Stocks Experience Irrational Exuberance on Employment Report

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.


U.S. stocks rallied strongly on Friday because of the February employment report. In what could only be described as the latest episode of the emperor has no clothes or more appropriately the emperor's people have no jobs, the Dow Jones was up 122 points (1.2%), the S&P 500 up 16 points (1.4%), the Nasdaq up 34 points (1.5%) and the small-cap Russell 2000 up 14 points (2.1%). Oil rallied close to 2% and gold was flat on the day. Bonds sold off. One major media outlet after another trumpeted the reported loss of 36,000 jobs as good news in their Friday and weekend coverage, as did the politicos in Washington. Wall Street was jubilant.

The media clearly wants to tell the story of a recovering economy and will be doing so even if there isn't any evidence to back that viewpoint up. The story of course is coming directly from the U.S. government during a congressional election year. The government writes detailed press releases for each economic report and in those it presents the rosiest scenario possible. It is not going to go out of its way to point out any bad news, but spins the story to make our political leaders look good. Analyzing the numerous detailed and at times poorly laid out charts in the economic reports is a time consuming and difficult process, but is the only way to find out what is really going on.  For those who are interested, the next time there is a major economic news release, look at the time stamp (the moment of publication) on the articles from the major news services. I have seen time stamps of 8:30AM for a news release that took place at 8:30AM. This is merely a reprint of the government's best of all possible worlds press release. This is the only news that most media outlets report.

Looking at the details and footnotes of February's employment report painted an ugly picture of the U.S. job situation. In addition to the 1.2 million census workers that seem to have been placed in the Business and Professional Services category over the last several months, instead of the Government category where they belong, the seasonal adjustments were substantial and made the headline numbers much better than the real numbers. The actual unemployment rate (known as U-3 in the report) was 10.4%, but this became the reported 9.7% through the magic of adjustment. The unemployment rate that takes into account forced part timers and some discouraged workers (known as U-6 in the report) was actually 17.9%, but this became a still whopping 16.8% for seasonal reasons. Does this sound like good news?

For those who want to see the numbers themselves, Table A-15 (yes, there are a lot of tables) of the February Non-Farm Payrolls report can be found at: http://www.bls.gov/news.release/empsit.t15.htm.

The snowstorms in the East during February were specifically used to imply that the employment numbers were actually much better than they appeared. The BLS in its press release said it couldn't calculate their impact (as if it has never snowed in the United States previously). The spin coming from Wall Street was that there must have been huge job losses, which could have taken place in construction, and this meant the 36,000 job loss number would have been a gain otherwise. This is completely implausible. It could only have happened if there were a lot of workers that were going to be working during that time (there weren't, construction employment has fallen severely over the last two years) and couldn't because of the weather and that the numbers didn't already account for this problem through seasonal adjustments (they did). Furthermore, snow removal is frequently done by temporarily employed workers and this would have added substantially to the employment numbers, not subtracted from them. Moreover, it is unlikely anyone fell off the employment rolls as far as the government was concerned because of the snowstorms. Any regular worker who got paid for at least one-hour during the two-week survey period was considered to be employed.

Job losses in the U.S. have been a regular occurrence for the last couple of years. The only exception recently was in November 2009, when the numbers became positive because of after the fact adjustments. While job losses are bad, small job gains are also bad. The U.S. needs to create up to 200,000 additional jobs each year to employ people entering the labor force. Things will really have turned around when that happen and the jobs are from private industry and not the government. Wall Street's reaction to the February employment report indicates more than snow was being shoveled recently.

Disclosure: None

NEXT: Watch What China Does and Not What It Says

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.

New York State Comptroller's Wall Street Bonus Update

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.


I attended the February 23rd press conference given by New York State Comptroller Thomas DiNapoli where he announced Wall Street bonuses tallied at least $20.3 billion in 2009 and industry profits could exceed $55 billion for the year - nearly three times the previous record. While a blogger or two from a major political website is occasionally included in such events, this may have been the first time a blogger for an investing/economics site was invited.

The Wall Street bonuses revealed by the comptroller were literally that - compensation paid to employees working in New York City. All of these firms are international in scope so payments made to employees working elsewhere, and these could be considerable, were not included in the totals. Moreover, the bonus numbers were based on cash payments or recognized deferred compensation, options that were cashed in during 2009 for instance. Stock options granted, but still outstanding are not part of the numbers.

The comptroller's office noted that many Wall Street firms delayed cash bonus payments and increased stock and other forms of deferred compensation in 2009. Many top executives received no cash bonuses last year, but got stock options instead. This made the bonus amount for 2009 to appear to grow less than it actually did, keeping the apparent increase to only 17%. Wall Street executives received larger salaries as well as part of their compensation.

In 2008, Wall Street firms lost $42.6 billion and granted at least $17 billion in bonuses according to the comptroller's figures. Never in history has incompetence proved to be so lucrative. If you screwed up at work and almost drove your company out of business would you get a big cash reward for doing so? Yet, the perpetrators of the biggest financial collapse in history were richly rewarded for their efforts. How is this possible and where did the money come from?  Government bailouts are the answer to both questions. Wall Street got money from the Federal Reserve and the U.S. Treasury and then funneled that money into its executive's pockets. The government in turn got that money from your bank account. The other question that needs to be answered is how did Wall Street triple its profits from the previous high in 2007 when U.S. unemployment reached 10% and the GDP was negative in 2009?

The New York State Comptroller is the sole trustee for a $128 billion pension fund. New York State, along with the other major state and city pension funds, is responsible for a huge amount of market investment. While Wall Street knows about what goes on in the nation's comptroller's offices, most of the activity remains unknown and unseen by the investing public.  Investors have a right to know what is going on with public money. Including bloggers, who are the people's press after all, in the news flow is a major step in the right direction. Comptroller DiNapoli deserves credit for opening the process.

Disclosure: No positions.

NEXT: U.S Economy Continues to Deteriorate Despite '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.

Big Bust on Wall Street

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.

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It's not everyday that a billionaire hedge fund manager gets busted for insider trading as happened last Friday. This is not because Wall Street isn't permeated with criminal insider trading activity at the very top, but because the SEC has turned a blind eye to it for a long, long time. In a celebrated case from just a few years ago, an SEC employee who tried to investigate a well-known hedge fund manager was promptly fired for his efforts. The SEC has claimed in the past that since hedge funds and big brokers trade continually it isn't possible to prove that they are engaging in insider trading. It was possible this time however because instead of just examining trading records, wiretapping was used.

