Germany Stops the Global New Deal

At least we have one world leader who has not lost her sanity. Angela Merkel, the German chancellor, last night led the assault on the Prime Minister Gordan Brown's “global new deal” for a $2 trillion-plus fiscal stimulus to end the recession. “I will not let anyone tell me that we must spend more money,” she said. Also, the Spanish finance minister, Pedro Solbes, also dismissed new cash being pledged at Thursday’s London summit. He stated that I and the rest of my colleagues from the Eurozone believe there is no room for new fiscal stimulus plans. Also, Nicolas Sarkozy, the French president, has insisted that “radical reform” of capitalism is more important than tax cutting.

The assault by European Union leaders also represents a defeat for President Obama, who is desperate for other big economies to copy his $800 billion stimulus plan.

Thank you Chancellor Merkel!

S&P 500 Weekly Update

Note: To enlarge, double-click inside of chart.

Truth Speaks for Itself: "We The People Stimulus Package"

After listening to the video, the following statements are facts, not opinions.
1. That our Congress voted for the largest spending bill without reading it.
2. That Congress was told (several times) to enforce our immigration laws and has refused.
3. That illegal immigrants have no right to the common wealth (Social Security) of our nation, but Congress continues to insist that they do.
4. That Congress was told (at a level of 300:1 against) to NOT pass TARP, and they ignored us.
5. That the people have every right to demand the redress called for in that video be passed as law and put into force.
6. Our government exists only because we the people grant it power over our lives.

P.S. Send a "used" tea bag to your Representatives in Congress. They don't deserve a "new" one.

CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS (November 5, 1999)

Congress Passes Wide-Ranging Bill Easing Bank Laws
By Stephen Labation
The New Times
Published: Friday, November 5, 1999

Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another's businesses.

"Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers (By the way, he is President Obama’s key economic advisor.) said. "This historic legislation will better enable American companies to compete in the new economy."

The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.

"The world changes, and we have to change with it," said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. (Republicans are also to blame.) ''We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.''

The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.

"I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010," said Senator Byron L. Dorgan, Democrat of North Dakota. "I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness."

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had "seemed determined to unlearn the lessons from our past mistakes." ("Those who cannot remember the past are condemned to repeat it." -- George Santayana, The Life of Reason, Volume 1, 1905)


For the complete article, go to New York Times. This is a must read! Matter of fact, send it to your Representative and Senators.

Government Motors (GM)

The GM said Thursday that 7,600 U.S. factory workers have volunteered to leave the company under a job-buyout program, fewer than GM had hoped. Each worker will receive a check for $20,000 and a voucher to purchase a GM product worth $25,000.

Under terms of the union job buyout plan, GM last month started offering early-retirement incentives to 22,000 of its 62,000 UAW members as part of the company's efforts to dramatically downsize its global operations. Company officials said last month they would be "pleased" if as many as half of those offered the deal would take it, but just 7,600 did, or 34.5%. Thursday's announcement brings GM's total reduction in hourly workers through buyouts to roughly 60,500 since 2006.

Senate Reviewing How College Football Picks No. 1

Readers, I am not making this up! I am not that creative. At a time when we need leadership in Congress to resolve our economic problems, we have the Senate taking up how the BCS determines how football teams are selected. To quote the Senate Judiciary's subcommittee on antitrust, competition policy, and consumer rights, "The current system "leaves nearly half of all the teams in college football at a competitive disadvantage when it comes to qualifying for the millions of dollars paid out every year."

President Obama and some members of Congress favor a playoff-type system to determine the national champion. The BCS features a championship game between the two top teams in the BCS standings, based on two polls and six computer ratings.

Behind the push for the hearings is the subcommittee's top Republican, Sen. Orrin Hatch of Utah. People there were furious that Utah was bypassed for the national championship despite going undefeated in the regular season.

The subcommittee's statement said Hatch would introduce legislation "to rectify this situation." No details were offered and Hatch's office declined to provide any.

Hatch said in a statement that the BCS system has proven itself to be inadequate, not only for those of us who are fans of college football, but for anyone who believes that competition and fair play should have a role in collegiate sports.

The Dollar Status

In today's Wall Street Journal, Review and Outlook section, the Journal states the following: "As if the dollar didn't have enough problems, Timothy Geithner took China's bait yesterday and said he was "quite open" to its suggestion this week to displace the greenback with an "international reserve currency." The dollar promptly fell and stocks followed, before the Treasury Secretary re-emerged to say "the dollar remains the world's dominant reserve currency. I think that's likely to continue for a long time." Please Mr. Geither think before you talk!!!

