FDIC Swan Song: 8 Banks a Week

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 FDIC closed down eight banks last week bringing this year's total to 118 so far. Included in this week's closures was the notorious ShoreBank in Chicago. In a separate report, the U.S. Treasury has disclosed that the Obama administration's HAMP (Home Affordable Mortgage Program) seems to be rapidly falling apart. This could further weaken the U.S. banking system.

The FDIC is operating on both borrowed time and borrowed money. This agency is the bulwark protecting American's savings in the case of failed banks, but the FDIC itself is close to going broke. The eight closures this week alone cost the FDIC’s deposit-insurance fund $473.5 million. The deposit insurance fund was already $20.9 billion in the hole at the end of the fourth quarter in 2009. In order to plug the hole and keep going, the FDIC in December forced banks to prepay three years of insurance premiums and raised about $45 billion by doing so. That money had to pay off the deficit already accumulated and then last for the next 156 months of bailouts. There have been weeks this year when the FDIC has had to shell out close to $1 billion for bank rescues. That $45 billion isn't going to last much longer.

ShoreBank was the most significant bailout this week. The bank was founded in the South Side of Chicago in 1973 and was the nation's first community development and environmental bank. Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Citigroup (C), Bank of America (BAC), American Express (AXP), GE Capital (GE), and Wells Fargo (WFC) were investors. The bank has indirect ties to a number of members of the Obama administration. The bank was under a cease-and-desist order from the FDIC for more than a year before it was finally closed down. Its remaining assets will be transferred to a newly created corporation, Urban Partnership Bank. Some of the same executives from ShoreBank will be running this newly chartered bank (once they drive Urban Partnership Bank into the ground, it too will be bailed out). It looks like the investments of the too-big-to-fail, or even lose any money, big bank funders will also be protected under this arrangement by transferring them to Urban Partnership Bank.

Meanwhile, the poorly thought out and even more poorly run HAMP program is not making a big dent in slowing foreclosures. Nearly half of the 1.3 million homeowners who enrolled in the Obama administration's flagship mortgage-relief program have already fallen or more likely been pushed out. Mortgage holders blame the banks for not cooperating and banks blame the mortgage holders. According to RealtyTrac, the nation is headed toward more than one million foreclosures this year - a higher amount than the 900,000 homes repossessed in 2009. Boy, HAMP is certainly doing a great job in significantly reducing the number of foreclosures. Well, I guess it's just too much too expect that something will be accomplished for only $75 billion in taxpayer money.

Based on this week's events, I have written the following theme song for the FDIC (maybe Sheila Blair will sing it at the next board meeting) to be sung to the tune of the Beatles 'Eight Days a Week':

Oh I'll bail out your bank babe,
Guess you know it's through,
Hope you like the money banker,
When I'm funding you,
Spent it, Lost it, Pay Me, Save Me
Don't do nothing but bailouts,
Eight banks a week


Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Five Year Lows are Bad, Eleven Year Lows are Worse

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.

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On Wednesday the Dow hit a five year low. Yesterday the S&P500 broke its key long term support around 775 to hit an eleven year low. The import of this event should not be underestimated. The market sell off that began in the spring of 2000 and which first ended after two and a half years has now been extended to eight and a half years - at least for the S&P500. The Dow and Nasdaq have still not broken their 2002 lows, but the Dow is close to doing so and this would represent another violation of key support that would have ugly implicatons for future stock prices. The Nasdaq is holding well above this support level, but this provides scant comfort considering that that this represents an approximately 78% drop from its 2000 high.

The market statistics for this year alone are already devastating enough. After Thursday's drop the Dow Jones is down 43%, the S&P 500 49% and the Nasdaq 50% in less than eleven months. The S&P's drop matches the one that took two entire years in the crushing market sell off in 1973/74. As of now, it is worse than the 47% drop in 1931 - the year with the biggest drop in stock prices during the Great Depression. All the U.S. indicies had crash level drops once again yesterday, but in an unusal pattern the S&P fell the most with a 6.7% loss and the Nasdaq the least with a 5.1% drop. For the record the closing prices were 7552 on the Dow, 752 on the S&P 500, 1316 on the Nasdaq and 385 on the Russell 2000.