Wiretapping was first legally permitted in 1928 by a U.S. Supreme Court decision, several years before the SEC was created. Left to its own devices the SEC would probably never have decided to use any law enforcement technology not available to the Amish, but the FBI was involved in this case. The insider trading investigation against Raj Rajaratnam apparently began in 2007. Rajaratnam runs the Galleon Group which has $3 billion under management. He has been charged with conspiracy and securities fraud. Reports indicate that he is at the center of an insider trading ring and more arrests are coming.

Where did Rajaratnam get his inside information? Other than sources that worked directly for the companies involved, Internet sources indicate that Rajaratnam seemed to have at least one informant at the rating agency Moody's, the consulting firm McKinsey & Company, and Intel Capital (the venture capital arm of the technology giant). These are all top firms. You should ask yourself how many other firms have employees involved in providing insider information, how many employees are involved and to how many hedge funds is this information provided? My guess is the answers to these questions is a lot, a lot and a lot. Why aren't there stricter controls within these firms that prevent this from happening? The public has a right to know.

At least some progress is being made in reigning in the Wall Street criminal operations. The biggest Ponzi schemer of all time, Bernie Madoff, is behind bars, not because the SEC caught on to his obvious $50 billion scam after numerous investigations, but because it finally blew up on its own accord. At least the SEC did finally close down the $8 billion 'investment fraud' run by Allen Stanford. The head of a top New York law firm, Marc Drier, has been sentenced to 20 years in jail for fraudulent activity. All of these cases were beyond outrageous and extreme examples of criminality. What about all the other criminal activity on Wall Street that is being done with at least a grain of discretion? Rajaratnam is merely the tip of that very massive iceberg.

NEXT: U.S. Dollar Down, Everything Else Up

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.

How Susan Boyle Provides a Lesson for Stock Investing

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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Tonight is the final show in this season's 'Britain's Got Talent', the rough equivalent of 'American Idol'. The odds on favorite to win is Susan Boyle. Ms. Boyle is one of the most unlikely of superstars. She doesn't look the part. Instead of being young, glamorous, and sophisticated, she is middle aged, frumpy, and quirky. When she appeared for the audition, the public jeered and the 'expert' judges rolled their eyes. But when she opened her mouth to sing, it became immediately evident that Susan Boyle was one of the biggest talents of our era. Her audition performance so far has 220,000,000 online views on You Tube and elsewhere - the most ever, beating out second place by 100,000,000.

If Susan Boyle had been a stock trading on the market, she would have been valued in the low single digits barely hoovering above a bankruptcy price. She would have been generally ignored by the public. Any stock advice service would have rated her at their lowest level, pointing out all the superficial flaws and ignoring the rich value underneath. She would get no media coverage, most of which is reserved for the exciting glam stocks of the moment and the slow moving big caps. While the glam stocks can burn your portfolio badly, it's the Susan Boyle stocks that make you the big money.

The thing I find most amazing about Susan Boyle, is that there were a number of points throughout her life when should could have been discovered, but wasn't. People saw her, but they didn't look; they heard her, but they didn't listen. They simply ignored a major talent staring them right in the face. The analogy for the stock market is apt. The real money making stocks are ignored over and over again. They are staring you and the 'experts' in the face the entire time though. If you can train yourself to look at the data points that everyone else ignores, you can become quite rich. If you have any doubts, just look at Warren Buffett. He basically pays attention to aspects of a company that Wall Street ignores.

The most obvious example of the Susan Boyle phenomenon currently is what has happened to natural resource stocks in the last year. Some of the smaller caps lost 90% of their value or more. Did their value really change though? All the gold, silver, oil, diamonds, etc were still under the surface available for use in the future. The price of these are likely to go up substantially as time goes on as well. Yet traders and investors got caught up in the events of the moment. The real worth of these stocks were ignored (except by the New York Investing meetup and other non-mainstream sources) and that is one reason they have started roaring back.

Investing would be so much easier if stocks could just sing for you.

NEXT: GM Bankruptcy End of Era; Oil Rally Continues

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 Few Trading Days Are Important

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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Money moves around at the beginning of a quarter. Look for shifts in the next few days. You want to observe whether money is flowing into the market overall or are people taking money out and selling. If the market goes up, the big money has become more confident and the rally is going to continue for awhile. It is even more important to note which sectors have money moving into them and which sectors are selling off. The three most bullish sectors of the recent rally have been financials, basic materials and technology. You would like to know if this is continuing or are other sectors getting more fund inflows.

The news backdrop may color the picture somewhat however. The G20 meeting is on Thursday and the possibility of fireworks exists. The Jobs Report is coming out Friday and the consensus is that it will be quite ugly. While this may seem like it will be negative for the market, it may not be. When people are expecting the worse, even something slightly better can be considered bullish and make stocks go up. And as we have stated many times in this blog, the U.S. government is not beyond manipulating its economic statistics to make them look better. The market, at least up to this point, takes these reports at face value no matter how absurd they might seem. The latest incarnation of this behavior has been in the seasonal adjustment figures which have recently been quite sizable and always in the direction of making things look better.

The market was filled with panic selling yesterday. I usually look at this behavior as an opportunity to buy and I did pick up some commodity stocks that had big sell offs. So far, yesterday looks like just another typical Wall Street shake down. Investors who got in at good prices are scared out of the market, those that haven't are frightened away. The big money buys the stocks the small money is selling. Take a look at the press coverage yesterday and you will see that it is overwhelmingly negative and one-sided. Many important facts are left out. This is not the coverage you typically see when the market is going to have a serious sell off. Media pundits tell you to get into the market to catch the next move up when the market is actually turning down. Wall Street is busy selling at that point - and they want you to buy.

The market is filled with bargains right now. If you concentrate on buying stocks in the commodity sector and beaten down stocks in industries that deal with the production or movement of tangible goods that are necessities or pervasive, you will make money. This is where you will get your biggest bang for the buck when inflation hits. And don't worry, expect the mainstream media to inform you in a year or two that this is what you should have been doing in early spring 2009.

NEXT: Surgery Done by a Bull in a China Shop

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.

