Market Sell Off on Goldman News Has Deeper Roots

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The SEC's announcement on Friday (April 17th) that it was investigating Goldman Sachs on fraud charges seems to have been the cause of a serious market sell off, but other factors were at work as well. While major financial stocks took a hit, so did gold, gold miners, and oil. The tech heavy Nasdaq also had a sharp decline. The market was overbought and options expiration added an extra impetus to the volatility.  In such circumstances, any bad news can cause contagious selling.

While selling was broad based, large cap financials were indeed the epicenter of the damage. Goldman (GS) itself closed down 13% on the day. JP Morgan (JPM) was down 5% and Morgan Stanley (MS) down 6%. XLF, the financial ETF, was down 4.5%. Inexplicably, the gold mining index HUI was down 4.4% and gold and oil were each down over 2%. Gold should have seen safe haven investing flows, but did not.

As for the major market indices, the financial heavy S&P 500 had the biggest drop, falling 1.6%. The Dow Jones Industrial Average was down only 1.1% and the small cap Russell 2000 ended 1.3% lower. Nasdaq lost 1.4%. On the daily charts, the S&P 500 and Russell 2000 reached overbought territory in the middle of last week. Nasdaq became extremely overbought at the same time. If selling hadn't started on Friday, it would have done so probably at the beginning of this week.

Although the Dow has not gotten to overbought territory, it has other technical issues, namely volume or lack thereof. The Dow finally had a high volume trading day on Friday ... on heavy selling, which added even more weight to the technically negative picture. Overall volume on the Dow has been dropping since the bottom was put in last March, something that should not be taking place during a rally. Even worse, selling has been occurring on above average volume recently. This is known as distribution and indicates big money is getting out of the market. The only above average volume day so far in April was last Friday. The only high volume day in March also saw selling. February was more mixed, but the four highest volume days in January, all well above average, saw selling. 

Where the buying has been taken place in the market is also not encouraging. Only six stocks frequently account for up to 30% of the buying on the NYSE - Citigroup (C), AIG (AIG), Ambac (ABK), Bank of America (BAK), Popular (BPOP) and Fannie Mae (FNM). Considering that AIG and Fannie Mae are nationalized enterprises owned by the U.S. government and Ambac, Citigroup and Popular were penny stocks selling for 1.00 or less during the Credit Crisis, this is not exactly a sterling list of solid growth companies leading the market.

Liquidity is what makes markets go up (good earnings are the result of liquidity, although in the current rally, liberalized accounting standards may be even more important). The fed and other central banks throughout the world have pumped an almost unlimited amount of it into the world financial system since the Credit Crisis began. Too much liquidity over too long a period of time though pumps up stocks to unsustainable levels as happened in 1929, 1987 and 2000. Under such circumstances withdrawing even small amounts of liquidity can have the effect of sticking a pin in a very over inflated balloon.

Disclosure: Long oil.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

CFTC Kills Off DXO

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

DXO no longer exists. Deutsche Bank announced on September 1st that it would redeem all shares after the market closed on September 9th. DXO was started in June 2008 and had $600 million in assets. It was a investment vehicle that offered hundreds of thousands of small investors a leveraged oil play. Many members of the New York Investing meetup bought it in March and sold it in June of this year and made a 165% profit on this trade. We will not be able to do so again in the future.

The CFTC (Commodities Futures Trading Commission) has been holding hearings this summer to investigate 'speculation' in the oil market. It has specifically targeted ETFs and ETNs in this regard. Deutsche Bank did not directly mention the CFTC in its announcement but said this redemption is the result of “limitations imposed by the exchange” causing a “regulatory event”. How much behind the scenes pressure was put on Deutsche Bank is not known. Deutsche Bank is a holder of U.S. mortgage debt. While it doesn't seem to be on the list of TARP recipients, it did receive approximately $11.8 billion from AIG as a result of the government's nationalization of the company. It can also be assumed that Deutsche Bank benefits from other Fed programs that take junky assets off bank's books and replaces them with higher quality bonds. When the government 'owns you', you are likely to give it what it wants.

It is interesting that the CFTC is concentrating its efforts on 'speculation' from investment entities that are used by small investors. Like the SEC, it hears no evil and sees no evil when it comes to the large players. For years there have been two large banks that have held large short positions in Silver futures (and Deutsche Bank may be one of those banks). It took years of complaints before the CFTC agreed to investigate, just as the SEC continually ignored complaints about Bernie Madoff and his obvious $65 billion Ponzi scheme. So far, the CFTC has found nothing, just as the SEC never at any point found any wrongdoing on Madoff's part (his Ponzi scheme collapsed on its own accord). If the federal government wanted to limit speculation in the commodities market it could easily have done so, by forcing Goldman Sachs and Morgan Stanley to close down their commodity trading operations. Federal law prohibits banks from speculating in commodities and both Goldman Sachs and Morgan Stanley became banks in 2008. The government gave both firms a special five-year dispensation however. If you are a big player, you don't have to worry about 'the rules'.

