APPALLING!!!!!!!

GMAC President Bill Muir said in a statement today: "The company won’t finance “higher-risk transactions,” instead concentrating on prime customers who are more likely to repay using “responsible credit standards.” The relaxed policy “will allow us to return to more normal levels of financing volume, and should help in efforts to stabilize the U.S. auto industry.” Sounds good, doesn't it? Now, according to GMAC what constitutes a "prime" customer? This means that only the best credit risks will get financed at a reasonable rate, right? Well, no. Matter of fact, GMAC reduced the credit score necessary to get a loan from 700 (very good) to 621 (not very good.) Do you believe this? I am loathed at how they are wasting my money as a taxpayer. Everyone that reads this blog should send a copy of this posting to his/her Representative and Senators demanding accountability. By the way, the median (average) FICO score in the United States is 723.

Worse, here was what GMAC did: "Within hours, GM was offering no-interest loans for as long as five years to counter this year’s 22 percent drop in sales, caused in part by the inability of its customers to get financing." Oh, and the terms? GMAC will pay an 8 percent dividend on the Treasury’s $5 billion of senior preferred equity. The company will also issue warrants in the form of additional preferred equity that will equal 5 percent of the preferred-stock purchase and pay a 9 percent dividend if exercised."

So let me see if I understand this correctly. The government "buys" preferred equity that pays an 8% coupon. GMAC must pay that 8% coupon (9% if the government exercises the warrants. GMAC turns around and loans out money at 0% that it has to pay 8% to acquire, and at the same time decides that it will make loans to people with credit scores significantly worse than average, when before they would make loans only to people with scores that were slightly better than average. Loaning money out at a lower rate of return than it costs you to acquire - isn't that kind of like "we'll lose something on each sale, but make it up on volume?"

Oh, and then while we're at it, let's make lots of loans to people who have credit significantly worse than the average credit score in the United States, instead of just making loans to those who are at least average in their handling of credit."

Source: From the Karl Denninger's blog at the Market Ticker.

GMAC Bailout: The Sky is the Limit

According to the "Wall Street Journal," the federal government Monday deepened its involvement in the U.S. automotive industry by committing $6 billion to stabilize GMAC, a financing company vital to the future of struggling car maker General Motors Corp.

In a sign the government's role in the industry could become open-ended, the Treasury Department said Monday it had set up a separate program within the Troubled Asset Relief Program, a fund originally designed to help banks, to make investments directed at the auto industry. A Treasury official said the new program didn't have a specific dollar limit. In other words, the Treasury is saying that we don't know how much money it will take to save the financing arm of GM; but we will provide as much money (taxpayers money of course) as it takes.

The agreement opens a new rescue program for the auto industry as part of the Treasury’s $700 billion TARP. Keep-in-mind that the bailout was originally designed to buy troubled assets from banks and has instead become a fund for Treasury to prop up all kinds of lenders, insurers, car makers, and now auto-finance companies.

I am here to say that "we, as a nation, will reap what we sow." That is potential for hyperinflation and the total destruction of our currency.

GMAC: One-bank Holding Company

Question: Does having a "piggy bank" allow one to seek one-bank holding company status from the Fed? This a question that I sent to my Representative in Congress. You may want to do the same, since it seems everyone is becoming a one-bank holding company.

Shocker!!! The Wall Street Journal reports that the "Federal Reserve's decision to make GMAC LLC a bank-holding company throws the unit a desperately needed lifeline, but further entangles the federal government in areas of the economy it once considered beyond its purview.

In a Christmas Eve decision, the Fed gave a present to GMAC, a finance company controlled by private-equity fund Cerberus Capital Management and General Motors Co., to qualify as a bank. As a federally regulated bank-holding company, GMAC potentially gets access to billions of dollars of Treasury funds dedicated to recapitalizing banks."

Christmas Hiatus

I want to wish everyone who has been part of this blog over the past year a very "Merry Christmas."

2008 was not a kind year to investors of all shapes and forms who remained fully invested in this "Bear market." Most equity indexes for 2008 will be down anywhere from 40% to 50%. The S&P 500 is trading at approximately its same level as ten years ago. That really does hurt. And, keep-in-mind that just to get back to the price levels of January 2008, the market has to appreciate by 80% to 100%. However, those of you that heeded the sell signal on January 8, 2008 have been kept out of harm's way. On January 8, 2008, the exponential moving averages (14-Week in relation to the 40-Week) generated a sell signal, whereby investors were suppose to exit all equity investments and redeploy the proceeds to money market investments. For those of you that did execute the strategy, thank your blessings and be generous this Christmas with those that are truly in need.

2009 will probably not be that much better than 2008, especially the first half. However, saying that, I will let the market tell me when the trend changes from bearish to bullish through the exponential moving average strategy.

