Double-digit Wall Street Week

DJIA had its best five days since 1932. Thank you, Santa. But Santa, wasn't 1932 in the midst of the "Great Depression?" Then, I heard Santa say, "Sharpest bull rallies happen during bear markets." Umm, I guess I will not get too excited about this market rally. Instead, I will look at the indicator that took me out of the "claws" of the "Bear" on January 8, 2008 and see what it is saying:


Source: Big Charts

The market's signal is still "Bearish," since the 15-Week EMA is still below the 40-Week EMA. Market, I have heard you loud and clearly.

Once the rally is complete, you may want to consider the following four bearish ETFs, which provide 300% leverage: FAZ (3x Financial Bear), BGZ (3x Large Cap Bear), TZA (3x Small Cap Bear), and ERY (3x Energy Bear). These ETFs are definitely not for "widows and orphans."

Fiscal 2009 Federal Deficit Could Hit $1 Trillion

For fiscal 2008, the federal deficit hit a record $455 billion, which ended Sept. 30, more than double the previous year's deficit. But now, even the fiscally conservative say another doubling, to $1 trillion or more, may be inevitable if the economy is to be rescued.

President-elect Barack Obama said at a news conference Tuesday, November 25, that the government's first obligation was to spark an economic recovery and put people back to work. To do that, the Democratic-led Congress is expected to have a new stimulus package, costing in the $500 billion range, ready to go when Obama takes office in January 2009. The focus of this stimulus package will definitely be on the personal consumption side.

Any type of government stimulation package will only prolong the economic suffering. Government spending increases consumption and discourages savings and investment. What is needed is less consumption and more saving, which will lead to a quicker recovery. If the government continues on its current polices of propping up financial institutions by forgoing the market resolution of liquidating malinvestments and stimulating consumption while discouraging savings, the economic pain of all will be exacerbated. I don't know about you, but if I am going to have to endue pain; I would rather get it over quickly rather than having to endue decades of it.

Fed Commits Another $800 Billion MORE!

I don't know about you, but I am having a very hard time keeping up with all these money dispersion programs. What is it now, $7.2 trillion or $8 trillion? Who cares! Who is counting? It's the season of giving, isn't it?

Well, the FTA has come to the full realization that the consumer is in a big-time hurt. It stepped up its efforts to support strained credit markets through a new program backed by the Treasury Department aimed at boosting consumer credit and another to bolster the market for mortgage-backed securities.

The Treasury Secretary Paulson added that the current lack of credit available to consumers was undermining consumer spending and weakening the economy. Mr. Paulson said Treasury, the Fed and other federal government officials plan to take all the steps necessary to "minimize the spillover into the rest of the economy.

Source: Wall Street Journal

Fed Pledges Top $7.4 Trillion (Half of GDP)

According to Bloomberg Services, "The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis."

Can anyone spell "GOLD AND SILVER?" I would highly recommend that you begin to learn the spelling of those two words.

Crude Production Cost for GCC Countries

Trading Addicts posted the average crude production cost for the Gulf Cooperation Council (GCC) countries at $47, which in itself is very interesting in the context of light sweet crude yesterday closed at $49.42. Could it be that we are approaching a low in oil prices? It would not surprise me at all if the low is already in place, because I can not see a scenario whereby OPEC would not cut production to maintain an oil price above its members' production cost.

The individual country production costs are as follows:
1. Algeria $56
2. Kuwait 33
3. Iran 90
4. Bahrain 75
5. Irag 111
6. Oman 77
7. Libya 47
8. Saudi Arabia 49
9. UAE 23

Average Cost for an Hour of Union Auto Wages over $70

"Economists in Michigan, the long-time home of the auto industry, say they don’t support the proposed multi-billion dollar bailout of Big Three automakers Chrysler, GM and Ford.

One reason why, they say, is the ultra-high labor costs for union workers employed by the Big Three. It costs over $73 per hour on average to employ a union auto worker, according to University of Michigan at Flint economist Mark J. Perry.

“Is it right to tax the average worker making $28.50 to bailout workers whose labor cost is over $73 an hour?” Perry asked.

