Thursday, January 31, 2008

The Hidden Headline

Notice the six silver dollars on the Newspaper. On the right you see the headline "Fed slices rate again amid push for relief." The word constipation comes to mind.

You only need three of those silver dollars to fill your gas tank. Remember back to when gas was 25 cents a gallon? It's even cheaper if you use "Yesterday's" money! Those six silver dollars represent a hundred dollar bill in today's world.

This gives you some idea of what FDR's new deal programs like Social Security have done to the Country. The government can't cover all of its operating expenses so we print the rest.

The name of the game is inflation; a very slow and despicable disease. It's a tax on people who save. Gas is cheaper now, than it was in 1960. The real headline is "Wake-up America!"

Reality can be a cruel mistress. It's kind of like going to a casino that advertises High returns, Hot slots and Hell of a lot in action, and you walk out broke. If you have ever looked at an enema hand book, the instructions read; High, Hot and Hell of a lot. Either way, you get it in the end. Let's hope everything comes out alright.

Copyright 2008 All rights reserved

Sunday, January 27, 2008

The "Out of Thin Air" Income Tax Rebate

The government is going to give us 150 billion dollars. Doesn't that sound like the lead-in for a Jay Leno joke? For what it's worth, they didn’t take in enough in taxes to cover the yearly budget. You kind of wonder where it's coming from. I’d love to enlighten everyone, but it's not nice to explain what’s going on and piss people off, all in the same sentence.

The government is going to disperse 125 million checks for $1,200. Its purpose is to stimulate the economy. We jump to the conclusion that the government wants us to buy something to get the economy going. Then it gets carried further with the observation that paying off debts won’t stimulate consumption. So what gives?

I’m stepping out on a limb here; this is pure conjecture on my part. So if you are using this column as investment advice, I express my sympathies to your family. Using speculative conjecture for brains is rather novel, award yourself two points.

Bernanke has lowered inter-bank-transfer-rates to levels not seen in a while. This allows a bank more time in selling assets to raise cash for withdrawals. There is no way the bank gets any free money out of this deal. What they borrow, they have to pay back to the Fed (we are not talking credit card math here).

During the real estate boom people bought a house for 100K and sold it for 200K. The extra 100K went into the banking system money pool. Right now the reverse is going on. You buy for 400k and sell for 200k and the bank chokes. The money supply that the banks and the economy have access to is contracting.

I am suggesting that this 150 billion dollar package is to help the banks. Congress really doesn’t care whether you spend it on a plasma TV or pay off a debt. The goal is to insert money into the banking system by way of your bank account. This cash injection will hopefully increase the money available to jump start the economy and keep the banks solvent.

150 billion dollars is peanuts to pay to avert a major bank collapse. The trouble is, printing the checks. I don’t know how many checks a day the government can print, but logistically, 125 million checks at one million a day is about 4 months of continuous printing. Even if the measure passed Congress tomorrow, I don’t think that the economy has the luxury to wait out four months. This mess started 6 months ago and it seems like it doubles in size every three months.

In Kalifornia, it took 6 years in the 1990’s for housing foreclosures to get to the levels they are today. 150 billion dollars dropped into the money supply has to be inflationary. The loss of buying power is becoming more apparent. More money will be chasing the same amount of goods.

Things have changed since I was a kid. We use to drag our date to the drive-in for a good time, popcorn and all. Now days you can get screwed at any gas station—it just isn’t the same.

Now you know where the money in this future check is coming from, or do you? You get something for nothing--it must be an election year. Congress is buying "The Short Bus" vote.

Copyright 2008 All rights reserved

Friday, January 25, 2008

The Short Side of the Market

The stock market has been up 300 and down 300. It seems a little peculiar unless you understand one principle. You can make just as much money in an up market as you can in a down market.

When I first started buying stocks (a long time ago), I was able to turn $5,000 into $3,000 with no problem. Then as the bull market progressed, I got better at what I was doing (I’m lying). I was always inquisitive, I asked my broker once, why he never recommended any stocks to short, only ones that were a “good buy.” His answer at the time didn’t really sink in until now. He said, “Most investors want to be positive about the market, being negative is bad for stocks and business in general.”