The Journal continues by stating that the dollar's status as a reserve currency gives the U.S. enormous advantages, and it should be protected ferociously by our public officials. It means we don't have to repay our debts in foreign currency and that our borrowing costs are cheaper. To the extent that the rest of the world follows a dollar standard, it also gives us far greater global sway.

I am so tired of our Fed Chairman and Treasury Secretary acquiescing to the rest of the central bankers of the world. Sirs, the vast majority of U.S. citizens do indeed want a strong currency. So stop the rhetoric and implement policies that do not debase our currency. If that occurs, the dollar will remain as the primary reserve asset.

Commercial Property Faces Crisis - Delinquency Rate at 1.8%, Near Peak of Last Recession

Back on February 12, 2009, I posted a message entitled "Commercial Mortgage Back Securities (CMBS). In that posting, I stated the following: "The time has come for the commercial real estate market to be exposed for the excesses over the past five years. CMBS will be the CDS (Credit Default Swaps) and Sub-prime Mortgages of 2008. Approximately $380 billion in commercial real estate are up for renewal/refinance/payoff during 2009. Financial institutions are holding over $1.2 trillion in commercial real estate. And unfortunately, we are just now hitting our stride in terms of the inevitable down cycle of commercial real estate."

Guess what? The "Wall Street Journal" reports today that, "Commercial real-estate loans are going sour at an accelerating pace, threatening to cause tens of billions of dollars in losses to banks already hurt by the housing downturn."

According to the article, Foresight Analytics in Oakland, Calif., estimates the U.S. banking sector could suffer as much as $250 billion in commercial real-estate losses in this downturn. The research firm projects that more than 700 banks could fail as a result of their exposure to commercial real estate.

IBM Eliminates Jobs in U.S. by Outsourcing to India

The "Wall Street Journal" just reported that IBM is expected to inform a large number of U.S. employees in its global-services unit that their jobs are being eliminated, with some of the work being shifted to IBM employees in India. The planned cuts show that even companies that are successfully navigating the global recession are continuing to slash costs--some of them by taking advantage of cheaper Asian labor.

It is sad but so very true. It is hard for U.S. firms to hire here when these firms can go to India and hire individuals at a fourth of the cost and are just as skills. The reason that I know that is the situation, because during my five years in the United Arab Emirates; we did exactly that when we needed computer technicians.

A Significant Rally?

Thanks to the Contrary Investor, who brought the following ROC indictor to my attention, the following chart illustrates the indicator. What you see is the largest ten-day percentage advance, as measured by the ROC, in the S&P 500 since 1938. Over the last thirty years, never has there been such a 10-day move in the ROC. All other moves that even came close were major bottoms followed by incredible price advances. Why is this knowledge relevant? First, it provides evidence to the bear market rally that I have been mentioning. (See posting from the other day.) Second, we need to respect what the ROC is indicating and remain mindful that prices could rally further. Third, if this turns out to be a major Bear Market bottom, our exponential moving averages (15 and 40) will confirm it. Fourth, if this does not turn out to be a major Bear Market bottom, I would take that as being extremely bearish.

Note: Click inside of chart to enlarge it.

Bear Market Rally!

Wow! What a day on Wall Street. The bears were in full retreat. The S&P 500 ended the day up 7.08%. Stocks jumped across the board after the Treasury detailed its plan to relieve banks of its toxic assets.

Back on Thursday, March 19, I mentioned that the market was primed for a bear market rally. With today's move, the S&P 500 has rallied 23.5% from its March 6 low of 666.79. Is this it to the rally or do we have more to come? (Refer to the box inside the following chart of the S&P 500.)

As usual, our focus will be on the exponential moving averages. The 15-Week EMA is still below the 40-Week EMA. Therefore, any rally, as such, is just a bear market rally until the 15-Week EMA penetrates the 40-Week EMA. Stayed tuned!


Note: To enlarge, click inside the chart.

China and Russia Call for New Reserve Currency

China’s central bank on Monday along with Russia proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund (IMF). And, President Obama played the fiddle while Rome burned. No, I have my stories wrong. It was Nero who fiddled, as the story goes; however, President Obama chuckled it up on the Jay Leno show while the dollar and the U.S. financial system collapses.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic U.S. economy would have a negative impact on China.