He explained that in 2006, widely available industry and Labor Department statistics placed the average labor cost for UAW-represented workers at the former DaimlerChrysler at $75.86 per hour. For Ford it was $70.51, he said, and for General Motors it was $73.26.

“That includes the hourly pay, plus the benefits they’re receiving and all the other costs to General Motors, Ford and Chrysler, including legacy costs – retirement costs, pensions, and so on – so it’s looking at the total labor costs per hour worked for workers,” Perry said.

For U.S. workers at Toyota, however, the per hour labor cost is around $47.60, around $43 for Honda and around $42 for Nissan, Perry added, for an average of around $44.

“Using Bureau of Labor Statistics numbers, the average compensation for manufacturing workers is around $31.50, and the average hourly compensation, including benefits, for the average worker in the U.S. economy is around $28.50,” Perry told CNSNews.com.

If you annualize Chrysler’s labor cost of $75.86 an hour per worker over a 35-hour week, for 50-weeks a year, the yearly compensation comes in at almost $133,000 per worker per year."

For the full article, go to CNSNews.

S&P 500 -- Closing Price for November 20

I thought it would probably be next week before we took out 768. However, we did it today. Closing price for the S&P 500 was 752.44

S&P 500 Update

The critical level for the S&P 500 is 768. See the following chart. If that level is penetrated, the next likely long-term support is 480. Once again, I listen to what the market is telling me, not what I hope will happen.



Source: Evil Speculator

Stock Market Crashes

Source: Calculated Risk

Will this one be worse? So far, the probability is that it will be.

Auto Industry Close to Bankruptcy But Its CEOs Get Pricey Perks

How many of the automaker CEOs travelled commercial to get to Congress yesterday and today? The answer is a big fat ZERO!

All three CEOs - Rick Wagoner of GM, Alan Mulally of Ford, and Robert Nardelli of Chrysler - exercised their perks Tuesday by flying in corporate jets to DC. Wagoner flew in GM's $36 million luxury aircraft to tell members of Congress that the company is burning through cash, asking for $10-12 billion for GM alone. Wagoner's private jet trip to Washington cost his ailing company an estimated $20,000 roundtrip. In comparison, seats on Northwest Airlines flight 2364 from Detroit to Washington were going online for $288 coach and $837 first class.

Ford CEO Mulally's corporate jet is a perk included for both he and his wife as part of his employment contract along with a $28 million salary last year. Mulally actually lives in Seattle, not Detroit. The company jet takes him home and back on weekends.

Please tell me that Congress is not that dumb to allow a bailout without demanding a major change to Detroit's business model.

This Monster Needs to Die!

(Click inside the chart for a larger view.)
Source: Ben Bittrolff

TARP: Abrupt Change in Plans

The seemingly abrupt “change in plans” regarding focus of the remaining Treasury Asset Recovery Program (TARP) money from buying up toxic mortgage debt to potentially buying up consumer loan asset backed securities might be telling us something. The Fed/Treasury/Administration (FTA) may have had a moment of sudden intuitive understanding in regard to the theoretical multiplier effect (remember that one from Basic Economics) as per use of TARP funds.

Your assignment is to ponder the reason why. This is due next week.

What Should be Done with the U.S. Auto Industry?

Let's talk about the potential bail out for the auto industry, which is a very emotional issue to many individuals, especially those individuals tied directly or indirectly to the industry. The argument goes something like this, if the financial sector can be bailed out, why not the same for the auto industry? The answer is that we, as in taxpayers and the Treasury, do not have the financial wherewithal. Congress should not have approved TARP. Also, there is no fix for the so-called big three, or should I say, little three, auto firms in their present form. Period!

Karl Denninger, from the Market Ticker, succinctly states the problem and solution as follows: “We have been operating at a "run rate" for automobile sales of about 17 million units a year. The "no silly credit" number is closer to 11 million units. Notice how you don't see the number of "older, junky" cars on the road you used to? That's the "chicken in every pot" that was silly-credit created.

The UAW has said they will not make any (more) concessions. Yet they have to make concessions, simply put, because the industry needs to shrink by 40% to be viable.
There is only one way out of this mess. That is “Chapter 11”. We must force these firms to downsize to a size that can be sustained. Yes, this will cost jobs. It is going to cost jobs no matter what we do, because we have built an entire industry up around a totally unsustainable demand curve and that which cannot be sustained will not be sustained.