New York Investing Meetup Versus the SEC

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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I would like to thank the 145 people who braved a snow storm last night to come to the February general meeting of the New York Investing meetup. In addition to the scheduled talks on the State of the Market (and why gold is looking good and oil could have a pop up in the near future), the Credit Crisis Update and Art Investing, Shelley Gould flew in from San Francisco and gave a couple of minute introduction to her new SmartStops service. While New York Investing meets the needs of the investing public as long as New York City hasn't been shut down, investors unfortunately don't receive such dedication from the watchdog government agencies that are suppose to be protecting their money.

New allegations arose last night against the SEC and FINRA (the the brokerage industry's self-policing organization). Harry Markopolos, the securities industry executive and fraud investigator who brought allegations against Bernard Madoff to the SEC by 2000, if not earlier, is now saying he feared for his personal and family's safety because of the SEC's inaction (and indeed he should have). Markopolos submitted detailed evidence to the SEC in Boston, New York, and Washington about Madoff's scam and as we all know too well, the SEC did nothing. Markopolos will be appearing before a congressional investigatory committee today.

Markopolos was not alone in being suspicious of Madoff. Anyone who examined his trading strategy knew immediately it was a fraud. How? His trading would have been bigger than the entire volume of the markets he claimed to be trading in. While even a casual observer would realize something crooked was going on, the public watchdog SEC couldn't figure it out. While you may think nothing like this could have happened before, you would be mistaken. The 1962 Salad Oil Scandal (a $175 million fraud then or about $1 billion in today's money) required the same suspension of common sense from the 51 Wall Street banks that lent money to the perpetrator, Tino De Angelis. De Angelis borrowed money from these banks based on his inventory of salad oil, stored in huge tanks in New Jersey which actually contained water with a thin layer of salad oil floating on the top (so field inspectors did indeed see oil when they looked into the top of the tanks). However, publicly available information published by the U.S. government indicated there was less salad oil in the entire United States than De Angelis claimed he had in his New Jersey storage facilities. Apparently this wasn't enough to make Wall Street banks avoid lending to him, just as their contemporaries would make loans to people without any income or assets. Consider this the next time you are tempted to follow Wall Street's investing advice.

In case you may also be thinking things are now going to get a lot better, I would advise you not to get too hopeful just yet. The new head of the SEC is Mary Schapiro (replacing See-No-Evil Christopher Cox). Ms. Schapiro was previously the head of FINRA (Financial Industry Regulatory Authority). FINRA at least investigated Madoff several times. They found nothing out of the ordinary and claim they couldn't have because they were only empowered to examine his brokerage business (an almost guaranteed destination of some of the missing $50 billion) and the fraud was perpetrated through his investment business. Congress claims that it was not particularly impressed with It's-Not-My-Job Mary Schapiro's performance in this circumstance. Nevertheless she is now in charge of protecting the public's investments.

NEXT: Only TARP Recipients Should Worry About Deflation

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.

Changes in Wall Street Firms that Led to the Credit Crisis

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.

Today's Guest Blogger: Dennis Mack, New York Investing meetup member, graduate of Harvard Law '69 and Fulbright scholar.


It is my belief that one of the major factors that has led to the current Wall Street collapse is the loss of internal self-regulation by the financial institutions once they became public companies. When I started practicing law on Wall Street, brokerage firms and investment banks were partnerships. The senior partners (often depicted in movies as miserly, backward thinking and overly demanding) were reluctant to take excessive risks because it was their personal capital that was at stake and the capital of their business partners and, perhaps, family members. When the brokerage firms and the investment banks sold shares to the public, we as a society lost the connection between risk-takers and risk-absorbers. The traders and bankers took on risks, but it was other people's money (the public shareholders) that actually suffered the losses. The traders and bankers were richly rewarded for short term results, but there was always a one-in-ten chance that their bets would result in a wipe-out - not of the traders and bankers but of their shareholders. The traders and bankers could just move to new firms.

In the old days, traders and bankers did not move to new firms. They became part of the firm and would not dream of leaving it. They married into the firm - literally sometimes by marrying the daughter of a partner. That may seem stifling but it also meant that the partners and those traders and bankers knew that their success was tied to the success of the firm. Now, there is a great disconnect. Traders and bankers can make their reputation at a financial institution and demand more or they will walk. Compensation committees award the higher bonuses because it does not come out of their own pockets. When there is a problem (uncovered by management) or an insufficiently generous bonus, the trader/banker could move on to another institution or even set up his own shop and practice his craft. His track record at the old shop would draw in money at 2% and 20%. In an up market with cheap borrowed money from China, they were able to magnify small returns into large returns and demand their big bite. No matter that leverage is a two edged sword that would eventually decimate the client's portfolio while still giving the manager his 2%.

In 1969, when I was assigned the task of organizing my first hedge fund in Panama/Bermuda, I was flabbergasted by the fee structure. I peppered the client with questions about whether people would actually pay such a fee when there was no clawback in later years after the fund would decline. They explained to me that a hedge fund was designed to create positive returns in both up and down markets and therefore the risk I perceived was negligible. They also said that if an investment manager had to give credit for past losses, he would have no incentive to service the fund after the loss and might even leave the management company to get a new start elsewhere. Besides, they argued, it would be unfair for new money coming into the fund to get a free ride up - not having to pay a 20% fee on the gains that they would enjoy.

The extraordinary rise in executive compensation in other corporations is a whole other story, but there are at least two connections. First, there was the rise of finance in business schools. This sent the best students into finance or consulting. It also meant that corporations were valued less on the products that they could turn out for a profit than the profits that could be augmented by adroit maneuvering among the tax, accounting and financial rules. People who could massage the results for the best appearance rose through the ranks. To retain them, you had to pay them like financial managers. Second, in pre-WWII America, individuals and family trusts owned corporations. Insurance companies invested in bonds and mortgages. Mutual funds were tiny. Pension plans were not funded. Individuals and family trusts bought and held. Trading on the stock exchanges was very, very low. There were concentrations of individual money that controlled corporations. Investors with large shareholdings voted their shares as if it were meaningful. They had a long term commitment to the company. Today, most shares are held by financial institutions. Many of them are traders and not investors. Some vote to support their trading strategy - not for the welfare of the company and its shareholders. Some are even able to rent the votes of real shareholders in order to produce a result that will allow them to profit personally. There is a disconnect between shares and corporate decision making.