When markets start to drop like they have lately, many people start selling the market short. They borrow shares from the broker that are held in street name. So if you wanted to short 100 shares of XYZ that are trading at $100, you would have to have 50% of its current value in your brokerage account. An investor that is "Dead certain" on the future of the market is liable to short to the max. $10,000 in his account allows him to short $20,000 of stock. If the stock pops up $20 then he has a margin call of $4,000 (200 shares x $20). So if traders are seriously shorting a stock and it turns around and goes up they have to cover. The stock could shoot through the roof. A real neat thing is, if the broker feels that the stock has moved too far, they can buy it back without calling you, which can be quite irritating. The stock could go up $40 on the open and they buy the stock and close you out. Later in the day it drops $70, you owe the amount where they settled your account with a buy confirmation, not at the close where it is down $70.

At first glance, it looks as if the market is back to normal, going up. This is your typical Bear Trap. The market goes up when it should be going down (by all logic) and the shorts literally take it "In the shorts." They have to buy to limit their losses or add to their margin account, with their broker.

This is why markets don’t go straight up or straight down. There is money to be made on people that bet the farm on one side or the other.

The rate cut by Bernanke, gives one a feel for the presence of the current market. His actions indicate that something is seriously wrong. The stock market moves pretty much independent of his actions, but psychologically, the market is a reflection of perceived future events. Imagine being in the lifeboat line on the Titanic and the captain of the ship is ahead of you, you know you're in the right line.

The market has burned the hell out of the shorts, these players always bought back into the market, to realize their gain. They gave the market some stability. Now there are fewer shorts to buy on the dips. That could speed up the next drop.

The thing that scares me, is that Congress is giving us all some money back to stimulate the Economy. Bernanke is going to lower the interest rate another half point. It’s kind of like a hooker giving away free sex, there has to be a catch. Why should anyone take these measures at face value? From a government perspective it makes absolutely no cents!

Copyright 2008 All rights reserved

Tuesday, January 22, 2008

Full Moon Night, Anything Goes

The Federal Reserve lowered the interest rate ¾ of a point. What was the significance of that move? It makes absolutely no sense to me. Is this a repeat of Richard Whitney's bid of $2.05 for US Steel October 24, 1929? It saved the day and then October 29th all hell broke loose. Maybe it's probably just my imagination running amok.

It’s a little like a fire in a dynamite factory adjacent to a movie theater. If the movie is titled Pearl Harbor, one would marvel at the special effects! The trouble is, it could get a little too real, too fast!

Stay tuned, it's about to hit the fan

Copyright 2008 All rights reserved

Monday, January 21, 2008

The Stock Market Game (reprint)

Reprint from 4/27/07. The rest of the world has a head start on what may happen tomorrow (from examining the declines in foreign markets today). I thought this might be informative to those that missed it.

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. It 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
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.

The next picture is a logarithmic rendering of the DJIA over the last 100 years. The slope of the graph is linear. On logarithmic paper that's not a good thing. It could indicate a bubble, or the last step before hyperinflation (slope equals inflation rate). (Click on the graph for a larger picture)

The area under the graph line could be considered the measure of value paid for all stocks in the market. For that reason I have included the next graph which is linear. The crash of 1929 and 1987 are not very noticeable. This one, puts in perspective the large amount of money moving into the market. (Click for a larger picture)

---------------Picture from

The DJIA broke through 13,000 today or $1,600 (if you do the math my way). Both graphs tells a story. One is logarithmic because it was too big to fit on a page without losing detail. The other suggests that 1929 and 1987 were non events (that should raise an eyebrow or two).

On the positive side, the Dow's a lot more liquid than the housing market. Stockmarkets are not sticky on the down side! At one time Wall Street offered "Cradle to Grave Service." There was a nursery at one end of the street and a grave yard at the other. The grave yard is still there.

Copyright 2008 All rights reserved

Friday, January 18, 2008

The Road to Hell is Paved with Good Intensions

Congress is trying to rustle up a tax break for everyone to help stimulate the economy. I thought it was too much spending that got us into this mess. Government tax receipts for this year are certain to be less than those for last year. Why give it back? Carry it forward and spend it next year.

They want Bernanke to lower interest rates so people can refi their houses. The fact that a lot of homeowners paid too much for their home, doesn’t enter into the equation.