To replace the current system, China suggested expanding the role of special drawing rights (SDRs), which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.

Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling. These SDRs are used largely as a unit of account by the IMF and some other international organizations.

China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions.
Source: Financial Times.com (March 23, 2009)

You Want to be a Billionaire?

Want to become a billionaire fast? Move to Zimbabwe! At one time this was one of the richest countries in Southern Africa with its vast abundance of natural resources. Back then, it was know Rhodesia. Will the U.S. become another Zimbabwe? I hope not! But at some point in time (two to three years), the Fed’s quantitative easing policy will start catching up with us in the form of massive inflation.

Fed's Major GAMBLE: Buying Long Treasury Bonds

In today's, March 20, Review and Outlook section of the "Wall Street Journal" is an excellent overview of the tremendous risk that the Fed is taking with its latest strategy of directly monetizing the federal deficits. Please take the time to read the article; because on March 18, the Fed is no-longer an independent body. The Bernanke Fed has made itself an agent of the Treasury, which means of politicians. Another very sad day for the United States of America.

"In case there was any residual doubt, the Bernanke Fed threw itself all in this week to unlock financial markets and spur the economy. With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed's political independence are details that can be put off, or cleaned up, at a later date. Whatever else people will say about his chairmanship, Ben Bernanke does not want deflation or Depression on his resume.

It's important to understand the historic nature of what the Fed is doing. In buying $300 billion worth of long-end Treasurys, it is directly monetizing U.S. government debt. This is what the Federal Reserve did during World War II to finance U.S. government borrowing, before the Fed broke the pattern in a very public spat with the Truman Administration during the Korean War. Now the Bernanke Fed is once again making itself a debt agent of the Treasury, using its balance sheet to finance Congressional spending.

It is also monetizing U.S. debt indirectly with the huge expansion of its direct purchase program of mortgage-backed securities (MBS). It was $500 billion, and now it will add $750 billion more "this year." Foreign governments have been getting out of Fannie and Freddie MBSs in recent months and going into Treasurys. Thus the Fed is essentially substituting as these foreign governments finance U.S. debt by buying presumably safer Treasurys.

The purpose of these actions is to keep rates low on both Treasurys and MBSs, and to keep the cost of funds low for banks and especially for home buyers. It worked on Tuesday; long bond and mortgage rates fell.

The case for doing all this is that the Fed needs to supply dollars at a time when money velocity is low and the world demand for dollars is high amid the global recession. As long as the world keeps demanding dollars, the Fed can get away with this extraordinary credit creation. That said, bear in mind that the Fed's balance sheet has more than doubled since September -- to $1.9 trillion from $900 billion. These latest commitments mean it may more than double again, close to $4 trillion. That would be about 30% of GDP, up from about 7%.

The market reaction clearly showed the implied risks, with gold leaping and the dollar taking a dive the past two days. As the economy improves, and thus as the velocity of money increases, the risk of inflation will soar. Mr. Bernanke says the Fed can remove the money fast, but central bankers always say that and rarely do. The Fed statement isn't reassuring on that point. It says, "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term." The Fed seems to be saying it wants a little inflation, which we know from history can easily become a big inflation or another asset bubble. The last time the Fed cut rates to very low levels to fight "deflation," we ended up with the housing bubble and mortgage mania.

The other great, and less appreciated, danger is political. The Bernanke Fed has now dropped even the pretense of independence and has made itself an agent of the Treasury, which means of politicians. With its many new credit facilities -- the TALF and the others -- it is making credit allocation decisions across the economy. If a business borrower qualifies for one of these facilities, it gets cheaper money. If it doesn't, it's out of luck. Thus the scramble by so many nonbanks to become bank holding companies, so they can tap the Fed's well of cheap credit.

The question is how the Fed will withdraw from all of this unchartered territory now that it has moved into it. How will it wean companies off easy credit, especially since some companies may need it to survive? What happens when Members of Congress lobby the Fed to keep credit loose for auto loans to help Detroit, or credit cards to help Amex? House Speaker Pelosi yesterday gave a taste, saying the AIG bailout was the Fed's idea "without any prior notification to us." Mr. Bernanke, meet your new partners.