Financial stocks bore the brunt of the selling with Citigroup losing 24% after a 23% loss the day before. Citi closed at 4.71 even after (or possibly because) Saudi prince Al-Waleed said he would raise his stake in the bank back to 5% (this was the amount he has held for many years and if he has to buy to get back to this level, he has obviously been selling recently). Citi announced this morning that it was considering auctioning off the firm in parts or selling itself wholesale. It also requested the SEC ban short selling on its stock again. JP Morgan was damaged almost as much as Citi, with a 18% decline and Bank America did a little better dropping only 14%. GE was down 11%. Morgan Stanley and Goldman fell 10% and 6% respectively. While Goldman did a little better at the close, its intraday low at 49.00 was a much bigger drop. Morgan Stanley fell back into the single digits. So much for TARP, the Wall Street welfare bill, that was supposed to save the financial system from a meltdown.

Wiffs of panic in the financial system were palpable yesterday. The VIX (the volatility index) closed over 80. Interest rates on 3-month T-bills fell to 0.1% in flight to safety buying. A little better than the brief negative interest rate on the 1-month T-bill reached awhile ago, but not by much. Oil continued its relentless decline, falling to $49.42 a barrell. Weekly jobless claims spiked to a 16 year high of 542,000, with continuing claims the highest since 1982 (less than half of employed workers in the U.S. are eligible for unemployment by the way, so you may want to double all numbers to get a more realistic picture of the U.S. employment situation). One market commentator ventured that the current slowdown could be the "worse since the Great Depression". Perhaps he should have used the word than.

NEXT: The Citi that Should be Put to Sleep

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 Must Hold in Here

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 major U.S. stock indices hit five year lows yesterday. The Dow and the S&P 500 are now going to test their 2002 lows, also the 1998 low in the case of the Dow, around 7200 and 775 respectively (mentioned many times in this blog as the target price to look out for). Nasdaq is heading toward a support level in the 1250 to 1300 range, the shoulder area of the reverse head and shoulder pattern that it made in 2002 to 2003. Its stronger support is around 1100. This would be the next place to look for a market sell off to stop. The Dow, and even more likely the S&P, would be below their 2002 lows if this happened. The charts offer little guidance for any significant breaks of the 2002 lows, since there is no significant support until much, much lower levels.

Once again yesterday was a crash day, with all the major U.S. indices closing down 5% or more. I have lost count how many times this has happened in the last three months. The gains from last Thursday's mystery rally were completely dissipated in four trading days. The Dow held up the best with only a 5.1% drop, but closed at 7997, the first close below 8000 since 2003. Small caps were the hardest hit, with the Russell 2000 falling 7.9%. The S&P 500 and Nasdaq were in between with 6.1% and 6.5% drops respectively. Financial stocks had the biggest losses, with Citibank leading the way down with a 23% loss (the New York Investing meetup has been saying since fall of 2007 that Citi is insolvent and the market is now realizing it). Bank America, JP Morgan, Wells Fargo, and Goldman Sachs all had 10% or greater drops. GE, the next major bailout prospect, fell 10%. Autos of course were also hit hard, with GM falling 10% and Ford 25%. Ford barely remained above penny stock levels.

What is currently roiling the market, other than the usual unrelentingly bad economic news, was that the bailout prospects for the auto industry fell apart on Capitol Hill yesterday. Members of congress grilled the auto chieftains on their extravagant spending, including the private jet trips they took to the hearings. While there is certainly profligacy in auto company spending, it can't compare to Wall Street. The TARP legislation failed to eliminate multi-million (or even deca-million) bonuses given to Wall Street management, their high salaries, lavish executive perks as was revealed recently with AIG, nor the dividends they are paying to their shareholders with government bailout money. Suddenly Congress has discovered that taxpayer money shouldn't be wasted irresponsibly with auto companies (whose political contributions can't match Wall Street's). While overall this is certainly a good thing, the economic impact of all the major U.S. auto companies going into bankruptcy should not be underestimated. Market action yesterday made that very clear.

