27 January 2009
Politicians and corporate CEO's all feed us a line of optimism when describing a potential catastrophe, I guess to keep everyone from panicking. I suppose that is the best policy, after all what would happen if we knew the truth.
What do this executive insiders really know about what is about to happen and how much should they tell us?
Who can we really trust when we are trying to ferret out information to make an investment decision?
If you are wondering if you can trust CEO's who come on TV to tell the public that their company is doing better than everyone thinks - then read on...
26 January 2009
Nearly 2.6 million jobs were lost in 2008, the highest since 1945. It has become a vicious cycle where weak spending results in job layoffs, which in turn leads to further weak spending and that leads to more layoffs.
Caterpiller announced the layoff of 20,000 workers being the largest of the latest announcements. These layoffs of course, reflect how the world economy is performing.
Sprint Nextel cut 8,000 jobs, Home Depot cut 7,000, ING cut 7,000 jobs, Pfizer will cut about 8,100, Deere will cut about 700, Schlumberger will cut about 5,000 jobs, Time Warner will cut about 800 and Microsoft cut 5,000.
While many analysts expect the unemployment rate to approach 10%, some are thinking of this as a normal business cycle and expect everything to suddenly turnaround and improve from here.
There are those, however, who have a more extreme view and believe that we are just beginning what could become a 10 to 20 year depression, if the right decisions are not made in the next 90 days.
These people feel that politicians should let capitalism run its course. That means letting the banks and large corporations fail. It will be painful in the short run, but the continued bailouts will lead to prolonged pain.
The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery. -Winston Churchill
Banks have lost trillions of dollars in wealth and the last thing they want is to go bankrupt. The people that are making the decisions on what to do, Paulson, are former bankers and they don't want to see the banks they used to run go under.
Currently, banks are being nationalized, which is more socialism than capitalism and this is offensive to many. Of course, this is more of a stealth nationalization. An official nationalization would require the government to freeze accounts and limit withdrawals (which could happen anyway). This would be very undesirable, the loss of shareholder equity would wipe out the stock market.
Nationalizing banks, officially or unofficially, is going to require the government to pour trillions of dollars into the system to keep it from going bankrupt. This is money that will never be returned to taxpayers.
With all of the recipients of the bailout money having burned through half of it already and asking for more. It is becoming clear that whatever they are given it will not be enough.
That is why, the extremists say, action, the right action, is needed immediately. One conspiracy theorist says that Obama will need to act within the next 90 days to shore up the financial system or it could collapse completely. He gives it a 50/50 chance.
Stay tuned, there will be opportunities to make a lot of money if this were to come true. For now it is best to be in cash.
23 January 2009
Obama's says they are putting in place the kinds of elements - oversight, transparency and accountability - that are needed to instill confidence from the American people.
Citing a report from the Government Accountability Office, the President said the financial markets have "major weaknesses" that can lead to wasteful spending.
Most notably the recent firing of Merrill Lynch CEO John Thain who did a $1 million office remodel after the government gave parent company Bank of America billions in bailout money.
Congress has said that the economic stimulus package should be on the Presidents desk by mid February.
Naturally, the republicans are having difficulty with the size and content of the stimulus package. House minority leader John Boehner, R-Ohio, said his party is looking for more tax cuts and less spending and thinks that the $825 billion bill (Boehner rounds it up to $1 trillion), is too much.
Nancy Pelosi says that much of the bill is tax cuts and not all spending. She also notes that many of the measures in the bill are republican ideas. She states that the size is not as important as the stimulus and number of jobs that are created.
The House is expected to continue its debate next week and vote on Wednesday. The Senate begins its debate next week.
20 January 2009
As usual Obama delivered an eloquent speech to the nation and the world acknowledging the situation we're in, but promising hope that America is willing and able to work its way through these troubled times.
To read the entire speech click here...
Even so, the stock market still feels an air of uncertainty and is trading down 200 points. The markets are looking for something more to grab onto. Now that the new President is in place, the market will need to see action and results before a rebound can begin.
19 January 2009
In fact, many are hoping that the words he speaks will someday be carved in marble.
Obama has been studying the words of Abraham Lincoln and Franklin D. Roosevelt as they inspired the nation and help calm troubled times. Can Obama do the same? Many think so, most hope so.
