Effor.com

I don’t have time to get into all of the reasons that George W. Bush will go down in history as one of the worst Presidents ever, but the Knoxville News Sentinel captured part of it in an editorial today.  His mind boggling deficits.

In case you’ve forgotten, we had a surplus (fake though it may have been do to counting Social Security receipts as general revenue) but overall the federal government took in more money than it spent in 1998, 1999, and 2000.

Bush not only blew the surplus, he’s run the highest deficits in history!  The only President who comes close to being as fiscally irresponsible is his dad - Mr,. “Read my lips, no new taxes” - who also sucked.

From the News Sentinel:

In 1998, thanks to a healthy tension between a Democratic president and a Republican Congress, the country began running budget surpluses.

That lasted until George W. Bush took office. He saw a projected 10-year federal surplus of $5.6 trillion as a problem, a sign that taxpayers had been “overcharged.” He certainly solved that problem.

The interest on the federal deficit alone is $451 billion in 2008.  Bush is adding $1 trillion to the deficit this year alone - not counting the cost of the wars in Iraq and Afghanistan!  For some reason, Bush doesn’t think those billions (it’s gotta be close to $1 trillion by now) should count.  Huh?

Please go away George.  Really, I won’t be mad if you left office early and let the White House janitor run the show for a few months - he CAN’T do any worse than you are doing!

I titled this post “Bush sucks part 1″ because there’s a LOT more to back up my assertion that Bush is the worst President we’ve ever had, but I don’t feel like doing all the research tonight.  Just pick a subject - economy, growth of the federal government, starting a needless war to settle a family fued, overly intrusive rules and regulations on business (does Sarbannes Oxley - SOX - ring a bell?), unconstitutional wiretaps, imprisonment without charges, etc.

Bush makes lame-brain Carter look like a genius!  And that’s way to much to put into one post, so I’ll add parts to this as I get to them before Bush leaves office.

gk

I don’t know what news people are seeing that encourages them to buy stocks.  I meant to post this last night but didn’t get the time, so here goes.

The DJIA went up over 500 points yesterday and I’ll be damned if I can figure out why.  I kept an eye on the news headlines during the day, and here’s what they looked like at 2:45pm ET - just before the market skyrocketed into the close.  Here are the top headlines on MarketWatch.com as displayed by my “My Yahoo” page yesterday:

· Intel, H-P, Dell lead tech-sector losses - 14 minutes ago

· Citigroup looks for a new fall guy - 14 minutes ago

· Economic clouds could thwart some Obama energy promises - 14 minutes ago

· Energy stocks flirt with gains in volatile session - 14 minutes ago

· Chrysler’s survival difficult without government aid: CEO - 14 minutes ago

· GE shares fall back to 1996 levels on financing-cost concerns - 14 minutes ago

· U.S. stocks bounce back some after hitting new lows - 14 minutes ago

· Shares of Citigroup, Bank of America sink to decade-plus lows - 14 minutes ago

· Treasurys steady after 30-year bond auction - 14 minutes ago

· Gold dips below $700 as traders take more money off the table - 14 minutes ago

And here’s what the topr Reuters Business news were at the same time:

Jobless claims hit 25-year high, imports plunge - 1 hour ago

• The number of U.S. workers drawing jobless benefits hit a 25-year high this month and imports suffered a record fall in September, according to reports on Thursday that underscored a rapid drop-off in…

  · Stocks cut losses; energy offsets tech drag - 36 minutes ago

  Stocks cut losses on Thursday, sending the Dow and S&P 500 back briefly into positive territory, as investors scoured the market for beaten-down shares, including those of energy companies, offsetting…

  · Top hedge funds see more rules ahead for industry - 53 minutes ago

  Some of the world’s richest and most powerful hedge fund managers told U.S. lawmakers on Thursday that they support greater transparency for the secretive industry, but offered divergent views on …

  · GE shares tumble, company confirms 2009 dividend - 1 hour ago

  General Electric Co (GE.N) confirmed on Thursday it plans to pay a dividend through the end of 2009, but shares of the U.S. conglomerate remained down sharply.