The government's action in the energy market should be seen for what it is - an attempt at imposing price controls on oil and gas. Price controls never work and almost always lead to shortages and much higher prices. ETFs will not disappear either as a result of the CFTC's action, but will turn into closed-end funds. There will be an attempt to launch more of them. Each one will be smaller, less liquid and have a much higher expense ratio. More will move to overseas markets that are less restrictive. While it is just oil and gas this summer, expect other markets (particularly agricultural) to be affected in the future.

NEXT: The Cash From Clunk-Heads Program

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bernanke Reappointed, Court Order and FDIC

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Federal Reserve Chair Ben Bernanke is going to be reappointed for another 4 year term. Obama decided to reappoint Bernanke because he wanted to keep together the team that had weathered the Credit Crisis, an administration official said. This is of course like reappointing the team that did such a 'good job' handling Hurricane Katrina. Just as Bush praised those incompetents, 'change you can believe in' Obama praised Bernanke for preventing another depression. Bernanke was first appointed by Bush and didn't foresee the Credit Crisis coming, nor did he respond appropriately once it did. There is of course also no evidence that another depression has been prevented . So far, it is just some fantasy that politicians inside the Beltway keep repeating to each other.

In other Fed related news, a federal court in New York has ordered the Fed make available information from 11 of its Credit Crisis programs to the public. The court ruled that the Fed improperly withheld records under the Freedom of Information law. Bloomberg News sued (kudos to them) and is trying to find out how much money was given to which banks. In its defense of the case, the Fed (which I would like to remind you is only a quasi-governmental entity - the big banks own stock in it and have their representatives sit on the Fed's regional board of directors) essentially maintained that it was above the law. Undermining our democratic system - just another example of the 'good job' that Ben Bernanke has been doing.

The FDIC is also in the news again. For some reason, even though the Credit Crisis is supposedly over and the economy is recovering U.S. bank failures are skyrocketing. The agency needs new bidders for failed banks because existing banks are now avoiding purchasing them. The FDIC's deposit insurance funds are also getting depleted. The FDIC is proposing a rule change that will allow private equity firms to buy failed banks and maintain capital ratios of 10% instead of 15%. This will of course make the failed banks likely to fail again - and I bet the private equity firms will scream for a government bailout when this happens. Indy Mac and Bank United were already sold to private equity firms earlier this year. Based on this news, we can presume that the FDIC is not using the Bernanke approach of threatening to fire any bank president that doesn't agree to the government's proposed takeover demands, as happened with Bank America. Since these banks are NOT too big to fail, they are not being directly nationalized as was AIG or indirectly nationalized as was the case with most of the big U.S. commercial banks and brokers. Undermining our capitalist system - just another example of the 'good job' that Ben Bernanke has done.

The biggest danger in any crisis is leadership that is oblivious and is in denial. The crisis only gets worse under such circumstances. Bernanke has been a disaster as a federal reserve chair by any criteria that you wish to measure his tenure by. Obama is not only totally ignorant of basic economics and devoid of any ideas for handling our current situation, but is even oblivious to what the current situation is. His actions remind me of Herbert Hoover's famous June 1930 press conference stating the Depression was over. Hoover was more than a decade early.

NEXT: Consumer Confidence Game and Housing's False Bottom

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Smoking Gun of the Economic Recovery Scam

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The Economic recovery that is supposedly taking place has been carefully arranged by the U.S. government. Unfortunately, the 'recovery' will be far more evident in the published statistics than in the economy itself. After all, it is a lot easier to change the numbers that to actually fix the economy. Apparently, the hope is that with enough cheer leading, businesses and the public will get on the bandwagon and start spending again. I can picture Bernanke, Geithner and Obama clicking their heels together and trying to wish hard enough to make it so.

The AIG earnings report came in as positive as expected on Friday. How did a company that is beyond bankrupt manage to show positive earnings? The key statement in the report about what happened was "resulting from the adoption of new accounting guidelines". These new guidelines were set by the U.S. government and probably benefited every big bank and brokerage house as well, most of which had surprisingly good earnings - even though their lending operations (the core business of any bank) were continuing to deteriorate during the quarter. So the mystery has been solved. If your earnings are disastrous, just change the accounting rules and like waving a magic wand, suddenly you're earning gobs of money. Happy days are here again!

