Is the Euro really the German D-Mark in disguise

In 1999, the Euro currency started trading in world financial markets. The Euro coins & banknotes replaced German marks and fifteen other EU member states currencies on January 1, 2002. The euro zone includes almost 300 million people. Outside of the EU, 23 countries peg their currencies to the Euro (175 million people). The Euro currency's highest rate against the dollar was in 2008 at $1.599 and the lowest was in 2000 at $.8252.

In 2008, Germany, France & the UK accounted for almost 60% of the total GDP of the EU countries ( the UK is a member of the EU without adapting the euro currency). Germany's share of GDP of Euro currency countries is over 30%.

The German government has approved a EU Greek rescue package of 110 billion euros and a plan to be unveiled tomorrow that will help support the euro currency. It is clear that the citizens of Germany are wondering what happened to their strong currency, the D-Mark. The results from elections held in Germany today point to rejection of support for the Greek rescue. What will happen next?

Contagion erupted in American markets last week and will probably continue into this week. Gold is hitting all time highs as speculators are broadcasting doomsday forecasts. It is up to the German government to stop this speculation immediately.

German chancellor Angela Merkel must take the leadership role in the EU or face the end of the Euro currency. Time is running out for Europe and it will spread to the rest of the world within hours.

Random thoughts....Obama, Bernanke and Geitner realize that the problem is the EU and not Goldman Sachs....it is time to focus on the global sovereign debt problem...Spain could be next and that will not be pretty....

We Want Our Money Back

President Obama has told US Banks, "We want our money back and we are going to get it". This new tax which will total about $90 billion will be collected from the top 50 banks over ten years. It will impact the top six financial institutions (JPM, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo) the most. The tax which is based on liabilities will cost each bank about 15 basis points on every loan that is written. Why isn't the goverment asking General Motors, Chrysler, Freddie Mac, and Fannie- Mae to pay this tax?

It seems to me that the Democratic President & Congress are trying to win votes by blaming Wall Street for the Great Recession of 2008-9. I can remember that all of these banks borrowed money from TARP and repaid it in full with interest prior to the end of 2009. The President feels that if the banks have enough money to pay huge bonuses, then they should pay this new tax. Are we going to tax Exxon for making too money on oil? I believe that populist laws like this will lead to a slower economy and potential disaster. I thought we were worried about banks' loaning more money and unemployment. This new bank tax program will not get us there.

Random thoughts...The January indicator for 2010 market performance is doing extremely well ...Earnings from Intel and JPM were excellent and will lead to higher prices later this year for those stocks...next week other financial companies like Goldman Sachs, Citi, Morgan Stanley & Bank of America report on 4Th Quarter 2009 Earnings.....the Big event next week may be the surprise election of a Republican Senator in Mass. to take the late Ted Kennedy's senate seat....

Wall of Worry 2009 Style

As the Dow Jones Index has rallied 3,800 points (over 55%) since March, there has been a consistent 'wall of worry' about inflation and increasing interest rates. The Federal Reserve has maintained a consistent policy of keeping interest rates close to zero. The Great Recession of 2008-2009 is over, but Ben Bernanke is worried about further weakness in 2010.

As we all know, unemployment is a lagging indicator, but when it is above 10% nationwide, there is cause for concern. The Obama government has trouble sleeping as they contemplate a jobless recovery. This brings up the great 'disconnect' between Wall Street and Main Street. The S&P 500 has rallied while more people continue to collect unemployment checks.

My conclusion from the disconnect is that we will continue to climb the 'wall of worry' into 2010. The monthly unemployment report will improve as the next six months unfold. The consumer will spend more than forecasted for the holiday season and major corporations will increase their profit margins. Where does this leave the markets? The markets will trend higher as zero interest rates lead to fatter profits for the Banks.

Random thoughts....the Dow is still down over 25% from the highs of 2007....look for another 10-15% upside in the market over the next three months...the next big event will be the Obama health plan...how quickly will it pass the Senate or will it run into trouble....look for a major rally in the markets if the Senate has trouble passing the plan....

The New CITI

It is clear that banks such as Citi and Bank of America were on the brink of collapse during the Great Recession of 2008.

Citi received $45 Billion in Tarp funds and subsequently converted the government's preferred stock into common stock. The government now owns 34% of Citi common stock. There has been a huge increase in common shares outstanding as a result of the combined government and private $58 Billion preferred stock exchange offer. All of the preferred holdings were converted into common stock thereby diluting common shareholders and eliminating the payment of preferred dividends. This conversion has dramatically improved Citi's capital base as it now has a higher tangible book value than most big financial institutions.