We learned in law school that shareholders own the corporation and elect the directors to run it on their behalf. Today, management presents to the atomistic community of shareholders a slate of their golf buddies to direct the company pretty much at the behest of the management. Management takes the risks and are paid large bonuses whether they succeed or not while an ever-changing body of shareholders pass their holdings from chump to chump until the music stops in Chapter 11 or 7.

How do we change that? Do we want to require brokerage companies and investment banking houses to return to private partnerships when they have to compete with foreign behemoths? Do we want to impose upon financial institutions fiduciary duties in voting? Should only the very wealthy invest in stock and be incentivized to hold on to it for the long term (e.g., 5 years or longer)? We must start talking about some very fundamental changes, but we must see it within the competition of a global marketplace for financial and management expertise. I wonder whether US regulation alone can resolve our problems.

NEXT: New York Investing meetup members in the Videosphere

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's Trade Gap and the Global Economic Future

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:

China's import/export figures for November were released today. Both had significant declines. Year over year exports fell 2.2%, while only last month they were up 19.2%. Imports fell even more, declining 17.9% after being up 15.6% on the year in October. The Trade Surplus swelled. The turnaround was dramatic to say the least and gives the appearance of an economy falling off a cliff. The last time China's exports fell was in February 2002.

The sharp fall in imports is perhaps more worrisome than the export drop, even though the Chinese economy is export driven with internal demand being weak and an undeveloped component. As a manufacturing economy which imports a lot of the raw materials that it needs to produce the items it exports, large drops in imports can mean a lot less will be produced in the future. Falling prices of commodities could account for much of this drop however. Regardless, lower imports imply significant weakening is taking place in the commodity producing economies that supply China. On the other hand, lower exports imply weakening is accelerating in the world's developed economies that buy China's finished goods.

In case you might find these figures worrisome, the Wall Street hype machine has been out in full force this week to bull up expectations about the U.S. economy and stock market (you should always worry when this happens). Headlines like, "Worst of the recession upon us, forecasters say" and "Stocks most undervalued since 1974" are just some of the many examples that I have seen lately. The optimistic forecasters all work for Wall Street firms of course and even the top ranked are pretty sure that things will be getting better soon (by the way, being a top ranked Wall Street economist is an honor similar to having the best vision in the school for the blind). I particularly liked the article I read quoting a well-known investor about how it was a good time to get into the stock market. You had to look toward the end of the article to see that he was down 58% for the year and his judgment about the market had obviously been completely wrong lately.

All of the recent press also shows that Wall Street is universally in favor of the Fed lowering interest rates further (which would make the New York Investing's prediction of ZIRP - zero interest rate policy - a reality) and "flooding the economy with money". This of course would benefit the big Wall Street banks and brokers by lowering their costs and increasing their profits. And, yes the economy would likely recover for a short time before it drowned in the wave of inflation that will inevitably followed these actions.

NEXT: Unemployment - Truth Worse than Even Government Reports

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.

Tribune Bankruptcy Has it All

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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Only minutes ago the Tribune filed for bankruptcy. The failure of the Tribune contains within it a multiplicity of elements from the credit crisis, the economy, and the failure of mass media to adequately inform the public of both. According to its filings, the owner of the Chicago Tribune and the Los Angeles Times has $13 billion in debt, but only $7.6 billion in assets. Under such circumstances, it is not surprising that it sought bankruptcy protection, but that it managed to avoid doing so for so long. This leads to the obvious question of just how many other U.S. companies have similar finances that are so precarious that it is inevitable that they will go under? Probably quite a few.

The Tribune was taken private under one of the many private equity deals that took place during the low interest rate fueled credit bubble. Just like subprime borrowers for homes, the company was loaded up with debt that could never be successfully paid back if future circumstances proved to be anything less than rosy. And less than rosy certainly describes the recent history of events impacting the Tribune. The current recession, denied until this month by the U.S. government, has caused a dramatic decline during the last year in all of the Tribune's advertising categories (the source of most income for mass media outlets in the U.S.). The credit crisis makes it impossible for the Tribune, as well as all other companies in similar circumstances, to get out from under the stranglehold of debt that it took on earlier in the decade.

Who are the financial geniuses that are the Tribune's creditors? The usual list of Wall Street's who's who of course. The Tribune's biggest unsecured creditors are its lenders, JPMorgan Chase and Merrill Lynch. Others include Deutsche Bank, New York-based investment management firm Angelo Gordon, hedge fund Highland Capital Management and Goldman Sachs Group. Barclays Capital., which bought key assets from bankrupt Lehman Brothers, is also among Tribune's creditors, with about $142.9 million in interest rate swaps (boy, it was a real bargain picking up those assets). Other outlets in the incestuous mass media business are also on the hook, including Warner Bros. Television, Twentieth Television, Buena Vista Entertainment, and NBC Universal Domestic Television. It can not be ruled out that the Tribune's failure will set off a chain reaction of bankruptcies in the industry.

In a broader sense, there is much more of an object lesson from the Tribune's financial difficulties than that dubious lending practices permeated Wall Street (not exactly a new idea at this point). The lack of responsible reporting on the events that led to the credit crisis, giving an outlet to the Wall Street Pollyanna chorus that denied that the problems were serious and which claimed over and over again that they would soon go away, and not looking into the U.S. government's cover up of the current recession with manipulated economic statistics are how the big news outlet have handled things of late. The tribune itself seems to have been victimized by the web of denial that the U.S. mass media fostered on the American public. Poetic justice perhaps?

NEXT: The Latest Washington Free Lunches

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.

T & A and the GS-20 Summit

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:

Last Wednesday Treasury Secretary Paulson announced the T&A would be taken out of TARP (the Wall Street bailout bill passed in early October). The raison d'etre given by the Bush administration to congress for passing TARP was that only by purchasing troubled assets on bank balance sheets could banks be freed up to lend again and get the economy going. After the legislation was passed, congressional leadership from both parties announced with great fanfare how they were saving the American economy with this program. The ink was barely dry on the bill however, before Paulson announced that preferred stock was going to be purchased in troubled financial institutions instead. While the first $250 billion will still be earmarked for that purpose, Paulson has now decided that the remaining funds should be used to support financial markets that supply credit for credit card debt, auto loans and student loans. Of course next week, there might be a better way to save the American economy and the six week old program could be changed even again. If all this looks like no one in Washington has the slightest idea what they are doing, it's because they don't.