  · Goldman suspends GM rating, Chrysler urges aid - 53 minutes ago

  Goldman Sachs suspended its rating on General Motors Corp on Thursday and said the automaker needs at least $22 billion in federal aid, while Chrysler said it would be “very difficult to survive&…

  · RIM co-CEO says market environment is “intense” - 50 minutes ago

  The current market environment is rife with challenges and requires careful planning of strategy, the co-CEO of Research In Motion (RIM.TO)(RIMM.O) said on Thursday as an analyst warned that sales of …

  · Citigroup board says supports its chairman - 39 minutes ago

  Citigroup Inc’s (C.N) board of directors said it supports its chairman and a newspaper report that said it was considering replacing him was “completely erroneous.”

  · Oil rises 4 percent on OPEC, equity market rebound - 9 minutes ago

  Oil jumped over 4 percent on Thursday as OPEC seemed poised to cut production again later this month and equity markets rebounded.

  · Lawmakers challenge big banks on bailout funds - 36 minutes ago

  Senators asked the nation’s biggest banks on Thursday to explain how they are using the billions of taxpayer dollars provided to them under a massive government bailout program. The answers were m…

  · Qualcomm halts UMB project, sees no major job cuts - 11 minutes ago

  Qualcomm Inc (QCOM.O), seeking to cut costs in the face of slowing demand for cell phones, has stopped developing a next-generation wireless technology called Ultra Mobile Broadband and is making smal…

There’s not a single bit of good news hitting the wires, but yet the market reverses course and ends up almost 1000 points higher than the low for the day.  Makes no sense to me, but I don’t see anyway investors can continue to ignore the news that says earnings are falling dramatically.  At some point the “P” needs to adjust to the dramatic drop we’re seeing in the “E” in order to bring the Price/Earnings ratio back in line.

gk

I thought the headlines on Friday were interesting.  There was ZERO good news about the economy, and all the economic and earnings reports were worse than expected.  But the stock market went up.  Makes no sense to me.

Here are the top headlines from Reuters Business news as of 12:57pm (ET) yesterday.

GM, Ford losses worse than expected, burning cash - 33 minutes ago

• General Motors Corp and Ford Motor Co reported far deeper-than-expected quarterly losses on Friday, and said their rate of cash burn was accelerating, as an extended slump in car sales raised question…

  · Pending home sales fall, tight credit bites - 18 minutes ago

  Pending sales of existing homes fell in September, reversing the previous month’s gains, as access to credit tightened, a private report showed on Friday, adding more gloom to the broader economic…

  · Bargain hunters buoy stocks, but GM slides - 10 minutes ago

  Stocks rose on Friday as investors followed two days of losses in the mood to buy beaten-down sectors, including energy and technology, offsetting a blitz of bleak news indicating economic gloom.

  · Job losses soar, jobless rate at 14-year high - 1 hour ago

  U.S. employers slashed an unexpectedly steep 240,000 jobs from payrolls last month and the jobless rate shot up to a 14-1/2-year high, the government said on Friday in a report underscoring the econom…

  · Microsoft CEO pours cold water on Yahoo interest - 2 hours ago

  Microsoft Corp Chief Executive Steve Ballmer dismissed speculation the software giant might still be interested in buying Yahoo Inc, sending shares of the Internet company down 14 percent.

  · Paulson considering all options for TARP funds - 30 minutes ago

  Treasury Secretary Henry Paulson is considering “all options” regarding implementation of the $700 billion financial rescue plan, including areas of the financial sector beyond traditional b…

  · JPMorgan sees consumer loan defaults rising - 2 hours ago

  JPMorgan Chase & Co (JPM.N) said on Friday it expects consumer loan defaults to increase in the current quarter and sees higher loan loss provisions.

  · Oil rises as U.S. jobs data hits dollar - 43 minutes ago

  Oil prices rose on Friday as the dollar slumped following bleak employment data in the United States, the world’s top energy consumer.

  · Sprint suffers loss as customers flee, shares slump - 36 minutes ago

  Sprint Nextel Corp (S.N), the No. 3 U.S. mobile service, posted a third-quarter loss and a 12 percent drop in revenue as customers fled to rival services.

