What Earnings Are Telling Us

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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In general, company earnings are coming in ahead of extremely lowered expectations this quarter. This is a typical Wall Street game of setting the bar low enough so things look good, no matter how bad they are. The big success stories this quarter are technology firms, such as Intel, Apple, Yahoo and Sandisk. Tech earnings are cyclical however and the big traders tend to sell when earnings look the best. It is not clear yet if we are at that point his quarter. The large majority of tech company earnings come from outside the U.S. and their business picking up says more about the state of the economy in East Asia than it does about the U.S. economy.

In contrast to tech, banks are in increasingly bad shape, even in the cases where they are reporting good earnings. Wells Fargo's earnings were out today. Well Fargo said credit losses rose to $5.1 billion, up from $2 billion a year ago and $4.4 billion in the second quarter. Even though this is the bank's core business, it reported a profit of 56 cents per share last quarter, higher than the 49 cents reported a year ago. Wells is the fourth largest bank in the U.S. The pattern of deteriorating loan portfolios was also seen in Bank of America, Citigroup, and JP Morgan. Loan losses also increased in the second quarter. These numbers don't indicate that U.S. consumers and businesses are in good financial shape, nor that any economic recovery is taking place.

As for the the banking system having been saved, we will have to wait to see what happens when the unlimited flow of federal funds is cut off. TARP is supposed to expire at the end of this year. Today, however, President Obama is going to announce a $5 billion program to bail out community banks. Obama will tout the new program as funding to help these banks increase loans. TARP was supposed to accomplish this goal as well. Available U.S. consumer credit has taken a nosedive in the last year since TARP was implemented. There is obviously no lie too outrageous that Washington won't keep repeating it and the U.S. mainstream media won't print it.

It should also be kept in mind that many large cap firms other than tech get a lot of their earnings overseas. As the dollar falls, earnings made in other currencies increase proportionately. Once again this is not an indication of any U.S. economic recovery, but of U.S. economic weakness. The falling dollar is at least finally getting some coverage in the financial press. Business Week had a story on it in its latest issue. This is going to continue to be a big story for many years to come.

NEXT: Dance of the Declining Dollar 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.

Dollar Watch; Bad Earnings are Good; Natural Gas

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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While no one was watching, the U.S. dollar got awfully close to its break down point yesterday. The low for the trade-weighted dollar index ETF DXY was 78.58. A drop below 78.33 would be technically negative. Meanwhile, earnings season will be winding down soon and so far the picture is dismal overall and even worse for the financials. You would never know it though, from the mainstream media reports which have been glowing and gushing with good earnings news. Many commodities have started to rally again, with natural gas still being very under priced.

Almost without exception, the large financial companies have had dismal earnings in their banking business, which continues to erode. Trading and accounting gimmicks have made the top line numbers look rosy however. Massive money gifts from the federal government don't hurt either. Imagine if someone deposited $45 billion into your bank account. You would look a lot more financially sound as well. Wells Fargo is out with earnings this morning, with quarterly profit up 47%! Looks good on the surface, although acquiring the giant albatross Wachovia was responsible for much of this. Within the report was the statement, "the bank expects credit losses and nonperforming assets to increase". It is also generally acknowledged that Wells Fargo needs to raise more capital. Even the 'see no evil' government stress test found that it had a $13.7 billion capital shortfall. But hey, earnings are great, except in the bank's banking business of course. For some reason, I think this doesn't make any sense.

Natural gas has been getting a lot of press in the last few days. UNG the natural gas ETF is awaiting approval from the SEC to issue more shares. They already made 300 million additional shares available on May 6th. The CFTC is trying to limit UNG's role in the natural gas market based on excessive speculation driving up prices even though natural gas is trading at a multi-year low. Seems to be rather contradictory. Media reports are filled with commentary from traders and 'experts' about how you should stay away from this market. They rarely if ever point out that natural gas tends to hit some type of low in July. I have yet to see any discussion of the production costs for natural gas and whether the price has fallen below this level. There is every reason to believe this is the case. The number of active U.S. rigs pumping natural gas has fallen to a seven year low of 665 from a peak of 1606 last September 12th. When the market cost gets too close to the production cost for a commodity, production shuts down and this is clearly happening with natural gas.