This is not to say that the new ideas for TARP are not an improvement on the original provisions of the bill which were essentially a form of welfare for Wall Street. Unlike welfare for the poor though, welfare for the rich comes with fewer limitations. While TARP has a provision for 'restriction' of bonuses, it doesn't eliminate them, nor does it force companies that can't continue to exist without government support to pay their executives salaries that top government officials would get. Nevertheless, over the weekend seven top Goldman Sachs (Paulson's old firm) managers graciously renounced their bonuses for 2008. Why they would have been getting bonuses when the company's stock has fallen 70% in the last twelve months is not exactly clear. CEO Lloyd Blankfein received a Wall Street record $68 million bonus last year when he was making the decisions that lead to this year's disastrous performance.

Like everything else in the contemporary economy, lack of effective ideas for handling the credit crisis is global as well. The GS-20 meeting of world leaders this weekend in Washington produced mostly a commitment to free trade and further monetary and fiscal stimulus (in other words governments throughout the world are going to print more paper money which will be backed by nothing other than their leaders hot air). British PM Gordon Brown, who decided to sell half of Britain's gold at the bottom of the market in 1999 and has presided over a worse subprime crisis than in the U.S., led the charge for increased stimulus measures. Other ideas bandied about included multinational supervision for global banks, more oversight for credit rating agencies and regulation for hedge funds. These useful suggestions didn't get much beyond the bandying stage however. Essentially anything concrete was put off until the next meeting in April. The do-nothing summit was immediately declared a success by President Bush.

Shortly thereafter, Japan announced a second quarter of negative GDP confirming it was in recession as the euro zone did last Friday. Since this was not exactly surprising news, Asian markets were little changed overnight, even despite the drop in the U.S. on Friday. The out of the blue rally in American markets last Thursday faded almost as quickly as it arriveed with the Dow down 3.8% and the Nasdaq down 5.0%. Technically speaking this was another crash day on the Nasdaq, but as I have said many times, no one pays attention anymore to just a 5% or 6% drop - and that includes world leaders.

NEXT: Trojan Horse of Earnings Surprises

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.

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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.

Start Looking for Capitulation

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:

Another market bloodbath took place in Asia last night. The Nikkei fell a further 6.4% and took out its 2003 low of 7603 to close at 7162. This is now a 26 year low and it's not clear that even 18 years of selling has been enough to establish a long-term stock market bottom in Japan. The surging Yen is crushing exporters there. Drops were even bigger elsewhere, with the Hang Seng in Hong Kong falling 12.7% to close at 11,016. The 10,000 support level, broken during the Asian financial crisis in 1997, seems to be acting as a magnet for the index. The Philippines market, after dropping 12.3%, halted trading. Only Korea was up slightly after it cut interest rates three-quarters of a point, the largest cut ever there. The U.S. Fed, which is meeting this week, almost certainly took notice.

While the Yen is going up against the dollar, the euro continues its fall and hit 1.2461 in overnight trading. Oil hit 62.20 and is now down 57% from its mid-July high. The drop has been so sharp and so quick that gas prices in the U.S. have fallen 53 cents in only two weeks - just in time for the November election, where the high cost of fuel was a major issue eroding voter support for the Republican party. The U.S. dollar's strong rally against almost all currencies other than the Yen, engineered by central banks acting in concert starting this summer, is partially responsible for the fall in oil prices. Their dollar support activities have been so 'successful' that the trade weighted dollar was above 87.50 early this morning. If the rally continues, this could cause U.S. exports to drop off a cliff, as they did in the early stages of the Great Depression, and take the economy with them. The American financial media, which published one story after another about the beneficial effects of a falling dollar when the U.S. currency was sliding, has so far ignored the flip side of this story.

European markets, down in the 4% to 6% range in early trading, started paring their losses by mid-day. The U.S. markets did not open down that much, but it's the close that will be important. The Treasury announced today that it would begin distributing it gift bags of money from the Wall Street bailout bill to banks and this may be helping to limit selling. The U.S. Fed will be meeting this Tuesday and Wednesday and a 50 basis point rate cut is expected - more is possible and that would rally the market if it occurs. The New York Investing meetup predicted in fall 2007 that the Fed would move rates close to zero and this prediction seems to be coming to fruition.

Stocks are extremely oversold and resistance to further selling has been evident for the last few days of trading. Buying on any major drop should now be considered. It is likely that soon some event will take place that will rally the market and its beaten down segments. While the financials may still be overpriced (doesn't mean they can't rally substantially in the short term), sectors like the precious metal miners have been fallen to truly bargain level prices. Buying at a real discount is always a good way to make money in any market.

NEXT: Short Covering Rallies, Explosive and Brief

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.

Landslide Elections and the U.S. Stock Market

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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There seem to be only two things that Americans voters will not forgive their politicians for. In the case of the President it is a failed economy, which led to a Democratic landslide in 1932 and a Republican landslide in 1980. While congressional voting is strongly affected by the economy as well, there is an additional factor of failing to deliver on a political party's core promises. When the Democrats couldn't pass a health care bill (something they had campaigned on for almost 50 years) in 1993, the voters turned on them en mass. This year, there is not only economic turmoil going into the election, but many Republicans in congress abandoned one of their party's most fundamental principals, fiscal conservatism, by supporting the Wall Street bailout bill. Conditions are ripe for a major political shift.

Presidential landslides are usually preceded by shifts in Congress two years earlier. In 1930, the Republicans, who had totally controlled Washington for the proceeding 10 years, lost 52 House seats and 8 Senate seats as the economy started to fall headlong into the Depression. Even with these losses, Republicans still had slight control of the U.S. senate and only lost their majority in the House after further defeats in special elections. While the U.S. economy was allegedly in good shape in 2006 (at least according to the official highly manipulated government figures), Republicans lost 30 House seats and 6 Senate seats in the election that year. This gave Democrats solid control of the House and a bare majority in the senate.

As bad as 1930 was for the Republicans, it was nothing like the political bloodbath that followed in 1932 when they lost 101 seats in the House and 12 seats in the senate. Best guesstimates as of now is that Democrats will pick up another 30 House seats this November. Interestingly, as many as 12 senate seats could also shift from Republican to Democratic hands this year, although the Democrats would only need 9 seats to have a filibuster proof majority. There is probably a slightly less than 50% chance of this happening, so it isn't a done deal yet. Wall Street would not react positively to this outcome and it has almost certainly not been factored into stock prices as of yet.