I intend to post again immediately after the New Year in which I will reflect on 2008, and look at some investment vehicles that could enhance your financial well being for 2009.

With Economy in Shambles, Congress Gets a Raise

"A crumbling economy, more than 2 million constituents who have lost their jobs this year, and congressional demands of CEOs to work for free did not convince lawmakers to freeze their own pay. Instead, they will get a $4,700 pay increase." Enough said.

Source: The Hill

The Mother of All Bailouts: Coming to Your Local Car Dealership

Bloomberg reports that General Motors Corp. and Chrysler LLC would get U.S. loans to stay afloat until March under a Bush administration rescue plan that may be unveiled tomorrow, Friday, December 19, 2008.

The Treasury Department intends to lend to the automakers through their credit arms, GMAC LLC and Chrysler Financial, to avoid having other industrial companies line up for access to the $700 billion TARP. Oh, we are all banks now!

Boston Tea Party, anyone? I am taking reservations for the tax-revolt party.

U.S. Conference of Mayors

CNN has reported that the U.S. Conference of Mayors went to Capitol Hill earlier this month with a report listing 11,391 infrastructure projects proposed by 427 cities. The cost, as reported, is a cool $73.2 billion to pay for all these infrastructure projects that includes plans for a polar bear exhibit, an anti-prostitution program, a water park ride, zoos, museums and aquatic centers to name a view. I don't have enough time or space to delineate the remaining 11,385.

Isn't anyone out there concerned about whom will pay for all this stuff? Then again, what's a billion or trillion or quadrillion or quintillion or sextillion or septillion or octillion or nonillion or decillion or undecillion or dodecillion or tredecillion or
quattuordecillion or quindecillion or sexdecillion or septendecillion or octodecillion or novemdecillion or vigintillion? It is just monopoly money.

Chrysler Shuts Down All Production

Starting this Friday, Chrysler will shut down all production of its vehicles at all of its 30 plants for one month, which is two weeks longer than it normally does at this time of year. Now, this is the real kicker. Workers will receive 95% of their wages during the shut down. Please tell me where is the incentive to change the status quo? Why would the UAW want to change anything when its workers can take a month off, not vacation time, and still get 95% of their salary. And, I thought they were going to remove the job bank. Sign me up, please. I want a deal like that!

The Real Great Depression

I am no longer looking at a 1929 type depression scenario as a possibility for our current financial crisis. That has now shifted to the panic of 1873, which was far worse than the infamous 1929 and included widespread civil unrest. Thanks to Scott Reynolds Nelson, who has written a very interesting article in the "Chronicle of Higher Education," entitled The Real Great Depression.

Please read the article for a good historical parallel to our current economic situation. The parallels of how that 1873 panic occurred are uncanny to today's situation, such as industrial shifts (US >> China) and easy mortgage credit (European in particular) are stunning.

Remember that those who don't know or remember history are bound to repeat it in one form or another.

Welcome to a Free "$" Zone

I like the sound of that title -- Free Money! Who doesn't? But at what cost? Yes, there is always a cost. And, we Americans will pay a "dear" price. The cost is known as "ZIRP." (If you forgot what ZIRP is or are recent to the blog, read my post from Friday, November 7, 2008.)

Today, the Fed cut its key rate (Fed Funds) by a whopping 1%. It stated that its target is now between "0 and .25%." (Even before the cut, the effective Fed Funds rate had been trading around 0.10%.) Further, the Fed stated that it will do whatever is needed to do to end the longest recession in a quarter-century and revive credit. Also, given the current weak economic conditions, it stated that these exceptionally low levels of the federal funds rate can be seen for some time. It went on to say that it will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. To me, that sounds like desperation.

We are in our dire economic strait because of excessive credit creation, which the Federal Reserve caused, and now their solution is more of the same!

Today's fed action reminds me of the following idiom: "A Fool And His Money Are Easily Parted." Please be careful out there in these current investment environs. Don't let your emotions get the best of you. Many believe that a stock market "bottom" is in place. For me, I will listen to the market by way of the 15 and 40 EMAs. And, it is still telling me that what we have is a bear market rally. These EMAs were go enough for me back on January 8, 2008; and I am sure that they will be good enough going forward.

Outrageous Economically and Morally

"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent. What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics." Jim Rogers

Post 2008 Corporate Logos

Source: Business Pundit

China and Korea: Currency Devaluation?

What is the likely probability that China and Korea would devalue their currencies by 35% against the dollar? And, if these countries do devalue, what is the overall economic ramifications for the U.S.? Definitely not good!

Keep an eye on the following dollar index over next couple of weeks. A price of $84 is critical. If that support is broken, there just might be something to the devaluation of the Yuan.

