The Gold is in Eastern Capitalism

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 head of China's State Administration of Foreign Exchange stated last night that China's gold reserves were 1054 metric tons, up substantially from previously reported levels. Purchasing gold, along with a whole host of commodities including oil and copper, seems to be China's strategy for getting rid of some of its almost $2 trillion worth of foreign reserve holdings (about half of which are in U.S. dollars). In separate news, a report by Deutsche Bank now predicts that China's GDP will be bigger than the U.S. GDP by the early 2020's. Based on recent reports of U.S. government chicanery in the manipulation of the financial system, capitalism seems to be disappearing in the U.S while it's on the increase in Communist China.

I have long predicted that the Chinese would be increasing their gold reserves, which are paltry compared to the current size of their economy. China also needs to diminish its foreign exchange holdings before the paper that its holding seriously devalues. These efforts have only just begun. Despite buying gold and stockpiling commodities, China's foreign reserves were up slightly to $1.954 trillion at the end of Q1 2009 from $1.946 trillion at the end of Q4 2008. In order to actually diminish its paper holdings, China is going to have to ramp up gold and commodity purchases substantially from recent levels. The implications are bullish for the commodity markets to say the least. China is not the only economy with small gold reserves and large foreign exchange holdings either, the Gulf Oil states fit this description as well. They also have good reason to be buying gold.

As China rises because it is becoming more capitalistic, the U.S. economy is heading down because of it is becoming less so. For anyone who doubts that the U.S. is turning into an authoritarian socialist state where the government calls the shots and no free is left in free enterprise, I suggest you read recent reports about the Bank of America and Merrill Lynch merger. It was arranged by Fed Chair Bernanke and Treasury Secretary Paulson (both Republicans and appointed by a supposedly conservative Republican president). When Bank of America CEO Ken Lewis tried to back out of the deal when he realized it could take his company down, Bernanke and Paulson told Lewis he and the board of Bank of America would be removed if he didn't go along with what the government wanted (recall that the CEO of General Motors was recently ousted and think about the implications for a moment). Lewis also claims Bernanke and Paulson directed him to lie to Bank of America shareholders, who remained uninformed about the actual state of things when they had to vote to approve the Merrill takeover. The government which is supposed to protect shareholders has obviously become one of their biggest enemies. We have pointed this out a number of times in this blog. Unlike the press, which is reporting this story now, the New York Investing meetup has been warning about this for over a year and a half.

Given the current state of affairs, no one should be surprised that China will over take the U.S. economically in as little as 10 years or so - at least based on official government figures. Keep in mind that the U.S. has overstated its GDP for many years and China may have been understating its GDP during its rapid growth phase. Investors needs to keep an eye to the East as economic power shifts there. The U.S. is now at a similar point historically that Great Britain was after World War I. Britain's world dominance was on the wane, while the more rough and tumble capitalistic U.S. was on the rise. Instead of facing this reality and making changes, the British engaged in denial and this assured their fall. The U.S is doing the same thing right now.

NEXT: Buy When There's Flu in the Streets

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.

Unemployment Everywhere

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:

Just the morning alone the following job cuts were announced:
1. Caterpillar profit falls 32% in Q4, to cut 20,000 jobs.
2. Sprint to eliminate 8,000 jobs.
3. Phillips to cut 6,000 jobs after first loss in 5 years.
4. Home Depot to close Expo and Design business and cut 5,000 jobs.

These companies represent a range of industries showing the current recession/depression is having its impact almost everywhere. The one exception in the news today was McDonald's. Although the headlines said its earning were down, this was only a quirk resulting from tax payments. McDonald's is actually planning on opening 1000 news outlets in the next year, although not necessarily in the U.S. (most reporting failed to mentioned this), since its big growth areas are overseas. Nevertheless, for the moment the very low-paid jobs at McDonald's seem secure. This can not be said about much of the rest of the retail industry (the biggest private sector employer) however. Expect massive job cuts and store closings starting this spring.