If you want to know how well this approach works, you can take a look at Enron and GM. Enron's earnings were phony for years and then it imploded overnight. GM changed its accounting in the mid-2000s after the recession and suddenly one quarter it was earning big bucks instead of losing big bucks. To its credit, CNBC News actually reported that the big 'improvement' was merely an accounting gimmick. The stock still rallied strongly on the news (so much for the Efficient Market Hypothesis). Even though the government started pouring money into GM starting in 2007, it still went bankrupt in 2009. Now the government is supporting it to the tune of $4500 per car with the Cash for Clunkers program. Reports out today predict that autos are going to be the next big recovery area of the economy, improving both the industrial production numbers (which fell at a depression level 19% in the first quarter) and retail sales (which went up in May and June because of higher gas prices - they're not adjusted for inflation).

If the government pours huge amounts of money into any industry, the numbers will of course improve. This doesn't indicate economic recovery though, even though it is being sold that way. Will the government keep doing this every quarter? It may have to in order to keep the 'recovery' going. If you want to know how well that approach works, see Weimar Germany and Zimbabwe.

NEXT: Inconsistencies of the Economic 'Recovery'

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Latest from Fantasy Land

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

AIG was up as much as 66% yesterday on rumors that it would show a profit for last quarter when it reports its earnings this Friday. For those of you who may not remember, AIG is the derivatives poster child for the Credit Crisis. It was nationalized by the U.S. government, which purchased 80% of its stock and grossly overpaid for it. It was of course impossible not to overpay since the actual value of the stock was well below zero. The feds have had to continue to pour money into AIG to keep it afloat and any 'profit' it shows would be the result of the U.S. government putting more money into the company than it is losing. Now that's a great business model. What investor wouldn't want to get a piece of that action?

Just consider AIG another example of how the economy is 'recovering'. The AP wire service published a piece this weekend about how U.S. real estate prices have bottomed and the market is turning up. According to AP, the crisis is OVER and happy days are here again. Interestingly in the same article, AP projected that U.S. unemployment would be increasing until well into 2010 - just the type of situation that prevents people from buying homes and banks from lending to them. Foreclosures are up too and that of course doesn't create a drag on the housing market. The increase in foreclosures is even worse in Great Britain, although house prices are supposedly going up there as well. The 'recovery' is going so great that the Bank of England announced a big increase in their quantitative easing (aka money printing) program this morning. Yeah, things are really going great when you have to fund government spending with money created out of thin air.

As pathetic as British government finances are, and they are indeed quite pathetic, the pound still has managed to rally against the U.S. dollar during the last two months. What does this say about the market's view of U.S. government finances and our much acclaimed economic 'recovery'? The recovery wasn't looking so good yesterday when the ISM service index came out. It FELL from 47.0 in June to 46.4 in July (anything under 50 is contraction). While the manufacturing index was above 48 (still in contraction), the service component of the U.S. economy is much bigger than the manufacturing component - and it's not doing well. Also not doing well are retail sales (consumer spending is approximately 70% of the economy). Most chain store sales were strongly negative. So the economy is 'recovering', but this doesn't include any of its major components.

The trade-weighted dollar declined again yesterday, making it three days in a row that it has been below it break down price of 78.33. Gold sold off slightly. Oil tanked on the weekly EIA storage report, but then managed to close higher. Mainstream media reported this took place because of dollar weakness. One financial service also had an article that said gold went down because the dollar had been strong in the morning (I missed that). I commented on their website that these two articles were contradictory and this looked like some form of manipulation of the news. That comment was censored - just like much of mainstream financial news reporting.

NEXT: Non-Farm Payrolls and Its Statistical Quirks

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Today's Economic Lunacy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

If ever there was ever any doubt that lunatics are running the economic asylum, we received more than enough confirmation of it today. Fed chairman Ben Bernanke expressed confidence that the current recession (actually depression) could end in 2009. It has been revealed that much of the AIG bailout money went to pay other banks and brokers who were also receiving bailout money and for executive bonuses. OPEC caved into pressure from the West not to cut oil production because it would hurt the world economy, as if this could somehow undo all the damage the Central Bankers were doing.