At the same time, when he takes office, he faces some of the most troubled times and biggest problems this country has faced in decades. It's a historic inauguration, but it will be no picnic in the White House for this President.
It's ironic that history will judge how the first African American President does as a President, but Obama faces the biggest challenges of any President in recent memory. How he handles the challenges and whatever the outcome, he will be judged, hopefully as a man who faces insurmountable odds and not as a black man facing those odds.
16 January 2009
There is still hope that Circuit City will come out of this if they can find a buyer in the next few days, but its more likely path is to continue operating its billion dollar online business and shut down most if not all of its stores.
Experts warn that this is a path for possibly thousands of other retail operators in 2009. After a dismal holiday season and consumers afraid to spend on anything other then needs, retailers are facing lower revenues and expenses that reach unsustainable ratios.
When retailers run short of cash, manufacturers don't want to sell goods to them on credit, because they are afraid the company will go out of business and they won't get paid. So, unless retailers can improve cash flows they could be facing bankruptcy.
How does this affect the stock market? It doesn't bode well for it, at least not the retail sector. The first analysts came out and said that if the Dow pierces the November lows it could be heading toward 6,000.
If we look at the lessons of the Great Depression, the stock market declined in waves for two years after the initial break. The sell offs made new lows and the bear market rallies were sharp and fast.
So, if the market does break to 6,000, look for a quick rally back. How high? I'd guess back to 8,000. From there it may trade sideways and work lower to a new low later in the year. If Obama's stimulus plan gets the economy back on track, then maybe 6,000 will be the low and stocks will be a very good value at that level.
Personally, I think that we are going to experience an event as bad as, if not worse than, the Great Depression. It may not be a depression, it may be hyperinflation with pockets of depressed areas, like housing. Either way, coming out of this unscathed seems unlikely.
Consider how much money the government is printing and borrowing and how it's going to get paid back. What if one or more of the giant corporations that the government loaned money to still fails. The money is gone forever. These companies are holding on by a thread. If fact, the government has loaned them more money than the company is worth if sold. In a panic, the government will likely throw even more money at it to keep it afloat and protect their investment, but will it work? As long as the confidence in the economy by the consumer and investors is gone, then the probability of success is low.
Still there are opportunities. Many people became millionaires during the Great Depression. Look for rally backs after big sell offs. Anxious investors who crave to put money to work in a rising market will pour money into stocks on the rally backs, but be careful to take profits when you have them.
15 January 2009
Obama wants to use the funds to expand lending to consumers and small businesses. But leaders from both parties expressed concerns about using the remaining TARP monies.
Larry Summers, Obama's economic advisor, sent a letter to Senate Majority Leader Harry Reid assuring him that the incoming administration would be more responsible in using the remaining funds. Summers also pledged to commit $50 to $100 billion to address foreclosures.
In the letter, Summers wrote: "We completely agree that this program must promote the stability of the financial system and increase lending, preserve home ownership, promote jobs and economic recovery, safeguard taxpayer interests, and have the maximum degree of accountability and transparency possible."
Many Republicans were angry that Bush used the money to help the auto industry. No one wants to use it for anything other than the financial industry.
The general public is also angry, shouting out at lawmakers and asking when they are going to get a check.
In the end it will not be enough money to do much good. The first $350 billion did nothing to help the economy. Giving money to bankrupt companies is just delaying the inevitable. Many of these companies are worth less than the amount of money they are receiving.
12 January 2009
Personally, I can't believe that oil needs to trade that high for oil companies to make money. Just a few short years ago, the world cringed at the thought of oil trading at $50. Everyone thought that would be the apocalypse and the economy would head into a tailspin.
Now, it's normal.
What changed so dramatically that oil companies can't make money at $20 per barrel anymore? It traded there for decades and oil companies made billions. It still costs around $2 per barrel to extract from the ground. Other expenses can't have gone up that much. Sure, exploration costs are high and we need to find more oil, but there are already known sources that we just haven't tapped yet. And there are other technologies that we haven't used to their potential yet.