As for the Presidential election, Obama is clearly ahead of McCain and some perennial Republican strongholds like Indiana, North Carolina, North Dakota, and Virginia may go his way in addition to almost every swing state. Obama has the advantage in ad spending and field operations. Most polls show him way ahead in the race. While there are a few that don't, closer examination of them reveal that they are as statistically suspect as the U.S. governments inflation and GDP figures.

So what has a major political shift said about the prospects for the U.S. stock market in the past? The stock market actually bottomed before the 1932 election and entered a multi-year rally period after FDR's inauguration in March. In 1980, Regan was elected while a recession was already underway (as is the case in 2008) and another recession immediately followed that one.
Two years later though, U.S. stocks started an 18 year secular bull market. Generally, things have to be very bad economically for there to be a large change in the previous U.S. political balance. By the time this happens, the worst is likely to be over soon thereafter.

NEXT: Start Looking for Capitulation

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.

Dr. Evil and Mini Me Loot the U.S. Treasury

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:

On Monday, U.S Treasury Secretary Henry Paulson and his look-alike Interim Assistant Secretary for Financial Stability, Neel Kashkari (both originally from Goldman Sachs and participants in helping to create the credit crisis) came up with a plan to stabilize U.S banks without nationalizing them. The U.S. will be saved from socialism by pilfering its treasury and giving the money to the U.S. banks and brokers that are considered 'too big to fail' the many teetering regional banks will have to wait and if still in business, might get a share of the government's succor sometime in the future). Pilfering was their intent, along with helping out their other well-placed friends from the beginning (Kashkari drafted the Treasury department's three-page constitutionally questionable, unworkable, and politically inept power grab that was the original Wall Street bailout bill). Interestingly, every major American news outlet seems to have missed the real story about what is taking place.

The story universally reported by the U.S. media, frequently in blaring headlines, was that the government was going to distribute funds to banks in exchange for ownership stakes. No such thing is occurring. In reality, the Treasury is injecting liquidity by buying preferred stock. Preferred stock is loan in perpetuity, it does not represent any ownership rights in a company. Preferred stock is supposed to pay interest (if it doesn't, like all other permanent loans it's a gift). No interest rate was cited in the Treasury announcements, although anything less than the 10% that Warren Buffett got on his recently purchased preferred from Goldman Sachs (along with warrants) or Mitsubishi got on its purchase of Morgan Stanley preferred (backed by a U.S. guarantee), is a government subsidy. No major media source seems to have pointed this out. Instead, they all reported that if rescue plan works, the U.S. taxpayer will benefit because these preferred shares will be sold for a profit. Since preferred share prices fluctuate with interest rates and not the fortunes of a company (as long as it's a viable enterprise), they would go down, not up, if higher interest rates result from the government's inflationary policies. No common share price increases, as happens when a company does better, will benefit preferred share holders. It is of course almost 100% certain the government also overpaid substantially for this preferred stock as well (in the case of AIG, the U.S. government paid ten times the market price for the equity it purchased). The U.S. taxpayer is going to lose somewhere between a little and everything on this deal. There is no chance is will be profitable.

This looting of the treasury is also not going to be terribly effective either. With it, the government has officially established a 'too big to fail' policy. Only big banks intitally get any money. These include J.P. Morgan Chase, Bank of America, Citigroup., Wells Fargo, Bank of New York, State Street, Merrill Lynch, Morgan Stanley and Goldman Sachs Group Inc. Citigroup, Wells Fargo, and JP Morgan will get $25 billion each (even though it doesn't appear that JP Morgan, nor Wells Fargo are in trouble and need the money). Another $25 billion will be split between Bank of America, and Merrill Lynch, which are merging. Goldman Sachs and Morgan Stanley will each get $10 billion, while State Street Bank and Bank of New York (which also doesn't appear to need the money) will get roughly $3 billion each.

This latest move by the Treasury will not only help to continue to put another major dent in the U.S. government's stretched finances, but is helping to create a dangerous concentration of banking power. For 200 years, U.S. policy has promoted a large number of small banks, but now we will be getting a small number of large banks. The thinking behind America's historical approach to banking was to prevent the concentration of too much economic power in too few hands, which could threaten the capitalist and democratic systems. Based on what is happening now, these fears were obviously well justified.

NEXT:

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.

Unlimited Liquidity Today, Unlimited Inflation Tomorrow

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 U.S. Federal Reserve, the ECB, and the central banks of England and Switzerland agreed over the weekend to "provide unlimited U.S. dollar funds to financial institutions" to support inter-bank lending. The Euro-zone will also guarantee bank debt until the end of 2009 and will assist its countries in buying preferred shares in failing banks in order to help recapitalize them. As this agreement was being worked out, Britain nationalized three of its major banks to prevent their failures. Meanwhile, the United States has altered the focus of its Wall Street bailout plan to concentrate on the purchase of non-voting bank shares and it looks like the American taxpayer won't be getting any equity in return (as the bill supposedly guaranteed).

The Euro-zone is essentially following the lead of Great Britain (the country that sold half of its gold in 1999 at the market bottom and which has a worse housing crisis than even the United States). Britain is now injecting $438 billion in loans to its banking sector - a sum that is proportionately much larger than the $700 billion U.S. bailout, but probably still not nearly enough. Its three bank nationalizations this weekend include the Royal Bank of Scotland (on the New York Investing meetup's likely bank failure list in September) where the taxpayers will get a majority 60% stake. Lloyds TSB and HBS were also merged by the government, which then bought a 40% ownership position in the new combined bank.

As the British banking system is being rapidly nationalized, the U.S. seems to be backing away from this socialist model. Instead of buying bad debt with the Wall Street bailout money, it now appears that preferred stock will be purchased (although media reports in this regard are garbled to say the least). Preferred stock is non-voting and represents no ownership rights in a company. It is merely a loan in perpetuity. Europe in general seems to be trying to adopt this approach as well. If there is any profit made on the government's money pumping (and there always is), none of it will be going to the respective taxpayers of any country that handles the banking crisis this way.