Fed Chair Ben Bernanke made his remarks about the recession on 60 Minutes (they should have resurrected the 1960's classic show, 'The Twilight Zone', for his commentary). While media headlines this morning blared that Bernanke said the recession would be ending in 2009, he actually added the important caveat that this would only happen if the banking system is stabilized. A realistic assessment of the chances of that happening can not be found in most press coverage. Bernanke further stated (try not to laugh) the largest U.S. banks are solvent and "they are not going to fail". The large U.S. banks are of course insolvent, although it is true that they are not going to fail because the government will pump an infinite amount of money into them if necessary to prevent this from happening. U.S. taxpayers should not worry about this however. Bernanke assured us last night that the bailout aid is not coming directly from tax funds and is "more akin to printing money than it is borrowing." Isn't that the approach the Weimar Germany and Zimbabwe took?

Government money printing is bad enough as is, but the news out of AIG over the weekend shows just how much of this is going to waste (hey, don't worry, they can always print more... and they will). Of the $170 billion that AIG received in government bailout funds, $105 billion went to pay other banks, including many foreign banks. Many of the U.S. banks were already receiving other government bailout money as is. As for the foreign banks, why is the U.S. bailing them out? Adding insult to injury, AIG is also using its bailout money to also pay executive bonuses. It claims that it is legally obligated to do so. Personally, I would like to see those contracts that state government money must be used to pay these bonuses. I think this problem could easily be solved if the people running AIG spent some time with Bernie Madoff in his new home.

Since the ordinary rules of basic economics are being ignored everywhere else, why should they apply to oil production. At its meeting on Sunday, OPEC did not cut production quotas again, but instead said it would aim to enforce the already existing cuts. In the last several months OPEC has announced a 4.2 billion reduction in quotas and it is estimated there has been 80% compliance. They are now trying to get the extra 20% or 800,000 barrels a day. Oil production is being cut elsewhere as well, including the U.S., and this is happening because it simply isn't profitable to produce oil under $40 a barrel in many places. And no amount of wishing, hoping and jawboning is going to make this happen. The rules of economics always win in the end. Someone should tell Ben Bernanke.

The New York Investing meetup is having its second class in Technical Analysis on Tuesday. If you are in the New York area, you should be attending (space is limited and by invitation only to members of the group, if you didn't get an invitation email me through the website).

NEXT: When Bad News is Good News and Vice-a-Versa

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Market Will Reward Real Value Going Forward

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Stocks rallied again yesterday and are doing so again this morning. Deconstructing this rally can provide investors with a lot of useful information going forward. While much of what it is taking place so far is short covering, some of that can turn into sustainable price increases and some of it can't. The market is also showing a clear preference for value over growth and hard assets over future promises, which makes perfect sense in a down economy with impending inflation.

The biggest up moves have been seen in the financial stocks. Many of them have massive short positions and in such cases any little piece of news can cause a big rally. It is also quite easy to have a big percentage gain if your company's stock was as low as 97 cents as Citigroup was. A move to 1.85 (the price as I write this) means a rally of over 85%. In the very short term, the big money is in the financials (if you trade them, watch them like a hawk). Nothing has really changed in their underlying value however. Many are still essentially insolvent, even if they haven't been fully nationalized yet like AIG, FNM, and FRE. Interestingly, bankrupt AIG, Fannie and Freddie are still trading and are in the pennies. They have not participated in the rally. You can expect many of the financials to come right back down and at some point to stay there.

Commodity stocks have also had nice rallies in many cases, but nothing like the financials. The represent extreme value and the possibility of sustainable action in long term (many of them actually bottomed sometime between last October and December and made a bullish divergence with the rest of market by not going to new lows in the recent sell off). In most cases they own large deposits of oil or metals, as opposed to worthless pieces of paper. These will not only maintain their value, but increase it at rates faster than inflation. In contrast to these hard asset stocks are growth stocks, which frequently have very limited real assets but are valued based on their future business. These are the stars in long term bull markets (think tech stocks in the 1990s), but are put on the back burner in long term bear markets. The IBD 100 is good proxy for this group. It has underperformed the market indices in this rally and this is not surprising. The days of easy money in this group are not likely to return soon.

Like all rallies off the bottom, the first down move will be important. Minimally, you don't want to see the recent lows broken and you would like to see the low of the first down move put in by next Friday and then a rally follow that. If the market breaks the lows from last week, a drop to the next major support levels is likely. This will almost certainly happen in the future, but doesn't have to happen right now. Long down moves in bear markets are frequently interupted by nice rallies on the upside.

NEXT: Today's Economic Lunacy

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Geithner's appointment to Treasury - a Golden Opportunity

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The market turnaround last Friday afternoon was reported by the financial media as resulting from the announcement that the head of the New York Fed, Timothy Geithner, would be appointed by President elect Obama as his Treasury Secretary. It would indeed be reasonable for Wall Street to cheer Geithner's appointment and the future team of takover Timothy and bailout Benny. It sent a very clear message that the new administration's policies will be to rescue any and every company needing it. While stocks rallied sharply on this news, the inflation hedges gold and silver rallied even more - and for good reason.