The people responsible for the Credit Crisis are still mostly employed (and getting big bonuses as well). One of the recent exceptions in John Thain, the recently fired CEO of the financial cesspool Merrill Lynch. In a leaked memo, Thain claims that Bank of America CEO Ken Lewis knew about $4 billion in accelerated bonus payments to Merrill executives (apparently paid for with taxpayer money from TARP) and Merrill's Q4 losses (something a mentally challenged 5 year old with vision and hearing problems could have figured out, but not the CEO of one the biggest banks in the world). As discussed in this blog several days ago, Ken Lewis extorted the U.S. government to pony up more TARP funds because of these 'unanticipated' issues cropping up and threatened to KO the Merrill takeover if it didn't. John Thain will probably be remembered for his $35,000 toilet - an especially appropriate symbol for where most of U.S taxpayer Wall Street bailout money has gone.

There was 'good' news reported (never confuse reported from the mass media and reality) overseas this morning. Barclay's stock was up as much as 75% because of a big buffer in equity capital and reserves (something that Fannie Mae, Freddie Mac, Bear Stearn's and Lehman also claimed .... just before they went under). I can't say this is not true in Barclay's case because the UK government may have pumped enough money into the bank to make this possible. What I can say, is that traders never learn and can be duped over and over and over again with misinformation from the mass media which it will report over and over and over again and never question no matter how absurd it is.

NEXT: The Canary in the Coal Mine, Foxes Guarding the Chicken Coop

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.

Bank(rupt) of America Gets Government Bailout

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

Our Video Related to this Blog:

This morning, only hours after getting another major infusion of bailout cash from the U.S. government, Bank of America reported its first quarterly loss in 17 years. The latest bailout became necessary because Bank of America's government arranged takeover of money- hemorrhaging Merrill Lynch (this took place after Bank of America's takeover of money- hemorrhaging Countrywide Financial). This time, it is at least being admitted that taxpayers are getting stuck with the loss. Things were so bad, that the government didn't even try to lie about. The Fed and Treasury weren't just busy with Bank of America last night either, but put the final touches on the latest scheme to keep Citigroup afloat.

While Citigroup has been struggling for survival for some time now, Bank of America was one of the few big banks and brokers that seemed t0 be getting along well enough despite the Credit Crisis. The loss of $1.79 billion, or 48 cents per share it reported today is small compared to the fourth-quarter net loss of $8.29 billion, or $1.72 per share, for Citigroup (its fifth quarterly loss in a row, but better than the $1.99 loss in the fourth quarter of 2007). However, Bank America's proposed acquisition Merrill Lynch lost a whopping $15.31 billion, or $9.62 per share, last quarter and things looked bad enough to potentially drag both companies into oblivion. Bank of America management claimed it didn't realize that Merrill's loses would be so high (makes you wonder just how accurate their loan analysis is - no wonder they thought sub-prime borrowers were good credit risks) threatened to KO the deal if the government didn't pay up.

The Treasury coughed up another $20 billion of TARP funds immediately. To this, they added a rescue package with the government agreeing to share in losses on $118 billion in residential and commercial mortgages, derivatives and corporate debt. Bank America will absorb the first $10 billion of losses, the government the next $10 billion, and the government 90 percent of the rest. Why taxpayers should get stuck paying off this debt is beyond me. Even worse, there will probably be more to pay down the road.

The Treasury was also busy coming up with a new idea for saving the beyond insolvent Citigroup. After more than a half-dozen bailouts since late 2007, the bank is still at risk of crumbling . The latest scheme is to split it into two businesses, Citicorp and Citi Holdings. Citicorp, will focus on traditional banking, while Citi Holdings will be the dumping ground for the company's riskier assets. CitiHoldings will account for $850 billion of Citigroup's $1.95 trillion in assets including CitiMortgage and CitiFinancial. It will also be in charge of Citi's 49 percent stake in the joint brokerage with Morgan Stanley, and the pool of about $300 billion in mortgages and other risky assets that the U.S. government agreed to backstop late last year. Citi's new structure is an almost complete reversal of the financial supermarket approach it adopted in the late 1990s and which everyone on Wall Street thought was one of the best ideas ever (so much for that). The company isn't out of the woods yet either. The fourth quarter earnings report showed that credit deterioration was severe from North America to Europe to Latin America to Asia.