Where all the money is going to come from to pay for the 'unlimited' liquidity injections into the collapsing American/European financial system has not been stated. It is highly unlikely that it will dropping from the sky attached to a big balloon. Printing more money is the only possible option. This makes the inflation hedges gold and silver even better investment possibilities going forward. Amazingly they are both at particularly low prices - at least in the futures markets. While both had severe sell offs in the U.S. markets on Friday (sell offs for gold and silver that take place only in U.S trading have happened many times), anecdotal reports indicate that people were rushing coin shops and bullion dealers to purchase them.

NEXT: Stock Market Rallies Like It's 1932

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 Third Crash is the Charm - Fed to the Rescue

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:

As predicted in earlier entries to this blog, there was a coordinated global interest rate this morning. The only mystery is why it didn't happen yesterday morning instead. Apparently two crash days in a row in the U.S. markets were needed to expedite this action. A G7 meeting is scheduled for this Friday in Washington and it was likely that the world central banks were waiting for the meeting to be over to show that it had resulted in them taking bold, decisive rate cutting action. The U.S. Fed also probably thought that its Monday/ Tuesday announcements of $900 billion increased lending from it various credit facilities and that it would buy up to a trilion plus dollars of commercail paper would be enough to bull the market up. Instead, U.S. stocks crashed again on Tuesday. So now the ever reliable 'cut interest rates to juice up the stock market' is being tried, not just in the U.S., but globally. Instead of bold, decisive action, it smacks of bold, decisive desperation.

Tuesday's market behavior in the U.S. indicated that the monetary authorities were losing their ability to impact stock prices with their usual bag of tricks. While the announcement of the Fed's massive liquidity injections did cause a major intraday rally on Monday and a strong opening on Tuesday morning, it didn't last. At the Monday low, the Dow, S&P500, and Nasdaq were down over 8.0% and because of the Fed's announcements they closed down only in the 3% to 4% range (still a pretty bad day). If you measure a crash by intraday action, there was most certainly a market crash on Monday. If you measure it only by a closing price drop of over 5.0% on the indices there was only a crash on Tuesday (as well as Monday a week ago). While stocks were up a good bit on Tuesday morning and everything looked like it was going according to plan, the market nevertheless quickly faded and selling accelerated toward the end of the day. By the close, the Dow had dropped 508 points or 5.1%, the S&P 500 61 points or 5.7%, the Nasdaq 108 points or 5.8%, and the Russell 2000 37 points or 6.2%.

So this morning the Fed has turned to more interest rate cuts to save the market. The funds rate was lowered by half a point to 1.5% and the discount rate by the same amount to 1.75%. The ECB also dropped rates by half a point, to 3.75%, as did the Bank of England, to 4.5% (the UK recently passed an $87 billion rescue package for its banks similar to the U.S. Wall Street bailout plan). Canada, Sweden and Switzerland also joined the rate cutting party (noticeably absent, at least so far, is Japan). China lowered a key interest rate for the second time in a month. Australia had cut rates a full percentage point on Monday. This was the U.S. Fed's second intermeeting rate cut this year (the next Fed meeting is October 28, 29th), following the large cuts that took place to prevent a market meltdown in January.

The reason that central banks have avoided rate cutting recently is because of the inflationary implications. The Fed itself has stated in the minutes from it recent meetings that it sees entrenched inflation as a danger in the current economic environment. It avoided lowering rates at its September 16th meeting because of this. The stock market which had been conditioned to expect automatic rate cuts during its bouts of weakness, starting selling off and entered a crash period. Like all addictive processes, if you don't keep feeding the addict the drug, painful withdrawal follows. Supplies of the rate cut drug are almost gone however.

NEXT: Meltdown Microcosm - U.S. Future Can be Seen in Iceland Today

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

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 Videos Related to this Blog:
http://www.youtube.com/watch?v=h2f4XUpVINs
http://www.youtube.com/watch?v=UQieE8Ryvk0

On Friday, the House of Representatives took up the Wall Street bailout bill in a second time do-over and passed it by a comfortable margin of 263 to 171 (the party breakdown was 172 Democrats and 91 Republican yes votes). What made the difference wasn't that any of the horrendous provisions that looted the U.S. treasury on behalf of Wall Street were removed, but more costly measures, at least $110 more billion, were added! These pork runneth over items were for programs that had particular appeal in a number of districts where Congressman had previously voted no. The penny for your district, a dollar for Wall Street game worked like a charm. So did the lobbying efforts of those who benefited from the bill. One representative who switched his vote, said he never talked to so many bank presidents in his life (calls coming into the capital from just regular people were up to 100 to 1 against the bill). The U.S. congress proved once again that like every other regime in history that had created hyperinflation, it deems restraints on government spending to be unnecessary. Both presidential candidates showed their 'lemming to the sea' leadership abilities by not only supporting this legislation, but by helping to round up votes in their respective parties. It was reported that Obama alone helped switch 22 votes.

The passage of this bailout bill represents the third key policy blunder of the financial and monetary authorities in handling the credit crisis. The first was the rate lowering campaign by the Fed that started in August 2007, which flooded the financial system with a tsunami of liquidity. The second was the Bear Stearns bailout, which established a policy that would inevitably lead to bailouts for almost any failing financial institution. Now with this Wall Street rescue bill , the bailouts have gone from individual companies to the entire financial industry. Just as Bear Stearns was not the only bank/broker bailout, nor will this bill be the only industry bailout for the financials (Warren Buffet promptly stated that this bailout isn't big enough to work). The fourth key decision that will lead us down the road toward hyperinflation will be to expand the bailouts outside the financial system. The auto industry has already received its second government loan, expect more to come. This new phase for bailouts though will not be limited just to industry. The Federal government will also have to turn on its money spigot to save state and local governments from going under. Governor Schwarzenegger has already requested $7 billion in assistance for California.

In a little more than two months, the national debt ceiling has been raised $1.5 trillion because of the Fannie Mae and Freddie Mac bailouts (add another $5.3 trillion for their government takeover) and the Wall Street rescue legislation. A national debt of a little over $9 trillion will soon be exceeding $16 trillion, around $2 trillion more than the official overstated GDP figures. It looks like the U.S. government intends on borrowing from foreign governments to pay for this (both the Fannie Mae/Freddie Mac and Wall Street bailouts are sending a lot of money overseas). However, it is more realistic to think the printing presses will have to be scheduled for 24/7 operation.