  · Major banks ask Citadel to post more collateral: report - 28 minutes ago

  Citadel Investment Group, one of the largest hedge funds, is being asked by several major banks to post additional collateral to cover big losses on its investments, the Wall Street Journal said, citi…

It was all over the headlines yesterday - existing home sales rose 5.5% (seasonally adjusted) from August.  The median price dropped too - down 9% to about $191K.  Good news right?  It IS good news except for one minor detail absolutely no one reported.  Here it is straight from the press release that everyone’s story is from:

http://www.realtor.org/press_room/news_releases/2008/ehs_rise_on_affordability
“Compared to a fairly small share of foreclosures or short sales a year ago, distressed sales are currently 35 to 40 percent of transactions.”

Oops - it seems that foreclosures are counted as sales, and foreclosures and short sales are about 35% of all sales right now.

A short sale is where the bank agrees to the sale and take less money than you owe on the mortgage as payment in full.  For example, if you owed $100K on your house but you could only sell it for $80K, the bank would take it.  Why would they do this?  Because getting 80% of the money it better than getting none and having to go to the expense of foreclosure.  Then the bank is stuck with it and they’ll still need to reduce the price to sell it.

So a short sale cuts out the foreclosure process - but it’s the same result:  The bank didn’t get paid back in full, so they need to writedown that loan and take the loss.  Then the CDS’s (Credit Default Swaps) that were written on that loan need to be written down and taken as losses, and the “Traunches” (pieces of mortgages packaged together for resale to investors) need to be written down, then the “Super Traunches” (bundled groups of Traunches) need to be written down, etc.

Look at the example in this Wikipedia article: http://en.wikipedia.org/wiki/Tranche
(From what I’ve read, this example is a simple simple one, but it illustratates how one debt is packaged and repackaged.)

CDS’s, Traunches, Super Traunches and dozens of other alphabet soup abbreviations are all forms of derivatives, and this is why just a few percent increase in foreclosures (or short sales) can cause hundreds of billions (we’re at about $1 trillion now) in writedowns and losses.  And that’s why we’re nowhere near seeing the end of huge losses, and that’s a big reason the stock market is tanking.

To give you an idea of the size of the writedowns (losses) that need to happen, it’s estimated that the derivative market totals about $500 trillion.  The total GDP of the entire world is about $55 trillion.  These debt instruments have been repackaged and resold and repackaged and resold so many times that they total about 10 times the entire world ecomony.  That’s why Buffett (Warren, not Jimmy) called them WMD’s.  And unlike the ones in Iraq, these actually exist,and they will go off.

gk

Want to know the real reason financial stocks rose so much today?  The SEC loosened the accounting rule called “Mark to Market” today.  This accounting rule is blamed for the financial problems of banks and other financial institutions, because it requires companies to value assets on their books at the price they could actually bring if they were sold.

This is what has caused the massive writedowns you’ve seen banks taking over the past year - and it’s a good thing!

In essense, it requires companies to realistically value the real estate assets they show as assets, and to realistically value those assets when using them for collateral on loans.  What’s wrong with that?

Nothing - but the banks are vehemently opposed to the rule, and they want the old way of valuing these assets restored.  The old way was called “Mark to Model” or as I like to call it, Mark to Myth.  I call it that because it allowed companies to claim almost any value for their assets - even if no one would touch them with a 10 foot pole.

The mark to model requirement was part of Sarbannes Oxley which was passed after all the accounting problems uncovered in the wake of the Enron and Worldcom fiasco’s in 2000 and 2001.  The old way (mark to model) meant you couldn’t tell what a company was worth, because their assets were really just made up numbers.

Anyway, Marketwatch said:

I’ve got a lot more to say, but I was reading a story on the NY Times and this caught my attention:

“It’s like having a fire in a cinema,” said Hyun Song Shin, an economics professor at Princeton. “Everybody is rushing to the door. You are rushing to the door because everyone is rushing to the door. Clearly, as a collective action, it is a disaster.”

When there’s a fire and everyone is rushing to the cinema exits, you have a choice:

A) Join the crowd trying to get out.

B) Stay behind and get burned.

Which do you think is the correct course of action?