Citi has split itself into two banks- the retail and investment bank and Citi Holdings. Citi Holdings consists of the household lending arm and other asset pools of capital. The big question has been whether these so called 'toxic assets' will pay off. Based on tangible book value, Citi is cheap with a strong capital base. It is relying on its' global trading and investment banking business to create profits. Fundamentals have improved as credit quality has stabilized and consumer credit delinquencies have steadied.

Random thoughts....Bank of America is in a similar position as Citi but is stronger because of the acquisition of Merrill Lynch last year....the Dow Jones is down close to 20% in the last twelve months...look for the market to test 9,700 on the Dow and 1100 on the S&P within a few months....September, 2009 will be here in days as people try to forget the Lehman collapse of last September.....remember that the market is a leading indicator and it is pointing to a strong first half of 2010....the real estate market will be on the upswing in 2010 as party talk will include the discussion of 'jumbo mortgages'....

The Clunker jump starts the Economy

Supply and Demand is an economic model based on price, utility and quantity in a competitive market which results in economic equilibrium. One of the consequences of the Great Recession of 2008-2009 is zero demand by consumers for automobiles and other tangible goods.

The U.S. government recently launched a new program called CARS (Car Allowance Rebate System) wherein the consumer receives a credit of $3,500 or $4,500 at the time of purchase of a new energy efficient vehicle for their 'clunker'. Qualified purchases must take place between July 1, 2009 and November 1, 2009. The original law called for the program to halt when $1 Billion of rebates was awarded to consumers. Due to overwhelming demand, the program will be funded with an additional $2 Billion for purchases by November 1, 2009. Cash for Clunkers has been an amazing success in Germany where up to $7 Billion has been given back to consumers. Similar programs are being approved in France and the U.K.

The programs have boosted automobile sales, saved factory jobs and got rid of 'clunker' cars which helps the environment. We can expect automobile production for the next few months to ramp up and produce profits for the industry. The $3 Billion cost is a hefty price to pay, but it directly creates demand for automobiles and will help to jump start the economy.

Random thoughts.... The stock markets performance in July shattered records as the professionals were starting to buy....there is still $trillions sitting on the sidelines getting 'zero' income in money market accounts....the residential real estate market will start to tick up in the next few months....look for pent-up demand to drive sales in every sector of the economy...

The Black Swan or The Great Recession of 2008-2009

As the Summer of 2009 unfolds, some worried investors are wondering whether we are in a Great Recession or a casualty of the Black Swan theory. The Black Swan, a version written by Nassim Nicholas Taleb refers to hard to predict undirected random events that are beyond our normal expectations. He believes that after these events occur we always try to rationalize them. Taleb believes that financial institutions are vulnerable to huge losses from Black Swan events because their models are defective. The bankruptcy of Lehman, the sale of Bear Stearns and Washington Mutual to JP Morgan and the purchase of Wachovia by Wells Fargo could all be rationalized by an unforeseen event, namely the sub prime mortgage meltdown and the lack of regulation of risk by these firms. Was this a Black Swan or just greed and poor regulation? I believe that these factors are responsible for the near Depression of 2008 and not a Black Swan.

Random thoughts.....watch for a pickup in economic activity as the new Chrysler and GM start to spend money and produce new fuel efficient automobiles....Second Quarter earnings reports begin next week with Goldman Sachs and Intel...the market is in a trading range of 7900-8700 until the end of the year.....money market rates are still near zero while the bond markets have improved dramatically in the last four months.....

Strong Headwinds to Avoid this Summer

Did you know that oil futures closed above $70 today after trading as low as $40 in January,2009. The unemployment rate that was reported last week was 9.4% and the ten year bond yield is approaching 4%.

The GDP growth in the second quarter of 2009 will probably be close to zero possibly signalling the end of the recession. The problem is that the headwinds of the price of oil, high unemployment, increasing interest rates and weakness in the dollar could send us right back to negative growth for the rest of the year.

The U.S. government is projecting the price of oil to be $67/barrel for the second half of 2009. The fundamentals of the world economies indicate a much lower price for oil. The risk is that the growth in China and positive economic growth in the West will lead oil back over $100/barrel within a few months.

In addition, higher interest rates could halt a potential rebound in the housing market. The Federal Reserve and the US Treasury must continue to work together to promote positive fiscal and monetary policy. There is still plenty of work to be done to avoid another disastrous September.

Random thoughts.......will higher gas prices cut off the rebound in the economy?....is it time for everyone to BING instead of Google....watch for continued deflation in travel prices...Europeans love President Obama....who will be the next President of Iran?