Then there is universal health care. It isn’t going to get cheaper because of government legislation. The irritating thing is the word “universal.” It’s kind of like the car dealer walking up to you and saying, “Will this be cash or do you want to finance it?” He is trying to close the deal. When you buy the concept “Universal” that means “Everyone deserves it.” In my opinion if you can’t afford it, that’s just too damn bad. I’m no goodie-two-shoes, life is tough and life is unfair. You want the BMW and no health insurance, live with it. There are tragic exceptions to this all of the time, but that is life. We have to make choices about what we want to consume in life, because of one basic fact, we can’t afford everything. Congress doesn’t understand that concept.

Social Security is a huge government commitment. Benefits are tied to inflation. It’s amazing how low inflation is (insert horse laugh here). I guess if you are too old to drive, the cost of gas doesn’t enter into the equation. You need to be over medicated just to fill your tank.

A lot of what is going on in Congress revolves around pure stupidity. Stupidity is a little like dynamite; it doesn’t take much to do a lot of damage. The government faces decreasing tax revenues because of the shrinking economy. Nothing has been saved up from the good years. Congress just spent more because it was there.

The idea that we can spend our way out of this mess boggles the mind. It’s kind of like mixing Preparation H with salad dressing so it tastes better. You know what you want to do, but you are starting at the wrong end.

Copyright 2008 All rights reserved

Wednesday, January 16, 2008

It's Never Been This Bad Before (reprint)

This article first ran April of 2007, but not everyone has been on board since the beginning of this blog. I thought it worth repeating.

Reading some of the blogs, I run up against this phrase “We’ve never been in a bubble like this before.” On one hand their right and on the other they are wrong. They're right that none of us alive have experience a calamity of this sort, but they are wrong in assuming that it hasn’t happened here before. Here is a cut and paste from: (the link is well worth reading if you have time)

By 1927, according to Homer B. Vanderblue, most of the elaborate real-estate offices on Flagler Street in Miami were either closed or practically empty; the Davis Islands project, "bankrupt and unfinished," had been taken over by a syndicate organized by Stone & Webster; and many Florida cities, including Miami, were having difficulty collecting their taxes. By 1928 Henry S. Villard, writing in The Nation, thus described the approach to Miami by road: "Dead subdivisions line the highway, their pompous names half-obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement side- walks, where grass and palmetto take the place of homes that were to be .... Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death." In 1928 there were thirty-one bank failures in Florida; in 1929 there were fifty-seven; in both of these years the liabilities of the failed banks reached greater totals than were recorded for any other state in the Union. The Mediterranean fruitfly added to the gravity of the local economic situation in 1929 by ravaging the citrus crop. Bank clearings for Miami, which had climbed sensation- ally to over a billion dollars in 1925, marched sadly downhill again:
And those were the very years when elsewhere in the country prosperity was triumphant! By the middle of 1930, after the general business depression had set in, no less than twenty-six Florida cities had gone into default of principal or interest on their bonds, the heaviest defaults being those of West Palm Beach, Miami, Sanford, and Lake Worth; and even Miami, which had a minor issue of bonds maturing in August, 1930, confessed its inability to redeem them and asked the bondholders for an extension.

Here is another article that is even more intense that has to do with conditions in 1933: Pg 285 America’s Great Depression by Murray Rothbard. Quoted from Agricultural Discontent in the Middle West, 1900-1939,Wisconsin Press 1951 p.448

As in most depressions, the property rights of the creditors in debts and claims were subjected to frequent attack, in favor of debtors who wished to refuse payment of their obligations with impunity. We have noted the Federal drive to weaken the bankruptcy laws. States also joined in the attack on creditors. Many states adopted compulsory debt moratoria in early 1933, and sales at auction for debt judgments were halted by Wisconsin, Iowa, Minnesota, Nebraska, and South Dakota. Governor Clyde Herring of Iowa asked insurance and mortgage companies to stop foreclosing mortgages. Life insurance companies protested that they were being very lenient, yet in many areas the courts would not enforce foreclosures for insurance companies, enabling many borrowers arrogantly to refuse to pay. Minnesota forbade foreclosures on farms or homes for several years.

So we can say without a doubt that we have never seen anything like this, but it did happen here about 78 years ago. We could be on our way to an experience of a life time. Are you ready?