NEXT: Inaguaration Day 2009 - Looking for a New Beginning

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.

Our Video Related to this Blog:

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.

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

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

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

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

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

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

NEXT: The Mega Move Up in Gold and Silver

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

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

Banks and Brokers Most Likely to Fail - The Big Players

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

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

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

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

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

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

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

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

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

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

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

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


























































































































NEXT: The Banks and Brokers Most Likely to Fail








Daryl Montgomery
Organizer, New York Investing meetup







http://investing.meetup.com/21








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

Sovereign Wealth Funds Bail Out the Banks

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.

As the credit crisis unfolded in the fall of 2007, a number of big banks and brokerage houses were desperate for capital - far more desperate than was ever admitted publicly. While they needed large cash infusions to continue operating, a number of sovereign wealth funds in the oil-rich Gulf and the Far East had swollen coffers of dollars that they needed to place somewhere. It was therefore almost inevitable that some of the first bailouts (an insolvent financial institution requires multiple bailouts) of struggling financial institutions would be done by sovereign wealth fund purchases. By the end of 2007, it was estimated that these funds would make at least $37 billion of investments in Western financial companies.

The idea of foreign investment as a means of providing capital was not a completely new one. Prince Alwaleed Bin Talal of Saudi Arabia had purchased 5% of Citibank (then Citigroup) when it was reeling from the Savings and Loan Crisis in the early 1990s. Earlier in 2007, China purchased a $3 billion stake in Blackstone's IPO, which debuted just before the collapse of the private equity bubble and promptly plummeted in price. By November, Abu Dhabi had bought a 4.9% stake in Citibank for $7.5 billion. At the time of the purchase, rumors were circulating on Wall Street that Citi might be insolvent. U.S. government officials admitted being involved in the transaction, which begs the question as to whether or not they would have allowed the deal to go through if it wasn't absolutely necessary for Citibank's survival.

In early December, the Government of Singapore Investment corporation got 9% ownership in UBS for a little less than $10 billion and an unnamed middle eastern investor (thought to be Oman) bought a 2% stake. China then bought a 9.9% stake in Morgan Stanley only days before Christmas. Singapore's Temasek Holdings then helped bail out Merrill Lynch on December 24th. By mid-January, Citibank was already in need of a second bailout by the sovereign wealth funds, only two months after the first one had taken place. The Government of Singapore, the Kuwait Investment Authority and Price Alwaleed were part of a $12.5 billion capital infusion for which they got some ownership of the bank in return. On the same day, only weeks after its first cash infusion from a sovereign wealth fund, Merrill Lynch received an additional $6.6 billion from parties including the Kuwait Investment Authority and the Korean Investment Corp.

None of these deals had to undergo scrutiny by the U.S. Committee on Foreign Investment, which only examines whether acquisitions by overseas buyers compromise national security when their stakes rise above 10%. Given the large number of sovereign wealth funds and wealthy individuals in the Gulf States and Far East, it would be possible for their aggregate ownership to reach 100% without a review ever taking place.

Next: Government Investment Pools Dry Up

Daryl Montgomery

Organizer, New York Investing meetup

For more about the New York Investing meetup, please go to our web site: http://investing.meetup.com/21

What Banks and Enron Had in Common

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.