Personally, I choose “C” which is to leave when I smell smoke in order to beat the rush when everyone else finally sees the fire.  That’s why I got out of the stock market last year in June when the first reports of this financial meltdown started appearing.

I read into it, looked at the skyrocketing bankruptcy rates (and used a little common sense regarding what that would do to the financial institutions that invested in the toxic crap) and made the decision to get out.

If you stayed in the market, you’re probably down about 20% (or more) right now.  But guess what?  You could get out now and avoid another 20 to 30% in losses.  Despite the market surge today, this is far from over.  Think the 3rd inning of a 9 inning game and you’d be in the ballpark.

gk

Here’s the quote of the day from a story on MarketWatch.com

“The Fed is trying to provide liquidity as quickly as it can, but there seems to be an endless supply of ‘moles’ and only one mallet,” said Kevin Giddis, managing director, Morgan Keegan & Co. Inc.

Of course “provide liquidity” can also be read as “print money”, so inflation isn’t going away anytime soon.  And inflation while the economy has little or no growth is the definition of stagflation.  It’s 1977 all over again.  Get ready for the ride!

gk

I’m sure Henry Paulson is a bright guy, but you’d never know it from some of his public statements.  Here’s what he said today according to FoxNews:

“There are always difficulties during periods such as this. There may be more bumps in the road,” Paulson said in a statement to reporters at the conclusion of the meeting of G7 finance ministers and central bank governors.

Duh.

After meeting with the world’s top financial guru’s, the people who are supposedly in charge of their respective countrys’ economies, that’s the best he can come up with?  Anyone who’s read a paper, seen 10 minutes of TV news, or even glanced at the front pages of the NY Times, CNN, FoxNews, ABC News, USA Today, or Google News knows this drivel.

“There may be more bumps in the road.”  Way to go out on a limb Hank.  Do you think you could be bothered to actually say something pertinent next time?  Or should we expect more enlightenment like this from you in the future?

The complete incompetence of this administration continues to astound me.  I’m basically a libertarian, so I don’t want the federal government to actually do anything about the current financial mess, but I do expect them to know what’s going on, and to make statements that give us peons a clue as to what they’re thinking - that way we can prepare for the inevitable mess they’ll make of the situation.

I say inevitable, because they can’t help themselves.  The government is basically powerless to do anything constructive to repair the mess they helped to create - but that won’t keep them from passing a bunch of stupid, worthless, costly laws that we’ll all need to spend time and money on in order to make sure we’re in compliance.

I’m talking about the current financial mess, but you could apply the same statement “The government is basically powerless to do anything constructive to repair the mess they helped to create - but that won’t keep them from passing a bunch of stupid, worthless, costly laws that we’ll all need to spend time and money on in order to make sure we’re in compliance.” to damn near anything the federal government touches.

Wow - I just quoted myself one sentence after I wrote it.  That must be some kind of record….

Anyway, thanks for the warm fuzzies Hank.  You displayed your awesome intellect with your statement today, and I’l glad that you think there “MAY be more bumps in the road.”   Good stuff, you ought to pass that line onto Bush, as it would sound even more profound coming from his mouth.

gk

Just had to pass this on.  Excellent write up of the financial issues facing Wall Street and (though I disagree with some of it) Allan Sloan does a good job of breaking down a complex subject.  Highly readable and highly recommended.

gk

I ran across an interesting article in the NY Times today.  Gail Collins obviously believes in cradle to grave socialism, but she writes well. 

She sarcastically lambasts McCain for wanting the current crop of hustlers to fail on their own, and she doesn’t seem to understand the consequences of what she’s advocating.  If people (and companies) are bailed out for their bad choices, they will continue to make bad choices.  Even worse, others will be encouraged to make bad choices, thus compounding the problem in the future when more people need help.

This is no different than Medicare/Medicaid, food stamps, subsidized housing, welfare, etc.  Let people fail - and let them bear the consequences of their failures - and they improve their decisions in the future.  Bail them out and they’ll continue to need help forever.

gk

Ok, things are getting bad in the economy - sub-prime, housing, credit, Social Security and Medicare crisis’ - all sorts of problems that we’ll work through eventually.  But this could cause the whole house of cards to come tumbling down.

