inc.------------2.4583---------39.21
Honeywell-------------------- 3.2226---------51.4
Intel Corp.--------------------1.3894----------22.16
Johnson & Johnson---------4.0828---------65.12
JPMorgan Chase & Co.-----3.2941---------52.54
McDonald's Corp.-----------3.032-----------48.36
Merck & Co. Inc.-------------3.2282---------51.49
Microsoft Corp.--------------1.8194----------29.02
Pfizer Inc.---------------------1.6909---------26.97
Procter & Gamble-----------4-----------------63.8
United Technologies-------4.2307----------67.48
Wal-Mart Stores Inc.------3.1198---------49.76
Walt Disney Co.------------2.2119---------35.28

If you examine the Market Weighted %, this is the actual amount the Dow swings per dollar for each individual stock. Notice that a 5 dollar move in IBM translates into 30 points on the DOW (5 x 5.92). A 5 dollar move in Intel translates into 7 points on the DOW (5 x 1.38).

As boring as all of this is, its rather like doing 20 miles per hour in a car and the Manufacturer decides to add another zero to the speedometer and make it 200. In that scenario, you can go through a hospital zone at 200 mph and not suck the drapes out of the rooms.

DOW 13,000 sounds super, but when you add it up you begin to realize that the perspective is a little misleading. The DJIA 30 stocks are worth $1600. The real validity of the DOW hitting 13,000 has more to do with someone who bought into the market in about the year 1910.

So an $800 dollar drop in value of the 30 Dow stocks drops the Dow down six or seven thousand points.

The $1,600 hundred dollar value for the Dow is a concept I understand. When you start fiddling with graphs and divisors, things take on a look that can be quite misleading. Terms like P/E, Earnings, Book Value, Dividend mean nothing, afterall "It’s a high powered growth stock." It’s kind of like asking you daughter about her new boyfriend and what he does for a living and she says “It doesn’t matter Dad, he’s a STUD.” That's a good indication that Rug Rat “Welfare One” is probably on the way.

Saturday, August 18, 2007

The Wyle E. Coyote Acme Credit Loan

The Fed's over night discount rate cut of Friday has a lot of people wondering; "What is going on?" and "Why it was done?" I could be shot again for over simplification on this one. On the plus side, there are no complicated graphs, so read on.

Imagine a bunch of little stores that are about to open in the morning. Before they open, they go to the cash register and put in their transaction money for the day. This would be something like 5 20’s, 10 10’s, 20 5’s and 40 1’s and quarters, dimes nickels and pennies. This money is needed to open the store. The bigger the store, the more transaction money is needed.

Now let’s go one step further. Suppose the money is not there to open the store. Most businesses have an open credit line with their bank for such occasions. They can go down and borrow the money. What the heck, at the close of business, they can pay it back.

On to step three, the banks issue these lines of credit to businesses thinking that maybe only five to ten percent of their clients will call for such a loan at any one time. They were not counting on all of their clients lining up at the credit line window at the same time. The bank at this point has over contracted these lines of credit, and has to go to the Fed window for an overnight loan. Wasn’t it Countrywide that exercised their line of credit for 11.5 billion Thursday with 41 lenders?

So what is happening? New money is not flowing into the system. People are not borrowing, buying or what ever. The money supply is contracting. Lowering the discount rate, allows banks to make those loans to business so they can open with cash in the drawer ready for business. It’s no longer an over-nighter, hey pay us when you can. I think the Fed is stealing the same boiler plate previously used on home loans.

But why did the stock market go up? The increased access to liquidity allows the big traders to exercise their credit lines. After all buying and selling stocks is a business. You’ll notice that Bernanke picked an expiration Friday, (before the market opened) to drop the discount rate, which burned the short option players royally. Done like a true professional!

Halloween is early this year, the third Friday (Thursday if you're smart) in September, a Triple Witching Expiration. I guess I’ll mosey over for some cider and donuts at the 11.5 billion dollar bon(d)fire.

Thursday, August 16, 2007

Possible Explosion on Wall Street???


The Dow Jones hit a high of 381 September 3, 1929. By Wednesday October 23 it had dropped to 305. On Black Thursday October 24th 1929, the stock market was in a free fall. The market had fallen to 274. Then at 1:30 Richard Whitney Vice President of the Stock exchange walked to trading post number two, US Steel and announced a bid of 205 for 10,000 Steel. This was 40 points above the market price. He then went on to several other posts and placed bids for stock above the market price. The stock market came back to close at 299 (The money for his bids was fronted by JP Morgan et al). The following Monday the market dropped to 260 and then on Black Tuesday the market dropped to 230.