The dollar will either bounce soon or fall below its break down point and the powers that be will try to then save it. Note that once again that the stock market has been rallying when the dollar has been dropping. Will a government induced dollar rally cause the opposite? We will have to wait and see.

NEXT: Bernanke and Natural Gas

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.

Banks Get Swine Flu; William Cohan at New York 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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The long awaited bank stress test is scheduled to be out this Thursday. There have already been more leaks in this government PR gambit than in a sinking ship. Meanwhile, the Swine Flu panic is winding down, with an article by TIME magazine this morning questioning whether all the hoopla was justified (see the Sunday and Saturday entries for this blog for a detailed analysis for why it wasn't). And finally, I will be interviewing best-selling author William Cohan at the New York Investing meetup tomorrow. Whether or not you saw him on the Daily Show with John Stuart or elsewhere on TV, this is your chance to see him in person.

In the news out today, Citigroup and Bank of America are stating that they are going to be raising $10 billion more in capital to shore up their reserves. Didn't both of these banks say they were profitable in the first quarter and planning on returning TARP funds? Something seems to be inconsistent with this story. Wells Fargo and PNC Financial also need more capital. The U.S. banking system is by no means stable yet and if the Fed withdraw all the funding it is providing from its half dozen or so programs, almost every major U.S. bank would collapse immediately.

While it is difficult for the average person to understand how poorly the government has handled the Credit Crisis, it is much easier to see how badly they have handled the current outbreak of swine flu (the 1976 outbreak was bungled as well and had tragic consequences for hundreds of people who participated in the government's vaccination program - there was only one supposed swine flu death). A number of the top government medical authorities made dire warnings of impending tragedy and sounded the alarm bells at top volume in the last two weeks. Not only is there no rising death toll as they warned us about, but there are no deaths at all outside of Mexico. Even the supposed deaths that have taken place in Mexico are questionable. Over a week ago, Mexico claimed 160 deaths from swine flu had taken place, the current claim is 20. Mexico's health care statistics seem to be about as reliable as most U.S. banks financial statements (see the previous blog entry for more about this).

If you are in the New York metro area, you should be coming to the May 5th meeting of the New York Investing meetup tomorrow (PS 41, 116 West 11th Street at 6th Avenue, starting at 6:45PM, for more details see: http://investing.meetup.com/21). I will be interviewing William Cohan about his latest book, "House of Cards", which is about the demise of Bear Stearns (New York Investing was the first major group to predict that this would happen in August 2007). Cohan doesn't make a lot of personal appearances, so this is your opportunity to not only hear what he has to say about the Credit Crisis, but get him to sign of copy of his book for you.

NEXT: Market Getting Frothy; Meeting tonight for New York Investing

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.

Oil Yes, Financials No

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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Suddenly, oil inventories in Cushing, Oklahoma dropped by 200,000 barrels yesterday instead of increasing by 3.5 million barrels that industry 'experts' predicted. While I have predicted that this would happen in this blog and stated so at a class given this Tuesday by the New York Investing meetup, I was a lone voice in the wilderness. Before the news came out, oil ETFs were making new lows as were many financial stocks. While superficially oil and the financials looks like major bargains, only oil should be assumed to be so.

When the 'surprise' (only a surprise to people who get their information from the mass media) news came out that oil stocks had declined, the March contract for Light Sweet Crude jumped $4.86 to close at $39.48. April, which will be the front month after today, closed at $40.18. Anecdotal reports indicate supply is drying up, but you will not see any coverage of this in the American press, other than in relationship to OPEC. For those who are unaware of it (and this presumably includes all reporters on energy topics), every oil and gas lease in the United States contains a term that the producer can stop pumping if the prices aren't high enough. Based on the behavior of the oil futures, which have jumped back to the $40 level over and over again, the market is telling us a price under $40 a barrel just isn't sustainable.

Nevertheless, the coverage in the media today is once again the same old (off-key) song. You will see quotes like, "It was a significant move last night, but there's not much out there that can create a bullish story" . And the reason for this is, "The demand outlook is very weak, and there's nothing to suggest that it will improve in the near term." There is no analysis of the supply side of the equation, despite the news out of Cushing, Oklahoma yesterday. Supply dropping faster than demand is indeed a bullish story. The same reporters who know nothing about how the oil industry functions, also seem to have forgotten to take high school economics. The current coverage of oil is an excellent example of why the average investor who gets his or her (mis)information from the mass media can't make money in the markets.