Above all, the Treasury and Congress won't be happy if the Fed decides to stop buying Treasurys and the result is a big increase in government borrowing costs. This was the source of the dispute between the Federal Reserve and the Truman Treasury. The Fed wanted to raise rates amid rising inflation, while the Truman Treasury wanted cheap financing for Korea and its domestic priorities. The Fed prevailed in the famous "Accord" of 1951, thanks to a young assistant secretary of the Treasury named William McChesney Martin. He would go on to become Fed Chairman and create the modern era of Fed independence. The U.S. and the Fed are going to need another Martin, sooner rather than later."

GE Says Finance Unit on Firm Ground

Top finance executives at General Electric Co. said Thursday that even in the worst scenario for the U.S. economy its finance unit should manage to break even this year and avoid having to seek a capital infusion.

Wow, I have heard these "words" before. Haven't you? Remember to "trust but verify."

U.S. to Provide $5 Billion in Aid to Auto-Parts Suppliers

The "Wall Street Journal" reports today that the Obama administration plans to announce a financing facility that would provide up to $5 billion in assistance to the country's beleaguered auto-parts suppliers, many of which are teetering on the edge of bankruptcy.

According to the Wall Street Journal, the assistance would pump money into dozens of the country's biggest suppliers to help pay for seats, axles, and other components shipped to the Big Three auto makers. These suppliers last month offered a proposal to the Treasury with three options for various financing facilities. All told, the suppliers asked for about $25 billion in lending and other assistance.

Let me get this straight, the suppliers asked for $25 billion but will only get $5 billion. So, if anything, we, as taxpayers, have a moral victory, at least for the time being. (LOL) However, I am sure that the suppliers will get everything they have requested and more!! So much for a market economy.

P/E: Valuing the Market

Based on 2008 as-reported earnings, the S&P 500, which closed at 756.55, has a trailing P/E of 52. The forward P/E, based on 2009 projected earnings, is 23.4, which is still overvalued from a historic basis. See the attached chart that looks at the 10-year trailing P/E for the S&P 500. At the bottom of the three worst recessions since 1929, the average ratio fell below 10. To reach that, the S&P 500 would have to sink more than 30 percent. I guess the proverbial bottom-line is don't buy just yet! And, don't get lulled into believing the coming market rally is the end of the bear market. As always, listen to what the market is saying. That is, what is our 15-week EMA and 40-week EMA saying?

Bear Market Rally?

Since 2008, $GOLD:$NYK, which measures the relative performance of the price of gold to the price of financial stocks, has really excelled at indicating intermediate tops and bottoms in the S&P 500. Currently, this technical tool is indicating that we might be ready for some type of bear market rally. We shall see.

The Pundits at CNBC

This is what happens when you watch and believe the pundits on CNBC. You lose your financial shirt. And these individuals get paid big bucks!


Quiet Time

I have been very quiet this week in posting to the blog. There really isn't too much to say that is new. It is still the same old, same old song. I really would like to say something positive, such as the market has hit bottom and good times are about to start. But it is just not in the cards. Of course, we will have a bear market rally that should rally the market by 25% to 30%. But, it will be just that, a bear market rally.

Market, as measured by the Dow Jones Industrial Average, is at a twelve (12) year low. Citigroup (C) fell below a $1 share today before closing at $1.13. Today's closing price is a 98% drop in just two years! Ouch, that really hurts, especially if you have been a long-term investor in Citigroup (C).

In regard to the mortgage market, a stunning 48 percent of the nation's homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure. A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12 percent, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That's up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007.

Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could run out of money (insolvent) sometime this year amid a surge in bank failures.

General Motors has warned that billions of dollars in government aid may not prevent it from running out of cash if vehicle sales do not improve soon. (Does anyone really believe that car sales are going to improve anytime soon?) Deloitte & Touche, GM's auditors, have expressed “substantial doubt” about its ability to continue as a going concern, based on continued operating losses, negative shareholders’ equity and the inability to generate sufficient cash flow. The Wall Street Journal reports that top GM executives are more open to a speedy bankruptcy reorganization financed by the government, pushing aside earlier concern that such a move would scare away so many customers the company wouldn't survive.

See what I mean by the same old, same old song. Somethings just never change. Well, tomorrow is another day. Speaking of tomorrow, median estimates are that employers cut payrolls by 650,000 last month; and the unemployment rate will surged to a 25-year high of 7.9 percent. Anything more than 650,000 lost jobs and the market has the potential of a major, major sell off. If the job number is better, the market could have a great, great day. Stay tune!