Driving for Dollars: GM CEO Hits the Road to Washington

Is this circus of CEOs driving vehicles to Washington D.C. really going to change our minds? The people have already spoken. That is, 60% of Americans are against any type of assistance to the auto industry. They spoke against the $700 billion TARP, but Congress did not listen. Let's see what our Representatives and Senators do this time.

Have We, as a Nation, Lost Our Sanity?

The following chart would indicate that we have.



Essentially all of the so-called "growth" since the 1990 was in fact debt that was claimed to be growth! An analogy would be like an individual borrowing more and more money over a long period of time, spending it all, and then claiming to be "enjoying unprecedented prosperity." Insane, isn't it? But, it is so true.

UAW Open to Changes in Contract

Let's see, giving up a job bank that consists of paying 8,000 workers a full salary for staying home -- yup, that's a real concession. I have a very simple solution why doesn't Congress ask the UAW to assist in a loan, say half of what they want. Better yet, UAW can purchase Chrysler, GM and Ford at today's capitalized valuation for approximately $6 billion.

Read an excellent article by Jay Palmer in this week's Barrons, which is entitled "A Real Bailout for Auto Makers."

Metal Prices Have Fallen Further than During Great Depression

The price of key industrial metals has fallen further over the last four months than occurred during the worst years of Great Depression between 1929 and 1933, according to research by Barclays Capital.

Kevin Norrish, Barclays' bank's commodities strategist, said the average fall in the price of copper, lead, and zinc has been roughly 60% since the peak in July 2008. All three metals were traded on the London Metal Exchange in the inter-war years so it is possible to make a comparison.

Prices for the three metals fell 40% from their highs in 1929 before touching bottom in 1933, with the bulk of the fall in 1930 as the slump spread worldwide. Lead and zinc have already lost more than they did in the 1930s, according to Norrish.

Copper was hit hardest during the Depression, despite the electrification drive in the US and the Soviet Union, falling 70% at one stage before creeping back in the mid-1930s. The reason was an 85% fall in U.S. construction, then the biggest user of the metal.

Barclays Capital said the broader equity markets are already discounting the sorts of "savage declines" in corporate profits that were last seen during the depression. Price to earnings (P/E) ratios are actually lower now than they were the early 1930s, with moves in credit spreads that suggest investors are anticipating depression-era levels of economic contraction.

And yet, Fed Chairman Bernanke, see yesterday's post, states that there is no comparison between our current economic condition and the 1930s depression. Will someone please give him a dose of economic reality.

Source: Barclays Capital

Bernanke says Crisis "No Comparison" to Great Depression

"Federal Reserve Chairman Ben Bernanke said Monday that the current economic situation bears "no comparison" to the much deeper crisis of the 1930s Great Depression. Further, he states that you hear a lot of loose talk, but let me just say, as a scholar of the Great Depression; and I've written books about the Depression and been very interested in this since I was in graduate school, there's no comparison."

This same "scholar (and I use the term loosely, given his track record as Fed Chairman)" said in February 28, 2007 to the House Budget Committee that he didn't consider the housing downturn as being a broad financial concern or a major factor in assessing the health of the economy." In other words, he thought the "subprime problem" was contained and under control. So, in 2007, he said that we have everything under control; and now we are to believe him when he states that there is no comparison between our current economic situation and the 1933 depression. I, for one, don't believe the man. His policy of ZIRP (zero interst rate policy) will not work. It will not eradicate all the malinvestments that must be liquidated. It will only prolong our economic pain.

Ok, what should be done by the Fed and Congress? A good start in rebuilding confidence and trust in our economic system would be the following four measures:

1. The Fed should immediately stop its ZIRP.

2. Congress should repeal Gramm-Leach-Bliley Act of 1999, which will reinstitute the Glass-Steagall Act of 1933. The Glass-Steagall Act banned investment banks, which engaged in what was perceived as high-risk securities trading and underwriting, from taking insured retail deposits. In other words, an investment bank could not be a commercial bank. That prohibition was removed on November 12, 1999 by the Gramm-Leach-Bliley Act. Since 1999, there has been a rapid convergence between commercial and investment banking. Did anyone say Citigroup, Wachovia?

3. Congress and Fed should establish the maximum leverage for depository financial institutions at 10:1.

4. Congress should direct that all assets and liabilities, no off-balance sheet items allowed, are to be consolidated upon a firm's balance sheet, and all marking methods, formulas and variables for each asset held must be disclosed accurately. I refer to this as the Transparency Rule.

The Next Great Depression

A must view this Sunday at 10 PM on the History Channel.

It's Official: Economy is in a Recession

The National Bureau of Economic Research (NBER) said today, December 1, 2008, that the U.S. economy has been in a recession since December 2007. News worthy? Yes, but only a year late. Most Americans have realized this since July/August 2008; and, if you had been tracking my posts just since January 2008, you would have been keenly aware of the dire economic and financial problems facing the U.S.