The Government Admits Incompetency

The government is incompetent...say it isn't so!

Today the Inspector General said the SEC botched the Madoff investigation. Past SEC probes of the Madoff investigation were incompetent, the report says.

The report says that three agency exams and two investigations failed to uncover Madoffs ponzi scheme.

It also says that they found no evidence of improper ties between the SEC and Madoffs firm.

Finally, someone in the government admits what the rest of us already knew, but I wouldn't go out and start your own ponzi scheme anytime soon.

The government and SEC are shoring up regulations and investigative techniques and are more likely to be overzealous than over cautious.

Big business had to virtually destroy our financial system, but maybe something good will eventually come out of it, once the government stops meddling.

Is Inflation Ready to Come Back?

The actions of the government seem like they are extremely inflationary. That is the view of most investors. Inflation happens when the government prints money and it enters the economy. The government's actions today are not inflationary. For one thing they are borrowing money not printing it. And for another, the money that is going to bailout companies is not re-entering the economy. Banks, for example, are using the money to shore up their capital, not lend it out. They are buying Treasuries with the money.

Following are excerpts of an article from someone who believes the opposite of what everyone else believes. It provides interesting insight. He believes the stock market and gold will crash not rise as the public is being led to believe.

Here's the inside story Wall Street doesn't want you to know. The
entire global fnancial and baking system is built around the presumption of
inflation.

They desperately need you to believe inflation is still here. In fact,
they need you to think it's about to make a roaring comeback.

It's the only way they can sell you more loser investments. To sell their investment products, Wall Street must convince people we are NOT in a depression. They must persuade you prices are not falling.Instead, the masses must believe we are about to enter a period of massive inflation...or even hyper-inflation, due to government bailouts and massive deficits.

If we had inflation, prices would be going up. But prices are not going up. They are going down. In fact, they are plunging.The world isn't just in a recession. We are in a full blown depression. People are buying less. Paying less. And most definitely spending less. This is going to last a decade or more.

The politicians' schemes to "save the economy" will not work,
any more than band-aids cure cancer.

Remember how Wall Street tried to get you to buy more real estate teh past
few years? How they told you $150 oil was cheap and here to stay...and
that the 14,000 Dow was "a buying opportunity?"

People from New York to New Delhi are losing their jobs. People without
jobs do not go on shopping sprees. They don't buy things like homes or
cars. They don't sell them. They can no longer afford them. They desperately need to raise cash. And massive selling brings pricess lower and lower.

Wall Street wants you to believe that the U.S. government is printing money
and "monetizing the debt." That will supposedly inflate the money
supply, sending prices higher.

Truth is, the U.S. government is getting all the money it needs by borrowing, not printing. It does this at Treasury auctions that are 3 times over-subscribed.

Bottom line is that government borrowing is NOT inflationary. Just the
opposite. It sucks money out of the economy. It decreases the total
money supply, and is deflationary.

In normal times, banks wouldn't hold the trillions of dollars in bailout
funds. They would loan it out, over and over. The bank loaning
multiplier would go to work: the trillion of dollars would get
leveraged up to 100 times. Banks would create upwards of $100 trillion
in new debt. This is how new money is created.

In the past, all this new credit would bring about an explosion of economic
activity. People would buy cars and houses. They would go on
shopping sprees at WalMart. That would be inflationary and prices
would climb.

Not now, though. Now those trillion of dollars never get into
circulation. Banks do not loan the money out.

You see, the Fed is not giving money to the banks so they can make loans. Banks are getting bailout money to shore up their shrinking capital. To cover their bad loans and derivatives, that are still going broke en masse.

Guess how banks keep those trillion of dollars in bailout funds? They
buy T-bills from the Treasury. U.S. Treasury holds these T-Bills for
the banks. They keep them as the banks' reserve requirements.

The money ends up right back where it came from.

Over the past 10 years 1 quadrillion in derivatives has been created.
That is 20 times the entire worlds GDP.So how did Wall Street get away with this out of control debt creation?

They devised a mathematical formula, that supposedly "valued" derivatives.
It's called the Black-Scholes formula. Supposedly, Black-Scholes predicts
market moves and teh value of derivatives - not just now, but 10, 20, even 50
years in the future.

The Black-Scholes model claimed banks didn't have to book current losses from
derivatives. It said banks didn't have to value derivatives at their
current real market prices. (Called "mark to market.")

Instead, Black-Scholes said the derivatives would bounce back, and make huge
profits decades in the future.

And here's the kicker, Black-Scholes said banks could book those theroetical profits now - and ignore current losses.

This is why derivatives traders - like Warren Buffet - trade derivatives 20,
30, 40 years into the future. Even though they are losing money.