So why is it becoming acceptable for oil to trade between $60 and $75 per barrel? Maybe there just isn't as much oil in the ground as governments would have us believe and the markets are taking this into consideration.
There have been many studies that said we would reach peak oil in the 70's, then it got pushed back a decade or two. But maybe we've passed it and prices are beginning to reflect that. If so, prices will make new record highs. Prices in the low 30's may be an excellent buying point. That is coming soon and it may not get any lower than that.
On the other hand, if you are a contrarian, you might think that since most analysts are talking about oil trading normally in the $60 to $75 range then lower prices could occur.
10 January 2009
Then Paulson decided it would be better to give banks capital, which they could loan and get the economy jump started. Well, that isn't working and the banks want the first idea instead.
If you were one of the taxpayers to get a $600 dollar stimulus check last spring, did you spend it, save it or pay off debt? How far did it go? Did it change your life or somehow incent you to start spending again? Looking back, that plan didn't do anything to help the economy either. But what if the government paid off your mortgage, would that boost your confidence to spend?
That's essentially what the Treasury is doing with the banks. Their giving them a chunk of stimulus money that is a drop in the bucket of their problems. And at the end of the day, their problems are still there.
That's not to say there aren't problems with buying toxic assets. How do you determine what price to pay for them? And will banks want to sell them if they are priced too low? Pricing them too low could lead to more balance sheet write offs that might send the stock market lower. But giving banks some pocket change is just putting the problem in hibernation. I know what you're thinking, $25 billion doesn't seem like pocket change, but you have to keep things in perspective. Compared to the hundreds of billions in toxic assets, $25 billion isn't very much money.
Maybe it's just better to take the medicine all at once and get it over with so there isn't anything else that can be a problem later. We may go through a period of heartache, but dragging it on for a year or two and then finding out the problem is still there to prevent recovery could make the heartache we experience in a couple of years worse.
In fact, it seems like the government's hidden agenda is really to inflate us out of the problem by printing huge amounts of money. In time, the debt we are incurring will be worthless in inflated dollars. Problem solved. Historically, inflation rises at the same rate at which we print money. Lately, that rate has been around 40%.
Three weeks ago in Zimbabwe you could buy 20 loafs of bread for $10 billion Zimbabwe dollars. Today you can buy 1 loaf of bread with $50 billion Zimbabwe dollars. I can't image the inflation rate in the U.S. every reaching Zimbabwe's rate, but it won't be the first time in the world's history that a great economic power was brought down by runaway inflation.
09 January 2009
Panetta, who has little intelligence experience has had a 40 year political career, which include being the Chief of Staff during the Clinton administration.
Blair served 34 years in the Navy and led the Pacific Fleet after 911.
The economy lost 2.6 million jobs in 2008, including a whopping 524,000 in December, a month that traditionally sees a lot of seasonal job creation. Last year was the worst job loss years since 1945, which saw layoffs after the war ended.
The unemployment rate jumped to 7.2% from 6.7%. Additionally, there are over 8 million people working part-time who want to work full-time. The under employed rate, which includes part-time workers jumped to 13.5%.
The total number of unemployed Americans rose 632,000 to 11.1 million. November and December marked the first time in history that job losses totaled over 500,000 in consecutive months.
This morning President-Elect Obama said, "This morning, we received a stark reminder about how urgent action is needed," when talking about his economic stimulus plan.
Henry Paulson is the man that has put together a plan to save the economy. As an example of one of the deals he made with Goldman Sachs does not distill a lot of confidence that we picked the right guy.
Paulson invested $10 billion bailing out Goldman Sachs and received $882 million in warrants. As a comparison, Warren Buffet invested $5 billion in Goldman Sachs and received $3.6 billion in warrants. Paulson's investment was his terms, not Goldmans.
Analysts say that if Paulson did that while working at Goldman, he would have been fired. Too late for that now.
07 January 2009
And no, that doesn't include Obama's economic stimulus package that he must do because of the collapsing economy he's also inheriting. That could add anywhere from $800 billion to $1.3 trillion more.
These are record dollar amounts. But our wise government has found a way to make it seem not so bad. Yes, these are the same people who remove food and energy from the inflation index calculation. Doesn't make sense to include things everyone uses and needs, after all.