The Subprime Crisis began to take a serious toll on bank and broker earnings by the third quarter of 2007. Merrill Lynch led the pack with a $8.4 billion dollar write down. Citibank reduced its earnings by $5.9 billion, UBS by $3.4 billion, and JP Morgan by $3.1 billion. Deutsche Banks had $3.1 billion in write downs, but still amazingly managed to post a rise in earnings (one wonders who did their accounting). There was of course a lot of chatter from the talking heads in the media about whether or not these write downs were the final word in the impact of the Subprime Crisis on financial company earnings. Even the most casual knowledge of stock market history would have provided the answer - 'no they were not!' Whenever earnings in a group of stocks start to fall apart, the first write downs are never the last and usually aren't even the biggest for that matter. This was the pattern when the tech bubble burst only a few years earlier and yet many media commentators couldn't seem to remember even that far back.
Even without a knowledge of history, there was more than enough evidence to indicate that financial company write offs might get much bigger and go on for a long time. SIVs - structured investment vehicles - had already hit the news many weeks before November of 2007. These off-balance sheet items (think Enron) were so obscure that most people on Wall Street had never heard of them. Suddenly, there were an extra $400 billion of possibly bad debt that was not on the balance sheet of the banks, but would be winding up there eventually. Citibank alone had $100 billion in credit exposure to SIVs. This new wrinkle in the Subprime Crisis was viewed as so serious by the U.S. Treasury Secretary that he attempted to organize a bailout (how he had the authority to do so is unclear) by getting a number of large banks and brokers to create a pool that could buy up SIV assets and thereby support their prices. While much ballyhooed by the press, this effort went nowhere and was eventually abandoned by December.

While the Treasury Department's plans for SIVs fell through, the Federal Reserve created an alternative that could help out the big banks. It allowed them to borrow against their (highly questionable) assets, but this necessitated bringing the assets onto the books. In December, Citibank indeed brought $49 billion in SIV assets onto it balance sheet. It is presumed that the other $51 billion the Citi had originally in SIVs had disappeared because of reductions in value. Indeed, it was reported in December that the total value of SIVs was then only $298 billion (it was quite possible that even this was a significant overstatement of their actual worth). If Citi had lost approximate $50 billion in its SIV investments, it was not fully (if at all) reflected in write offs in its first quarter 2008 earnings report.

Although SIVs were considered a serious threat to the stability of the banking system, little did the public know in the fall of 2007, that they were not the sum total of all off-balance sheet items that the banks were holding. After all, why would a company have off-balance sheet items unless it wanted to hide what it was really doing? Since there purpose is secrecy, how does anyone know how many off-balance sheet items a company has, what assets they contain, and how much those assets are really worth? While it would be reasonable to assume that if there was one type of off-balance sheet item on a companies books, there could easily be others, there was little if any speculation on this matter by the financial media. Only in February of 2008 was it reported that SIVs were actually only one type of off-balance sheet items held by the banks - and the possible losses were much greater than had been previously imagined. The accountants who did Enron's book must have been envious.

Next: Mortgage Insurer Meltdown.

Daryl Montgomery
Organizer, New York Investing meetup

For more information about us, please see our web site: http://investing.meetup.com/21.

More Collateral Damage from the Fed's First Helicopter Drop

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.

The impact of the Fed's September 18, 2007 rate cut was not limited to the panic sell off in the dollar and the incipient bubble in gold, silver, oil, and food commodities. The lower rates that were supposed to help the housing market didn't materialize. By the end of the month, mortgage rates were actually higher than they had been before the Fed's action. Instead of helping the beleaguered housing industry and homeowners , the Fed's rate cut was actually ineffective at best and did nothing to decrease costs for those struggling to deal with ballooning mortgage debt.
Of course, in reality it was the big banks and broker-dealers that were stuck with increasingly worthless securities backed by subprime loans that were the real target of the Fed's beneficence. It would prove to be too little too late however. By October, the first of a series of multi-billion dollar quarterly write offs would start - $5.5 billion for Merrill Lynch, $3.4 billion for UBS, $3.3 billion for Citibank, and $3.1 billion for Deutsche Bank. As bad as these write offs looked at the time, they were not nearly as bad as what was to come.

The Fed cuts also gave the Wall Street Pollyannas ammunition to game up the market, since Fed cuts were traditionally bullish for stocks. The financial media had wall to wall coverage of talking heads urging viewers to buy stocks now because they were at fantastic bargain prices (of course at a real bottom no one appearing in the media urges viewers to buy stocks). Any experienced trader looking at the market rally that ensued knew something was terribly wrong however. While the market had sold off in heavy volume in late July and the first half of August, it rallied on light volume and then hit new highs on even lighter volume. Trends on low volume are usually soon reversed and the September rally would prove to be no exception.

Next: The U.S. Government Goes from Lying with Statistics to Just Lying

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21