I had some extra time today so I decided to take a look at what has happened this year. I wanted to go back and take a look at the various buyouts and bailouts that the Government has backed, and the promises made so far. And the numbers are horrendous.

The main focus so far is on the $1.5 trillion that has been authorized and/or spent thus far. $700 billion for the bailout of mortgages and the credit crunch, and now another $800 billion for mortgages and consumer loans. But those numbers are not the full amount of cost this year.

The year started with the bailout of Bear Stearns. It cost $29 billion to allow JPMorgan to buy that failed brokerage house. And we were promised that would fix everything. Then there was the $150 billion stimulus package that was promised to fix the sagging economy, which failed. Then came Fannie Mae and Freddie Mac, which Representative Barney Frank publicly pronounced as healthy and secure, that cost $120 billion each (not including the $600 billion that is now part of the $800 billion bailout package). And the numbers are still not done.

AIG cost $120 billion by itself. That though was said to be included in the $700 billion authorized by Congress. That means of the 1/2 of the funds given to Treasury Secretary Paulson only $230 billion was available for everything else needed. Not counting the tens of billions given to banks, or the money spent to buy bad loans at unknown valuations.

Of course there was also Citigroup. This cost $20 billion plus $306 billion for guarantees of their bad loans, for a total of $326 billion. Now that is a problem because if the funds came out of the same pool as AIG, we are in a bigger negative than the spending is already creating. A double negative of sorts. And yes I know that guarantees are not the same as cash, but a guarantee must be backed by something besides words. Which means cash from somewhere.

But let us not forget the $25 billion given to the auto industry. And that has nothing to do with the additional $25 billion that is being asked for now, just roughly 5 weeks later. Which is separate money. And that precedent is going to lead to the requests of the airline, credit card, home building/construction and other industries. If the Government is handing out money to businesses, it would be folly not to get in the line.

So the total is $1.94 trillion dollars. Which does not include Citigroup or the additional amounts from the auto industry. Including that figure we get $2.27 trillion in money that never existed and must be repaid. To be exact that means that every American, each of the 300 million citizens, owes $7,567 to the Government.

It is expected that some of these loans and stock purchases will eventually break-even or turn a profit. The expectation is that will happen in 10 - 15 years. Though it is absolutely unclear how the public will be repaid, though the Government will collect all the money. Thus it is possible that the Government will receive money from the public and hold repayments from loans - effectively being paid twice. And it is very likely that any repayment will be funneled into Government agencies instead of the public, as was attempted by Democrats with the first version of the mortgage bailout bill.

But even if 40% of the loans were to make a 50% profit, the bulk of the debt incurred will still be greater. And that does not cover the direct cash infusions made without a loan or repayment provision - which is about 70% of all the funds so far as I can gather.

And the fun does not end there. Remember that President-elect Obama, pushed by House Speaker Nancy Pelosi, has promised a now $700 billion second stimulus plan. The exact details of this plan are unclear, but some amount will be given to the public and some will be used to fund public works. Or so the loose plans state so far. That would mean that in 1 year the cost is $2.97 trillion.

And President-elect Obama still is pushing to add over $800 billion in new spending for new and/or expanded programs. That makes it $3.77 trillion. Or in terms of cost to you and I - $12,567. That's for every man, woman, and child alive right now - working or not.

Put in different terms, this money could have completely funded the entire NASA budget (roughly $419 billion unadjusted for inflation) since inception nearly 10 times over. We could have funded 1,000 moon landings ($36 billion unadjusted) including all the research and development.

Let me make it more personal. That amount is more than the entire net worth of Oprah Winfrey, Bob Johnson, Tiger Woods, Michael Jordan, Tom Cruise, Bill Gates, George Soros, and Warren Buffett combined and multiplied by 10. It's enough money that every single American citizen, of any age, could go to the average college for 2 years. It's enough money to give every American alive today a 10% down-payment on a $120,000 house.

And there is no guarantee, in fact there is reason to highly doubt, that it will get better.

Labels: AIG, Barney Frank, Bill Gates, Citigroup, Congress, Freddie Mac, mortgage bailout, Nancy Pelosi, NASA, Oprah Winfrey, Tiger Woods, Treasury Secretary Paulson, U.S. economy, Warren Buffett

Finally we have seen President-elect Obama stick by a campaign promise. It took long enough. I am of course referring to the nomination of the Treasury Secretary position today. Tim Geithner will replace Paulson and Larry Summers will lead the National Economic Council, which is a positive to a degree.