As a percentage of GDP, the 2009 deficit is less than the deficit in 1983 when it was 6% of GDP. The current deficit could grow to 14%, but don't worry because it is still less than the 21.5% deficit in 1945.
The Congressional Budget Office says the cause of the deficits was the collapse of the housing market and the financial market turmoil. The Federal government has thus far committed $7.2 trillion to combat the crisis, primarily in the form of investments and loans.
The CBO expects GDP to fall in 2009 and slowly recover in 2010. But the unemployment rate at the beginning of 2010 is expected to be around 9%.
The markets go through recessions to correct the imbalances that occur during normal economic activity. In this case, the imbalance was astronomical having been inflated even further with low interest rates and easy money for so long.
Given that's the case, what kind of correction will we have to go through to correct the imbalance of artificially injecting trillions of dollars into the system? Trillions of dollars that no one has, money that is literally being printed as fast as the presses will allow.
It is ironic that the people that are interfering with the free market system are the same ones that say the market should be allowed to correct itself.
Inflation is being built into the system, hopefully it won't turn into hyperinflation, but it will be big.
Bernanke, a student of the Great Depression, doesn't want to make the same mistakes that were made in the 1930's. Back then, they did virtually nothing. Now, the Fed is doing a lot. So that mistake is not being repeated, but that doesn't mean the outcome will be any better. Last time we had a great depression, this time we could have hyperinflation.
It is worthy to note that before 1929, all recessions were called depressions. The depression of the 30's was so big that it was labeled the Great Depression. After the Great Depression the government felt that it carried a bad stigma to call economic corrections depressions, so they changed the title to recession.
In other news, Democratic leaders are ready to accept Roland Burris into the Senate. The only obstacle left is the Illinois Supreme Court's decision to determine if the Secretary of State is required to sign off on Burris' credentials.
06 January 2009
FOMC saw a "substantial" downside risk to the economy in December when they lowered interest rates to 0%.
Fed sees outlook for the economy "weak for a time" and an appreciable reduction in inflation. In fact they see inflation as "uncomfortably low".
FOMC says balance sheet likely to remain at a high level. Fears prolonged contraction.
Obama said the deficit could reach $1 trillion dollars.
Illinois Secretary of State Jesse White has not signed the certificate of appointment for Burris because he believes, as other Democrats do, that the appointment is tainted by the scandal surrounding Governer Blagojevich.
Burris has stated that the Blagojevich's problems have nothing to do with him and that the appointment is legal.
Burris' attorney, Timothy W. Wright III, has said that the rejection of Burris' credentials is unlawful.
Burris has said he is not seeking a confrontation, but Wright has said they are ready to take this unlawful action "to the highest court in the land."
Even Republican leaders are urging Democratic leadership to seat Burris because it is not a battle they need or one that the incoming President needs.
Some believe that because of who appointed Burris, he may have difficulty getting re-elected in 2010.
05 January 2009
Most States are facing budget shortfalls and may be required to cut spending and raise taxes.
While many economist predict a stimulus package exceeding $1 trillion, the Obama camp puts it closer to $750 billion.
The plan will include tax cuts, breaks for small businesses, job creation credits and increased write-offs of expenses.
The tax credit could be a $500 cut for individuals and $1,000 for couples and would become part of the payroll system, meaning the cut would reduce the tax deducted from a workers paycheck so people would get the money right away. If a person doesn't have any tax liability, a refund could be issued to that person.
Currently businesses can carry-back losses for 2 years. Under Obama's plan that would be extended to 5 years, so businesses can carry-back or forward business losses and apply that to past or future tax bills.
Obama would establish a new tax credit for businesses that create jobs or avoid layoffs.
For 2009 and 2010, small businesses would be allowed to write-off expenses up to $250,000, up from $125,000.
Obama's team is looking for a plan that will have the fastest impact on jobs and economic stimulus.
Other parts of the President-Elects proposal will include:
- double renewable energy production and make public buildings more energy efficient;
- rebuild crumbling roads, bridges and schools;
- computerize the health care system;
- and modernize classrooms, labs and libraries.
Everyone agrees that the country needs a plan that will help avoid a steeper economic downturn and creates jobs in the short term and growth and competitiveness in the long term.