If we try to "bail them out," we are simply throwing money down a rat hole. GM has a negative $60 billion net value right now. Toss in another $25 billion, they still have a negative net value.
GM has been functionally bankrupt for more than a decade; this is not a new problem and both management and labor have refused to solve it for more than 10 years. There is absolutely no reason to believe they will solve, and the best way out there is the transparency that is forced upon a firm via the bankruptcy process.
Chapter 11 allows these firms to submit their labor agreements to the court to have them forcibly renegotiated (without favor to either side) and in addition it forces the pension problem into the PBGC where that is reduced as well.

Next, we need to allow the diesels sold in Europe into the U.S. They can't be sold here due to the Greenie BS. That's stupid; hang the greenies up by their toenails. While we're at it, if the crash standards are good enough for Europe, they're good enough for the US. Now we can have small cars that get 60 mpg with those diesel engines; a huge part of why we can't get there from here now is the crash standards in the US that prohibit the sale of vehicles available across the Atlantic. Why can't we build those here? Because of our emissions and crash standards here in the U.S.
Finally, there are other automakers in the United States that do not need bailouts. Honda, Toyota, BMW and others have plants in this country that are building cars, and they'd doing ok. Yes, their profits are down, but they're making money and producing cars with American workers.

If the UAW, GM, Ford and Chrysler can't compete with these foreign auto firms, using American workers, on our own soil, that's just too bad. Then, it may be time for us to drive an American-built Toyota until GM and the UAW learn the lessons of a market economy.”

Can We Fix Our Economic Mess?

Ben Brittrolff, who writes an excellent blog entitled, Financial Ninja, posted the following comments on the financial crisis: "A lot of people have been asking and wondering, what will work? What can prevent a massive recession? What can prevent a depression? How are our policy makers and political leaders going to ‘fix’ this mess?

The answer is actually a simple one and was very carefully and neatly articulated in the 1920’s.

The Original:

“Es gibt keinen Weg, den finalen Kollaps eines Booms durch Kreditexpansion zu vermeiden. Die Frage ist nur ob die Krise früher durch freiwillige Aufgabe der Kreditexpansion kommen soll, oder später zusammen mit einer finalen und totalen Katastrophe des Währungssystems kommen soll.” - Ludwig von Mises

The Translation:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” –Ludwig von Mises

Well, we all know which route was chosen for us. One more final, massive, desperate push in credit expansion should do us it.

Those of you that have never read Ludwig von Mises, I highly recommend you do. Check out the Mises Institute.

Mises figured out in the 1920’s what our current economic leaders still haven’t figured out. He enraged all the communists and socialists, proving mathematically that non-factor-market (NFM) socialism could never work. This was called the economic calculation problem. All statist regimes face this problem to varying degrees including our own mixed economy. The evidence is plain to see in our history of booms, bubbles and busts.

Market interferences via tax policies, subsidies, tariffs, regulation and ridiculous fiscal and monetary policy result in the constant misallocation of scarce resources because they distort market prices and market signals."

Zero Interest Rate Policy (ZIRP)

ZIRP is a Keynesian macroeconomics scheme for economies exhibiting slow growth with a very low interest rate, such as Japan, the United States, and soon the rest of world.
Under ZIRP, the central bank of the country involved maintains a "0% nominal interest rate" through the creation of excess liquidity. Japan has been using this policy since 1999 without much success.

In a zero interest rate environment, there world no incentive to save. The incentive would be to borrow and spend, which is how we got into our current financial debacle.

So how can more of the same fiscal and monetary policies be a solution? If cheap and easy credit got us into this credit and financial debacle, how can the extreme version of cheap and easy credit (0% interest rates) get us out?

The economy needs time to heal itself from the excesses of the housing bubble, which was induced by excess liquidity though monetary policies that were flawed from the beginning thanks to Greenspan. The last thing we need is ZIRP, which is being embraced by all central bankers, inclusive of Bernanke. The present crisis is indeed scary, but only because we are implementing the same failed policies that got us into this mess. The sooner the government steps aside, the sooner our recovery can begin.