The stock market spoke very clearly in its reaction to the the bailout bill. It started tanking immediately. The Nasdaq, S&P 500 and the small cap Russell 2000 all closed at new lows for the year - below the crash bottom on Monday. Only the Dow held above this level. Key support around 2000 was broken on the Nasdaq on Monday and this break was confirmed on Friday. The next major support level for Nasdaq is around 1800 and for the S&P around 1000. Expect a visit to these levels some time in the future. Although I suspect the government will try to interrupt this journey - perhaps instead of banning just short-selling, they'll try to ban all selling of stocks.

NEXT: Today's Global Stock Market Meltdown

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.

Short Selling Democracy - Senate Ressurects Bailout Bill

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 Videos Related to this Blog:
http://www.youtube.com/watch?v=h2f4XUpVINs

http://www.youtube.com/watch?v=UQieE8Ryvk0

Late on Wednesday evening the Senate passed their own version of the Wall Street rescue package by a margin of 74 to 25 . Unlike the House the Representatives where all of the members are up for election this year, only a third of U.S. senators have to face the voters next month. It was therefore easier for them to ignore an irate populace opposed to this legislation and instead follow the lead of their major campaign donors who have paid them the big bucks for their assistance in looting the U.S. treasury.

In order to make the bill more sellable, a small bone or two was thrown to the little guy. A number of tax breaks amounting to a few cents for the populace for every dollar for Wall Street were thrown in to the mix to help buy off some key congressional votes in the house. The provisions have nothing to do with fixing the financial system of course. They include disaster aid for Texas, Louisiana and the Midwest (as if congress wouldn't vote for this otherwise), aid for rural school programs, and tax breaks for people who live in states without state income taxes. Some fixing of the AMT (alternative minium tax), keeping it from affecting several million middle income earners, was also thrown into the bill. Many of the House members that voted against the bailout bill the first time would like these provisions. Only a little over a dozen or so need to change their votes. If they are willing to do so for a few cents on the dollar, their votes obviously come pretty cheap.

Also added to the Senate bill was a provision to raise FDIC insurance on bank deposits to $250,000 per person (already the limit for IRAs in banks). While this may be a good idea, this provision could wind up to be extremely costly to the government. Bank failures will eventually drain the FDIC insurance fund (this would have happened already because of the failures of Washington Mutual and Wachovia, but the banks taking them over are paying off the funds the FDIC would have had to pay, then writing off an equivalent amount of bad loans, and will be reimbursed by that amount through the bailout plan). The government is going to wind up paying $250,000 per account for a large number of depositors of failed banks one way or the other in the future (instead of $100,000). Needless to say, the senate bill doesn't assume these future costs will exist.

The Senate bill is just another confirmation that our representatives in Washington see no limits whatsoever are needed on government spending. They take a break-the-bank expenditure bill and try to pass it be adding more expenditures (the likely amount not adequately reflected in the proposed costs). While the U.S. is not the first government in history to engage in such profligate behavior, the powers that be seem to think it can be the first in history to avoid destructive inflation or even hyperinflation as a consequence of doing so. Just in case reality rears its ugly head at some point, you just might want to pick up some gold and silver.

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

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.

A Bridge Loan to Nowhere - the Wall Street Bailout Plan

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As I write this the U.S. House of Representatives has just defeated the Wall Street bailout plan.

On Sunday, the final details of the bill emerged from the fetid backrooms of the nations capital. After intense negotiations congress and the administration managed to put together the costliest and least effective piece of legislation ever to emerge from Washington D.C. The Emergency Economic Stabilization Act of 2008 was supposed to free up the credit markets and get banks lending again. Yet there were no provisions, no mechanism, and no requirements in the bill that would have made this happen. In exchange for their $700 billion dollars, American taxpayers were guaranteed nothing - and they were likely to have received it in abundance.

Even if the bill had had some means in it to revitalize the U.S. banking system, this still would not have happened. The simple reason for this is that the bailout was much too small to have had any significant impact. At no point in the verbose discussions and pontifications in the congressional hearings did anyone specify approximately how large the problem was that this bill was trying to address. I personally had no problem of finding an estimate of $13 trillion of bad loans (which I think is much too low). The Treasury, the Fed and the congressional research staff either couldn't determine this number or didn't want to discuss it publicly. If they had, the absurdity of this latest government endeavor to deal with the credit crisis and its real intent as just a give away to big Wall Street banks would have become immediately obvious.

To make the bailout more palatable, the cost tag was divided into three parts: $250 billion immediately, $100 billion additional at the discretion of the president, and another $350 billion unless congress decided to rescind it (fat chance of that ever happening). The Treasury secretary, not exactly someone known for his good judgment and lack of corruption, still would have had wide leeway in deciding who got the money. Inexplicably, loans up to March 14, 2008 were eligible for government purchase, even though the credit crisis was front page news starting in late July 2007. Why wasn't that the cut off date set for eligible funding?

According to government press releases, the plan was supposed to prevent the big money from profiting big time from the bailout. In reality, the bill insured that this would happen. The bill specifically made banks that acquired assets in a merger or takeover (this includes JP Morgan, Bank America, and Citibank so far) eligible to dump the bad assets they acquired on the taxpayer. This provision was also a de facto bailout for the FDIC, which would itself be bankrupt as of today because of the failure of Wachovia, if it didn't exist.

The taxpayers were supposedly protected in the bill because the government would get some ownership rights in companies that had their bad debts purchased. Rights in a company that fails - and most if not all of these companies will fail - are of course worthless. If after five years the government is facing a loss in the program, the president was required to 'submit a plan'. How submitting a plan would magically restore lost money from out of business companies was not detailed in the bill description.

What about caps on the $50 million dollar paydays for Wall Street executives? The bill created some 'tax restriction' on earnings above $500,000 and imposed some 'limits' on golden parachutes. What those 'tax restrictions' or 'limits' were, seemed somewhat vague. Executives that received huge bonuses in the past were not required to return any of the money before a company received bailout funds from the taxpayer, even if those bonuses had been obtained under false premises.

What direct benefits and new protections would the people paying for the bailout get? The average investor, pension holders, homeowners, people on Main Street in general, those who suffered because of the bad decisions of Wall Street companies weren't to benefit from the government's largess at all - they were only supposed to pay for it.

NEXT: The First Stock Market Crash of 2008

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.