While oil had a big pop up yesterday, financials hit their lows in many cases and remained at those levels. Citigroup fell to 2.50, Wells Fargo to 11.94 and Amex to 12.74. Bank of America dropped as low as 3.86, only a tinge above its low of 3.77. Collapsing financials led the market down and helped the Dow close at a six-year low. The possibility of a Swedish style bailout of the big banks is becoming more of a reality. This would wipe out the equity holders completely (which include every major pension fund in the United States as well as Wall Street insiders) and has been resisted for that reason. While there is a risk of losing everything if you buy financial stocks, no such risk exists with oil. All commodities have a minimal price which is the cost of production. The minimal price for a troubled stock however is zero.

NEXT: Stocks/Oil Trying to Bottom, Gold at Resistance

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.

Government Wants to Play Good Bank, Bad Bank

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 buzz on the wires yesterday was talk that the Obama administration is considering a good bank, bad bank policy. This would entail the government becoming the bad bank (like somehow that hasn't already happened) by buying up most, if not all, the toxic assets in the banking system. For anyone who missed it, this was the original intent of the biggest waste of government money of all time TARP program (Troubled Asset Relief Program). The Federal Reserve has also been doing this is various ways as well. Yesterday's reports said that the federal government would take on an (additional) trillion dollars in bad debt. As usual, the downside risk of major inflation that would result from implementing this policy was ignored by the media.

There was plenty of other 'good' news for the market to rally on as well. The House passed an $819 billion stimulus bill (it still has to be approved by the Senate). The bill would cut taxes at bottom instead of the top of the income structure (the most effective way to stimulate the economy), provide billions of dollars for infrastructure projects, help states balance their budgets, and provide relief to people who've lost their jobs or homes. Getting in touch with their Herbert Hoover roots, every Republican in the House voted against it. Just as a reminder, all the Republican leadership supported TARP and provided the votes from the rank and file to insure its passage.

The Fed also held up its end of the bargain yesterday as it two day meeting ended. To no ones surprise, it announced that it was keeping its zero interest rate policy in place. The Fed also reiterated that it will continue to buy mortgage-backed securities and other assets. The stock market rallied on this and all the other highly inflationary news and and as been the case for many months, the U.S. dollar counter intuitively rallied (only counter intuitive if you don't assume the government is manipulating it behind the scenes). Beaten down financial stocks led the way up.

Wells Fargo was one of the biggest winners, rising 30%. It only lost $2.55 billion last quarter.... or so it claims. Those results didn't include its Wachovia purchase, which would have increased Wells Fargo's loss by $11.2 billion (based on the reported figures, the reality is actually much worse). The bank took a whopping $37.2 billion in credit write downs at Wachovia. Even without the Wachovia losses, Wells Fargo still lost 79 cents a share. Analysts were completely off the mark as they have continually been since the Credit Crisis began and were expecting a 33 cent gain. While this should have tanked the stock, it didn't. Wells announced it was keeping its dividend and wouldn't need any more TARP funds (which is has been using to pay its dividend), so the stock shot up. Whoever said Disney was the king of fantasy, never looked at the U.S. banking system.

NEXT: GDP - Report is Bad, Reality 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.

Banking Bloodbath Covers Wall Street in Red

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 bloodletting on financial stocks was almost relentless in U.S. trading yesterday. Trouble began in Europe the day before with the collapse of Royal Bank of Scotland stock, a collapse which took place despite (and some are now saying because of) a second bailout of the banking system by British authorities. The U.S. markets were closed for the Martin Luther King holiday, but when they reopened banks and brokers were cut to pieces. It was not a propitious beginning for the new Presidency.

Action in the market overall was ugly Tuesday and while financials led the way down, selling wasn't isolated to just that sector. While the Dow was down 4.0% and closed below the psychologically key support level of 8000, the technology laden Nasdaq suffered even more. The Nasdaq's 5.8% loss was a crash level drop. While the rest of the market fell apart, the gold ETF GLD gapped up sharply for the second day in the row, showing incredibly strong technical strength. As it has done throughout history, gold was shining once again in the midst of a crisis.