Stocks Have Largest Post-Election Percentage Decline

NEW YORK, Nov 5 (Reuters) - Wall Street hardly delivered a
rousing welcome to President-elect Barack Obama on Wednesday,
dropping by the largest margin on record for a day following a U.S.
presidential contest.
The slide more than wiped out the previous day's advance, the
largest Election Day rally ever for U.S. stocks.
The following table shows the percentage rise or decline in the
Dow Jones industrial average .DJI, Standard & Poor's 500 index
.SPX and Nasdaq composite index .IXIC on the day after a U.S
presidential election and who won the Election Day vote.
Year Dow S&P Nasdaq President elect
2008 -5.05 -5.27 -5.53 Barack Obama
2004 +1.01 +1.12 +0.98 George W. Bush
2000 -0.41 -1.58 -5.39 No decision: G.W. Bush v Al Gore*
1996 +1.59 +1.46 +1.34 William Clinton
1992 -0.91 -0.67 +0.16 William Clinton
1988 -0.43 -0.66 -0.29 George H. W. Bush
1984 -0.88 -0.73 -0.32 Ronald Reagan
1980 +1.70 +1.77 +1.49 Ronald Reagan
1976 -0.99 -1.14 -1.12 James Carter
1972 -0.11 -0.55 -0.39 Richard Nixon
1968 +0.34 +0.16 --- Richard Nixon
1964 -0.19 -0.05 --- Lyndon Johnson
1960 +0.77 +0.44 --- John Kennedy
1956 -0.85 -1.03 --- Dwight Eisenhower
1952 +0.40 +0.28 --- Dwight Eisenhower
1948 -3.85 -4.15 --- Harry Truman
1944 -0.27 0.00 --- Franklin Roosevelt
1940 -2.39 -3.14 --- Franklin Roosevelt
1936 +2.26 +1.40 --- Franklin Roosevelt
1932 -4.51 -2.67 --- Franklin Roosevelt
1928 +1.20 +1.77 --- Herbert Hoover
1924 +1.17 --- --- Calvin Coolidge
1920 -0.57 --- --- Warren Harding
1916 -0.35 --- --- Woodrow Wilson
1912 +1.83 --- --- Woodrow Wilson
1908 +2.38 --- --- William Taft
1904 +1.30 --- --- Theodore Roosevelt
1900 +3.33 --- --- William McKinley
1896 +4.54 --- --- William McKinley
* George W. Bush ultimately was determined the winner of the 2000
election.
Source: Reuters EcoWin

Derivative Growth Continues

Read and weep. The banks still have not gotten the message. Then again, why should they when the Fed and Treasury continuous to bail them out.

To get a full impact of the meaning of the following graph, you may want to go back and read my posts from October 7, "Chain of Fools" and from September 26, "Credit Default Swaps: The Next Financial Crisis?"

Going, Going, Gone: National City Bank

On Monday, September 29, I posted the following comment, "Who is next on the so-called "hit parade?" My guess is National City Bank (NCC) out of Cleveland, Ohio, which could happen within the week (probably sooner rather than later)." Well, it was later. On October 24, National City Bank was taken over by PNC Financial (PNC).

Karl Denninger from "The Market Ticker" had some interesting observations about the National City and Wachovia acquisitions. He states that what is interesting about the acquisition by PNC is that it acquired NCC for $5.2 billion in PNC stock or at a discount of approximately 70% from the value of its shareholder equity. On September 30th, according to NCC's financial statements, the firm had shareholder equity of $17.2 billion on its balance sheet. NCC was not alone. Remember Wachovia. In its quarterly report, dated September 30th, it claimed a balance sheet net asset figure of $50 billion. Yet just a very short time later (literally two days later), the board of Wachovia approved a deal for Wells Fargo to buy the bank for $14.8 billion in Wells Fargo stock. Both firms of course defend such treatment and, in fact, the entire banking system, including Ben Bernanke, believe that "fair value" accounting is to blame for much of the current financial crisis. But if, in fact, fair value accounting outrageously understates the value of assets, why is it that the boards of both National City and Wachovia accepted these deals and voted in favor of them? Certainly the boards do not believe that their companies are worth what their balance sheet proclaims, or they would not have agreed to any such transaction. National City and Wachovia show why bank's financial statements are not trusted!