The Great Recession of 2008-2009 has ended

Lehman Brothers filed bankruptcy on September 15, 2008. The world economies and the stock market fell of a cliff within days. Demand totally dried up in every sector of the economy. The stock market dropped about 5,000 points (over 40%) in six months while unemployed skyrocketed. The worry was that our big banks would be nationalized and that we had a chance of another Great Depression. In the winter of discontent, it became clear that we were in a Great Recession. On March 15, Ben Bernanke was interviewed on 60 Minutes (the first time for a Federal Reserve Chairman). The Federal Reserve Chairman was asked when he thought the first signs of recovery would be. Bernanke said, "Well, I think that one sign would be that a large bank is successful in raising private equity."

The Bank Stress tests were announced last Thursday requiring that at least ten banks need to raise more capital. A number of these banks including Morgan Stanley, Wells Fargo, US Bank,

and Capital One have sold $billions of stock successfully in the public market in the last few days. Bank of America and Citi will be able to raise the necessary capital without help from the Government.

This marks the beginning of a new chapter and the end of the panic of 2008-2009.

We are now trying to fight our way out a terrible recession. It is impossible to pinpoint the exact day that the recession will end and when the recovery will begin. The stock market has recovered about 40% of the losses since September 15. It seems to me that Ben Bernanke deserves much of the credit for keeping this economy from getting worse.

Random thoughts....GM still has to finalize its' financing plans...I don't think that they will avoid bankruptcy....look for continued high unemployment through the end of 2009.....my guess is that the economy will grow by a fraction in the 3rd Quarter of this year....Junk bonds have outperformed every investment category so far this year...look for 10,000 on the Dow before the end of the year.....a 5-7% correction could come at any time.....

Tangible Common Equity

Tangible Common Equity (TCE) is defined as equity capital (common stock) of a bank, less goodwill and other intangibles (net worth). It indicates the borrowing capacity or strength of a bank or what common shareholders would get if the bank were dissolved. Intangible assets like goodwill don't produce any income and therefore don't have a cash equivalent value.

Regulators have determined that TCE is the key indicator to follow in their stress test evaluations. Some experts believe that a TCE ratio of 4% to 5% should indicate enough strength for a bank to stay solvent in a deep recession. The nineteen top US banks received TARP funds in the form of preferred stock which carry a dividend of 5%. The Obama administration hopes to convert the preferred stock to common stock thereby eliminating the 5% dividend and increasing the banks cash flow. This conversion would increase the TCE ratio for the bank and dilute common shareholders. The only bank that has agreed to convert is CITI which will see its' TCE ratio go to 5% or above after the conversion.

In summary, on May 4th regulators will release the results of the stress tests which will indicate which other financial institutions will have to dilute their shareholders by converting the TARP preferred stock to common stock.

Random thoughts....Swine flu is the talk of the day.....will the markets ignore it and go up anyway? ..GM unveiled another restructuring plan ....will it succeed....Obama's first hundred days are over...what do you think? ...look for regional banks with large commercial real estate loans to get low grades from the stress tests.....potential large banks that will have to raise capital include Wells Fargo and Bank of America...

The Stock Market Rally of 2009 & Susan Boyle

The Stock Market has been up for the last six weeks leading experts to ask, " Is this rally too far, too fast?" Since March 6, 2009 major indexes have gone up about 30%. One year ago, the Dow was trading around 13,000 and the NASDAQ was 2,500. The Dow (8,130) is still down 37.5% in twelve months while the NASDAQ (1,673) has lost 33%. In fact, a 50% recovery for the Dow from the low set on March 6 would be around 9,700. My conclusion is that we fell so far so fast that it is possible to rally much further than experts envision. I expect a pause in the rally in the next few weeks as we wait for the results of 'stress tests' for financial institutions. The market needs unexpected good news like an uptick in housing or strong retail sales. As the overnight success of Susan Boyle shows us, anything can happen when we least expect it.

Random thoughts....this may the time to convert your IRA's to Roth IRA's...it is worth an email to check with your tax advisor....this week Microsoft, Bank of America, IBM and Apple report Quarterly Earnings....If Goldman Sachs, Wells Fargo & JPMorgan want to pay the TARP back (over $60 Billion) will Las Vegas be a buy again....only time will tell...

Do you want to buy a BAB?