Copyright 2008 All rights reserved

Saturday, January 12, 2008

The Invisible Recession

The economy is slowing down. The under 40 crowd has no real life experience to relate to the word “recession.” Its effects are not understood. An early sign is insufficient government tax revenues. California has a 10 billion dollar budget shortfall. How do you cut back 10% when you have already spent it? The cuts for schools, police and fire department will be felt slowly.

Countrywide is being bought out by Bank of America who gave them a two billion cash infusion last August. They figured why not buy the cow, they already paid for the milk. Their purchase would make sense at a market bottom. At a near top, it sounds more like suicide. Two dollars a share would have been a reasonable price. Seven dollars a share is shear lunacy! Another loser in play, Washington Mutual is talking to JP Morgan. Common sense suggests that neither deal is prudent. This sort of speculation reflects a complete lack of financial responsibility on the banks part, towards their shareholders.

Post Script Note added 1/14/04: [Countrywide's purchase in lieu of bankruptcy keeps six million homeowners with Countrywide mortgage payments out of bank limbo.]

American Express seems to be having problems. Wasn’t that card supposed to solve all our financial needs? Another company, Merrill Lynch claims 15 billion in losses. Give them a couple of weeks, that number will get bigger; they have a decimal point rolling around on the floor. All of this has happened in the span of four months. The "R" word is sneaking up on the economy. Most people don’t comprehend what is beginning to unfold, they have no clue. The surf is up, but this wave may be a tad too big to ride.

The amazing part of this mess, is the size of the many different problems facing the economy. The scale is beyond belief. 100 billion here, 100 billion there, and no one has lost a dime. The Fed will probably lower the Fed funds rate again. They are not creating money. If everyone wanted to draw their cash out of the bank, there is not enough printed currency. The Fed is delivering money to the banks so that the depositors can stuff their mattresses with the cash. Naturally the bank sells assets to raise cash and this reduces the cash a bank has available for new loans. This results in a contraction of the money supply. The bank borrows from the Fed to cover cash they can't raise until they sell the asset. To put it another way, it’s a run on the bank. The Fed’s logic behind this action is the hope that the market turns around soon, then things can go back to the way they were. Unfortunately three to four months more of what we have now, the game could be over.

The unforeseen problem just appearing is the credit card conundrum. If a client is over their limit and you cut them off from further purchases, what incentive do they have to pay on their bill? The card user doesn’t have to file for bankruptcy to avoid paying a credit card bill. No payment for 10 years wipes the debt off of their credit report. Credit card debt is unsecured debt. So the card issuer has a fine line to look at, either “Cut and run” or “Extend more credit.” “Cut and run,” looks like what has to eventually happen. The end result could be massive losses.

Then we have the Don Quixote of finance, Ben Bernanke, who’s going to lower the Fed’s fund rate and save the country from certain destruction. It kind of reminds me of an Inspector Clouseau, Pink Panther movie. Whatever worked, worked for all the wrong reasons.

Copyright 2008 All rights reserved

Friday, January 04, 2008

Disappearing Home Equity

Here is a nice chart I purloined from Calculated Risk. I added some color to it to give it some pizazz. This graph shows the distribution of home owners with loans on the books. Statistical sources allude to the fact that 40-50 percent of all real estate is paid off, so this chart represents about half of the market.

If real estate drops 30% the red sector will be upside down. If housing prices drop 50%, then include the yellow area in the total. Figure a worse case scenario of a 50 percent drop, one fourth of all housing has the potential to become "Jingle Mail."

People in the purple band have no equity to lose. Those foreclosures were the first to affect housing prices. Now the home owners in the red region are in trouble. Bank REO's are pricing into the yellow region right now. The red and yellow areas represent cash that was in the home owner's wallet. It's slowly disappearing. Figure about 25% of home owners in the United States have a good shot at losing their down payment and paid in equity. This will affect consumer spending for many years into the future. A drop like that could take the "hurry" aspect out of any future home purchase.

50K off the price of a house in Colorado is different than 300K off of a house in Kalifornia (the pain is not evenly spread out). Examine the disappearing equity. It came from no where and is going back to no where.

Today's home owner is like a baseball player loaded up with Viagra, Ex-Lax and steroids. He doesn't know whether he's coming or going, but he's definitely going to set some records.

Copyright 2008 All rights reserved