Geithner was the mastermind behind the AIG and Bear Stearns deals. In the case of AIG the company was nationalized by paying 10 times the market price for the U.S. taxpayer's share (if this had been a private deal he would have been sued for malfeasance). Bear Stearns was valued well below market value as a gift to JP Morgan Chase (which has a seat on the New York Fed Board of Directors by the way). Taxpayers just got to guarantee Bear's toxic loans and were left holding the bag. While most news media reported that Geithner was in favor of bailing out Lehman Brothers, this was apparently not the case. People who were on the scene at the negotiations claim otherwise. It is now widely acknowledged that allowing Lehman to fail is what has led to the market turmoil in the last two months. The PR campaign to build up Geithner obviously felt it important to rewrite history and in doing so made it clear that a universal U.S. government bailout policy was in our future.

Despite the momentary trouble that the automakers are having in Washington on getting in on the government gravy train and the failure to bail out Lehman (somewhat similar to the failure of the Fed to bail out the Bank of the United States in 1930, which had disastrous consequences), short of complete nationalization, the U.S. government couldn't do much more to support financial firms other than pump even more money into them (this will indeed be happening). Over the weekend the government guaranteed the most worthless one-sixth of Citigroup's assets. Today, the Fed announced a $600 billion program to support the mortgage market, $100 billion for Fannie Mae and Freddie Mac (two other financial black holes for government money) and $500 billion to purchase mortgage backed securities. Additionally, the Fed will lend up to $200 billion to the holders of securities backed by various types of consumer loans. So that's another $800 billion just for today. The total in the last year is way into the many trillions and you many assume most if not all of that is freshly printed money.

The implications of these moves have not gone unnoticed in the markets. Inflation sensitive silver rallied more than any stock index on both Friday and Monday. Gold, which has not been terribly damaged in the sell off during the last two months, and beaten down oil also had good rallies. The charts for gold and silver are much healthier looking than those for the major stock indices. Sustainable rallies are possible for both, while stocks look like they will need to do more work to get to that point.

NEXT: A Black (Plague) Friday for Retail

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

AIG - Bailing Out the Bailout... Again

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The New York Investing meetup has repeatedly said in its meetings that there is no such thing as one bailout for an insolvent financial company. If Fed Chair Bernanke or Treasury Secretary Paulson belonged to the group they might have realized that Dow stock AIG was likely to turn into the bailout black hole of taxpayer funding that it has become. AIG is now on its third government bailout in less than two months. In mid-September, it had originally requested a loan of $40 billion from the Fed which was turned down. Days later the Fed bought 80% of the company for $85 billion. (see our September 17th blog entry: The People's Republic of the U.S. - the AIG Bailout). The government had to throw in an additional $38 billion in October to keep the company afloat. AIG then reported a $24.5 billion loss, 80% owned by the American taxpayer, for the third quarter in early November and this necessitated the bailout to be totally restructured.

After the initial bailout, the federal government issued assurances that its actions had stabilized AIG - and indeed it did for a whole few weeks (the approximate see ahead time for the visionaries that currently run the U.S. Treasury department and Federal Reserve). Unfortunately, the way the government stabilized AIG helped destabilize the market. This occurred because there seems to have been a high interest attached to AIG's government funding, which was treated as a loan even though it involved the purchase of common stock. While this apparently makes no sense whatsoever, we are dealing with the government here so don't expect the ordinary rules of financial logic to apply. This high interest rate forced AIG to dump a lot of securities on to the market in late September and early October helping to exacerbate the post-Lehman bankruptcy meltdown that took place during that time.

In the $150 billion AIG bailout part 3, the amount of funding from the Fed will be reduced to $60 billion and the interest rate on this loan will be lowered as well. An additional $40 billion will come from TARP, aka the Wall Street welfare bill, for the purchase of preferred shares in AIG. The Treasury for once correctly stated that this would not increase the government's ownership in AIG, although Treasury has previously indicated that preferred stock, which is a perpetual loan, represented ownership rights in a company. Paulson has also indicated that funds from TARP would only go to 'healthy companies', not failing companies such as AIG (this of course begs the question of why a 'healthy company' would need government assistance). The government will also be funding a $20 billion dollar buy back of residential mortgage securities that AIG insures and $30 billion dollars for the purchase of collateralized debt obligations (CDOs) for 5o cents on the dollar. It is CDO exposure that has financially ruined the company.