Under President Obama's 'American Recovery and Reinvestment Act', tax-exempt issuers are allowed to sell taxable bonds. The issuers can either pass on a federal 35% tax credit or take the subsidy themselves as cash. Babs (Build America Bonds) are a new financing tool for municipalities and can be issued until the end of 2010. You may ask, 'why would a tax exempt municipality want to issue taxable bonds?' The answer is as of today, US Government bonds are yielding much less than Municipal Bonds. For example, a highly rated General Obligation bond due in twenty years yields about 4.68% while a similar US Government bond yields 2.92%. The success of BABS will giver issuers a chance to lower their Net Interest Costs (NIC) and therefore help our cities and states. Potential buyers of these bonds include foreign investors, pension funds and tax-deferred portfolios.

Random thoughts.......1Q Earnings Reports this week include Goldman Sachs, Morgan Stanley, Citi, Intel and Google.....the market has the potential to go to 8600-8800 in the short term......financials must continue to lead this rally....if we were to get great earnings from Bank of America or Citi...the shorts better cover.....it appears that the residential housing market is within months of bottoming.....look for the commercial real estate market to continue to struggle into next year.....

The potential CMBS disaster

Commercial Mortgage Backed securities (CMBS) are backed by mortgages on commercial properties (like office buildings, apartment complexes, retail malls) rather than residential real estate. This $800 Billion market has over $20 Billion of loans in 'special servicing' (indicating a potential default). If the economy continues to weaken, we may see over $40 Billion in delinquent CMBS loans this year.

President Obama is trying to halt the Great Recession of 2009 by a combination of fiscal and monetary policy. The easing of the 'mark-to-market' accounting rules will help ease pressure on financial institutions who are very active in this market (JP Morgan, Morgan Stanley, Hartford Insurance). The basis for the payment of commercial mortgage loans is the level of occupancy of the project and the timely payment of rents by it's tenants.

Hopefully, President Obama's economic stimulus plan will work and halt the potential CMBS disaster.

Random thoughts.....The market has been up for four straight weeks...a 50% retracement of the decline of the DOW JONES from 11,500 would be 8,500-8,900...a close above 9,000 in April would be extremely bullish for 2009....it seems that the market will probably trade between 7600 and 8900 for the next few months...we know that the first Quarter earnings reports will be disastrous.....look for an improvement in Q2..

ps...the John Hancock office building shown in the picture above just sold for $660 Million ...about 50% of its' value in 2006 ($1.3B)

Bank Walkaways are becoming fashionable

Banks throughout this country are beginning to utter the phrase, "lets walkaway from this foreclosure". In some locations, the value of the underlying real estate has fallen so much that it is not worth the banks time to foreclose on the property. In other words, we are beginning to witness neighborhoods with vacant houses that are boarded up and decaying. Imagine ten houses on a street all boarded up because there is no investor willing to buy or rent the property. This is happening in places like Indiana, Missouri and Florida. These areas are being haunted by the famous real estate phrase, "location,location, location".

Random thoughts.....As the first quarter of 2009 ends this week, President Obama is tackling the eventual bankruptcy of GM & Chrysler....his actions to remove the CEO of GM should be applauded...the market is correcting today but should trend higher in the next thirty days.....this week the important phrase will be G-20 and the Employment Report on Friday..

The New Private-Public Bank

In the next few days, Treasury Secretary Timothy Geithner will unveil his plan for public-private partnerships that will begin the process of removing toxic assets from banks balance sheets. The final plan is still being formulated but the concept would be for the government to finance and participate in the purchase of these assets. The private sector will have to invest some equity in these deals and will help determine the purchase price. If this process is successful, a market will develop for these toxic assets and the banks will begin to clean up their finances. The private investors such as hedge funds will only get involved if they believe that they can trust the government to stay 'out of their business'. The AIG bonus debacle has to fade from view so that we can get back to solving our problems.

Random thoughts....the first quarter ends in nine days...earnings reports for financial companies will be released around April 10th or so....look for upside surprises from most banks....optimism would help.....how will gold and the dollar behave for the next few months?...please leave Geithner alone and let him live....

Fifty Days that may change the world

In a year when so many baby boomers are approaching FIFTY years old, it is the next FIFTY days of President Obama's administration that will make or break the back of the 'Great Recession' of 2008-2009. The President has realized that leadership and a positive attitude are important ingredients for success in dealing with the economy.

The politicians are beginning to understand and deal with some of the basic issues that have sabotaged the economy. We can expect the so called 'uptick rule' to be reinstated within a few weeks. This will make it more difficult for short sellers to drive down the price of stocks. I also expect a revision in the 'mark to market' rules that will add some flexibility in dealing with the write downs of bank assets. The fiscal and monetary stimulus that were instituted in the last six months will begin showing some progress.