I had remarked a few days ago that President-elect Obama has broken several campaign promises since the election. One of the most troubling to me was the delay he placed in selecting a Treasury Secretary. That problem has now been allieved to a degree. But by no means should the public think that Wall Street is in love with this selection (the Dow dropped 123 points from 323 up at the start of his speech today to 200 points by the end).

While removing Bernanke and Paulson are important moves, who replaces them is important. And the positive move in the early trading today is not a signal of the confidence of those moves but the response to Citigroup being bailed out again. It is the stabilizing action to world markets that the Dow reflects. The reaction to the economic team is just starting to settle in.

Why am I not totally enthused? Well first off, the most important selection to the Obama Administration is the Treasury Secretary. By naming a new face the markets can calm since they are aware of someone being in place. Uncertainty on that position is a negative for the market. The delay has helped to drag the markets lower.

The other factor is the fact that Larry Summers was in charge once before. Under the Clinton Administration from 1999 until 2001. Those dates should be a lightning bolt for those familiar with the market. It is that time where the stock market peaked and began the internet bubble implosion. And Summers let it happen.

The Clinton Administration was a beacon of inaction in the face of pressing need. There is no doubt that all who served were qualified, just as there is no doubt that they failed to act. I am not saying that the internet bubble was preventable, but I am saying the degree and manner in which it fell apart could have been dealt with better. So having a key figure that allowed massive devastation, which lasted for years beyond the initial meltdown, does not make me feel much better. Though I think it’s hard to screw up as much as Paulson has.

Adding to my concern is the incredible number of former Clintonites in the new Administration. It is as if President-elect Obama is reaching into the past because he hopes to repeat the luck of the last Democratic President. And such an opinion is silly at best.

The Clinton Presidency was a symbol or preservation. They did little to change the economic path the nation was on, which allowed things to prosper. And because little maintenance was done what prospered rotted as well. Now we get many of the same people picking up in a worse economic environment. That means they will either shine brightly, or all be replaced within a year.

Considering that President-elect Obama is not going to rush into raising taxes (a promise he implied would not be altered right up to election day) there is a positive out there. But that is sullied by the prospect of a now $500 - $700 billion stimulus plan. My belief is that is akin to burning the money in front of the NYSE. I hope to be proven wrong.

Looking at the new National Economic Council director, his connection to Robert Rubin and thus Citigroup, and his performance in the past I have slightly more confidence now than with Paulson and Bernanke. But that is not enough to alter my opinion of what will happen. I have predicted that the market will drop on inauguration day, by 500 points. I stand by that thought. I have said that I believe the Dow will hit 7600 in the 1st quarter of 2009. I reconfirm that outcome. And I have stated that I believe the Obama Administration will lead the nation into a depression – which I again state.

I do not say these things with cheer. I desperately hope to be proven wrong. I will be happy to admit my mistake if the stock market were to run, and the economy gain its legs. But that would be no different than looking at Hope in Pandora’s Box and assuming it was a gem of redemption among pestilence.

Senior Drill Instructor Sgt. Williams once told me to prepare for the worst to survive the best, and I have lived by that as a stock broker and business owner. Improvise, adapt, and overcome a motto for more than just Marines. I hope both of these thoughts are paramount in the minds of the Obama Administration even though none I am aware of have ever served in the military.

Labels: Citigroup, Clinton Administration, internet bubble, Larry Summers, National Economic Council, President Barack Obama, Tim Geithner, Treasury Secretary

This year Christmas has come before December, especially if you are a money center bank, a brokerage house, insurance company, or car manufacturer. For regular people though the holiday may not arrive at all. Such is the way things happen when the Government gets involved.

The news is out now that Citigroup will receive another $20 billion, with guarantees for $306 billion in assets, before the holiday season ends. In fact they should have the money, your money, in hand before the holiday season officially starts this Friday. Santa it seems has a 401k.

The good part of this is that Citi should not fail. Thus money will be stable in over 100 countries around the world, for the time being. Another bonus that New York City officials must love is that Citi will not be sold off in parts, and thus tens of thousands of additional jobs should be secure. And there is a better than 50% chance that many of the major bonuses that help the Big Apple float will be paid out (contractual obligations don’t end when the company gets a Government bailout). And in all honesty that is a good thing for the U.S. economy too, as long as they spend the money and not hoard it in fear of future layoffs.