AIG has taken $100 billion or so in write downs so far. Its exposure to insurance for fixed-income investments fell from $441 billion to $372 billion after the governments first injection of $85 billion. Based on these figures, my guess is the the upper limit for bailing out the company is somewhere around $400 billion. Assuming of course they can cut down on using taxpayer funds for spa treatments for their executives and the one-million dollar a month payments they are making to former management who's decisions helped destroy the company.

NEXT: U.S. Market Tests Low as Global Recession Predicted

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

China Bails Out Asia - at Least for Today

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Finance ministers and central bankers from the Group of 20 (nineteen of the world's largest economies, plus the European Union) met in Brazil on Sunday and called for increased government spending to bolster the sagging global economy. The multi trillion dollar bailouts, massive liquidity injections, and sharp rate cuts in the last two months apparently haven't done the trick. To do its part, China promptly announced a $586 billion stimulus plan consisting of spending, subsidies, loser credit, and tax cuts. Unlike the rate cuts in Britain and the ECB last week, when the markets crashed the day they were announced, Asian markets rallied strongly on the news.

Not surprisingly, the Shanghai composite was up the most with a 7.3% gain. It is still down about two-thirds from its high last October, after rising in one of the most spectacular bubbles in history (bubble markets usually need somewhere between an 80% to 98% drop before they can stabilize). The Nikkei rose 5.8% on the news, after having hit a new low in its 18 year drop only recently. Intraday, the Nikkei has had approximately an 83% drop so far from its bubble high in 1990 to its current low. What the final number will be and when it will take place is anybody's guess. The Sensex in India, another bubble market, rose 5.8% as well. The dollar rallied against the Yen and natural resource stocks (inflation indicators) seemed to be the major beneficiaries of China's announcement. BHP Billiton, the world's biggest mining company was up 13%.

As the rally moved along with the sun to Europe, the enthusiasm dampened somewhat. Major European markets are up less than 3% as of this writing. U.S. pre-market futures indicate an even smaller rally here. Of course the Dow already rallied 2.8% on Friday, but this was after a two-day post election drop of around 10% (half of what would be necessary to create a bear market). The news of Circuit City's bankruptcy and AIG's third government bailout, with the total now up to $150 billion, will weigh on the U.S. market if rationality prevails - a dubious presumption at best.

In case there was any doubt previously, the economic policy makers for all the world's large economies are pursuing and will continue to pursue extreme inflationary policies. In many cases, this is being done to try to reinflate collapsing bubbles. There is no short-term likelihood of success in this endeavor. They will be successful however in igniting an inflation bubble. Although this is completely predictable, expect great surprise - and denial - when inflation starts to get out of control.

NEXT: Auto-Asphyxiation - GM, Ford Gasp for Bailout

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

No Assurance in Insurance; Wachovia's Deal is Not a Deal

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Apparently you can't rely on anything that U.S. government officials say, whether it comes from politicians or federal agencies. As is the case for those with severe psychological disturbances, reality has no permanence, but can change from moment to moment. Today's illustration of this 'Washington psychosis' comes from the Democratic leader of the Senate, Harry Reid, and the FDIC, the people who are supposed to be protecting your bank deposits. Reid publicly stated that a major insurance company was about to go under and then later backtracked (apparently the amnesia drugs had kicked in by that time). The FDIC announced on September 29th that Wachovia had been purchased by Citibank and provided detailed terms of the transaction. This morning, Wells Fargo announced that it was taking over Wachovia in an all stock deal. This leads to the immediate question of who paid whom a bigger bribe to make this happen.

Reid's statement was, " We don't have a lot of leeway on time. One of the individuals in the caucus today talked about a major insurance company. A major insurance company -one with a name that everyone knows that's on the verge of going bankrupt". Insurance stocks were already down before this comment because of exposure to AIG, Lehman, and Washington Mutual debt, not to mention derivatives. The selling accelerated after Reid spoke. In a very carefully worded statement (note the italics), a spokesman for Reid later stated, "Senator Reid is not personally aware of any particular company being on the verge of bankruptcy. He has no special knowledge about [a bankruptcy], nor has he talked to any insurance company officials." There were four insurance companies, which might be considered household names, that had double digit sell offs on Thursday - Hartford Financial Services (down 32%), MetLife (down 15%), Prudential (down 11%), and Lowes (down 10%). Both Met Life and Hartford released statements that they were not on the verge of bankruptcy (one wonders why they felt a need to do so).