The most important policy decision of the Treasury will be the plan for dealing with the 'toxic assets' that are on the balance sheets of most banks. These policies must be viewed positively by Wall Street so that we can begin the process of healing our banking system. I expect the President and his staff to spend as much time as necessary in the next few weeks to make sure that the plan will work. Hopefully, the next FIFTY days will put a smile on all of us as we head to the stores to start spending money again.

Random thoughts.....I think it is time for the press and the politicians to stop worrying about the bonuses that everyone is getting on Wall Street...it is time to calm down and start spending some money....

Dear Mr. President Please Act Now on my plan

President Obama has the power to change the course of the Great Recession of 2008-9 by following these steps:

1. Suspend the accounting rule of Mark-to-Market for two years. This will take the pressure off of the various financial institutions that have seen their Balance Sheet collapse.

2. Suspend Capital Gain taxes for any individual buying United States stocks in 2009. Give the American people a chance to invest in their country and keep 100% of all gains so that they can recoup some of their losses.

3. Use the rest of the TARP money to make sure that the banking system doesn't fail. There are a number of reasonable plans to remove the 'toxic assets' from the books of major banking institutions. Make a decision by Monday on whichever method will satisfy the financial community.

4. State that the US Government will not dilute any Senior Corporate bonds in any restructuring of a non-bankrupt Corporation. In addition, instruct the Federal Reserve to begin purchasing investment grade Corporate bonds next week (at least $500 Billion).

5. Force General Motors into a pre-packaged bankruptcy that is financially supported by the government. Inform Chrysler that they are on their own.

Mr. President, if you take these steps within days you will create a stock market rally of 25%.

In addition, you will stop the downward spiral in the world's economies. People around the world will have confidence in your ability to lead and to create confidence. It is time to lead us out of this great recession.

The Award for the Best Actor in a Financial Crisis

We will probably be singing the Slumdog Millionaire song tomorrow as this picture will be crowned best in 2008. Why not think about the nominees for best actor in a financial crisis? We would have to think about Alan Greenspan, George Bush, Ben Bernanke, Timothy Geithner, Barney Frank, Hank Paulson and Barack Obama as potential nominees. Barack Obama is clearly the winner for best political actor in 2008 as he convinced a nation that he could change the course of America and the world. The best financial actor is none of the above. President Obama chose Timothy Geithner as Secretary of the Treasury so he could lead and provide confidence for markets and consumers. In his debut performance a week ago he clearly failed on all counts as markets collapsed. Secretary Geithner has one more chance this week to convince the world that he has the answers and the ability to solve the banking crisis. Hopefully he will succeed and become the winner of the best actor in a financial crisis for 2009. My nominee and winner would have been Paul Volcker as he would have provided the confidence and leadership that the world needs. Lets watch tonight and see if the winner is really a wrestler.

Random thoughts......The 'Dow Theory' gave a sell signal late in the week indicating a Bear market that can still decline by another 20% or more....it sounds like we are very close to a rally

in a bear market...

Will Obama go Swedish

The Dow was down almost 300 points today as it approaches the low reached in November 2008. The decline today was due in part to the probability that the 'Swedish Model' for banks (nationalization of the banking sector) will be approved by President Obama. The banks would be forced to write down their assets to market which would effectively wipe out their equity. The Government would then recapitalize the banking institution or sell it off. Some economists believe that this would be bullish for the markets.

Random thoughts....GM & Chrysler want more $Billions and promise more employee layoffs....Obama signs the Stimulus Bill and the market goes down 300 (sounds like what happened to George Bush)....Gold is approaching $1000 as the Euro heads to 1.20....Obama unveils his plan to end home foreclosures tomorrow...The Dow may go down to 7,200 this week...

Suspending FASB 157 true or false?

This Federal Accounting Standards Board Rule requires all publicly-traded companies in the U.S. to classify their assets based on fair value. Banks have had to write down billions of dollars in hard-to-value level III assets following the credit crisis. This Rule became effective after November 17, 2007 and requires commercial banks to value securities and loans quarterly according to current values whether or not the institution planned on selling the asset. Marking to market creates these 'paper' unrealized losses. This Rule has contributed to the credit crisis and the weakening of our banking system. There are rumors today that the Obama administration may alter this concept in some instances.

Random thoughts....The Senate will pass the Recovery Act by tomorrow the unemployment report will be horrible....January shows an economy in depression...Obama will begin to change psychology next week with the Stimulus bill...the market is holding 8,000....we could get a rally beginning next week that breaks above 8,600....leadership is what counts...