And Now:

The Dow Jones hit a high of 14,000 July 19, 2007. By Wednesday August 16, 2007 it had dropped to 12,861. On Thursday the market started dropping down about 350 points and came back to close at 12,845.

It looks like Bernanke is the replacement for the historical JP Morgan banker’s consortium of 1929. It kind of makes you wonder if the rest of what is about to happen, hasn’t already been written. It's probably just my imagination running amok again.

BTW can somebody go over to Bear Sterns and turn out the lights? I guess we won’t read the obit until they pull the plug. Plus, I hear that Country Wide is in an adjoining bed.

Tuesday, August 14, 2007

Famous Quotes From the Past revisited

This is a reprint of my 9/03/06 post it seems appropriate for today, you might have missed it.

Here is something that I ran across that seems like a parallel to todays mindset.

This is a link to the site:

1927-1933 Chart of Pompous Prognosticators

1. "We will not have any more crashes in our time."
- John Maynard Keynes in 1927

2. "I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."
- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

"There will be no interruption of our permanent prosperity."
- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

3. "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding."
- Calvin Coolidge December 4, 1928

4. "There may be a recession in stock prices, but not anything in the nature of a crash."
- Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929

5. "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929

"This crash is not going to have much effect on business."
- Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

"There will be no repetition of the break of yesterday... I have no fear of another comparable decline."
- Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929

"We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices."
- Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

6. "This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."
- R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

"Buying of sound, seasoned issues now will not be regretted"
- E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

"Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom."
- R. W. McNeal, financial analyst in October 1929

7. "The decline is in paper values, not in tangible goods and services...America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin."
- Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929
"Hysteria has now disappeared from Wall Street."
- The Times of London, November 2, 1929

"The Wall Street crash doesn't mean that there will be any general or serious business depression... For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before."
- Business Week, November 2, 1929

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..."
- Harvard Economic Society (HES), November 2, 1929

8. "... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall."
- HES, November 10, 1929

"The end of the decline of the Stock Market will probably not be long, only a few more days at most."
- Irving Fisher, Professor of Economics at Yale University, November 14, 1929

"In most of the cities and towns of this country, this Wall Street panic will have no effect."
- Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

"Financial storm definitely passed."
- Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

9. "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."
- Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929
"I am convinced that through these measures we have reestablished confidence."
- Herbert Hoover, December 1929

"[1930 will be] a splendid employment year."
- U.S. Dept. of Labor, New Year's Forecast, December 1929

10. "For the immediate future, at least, the outlook (stocks) is bright."
- Irving Fisher, Ph.D. in Economics, in early 1930

11. "...there are indications that the severest phase of the recession is over..."
- Harvard Economic Society (HES) Jan 18, 1930

12. "There is nothing in the situation to be disturbed about."
- Secretary of the Treasury Andrew Mellon, Feb 1930

13. "The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity."
- Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930
"... the outlook continues favorable..."
- HES Mar 29, 1930

14 "... the outlook is favorable..."
- HES Apr 19, 1930

15. "While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us."
- Herbert Hoover, President of the United States, May 1, 1930
" May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."
- HES May 17, 1930

"Gentleman, you have come sixty days too late. The depression is over."
- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

16. "... irregular and conflicting movements of business should soon give way to a sustained recovery..."
- HES June 28, 1930

17. "... the present depression has about spent its force..."
- HES, Aug 30, 1930

18. "We are now near the end of the declining phase of the depression."
- HES Nov 15, 1930

19. "Stabilization at [present] levels is clearly possible."
- HES Oct 31, 1931

20. "All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S."
- President F.D. Roosevelt, 1933

Quotes #5 and #8 are very famous remarks by Irving Fisher, who at the time was managing the Yale endowment funds. It didn't go well from there.

These were very intelligent people back in their time. Their thoughts on what would happen next were way off the mark. What was said, sounded good and was reassuring.

It leaves a lot of doubt about what you can take for granted in todays newspapers

Note, quote 20 refers to the fact that it became illegal to own gold as an American citizen. The government was making sure no one was holding out on them. You had to trade your gold in for currency. This was FDR's way of keeping everyone honest--government excluded.