Below is all the U.S. listed insurance companies with a market cap over one billion that had 10% or greater sell offs on Thursday:

Hartford Financial Services (HIG) - down 32%
Principal Financial Group (PFG) - down 16%
MetLife (MET)- down 15%
AXA (AXA) - down 12%
State Auto Financial Corp (STFC) - down 12%
Delphi Financial Corp (DFG) - down 12%
Prudential Financial (PRU) - down 11%
Unitrin (UTR) - down 11%
Everest Real Estate Group (RE) - down 11%
Loews (L) - down 10%
Cincinnati Financial Corp (CINF) - down 10%

The Reid insurance bankruptcy comments were just a moment of truth accidentally slipping out. The takeover of Wachovia by Wells Fargo after there was a done deal with Citibank is far more serious however. This represents a fracturing of the capitalist system in the U.S. Such niceties as contract and property rights no longer seem to be necessary, as indeed is the case in backward, undeveloped economies (which remain backward and undeveloped because these underpinnings for successfully doing business are missing). Of course, things may not actually that bad. This could merely be a case of the FDIC publishing completely false information about its activities and what is going on in the banking system. Well, that's certainly a reassuring thought.

NEXT: The House Caves in, but it's the Market that Collapses

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Central Bank Liquidity Tsunami Returns

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video related to this posting:

After Lehman declared bankruptcy on the Monday the 15th, Merrill Lynch had to be taken over by Bank America and AIG was nearing its end, the market was looking for a rate cut from the Fed during its Tuesday meeting. The Fed and Treasury had conditioned the market to expect bailouts for financial firms and then failed to deliver when they didn't rescue Lehman and grant AIG its initial loan request of $40 billion. The Fed failed to deliver again when it didn't cut the funds rate. This seeming policy reversal, refusing to support failing financial firms with loan guarantees and the stock market with rate cuts, not surprisingly started a huge market sell off.

The Fed started pumping money into the financial system at the rate of $70 billion a day on Monday and Tuesday. While this was well above normal, it was by no means adequate for the financial crisis that was unfolding. Not only did the Dow go down 45o points and gold go up $90 on Wednesday, but the bond market indicated a panic flight to quality. For a brief time, interest rates on 1-month T-bills became negative. The rates on 3-month T-bills remained barely positive at 0.2%, the lowest level since 1954. The TED spread a measure of financial system stability, or lack thereof, hit the level it reached during the crash of 1987.

The Fed's apparent obliviousness to the magnitude of the situation was truly mind boggling, but not inconsistent with Bernanke's previous missteps - after all he didn't expect the subprime crisis would have any serious impact on the market as of June 2007, if not later. After the market route on Wednesday, along with Morgan Stanley acting as if it was about to go under, the Fed decided to flood the world financial system with liquidity. It supplied a line of credit of as much as $247 billion to the ECB, Bank of England, Bank of Japan, the Swiss National Bank and the Bank of Canada. These banks in turn added their own funds and a gusher of money poured forth from every central bank spigot available. As one observer noted, the central banks were essentially providing unlimited liquidity to world financial markets. Not surprisingly, stock markets reacted positively everywhere with big rallies, with the Dow being up 410 points and the Nasdaq up 100 points on Thursday.

Euphoria from liquidity injections usually lasts only a short time, unless the underlying problems get fixed. In this case, the problems may be even worse than the market realized. The Fed's delayed reaction to the market turmoil and its initial cold shoulder to AIG may not have been voluntary, it may have had no choice. On Wednesday, the Fed asked the U.S. Treasury to raise money on its behalf by selling bonds and by Thursday it had received $160 billion from this operation. The Fed has never made this request from the Treasury before. While the official explanation for doing so was to help with its cash management, this is highly unlikely. More plausible is that the Fed itself has run out of money and is being secretly bailed out. Events that took place Thursday evening lent further credence to this belief.

NEXT: The Free Market Goes Under

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Peoples Republic of the U.S. - the AIG Bailout

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

In a socialist state, the government decides what a company is worth, not the market. The Federal Reserve clearly demonstrated this concept by purchasing almost 80% of the insurance giant AIG on Tuesday night, September 16th. The Fed paid over 10 times what the market said its stake in AIG was worth. It is not clear what U.S. laws allow for the nationalization of part of the insurance industry, nor what companies will be bought next now that this precedent has been set.

The final phase of AIG's death spiral began on Monday evening when the major credit agencies downgraded it. This credit downgrade required AIG to post billions of dollars of additional collateral for its mortgage derivative contracts - capital that AIG simple didn't have. The implications were far more serous than the public realized, since AIG is a central player in the CDS (credit default swaps) market and does business with almost every financial institution in the world. If AIG went under it would have been unable to pay off its CDS obligations and its counter parties would have unable to collect on its trades. It was estimated that a large number of hedge funds, and possibly some banks, would have gone under along with AIG.