Having a policy of selective government bailouts is the worse of all choices. A government can bail out no company if it wants to maintain a free market system or it can bailout every company if it doesn't. The government certainly shouldn't do bailouts based on political favoritism. At hit or miss bailout policy also is likely to insure the least results for the most money spent -. something the U.S. government has proven particularly adept at in the last several years.

NEXT: Five Year Lows are Bad, Eleven Year Lows are Worse

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 Trader of Last Resort

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:

Yesterday, a spectacular market rally took place once again. This is the third time in approximately a month that the Dow has had close to a 1000 point intraday rally. The last such rally took place on October 28th and conveniently rallied the market right into election day. That rally fell apart the moment the voting was over, with the market experiencing the biggest two-day back to back price drop since 1987. While the Fed rate cut was allegedly the reason for the late October move up, the motivation for yesterday's out of the blue rally is not immediately evident.

The economic news was bad before the market opened and only got worse during the day. Big caps Intel and Walmart had already lowered earnings expectations. The weekly unemployment report showed a way above expectations 516,000 new claims for unemployment, which matched the post-911 figures when the U.S. economy briefly ground to a halt. Continuing claims hit a level last seen during the deep recessionary early 1980s. Next came the Trade Deficit. Its figures showed that even though there was a drop in imports last month, the drop in exports was even bigger. The drop in the price of oil was a major cause of the import drop, while the export drop seemed to be more the consequence of a declining global economy. The impact of the rising U.S. dollar, already reflected in oil prices seems to have yet to have fully impacted U.S. exports. Expect that it will be doing so in the not too distant future. Finally, the Budget Deficit numbers for October were released and there was a record monthly deficit of $237 billion (actually $662 billion or 55% of GDP if you exclude the money looted from the social security and other trust funds). For fiscal year 2008, which ended on September 30th, the entire yearly deficit was only $455 billion.

It is not surprising in the least that the market sold off on this news and that a rally attempt in the morning failed. By the beginning of the afternoon, the Nasdaq, S&P 500, and the Russell 2000 all hit new yearly lows and the Dow was getting close to doing so. Market stalwarts, like Citigroup, General Electric and Goldman Sachs were in collapse mode, falling to 8.27, 14.58, and 61.02 respectively. The technical picture was breaking down. Suddenly at 1:00 o'clock the market turned around. Was major support hit? No. Was there release of some good news? No. Could things have become much worse if something wasn't done? Yes. Was the PPT involved? In all likelihood.

The quasi-secret Plunge Protection Team (PPT), officially known as the Working Group on Capital Markets, was created by a presidential executive order from Ronald Regan shortly after the 1987 market meltdown. It's purpose was originally to prevent similar crashes in the future. This Regan/Greenspan effort expanded the Fed's role as the lender of last resort to include 'trader of last resort'. It should be assumed that a lot of seemingly illogical trading behavior that has taken place since the credit crisis began can be traced to the efforts of the PPT. Yesterday's rally has many of the earmarks of recent PPT behavior. Timing in the afternoon at 1:00, 2:00, 2:15, 2:30. Rallies starting for no reason or for reasons that are already known. Rallies starting after chart support is broken with the market becoming vulnerable to a much bigger drop. Rallies taking place at politically convenient times. While there are major ethical problems with the government interfering with free-market trading, there is also the problem that it only works short-term. Any PPT generated rally will inevitably lead to lower lows as the Japanese have discovered over time with their government based market interference. Their stock market has taken 18 years so far to hit bottom - and the U.S. may be setting itself up for a similar future.

NEXT: T & A and the GS-20 Summit

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.