The bad thing is that none of the officials tasked with resolving the financial crisis the nation is in foresaw this event. Chriss Dodd and Barney Frank didn’t see it coming, not because they were asleep at the wheel like when they promised Fannie Mae and Freddie Mac would be ok, because they were too busy blaming anyone but themselves for missing the problem. Treasury Secretary Paulson missed it. Fed Chairman Ben Bernanke missed it too.

Not one of these men, each tasked with identifying this continuing problem, envisioned this problem. They have dozens of staffers and hundreds working behind the scenes crunching numbers. Yet they all missed the chance of this happening. And the public is left to assume that it was so sudden they couldn’t have known.

Not true.

“I believe that the move to junk rating of ACA, the probable $6 - 12 billion loss at JP Morgan [significantly higher than expected], eventual losses from Citigroup - which reinsures itself, oil breaking $100 a barrel, and the multiple overseas investments will all hit the market in mid-January 2008. Thus I think a move to 11,000 is more than probable.”

I said that in December of 2007. That’s without being a stockbroker for years, without financial racords, conversations with CEO’s, discussion of the Fed, data from international sources, or Congressional committees. Just me reading the news and analyzing the public information.

I in fact went on to say

“Will those experiencing deflation outweigh the inflation fears? And if more people lose their homes how much of our financial institutions are we willing to sell to avoid the harshest realities of a crash?”

I knew Citigroup was in trouble a year ago. I knew there would be a major crisis from the mortgage industry, and that a bear market would hit the stock market. And I defined it several times, months in advance, in detail. The main thing I have been wrong on is the severity and speed at which all these things happened.

My point about this is simple. If I can figure out how bad things were, and most likely will continue to get, then what the hell were all these people whose only job is to figure this out doing!?

If they can’t get off they political posteriors, open their Government entrenched eyes, and understand the degree of a problem that is apparent to a guy on a computer in Binghamton – without even a stock ticker – they why are we giving them control of $700 billion and more? How can we expect that a single dollar of that money will be put to a use that is effective?

Case in point. Citigroup is in big trouble. They insure themselves internally. They are failing. So what is the value of the $306 billion in assets today, what was it yesterday? Are we guaranteeing a value that was intially set for these assets, the current market value of these assets, or are we getting to pick up the debt and bad loans of Citigroup mixed in with actual assets? The difference is very important. And I doubt if Barney Frank and Chris Dodd are even aware that this question should be asked.

I asked how much are we willing to sell to avoid a problem a year ago. Today I am looking forweard and I have to ask a different question. How much of the American capitalist system the nation functions on are we willing to lose to avoid the pain of this crisis? And if we are willing to comnpromise the basis of our economy, how do we prevent losing the freedoms a solcialist nation cannot tolerate?

Labels: Barney Frank, Ben Bernanke, Chris Dodd, Citigroup, Federal Reserve, financial news, mortgage bailout, New York City, Treasury Secretary Paulson

Some days I wish I was not previously a stock broker. Sometimes I hope that what I feel are likely outcomes in the stock market do not come to fruition. But time and again I find that I get it right, not always on the timing or the exact figures, but the trend. And I did it again.

Back on December 26, 2007 I wrote a post Will 2008 be a lump of coal or a nice present for investors? In essence I felt that the beginning or 2008 would be a horrible year for many investors. This also went in line with my thinking about gold and gold stocks.

Directly I stated,

“I believe that the move to junk rating of ACA, the probable $6 - 12 billion loss at JP Morgan [significantly higher than expected], eventual losses from Citigroup - which reinsures itself, oil breaking $100 a barrel, and the multiple overseas investments will all hit the market in mid-January 2008. Thus I think a move to 11,000 is more than probable.”

Key in on the fact that oil has already hit $100 a barrel this year, and Citigroup announced

“The biggest hit came from a $18.1 billion write-down in the value of its investment portfolio. But the bank also set aside $4 billion on Tuesday to cover anticipated losses on loans to U.S. consumers — a sign that deflated home prices, high energy and food costs, and rising unemployment are making it difficult for many customers to keep up with their payments.”

I am wrong in that the Dow Jones Index closed today at 12,501. That is a far cry from 11,000 but all the financials have yet to announce their losses, oil has not maintained $100 a barrel or more, the Fed is cutting rates, and all the 4th quarter numbers are yet to be reported. Even so, the Dow now stands 12.5% below the high and beyond correction territory. It is a mere 7.5% from a bear market.