Over the weekend AIG attempted to borrow $40 billion form the Federal Reserve. The Fed, originally set up to lend just to commercial banks, had no legal authority to lend to insurance companies. And even though it had extended its lending to broker-dealers in March and to mortgage giants Fannie Mae and Freddie Mac in July, it was reluctant to add insurance companies to the list. Then on Tuesday evening, the Fed (with support from the Treasury and President Bush) decided to extend its legal authority way beyond anything ever intended by agreeing to pump $85 billion into AIG. The media described this $85 billion as a 'loan' even though a 79.9% equity stake in AIG was being given in exchange (note to media: this is a stock purchase, not a loan). This is not for already existing AIG stock, but for newly issued AIG stock, so AIG will have to increase its outstanding amount of stock to five times its current level. This is a better deal for stockholders than usual, since they will be left with something, instead of being completely wiped out.

Based on Tuesday's closing price, AIG had a market cap of just over $10 billion dollars. In order to buy 80% of the company (which was worth $8 billion according to the market), the U.S. paid $85 billion or over 10 times the market price. Socialism leads to just such economic absurdities. Unless this is stopped, expect more of this in the future - and the permanently ruined economy that always follows.

NEXT: The Mega Move Up in Gold and Silver

Daryl Montgomery
Organizer, New York Investing
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Banks and Brokers Most Likely to Fail - The Big Players

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video for this posting can be found at: http://www.youtube.com/watch?v=sBhEO14lwMg

Other videos on this topic: http://www.youtube.com/watch?v=ZIxTlP5FU_Q

At our September 8th meeting, the New York Investing meetup presented a talk on the 'Banks and Brokers Most Likely to Fail'. This was a follow up to material that was already presented in our April meeting 9th meeting talk, 'The Dirtiest Dozen Financial Companies' (the notes for both of these talks were posted on our web site at: http://investing.meetup.com/21/files). Putting together all the criteria that should be considered in determining whether or not a bank of broker could be insolvent or heading in that direction the following list of large banks or brokers resulted (how much their stock was down from the high is the figure next to their name):

Washington Mutual -down 93%
Lehman - down 91%
Wachovia - down 87%
Merrill Lynch - down 78%
Citibank - down 75%
UBS - down 73%
Royal Bank of Scotland - down 73%
Keycorp - down 82%

With the exception of Wachovia, the Royal Bank of Scotland and Keycorp, these companies had already appeared on our April list.

Washington Mutual and Lehman were obviously both in desperate shape and jocking for the number one position of who would be gone first. Washington Mutual had the highest one-year CD rates in the U.S and the willingness to pay a lot more for funds than its rivals indicated how urgently it needed funds. It could also not raise capital because it had sold stock at $8.75 a share with an agreement to reimburse the buyer for the price difference if it sold stock again at a lower price. It's price had fallen so low (it's price dipped to $1.75 a share the day of our meeting) that if it sold new stock, it would have to pay more to this purchaser per share than it would from the sale. Lehman on the other hand, had been in serious trouble since March and would have gone under right after Bear Stearns failure except for Federal Reserve cash infusions into the company from the newly established PDCF (Primary Dealer Credit Facility). It had just released its earnings and had lost $5.62 a share in the third quarter versus $5.19 a share in the second quarter. Its stock was falling rapidly and would close at $3.65 on Friday.

Lehman had been trying to sell some of its operation or part of the company for the previous several weeks. The Korean Development bank finally withdrew from negotiations claiming they were asking too much. Lehman had deteriorated so much that an emergency meeting was held at the New York Fed's office starting Friday evening and going into Sunday. The Treasury secretary and all of Wall Street's movers and shakers were there. Even then, nothing could be worked out for Lehman. For the first time, the Treasury refused to offer government guarantees. This should not be interpreted as the Fed and Treasury finally realizing the danger of Moral Hazard, or that no one voted for the U.S. becoming a socialist state, but rather that they themselves are out of funding sources.

Without a government rescue, Lehman was forced to declare bankruptcy Monday morning. Ironically, Bank of America agreed to buy Merrill Lynch as a result of the emergency meeting (both were there), apparently with some prodding from government officials. Elsewhere, insurance giant AIG requested access to the Fed's lending facilities, in order to stave off its own impending bankruptcy.

NEXT: Lehman, Merrill Lynch, and AIG - the Morning After

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.


























































































































NEXT: The Banks and Brokers Most Likely to Fail








Daryl Montgomery
Organizer, New York Investing meetup







http://investing.meetup.com/21








This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.