To say the drop in some financial stocks was a crash would actually be understating the situation. State Street was cut in half with a 50% drop. PNC was down 41%. Even though Bank of America was down 'only' 29% it hit yet another yearly low and without additional intervention (it was bailed out only a few days ago) the stock looks like it is headed toward oblivion . Citi, down 20% on the day, also managed to hit a yearly low and dropped below $3. The detailed action in the financials below:

State Street down 50 percent to 21.46.
PNC down 41 percent to 22.00.
Bank of America down 29 percent to 5.10.
Wells Fargo down 24 percent to 14.03.
Suntrust Banks down 24 percent to 15.07.
Citigroup down 20 percent to 2.80.
JPMorgan Chase down 20 percent to 18.09.
Goldman Sachs down 19 percent to 59.20.
Deutsche Bank down 19 percent to 21.00.
U.S. Bancorp down 16 percent to 15.34.
Morgan Stanley down 16 percent to 13.10.
UBS down 16 percent to 10.00.
Credit Suisse down18 percent to 19.76.
HSBC down 15 percent to 33.83.

Some recovery is taking place today in the banks and brokers because of Geithner's statements about more banking bailouts. Of course, that approach hasn't worked well so far. However, nothing succeeds like failure in recent U.S. economic policy.

NEXT: Volatility is Back

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 Real Deflation is Taking Place in Bank Stocks

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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PPI came out this morning and the U.S. government is now claiming that there has been wholesale price deflation in 2008. At least this is what the headline number indicates. Core inflation wasn't as benign, rising the most since 1988. The media is of course now hyping the headline number, which it downplays when it indicates inflation and ignoring the core number which gets a lot of attention when it's the better number (the advantage of having two numbers, one is likely to look better). The prices that are really dropping are assets, not those that are consumer related, with bank stocks yesterday taking a real hit.

According to the BLS wholesale prices in the U.S. fell by 1.9 percent in December. The yearly drop of 0.9% compares with a rise of 6.2% in 2007. As has been pointed out repeatedly in this blog, recent drops in the PPI are due almost exclusively to declining energy prices. These led the price declines last month, with energy prices overall going down 9.3% and gasoline dropping by a record 25.7%. For a change, food prices also fell, or at least the reports indicates a 1. 5% drop for the month (there was no drop for 2008, nor have U.S. food prices fallen year over year in the last four decades). Core inflation told a very different story however. It was up 0.2% in December and 4.3% in 2008. The last time it was higher was 20 years ago.

Mainstream media reporting on the PPI, as has been the case recently, has indicated the risks of consumer price deflation because of the headline numbers. The media usually reassures the public that economists (almost all of whom missed the Credit Crisis, the recession and are usually wrong in almost all of their predictions) have "confidence that the Federal Reserve (which has totally and completely mishandled the Credit Crisis since its inception) has the tools needed to keep deflation from becoming a problem". The media usually follows this up with 'isn't it great that the Fed had the foresight to cut interest rates to zero'. Certainly, you can not argue that what the Fed is doing will keep the threat of deflation away. Central Bank monetary policies that have given rise to hyperinflation in the past are usually very effective in preventing prices from falling.

While there is no actual deflation going on in consumer prices as the mass media would have you believe, assets prices are indeed deflating (the two are not interchangeable) because of the collapsing financial system. That collapse is by no means done. Bank America actually hit a new yearly low in aftermarket trading yesterday. Citigroup fell over 20% into the 4's (its yearly low is just above 3, a price that large cap financial stocks trade at only if they are on the verge of oblivion). Wells Fargo was also down quite a bit. The charts for JP Morgan, Goldman Sachs and Morgan Stanley are not looking particularly healthy either. Even after the U.S. government has pumped almost an unlimited amount of money into these companies, they are faltering again. As we have said in the New York Investing meetup over and over, "there is no such thing as a single bailout for an insolvent financial institution". We'll just have to see what the government does next.

NEXT: Bank(rupt) of America Gets Government Bailout

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

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

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.

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.

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

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

Our Video Related to this Blog:

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

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

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

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

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

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

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

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