According to the story there’s a severe shortage of hops, an essential ingredient in the making of the drink that makes civilization possible - beer.

What happens when brokers and traders can’t relax with a beer (or 6) at the end of a long day?  How long will workers continue to work if they can’t unwind with a brew with their buddies? 

This calls for government intervention in order to prevent our whole civilization from disappearing.  I bet something like this happened to the Assyrians and Egyptians….  They invented beer and rose to greatness, but if they ran out of hops, they would have sunk faster than Atlantis.

I haven’t heard a speech by any of the presidential candidates explaining how they’d handle this calamity.  Why the silence?

gk

Just two days ago on Wednesday, March 12th, Bear Stearns CEO Alan Schwartz said (I’m quoting from a Reuters story) “We don’t see any pressure on our liquidity, let alone a liquidity crisis.”

He also said “We have $17 billion or so excess cash on the balance sheet.”

Today he said “Our liquidity position in the last 24 hours had significantly deteriorated.  We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

Bullshit.  Rumours about Bear Stearns and their problems have been circulating for quite awhile.  I even mentioned it here on Monday in a post titled “Who is this guy Margin - and why does he keep calling?” 

To put it bluntly, Schwartz lied.  He knew he was lying when he said it.  He should be fired immediately and prosecuted for fraud.

The bailout of Bear Stearns by the Fed today is the tip of the iceberg.  This will get worse, and the Fed has now set a precedent of bailing out non-banks.  Here’s a quote from a CNN story today. 

“The crisis, however, is not isolated to Bear Stearns, said Christopher Whalen, managing director of Institutional Risk Analytics, who predicts that the liquidity crunch will only get worse. The heart of the problem is that no one knows how to value the assets these Wall Street firms are carrying so noone wants them.  A lot of firms are right behind Bear,” he said”

gk

Despite the news about Bear Stearns, this may be the news that is the most significant in the long run.  The EEC economy is now larger than the US economy. 

According to the story “Taking the gross domestic product of both economies in 2007, the combined GDP of the 15 countries which use the euro overtook that of the United States when the European currency surged to a record high of more than $1.56 per euro.”

It’s not that Europe is growing faster than the US, it’s that our government is inflating the dollar faster than the Europeans are inflating the Euro.  And with all the billions the Fed has created out of thin air in the past few months, I don’t see that trend reversing anytime soon.

gk

Looks like Bush is looking for new ways to spend your money.  He’s already turned record surpluses into record deficits, he’s wasted billions on the “war against terror” on Iraq, and he’s stood by and done nothing while watching the biggest bubble in recent history grow to the bursting point.  Now this from:
http://money.cnn.com/2008/01/25/news/economy/preview_sotu/index.htm?postversion=2008012618

“Look for a pitch for tax-related provisions, such as opening the door for states to use tax-free bonds to help homeowners refinance out of unaffordable subprime [adjustable-rate mortgages],” said Jaret Seiberg, senior vice president at the Stanford Group, a Washington policy research firm.

So now Bush wants everyone to pay for the bad decisions of the idiots who bought more house than they could afford.  I guess he figures that if he can spend other people’s money (that he doesn’t have) why can’t everyone else? 

I’ve said it before, but you can’t borrow your way out of debt.  This plan would shift the existing debt burden to responsible taxpayers, which simply encourages more irresponsible behavior.  I think he’s just trying to postpone the inevitable crash until after he’s gone to protect his “legacy”- which will just make it that much worse.  

The same goes for his “stimulus” rebate package.  The only thing it’ll stimulate is more borrowing.  And I really want to know how it can be called a tax rebate plan if you give a rebate to people who don’t pay taxes….  Come again?

gk

I wonder how Doug Kass is feeling about this advice he gave on Jan 14th?

http://www.thestreet.com/s/kass-katch-buy-the-financials-yes-buy/newsanalysis/investing/10398482.html

Yup, you read that right - he said to “Buy the Financials. Yes, Buy”.  Since Mr. Kass published his story on the 14th, the Financial Sector Index (XLF) is down more than 8% - and it was down 10% at one time Friday.  I may be wrong (I often am!) but I don’t think buying on the 14th would have been a good idea….