Buffet's company, Berkshire Hathaway, booked the biggest losses in its
history. Its stock lost 50% of its value in one year, and Buffett's
net worth dropped by half. All due to the derivatives trades gone
bad.

But Black-Scholes says by the year 2040 these positions will be
profitable. So Berkshire keeps holding the biggest losing bet they
have ever made, just like the dead broke banks.

You've seen the incredible losses in commodities. In stocks. In real estate. In corporate debt. All because of derivatives.Black-Scholes claims these losses will magically become profits some day. And banks can book those profits now!

It is why banking executives say they are not losing money. Why they
claim that, in fact, they are profitable. Even as they losse every
last dollar of their capital...and every month need $50 billion more in
bailout funds.

Government regulators have bought into this mathematical hocus pocus, hook,
line and sinker. Remember when government was going to buy up all the
toxic derivatives? They were going to put them into a so-called "bad
bank". That was the original plan, but it was quietly dropped.
Why?

Because once derivatives are sold, they must reflect real valuations.
Not Black-Scholes fantasy valuations. Banks would have to admit their
huge losses. The world would know they already lost more money than
exists.

Politicians and government regulators have no concept of the amount of money
banks have lost. They do not understand derivatives, the valuation
tricks Wall Street uses, or what's really going on: That banks are
permanently broke...the derivatives losses can never be reversed...and will
keep getting bigger and bigger...as more and more of the loans that are at
the heart of these derivatives go bad.

Top echelon traders and corporate CEO's know this, but will never breath a
word of it. So month after month you see the same thing. More staggering losses that seem to come from nowhere and that the government must rush in to cover.

The article goes on to say how Black-Scholes is responsible for the destruction of capitalism and how the failure of AIG could lead to a catastrophic event. It's main thrust is that inflation is not coming back, the U.S. is in a depression and not to buy into the gold mania about gold soaring to $2,000 an ounce.

Obama nominates Sotomayor to Supreme Court

Sotomayor will be the third women and the first hispanic Supreme Court judge if she is confirmed by Congress.

Born in 1954 in the Bronx, Sotomayor was raised by her mother, a nurse, after her father died when she was only 9 years old.

Sotomayor graduated from Princeton summa cum laude and from Yale law school in 1979.

She was nominated to a federal bench by George Bush in 1991 and was a U.S. District Court Judge from 1992 - 1998. In 1997 she was nominated to the U.S. Appeals Court, 2nd Circuit by President Clinton. A year later she was confirmed by a 67-29 vote. All 29 votes were republican, 11 of whom still serve today.

Obama says that Sotomayor will bring more experience to the bench than any other judge had when they were nominated.

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Automakers - Bankruptcy

Will the bankruptcy of GM help other automakers? It seems that stock investors are willing to gamble that it will.

While auto stocks are still way down from a year ago, some are doing well in 2009. Ford, the only automaker of the Big 3 that is not in financial difficulty, is up big this year. Foreign automakers are doing exceptionally well also and many believe they will capture market share if GM goes into bankruptcy.

Even though the government has guaranteed that purchasers of GM cars will be able to get their cars serviced, consumers may still be leery of shelling out hard earned dough for a GM car when they can get a perfectly good car from another company.

Sales for GM are undoubtedly going to fall if bankruptcy is the path the government chooses to go. This will help other manufacturers, but could have a ripple effect to suppliers. Since GM is the largest car maker, suppliers could begin feeling the revenue pinch and some may go out of business.

This, of course, has a ripple effect to other manufacturers who may use the same supplier and will send more Americans to the unemployment line.

The hope here is that GM will emerge a better, more efficient company that can compete profitably. In the long run GM stock may be a good buy if you can endure the pain until then.

Stock Market Extends Rally

The stock market is managing to rally three days in a row. Is this the beginning of a new bull market or just a bear bounce?

In order for the market to make a sustained rally it is said that the financial sector has to recover and hold its gains. Recently Citigroup and Bank of America have announced profits for the 1st quarter. This is encouraging news, but does it mean a turnaround or is it just an aberration.

In fact, when the government gives a behemoth corporation $45 billion and they turn it into a $8 billion profit, I have to wonder if things are getting better.

At any rate, the stock market has gained 700 points since last Friday. The charts don't necessarily look like a bottom has been made, but a decent money making bounce is in progress.

Foreclosure Relief Ready to Go

President Obama's foreclosure prevention program is ready to begin saving homeowners. The plan is set to help 4 million owners who are behind on payments by lowering their payments to 31% of income and 5 million owners who are not yet behind on payments, but may be in danger of missing scheduled payments.

The $75 billion plan will provide incentives to borrowers, lenders and investors. The government will also subsidize interest rates.