Is America in a recession? Will gold spot prices hit $903 as have been projected by some brokerage houses? Will more Americans lose their homes?

I would say yes to all. I could very well be wrong, and I hope that I will be. But I don’t see an end to this problem in the near-term. The Fed cannot prevent many of these issues with the application of rate cuts.

Those that are in trouble, or will be, with their mortgages will not be helped by lower rates as that will not cap increased heating and gasoline prices. Small businesses are not going to be able to get new loans as easily even with lower rates as financials scramble to find cash to absorb the losses they are experiencing. Effectively some degree of pain must happen and is not preventable.

I say all this for one reason. So that you my readers can be prepared. If I am correct even in part, then this nation will encounter times we have not seen for quite a while. I doubt that we will see the inflation and unemployment that existed in the 1970’s (when I was a child) but I am sure that we will see levels that those under 30 have never experienced.

Credit will get crunched, and credit card debt will increase for a time. New loans will become far harder to achieve. And costs of fuel will go higher even if ethanol additives were readily available for widespread distribution today.

And then there is the political component. Don’t be lured into the cheap vote purchases offered by some candidates. The stimulus plan proposed by Senator Clinton, equating to $500 per person filing taxes is a ploy. It’s a one time gift that will help no one. It may help you pay a bill, say heating, for a month but will do nothing else for you. Rather a tax cut might help more, adding $50 a week to your paycheck. Either way, don’t sell your vote on a quick fix that is neither.

Further, if a Democrat is elected expect the impending pain to be trebled. Increased costs for nationalized healthcare and other social entitlements will hit the pocket books. That is not to say that a Republican in office will avert any of this. They will not. Just that the historical fiscal impact of a Democratic President is view more harshly, whether or not they are the best person for the position.

So my readers, be prepared. If I am right on the trend, and it seems that I am increasingly becoming so, those that are ready will endure best. And I only wish the best.

Labels: bear market, Citigroup, credit card debt, democrat, Dow Jones Index, gold spot prices, mortgage crisis

While in New York City recently I visited with several old brokerage friends. During that visit we all discussed the market and what may potentially be on the horizon.

One broker, whom I respect and consider quite sharp [even when I disagree], had an interesting comment on my predictions. I believe that the move to junk rating of ACA, the probable $6 - 12 billion loss at JP Morgan [significantly higher than expected], eventual losses from Citigroup – which reinsures itself, oil breaking $100 a barrel, and the multiple overseas investments will all hit the market in mid-January 2008. Thus I think a move to 11,000 is more than probable.

My friend disagrees. His view is that if I am correct in these outcomes, then the Fed will be forced to lower rates further immediately. He feels that this is the only way to stem the problem that is the mortgage crisis. This is especially true when you consider the increase in credit card debt.

“All the people with million dollar homes that would be refinancing and getting an extra $200,000… They find it hard to change their lifestyle quickly. That says nothing about most people who are feeling deflation. And add those paying the mortgage with their credit card and you have a market that needs the Fed to cut.” – Paraphrase

Sound reasoning. But I don’t think a bear market is avoidable.

The fact that the mortgage crisis is far closer to its beginning than end. I expect that there are far more homes in danger than has been seen to date. Even with the highly selective mortgage bailout stated by President Bush, many are going to be at risk. Credit card debt can only float for so long. With the added pressure of oil at or above $100 per barrel, which I expect mid-January as I stated above, more will fail even if rates are lowered (less than 2 points).

Add to this the fact that financials are at high risk. The early infusion of foreign capital may look good now, but this does nothing for future and continuing losses. It’s window dressing. With re-insurers like ACA in trouble and Japanese banks are unwilling to help bailout the shortfall (due to very limited exposure to this risk), the sector will be weak. Historically if financials are stagnant or falling so goes the majority of the market.

That says nothing of the potential of a Democrat becoming President. Again historically a negative pressure on the market. It is even graver with several prominent Democrats nearly promising to increase corporate taxes (or outright take their profits – especially oil companies).

The Fed can lower rates, but that will not stop the general malaise I see coming. At the least the first half of 2008 will not be good. A move to 11,000 seems inevitable. If I am correct then the question is this.

Will those experiencing deflation outweigh the inflation fears? And if more people lose their homes how much of our financial institutions are we willing to sell to avoid the harshest realities of a crash?

Labels: ACA, bear market, Citigroup, credit card debt, democrat, JP Morgan, Michael Vass, mortgage crisis, New York City, overseas investments, President Bush