I think it’s waaay to soon to be looking at this sector.  Personally, I think we’ll see a couple of big bank failures before the financial house of cards has collapsed fully.  No, I don’t know who it will be, but I do know that you don’t make money in the long run by borrowing money (especially at today’s higher rates) to pay down debt.  Eventually you run out of willing lenders (can you say credit crunch?) and you have to face the music.

Banks and other lenders have been putting off the inevitable for quite awhile, and they may be able to postpone it a bit longer, but borrowing from Peter to pay Paul still works the same way it did 100 years ago.  It doesn’t.  Infusions of capital from the Middle East, reductions in the Fed Funds Rate, and issuing corporate bonds simply makes the eventual crash worse.

In my humble opinion, we’re heading into a very rough period for almost all asset classes, but “soft” things like made up financial assets and corporate profits (measured in the dollar) will fare much worse than “hard” assets, such as commodities.  Another 20% to 30% decline from here is not out of the question, so sell some stocks and put the proceeds into simple money market funds or commodities.  In other words, it’s time to keep your powder dry (conserve your capital) so you can afford to pick up some bargains when this train wreck is over.

gk

Ok, I don’t understand how such bright and well educated people can be so stupid.  I’m referring to the Federal Reserve which released their meeting minutes today.   In case you didn’t notice, here’s what happened in the markets today:

Gold and oil hit record highs - http://www.foxbusiness.com/article/gold-prices-hit-28year-high_421594_1.html

The stock market swoons:  http://money.cnn.com/2008/01/02/markets/markets_0405/index.htm?cnn=yes

Here’s some background - basically all commodities have been going up for the past few years.   I’m not just talking about oil and gold - corn, wheat, soybeans, pork bellies (anyone ever bought a pork belly?) - basically anything material “real” thing has gone up at least 35% to 40% or more in the past 7 years.  And it’s not a coincidence that the stock market is about the same as it was 7 years ago, because the reason is the same.  Inflation.

The Fed’s dirty little secret is that they’ve been printing money like mad.  Everytime you see an article mention something like “The central bank, in conjunction with central banks in Canada and Europe, have already conducted two auctions of $20 billion apiece.” (from http://money.cnn.com/2008/01/02/news/economy/fed_minutes_analysis/index.htm) ask yourself where that $20 billion came from.  When you realize that the Fed “created” that money from absolutely nothing, you’ve understood the major issue. 

That $20 billion isn’t setting in a vault somewhere, it isn’t gold reserves that they sold and/or loaned out, it’s not even actually printed - it’s simply bookkeeping entries.  The Fed “made it up” and then loaned it out to banks - so the banks appear to have more money than they do.  It makes the books look better because - get this - the banks don’t even have to report to stockholders that they’ve borrowed the money!  That’s the key to the new “Term Auction Facility” that they’re lending the money through.

Unlike the usual overnight Fed Funds borrowing - which is required to be reported - there’s no reporting requirement for the TAF.  Since the Fed is sen as the lender of last resort, borrowing money to cover shortfalls from the Fed meant that that bank was struggling.  Now that they can do it secretly, the banks will do it even if it carries a higher interest rate, because they don’t need to disclose the fact.  And the Fed gets to “print” another $20 billion and put it into circulation.

They quit reporting on M3 a while back, but you can still find it at a site that compiles it from publicly available information.  Check it out at: http://www.nowandfutures.com/key_stats.html

Is it starting to make sense yet?  In a nutshell, it’s simple supply and demand.  We’re putting more dollars into circulation, but there’s nothing behind them - no tax revenues, no gold or silver deposits, not even the fake backing of government bonds.  What happens when you increase the supply of something but the demand doesn’t change?  That’s right, the price drops - but in this case the thing that’s dropping in price is the money itself, so real things (commodities) HAVE to go up.

Prediction:  Commodities will go up and down in 2008 (brilliant huh!) but they’ll go up a lot further than they go down.  You won’t regret putting 20% to 30% of your portfolio into some gold, oil, Euro, corn, etc, ETF’s a year from now.  And until the Fed stops printing money like madmen, the commodity boom will continue.

gk