It is estimated that 8 million homeowners are under water with their mortgages, meaning they owe more than their home is worth. It is unclear if this number is part of the 9 million owners that the bailout plan is supposed to help.

To participate in the program, borrowers must:

• have obtained their mortgage before Jan. 1, 2009;
• have a primary mortgage of less than $729,500;
  live in the property;
• fully document their income by providing tax returns and pay stubs;
• sign a statement of financial hardship; and
• go for counseling if their total household debt - including auto loans, credit cards and alimony - totals more than 55% of their income.

The modification program will be in effect until 2012, but loans can only be modified once.

Servicers must try to modify a loan to at least 38% of income and the government will subsidize the rest to 31%. Interest rates can go no lower than 2%.

The new interest rate will remain in effect for 5 years then increase 1% per year until it reaches the original rate of the prevailing rate at the time of modification, whichever is lower.

If the rate modification isn't enough to get the payments to 31% of income the servicer can extend the loan to 40 years or shift principle to the end of the loan with no interest. Also, servicers can reduce the principle.

Obama Unveils Budget Plan

President Obama's new budget proposal includes health care reform, tax increases for the richest Americans and new spending. Despite this, Obama plans to slash the budget deficit in half by the end of his first term.

The budget deficit for 2009 is expected to reach $1.75 trillion or 12.3% of GDP. That is a record in dollar terms and the highest percentage against GDP since World War II.

President Obama has called on Americans to sacrifice for the good of the country. He is confident we will get through this, but we will have to re-prioritize our spending.

The White House expects to spend $3.6 trillion dollars and GDP to fall to 1.2% this year. Growth in GDP is expected to grow 3.2%, 4% and 4.6% over the next three years.

Unemployment will rise to 8.1% this year, but then is expected to drop to 7.9% next year and around 5% by 2014.

The budget outline also sets aside $250 billion for stabilizing the financial system, which is net of the $750 billion that will be spent. In other words, the government is no longer expecting to recover all of their investment as the previous administration promised.

The budget proposal includes $634 billion for a health care reform reserve fund. This will be paid for in two ways. First, top tax payers would only be able to deduct 28% instead of their top income tax rate. This is expected to raise $318 billion over 10 years.

Secondly, by reducing payments to private insurance companies offering Medicare and reducing prescription drug prices the administration believes it will save $316 billion.

By letting Bush's tax cuts for the rich expire, Obama expects to raise $640 billion over 10 years. The other side of the coin, however, is that the tax cuts for the middle class and poor total $900 billion.

The President wants to make permanent the Making Work Pay tax credit, the child care credit and the newly enlarge college credits.

Every year Congress attempts to protect the middle class from having to pay the Alternative Minimum Tax by passing a "patch". Every year the "patch" is not included in the budget, this year it is.

Obama wants to tax the portion of profits paid to managers of hedge funds and private equity firms as ordinary income rather than as an investment gain, thereby subjecting it to much higher tax rates than the 15% capital gains rate. This could be worth $24 billion over 10 years.

Reducing limits on direct payments to farms that have over $500,000 in sales is expected to raise $10 billion over 10 years.

Obama's budget will call on Congress to create a cap-and-trade program in which companies would have to pay for permission to emit greenhouse gases. Revenue from the program is intended to pay for a $150 billion renewable energy fund among other things.

The new cap-and-trade program would pay for making the Making Work Pay credit permanent, which the White House estimates will cost $537 billion over 10 years.

Jobless Claims Jump to 667,000

The number of Americans receiving unemployment has jumped to 667,000 for the week ended February 21, 2009. The number of Americans on continuing unemployment benefits topped 5 million for the first time.

Economists expected a drop for this week, but a sharp spike is what they got instead. And first time claims are expected to rise to 750,000 for the coming weeks.

President Obama's stimulus plan includes some relief for displaced workers. There will be a weekly increase in the benefits of $25.

Also, the first $2,400 received in 2009 are tax free. And when your benefits run out, you'll get an additional 20 weeks. If you live in a high unemployment state you could get another 13 weeks on top of that.

Stock Market Headed For New Lows

The Dow has been making new lows for this bear market for a week now. Today the the Dow is headed for new lows that some analysts say could be a precursor to another 2,000-3,000 point drop.

The S&P is also headed for closing below its November low today. The day is not over yet and a rally could ensue, but over the short term it does not look good for the S&P. Some analysts are predicting 650 in the short term for the S&P.

I've been saying for some time that 6,000 on the Dow and 600 on the S&P are my minimum low predictions. Longer term I think the Dow could get to 4,000 and there is an outside chance the ultimate low could be around 3,000. That could mean the S&P could get to around 400.

When that happens there will be some great bargains out there, but stick to quality companies. That could be a challenge to find, what I may have considered a quality company a year ago, may not be today. Good hunting.