The Story Of Charles Ponzi

I remember one day in 1986 when my cousin in Irvine invited me to dinner in Orange County and told me to bring $1000 cash. She said that we could make $32,000 within a few weeks. She knew at least five people that made $10,000. This pyramid scheme ended rather quickly. The last people to join were the big losers and so on. In 1903, the Italian Charles Ponzi emigrated to the United States and came up with a scheme that had to do with postage stamps. Ponzi's scheme took in over $1 million dollars in a short period of time. Over the years there have been hundreds of ponzi or pyramid schemes that have defrauded investors. Notable examples include boy band mogul Lou Perlman who ran off with $500 million over twenty years.
Bernard Madoff will definitely win the prize for the biggest scheme of all over $50 Billion. I am sure that this will not be the last time we hear about a ponzi scheme.

Random thoughts....will the Federal Reserve cut the Funds rate to 0.50% tomorrow?....will money market fund returns got to 0.00%?....only ten days to Christmas...the rally has to begin any day now...I believe that Bernanke has to find a way to end the credit crunch...the corporate and municipal bond market have to function soon and I mean soon...within the next thirty days...

Debt or Equity?

What would you rather own in 2009, the debt or equity of a major corporation? When a corporation files bankruptcy (as the Chicago Tribune did yesterday) the equity is completely wiped out. As in Lehman Brothers, all of the equity became worthless.
Debt holders are either secured or unsecured. Unsecured bonds are usually worth about 25%-50% of original value in bankruptcy. Secured bonds have a better chance of total recovery. In previous blogs, I have written about the lack of liquidity in the bond market which leads to very cheap prices for bonds. As we countdown the last three weeks of 2008, the debate over debt vs. equity will grow more intense. Will the Federal government rescue GM? What will happen to the equity and debt holder?

Random thoughts...The Governor of Illinois is indicted for trying to profit from his job of appointing a successor to Obama...Wow...Was he trying to get $$$ from Jesse
Jackson?...the market acted very well today in the face of horrible news...the tape is beginning to look better and better...hopefully a close above 9,000 by Friday...if not, hopefully volatility eases....

Fast Foward Sixty Days

On February 9, 2009, President Obama will be entering his third week as Commander in Chief of our military and CEO of our economy. What will have changed? The most important change will be consumer optimism about the future. The new President will probably get a six month honeymoon from the public. We will all be looking for immediate change. We will see a unified government as Congress will pass new laws and the President will immediately sign them. The fiscal package that will be signed on January 20, 2009 will probably spend over $500 Billion to create new jobs in the next two years. I expect consumer spending to increase as more people feel secure about the prospect for better times ahead. What about the financial markets?
I believe that we will probably see signs of an easing credit crunch. Corporate profit reports for 2008 will be terrible, but in the past. All of this sounds like a much higher Dow Jones. The key to this will be the performance of our new President and how he changes the negative psychology in the world. We will have to wait.

Random thoughts...President Bush just bought a mansion in Dallas....I wonder if Jeb Bush will be running for Senate in Florida...We have such high expectations for the new President....Is Depression talk and Deflation off the table now?...the market has been up for seven of nine days....this is the Christmas rally....remember that the first five days of January indicate performance for the year...Will GM have a new CEO in 2009?...what other CEO's will be gone next year?...how did Sam Zell make a mistake on the Tribune Company?

The Housing Market Recovery

In 2004-2005, when mortgage rates were 5% or lower it seemed that everyone was in a rush to purchase a new home for personal use or investment. In 2009, when mortgage rates fall below 5%, what should you do? Well, if you have a strong balance sheet and have investment dollars, it will be time to start looking! Imagine if I told you four years ago that you can buy real estate for a 50% discount and get a mortgage rate below 5%. I believe that in the first half of next year you will be able to find housing for 50% off in selected markets. As for investment real estate, it may be more difficult to find a tenant to rent your property. We should also keep a close eye on the home building stocks and Real Estate Investment Trusts. They will be cutting their dividends early next year but could rebound after June, 2009.

Weekend thoughts....It seems that Caroline Kennedy may be the next Junior Senator from New York replacing the new Secretary of State, Hillary Clinton....there was a small 5.1 earthquake in Los Angeles the other day...it was an aftershock of a 1999 earthquake (how does that work?)...Look for a Christmas rally in the markets for the next two weeks...especially if the government gives the Auto Companies $25 Billion to
burn....

Sell or Buy on the NEWS

Tomorrow morning at 830AM, the Unemployment Report for November will be released. Today around 3PM (one hours before the market closes) the professional traders decided it was time to 'short' stocks because they are expecting very bad news tomorrow morning concerning unemployment. Within sixty minutes, the market was down 200 points and looked horrible. This was an example of selling in anticipation of the news. When the news is released, the market will go up unless the report is worse than expected. I think that we are in store for a pretty good Christmas rally in the market next week. This feeling arises from the fact that the market is starting to go up on 'bad news'. This means that all of the bad financial reports are already discounted. We will see, but it is definitely a good time to be looking to buy.....

Random thoughts.....It is apparent that our Federal Reserve and the Central Banks of most foreign countries are trying everything, including the 'kitchen sink theory' to liquefy the economies of the world. Interest rates are falling to zero as Corporate Bonds continue to be on sale.....the stores are jammed in NYC...sales are working...

The United States of America Hedge Fund

Secretary of Treasury Hank Paulson is the former CEO & Chairman of Goldman Sachs (from 1998 to 2006). Goldman Sachs has been the most profitable firm on Wall Street as it managed its' own private hedge fund. In June 2006, Paulson was approved by the Congress as Treasury Secretary. The current economic crisis became very public in September when Lehman Brothers was forced into bankrupcy. Subsequently, the Congress passed a $700 million bailout (the TARP) that was left more or less to the discretion of Secretary Paulson. Secretary Paulson has probably spent half of the money funding various Financial institutions. The typical deal requires the Bank to pay interest of 8% and for the government to receive stock warrants. Paulson & Bernanke have also funded other programs granting liquidity to the markets. The big question is 'will the taxpayer make a profit/loss on these investments'. As I wrote yesterday, five year treasury bonds are yielding 1%. The government is borrowing money at 1% and receiving 8% or more from the various financial institutions. This is profitable.

Random thoughts....What if all of these Banks & Insurance companies write down the
paper losses on all of the mortgage loans so low that they eventually make a profit (in two to five years) as less loans default than expected... This will create an upside explosion in Financials and a huge profit for the government...I think this is more than a 'what-if'.....

Will Treasury Rates go to Zero?

Yields on U.S. Treasury notes and bonds declined precipitously today. The yield on a 10 year Treasury fell to 2.70% while the 30 year fell to 3.21%. This means that you can buy at thirty year U.S. government bond at a return of 3.21%. Yields on shorter maturity bonds (less than five years)are 1% or lower. The Federal Reserve will meet in two weeks and probably lower the Federal Funds rate to 0.5%. This means that taxable money market funds will be paying about 0.0% on your money. It seems to me that the markets are worried about risk and deflation. The market is acting as if all stock market dividends will be eliminated and all corporate bonds will seize to pay interest.

Random thoughts...the market acted horribly today and better improve tomorrow....we need time for some of these government plans to work....Black Friday sales were better than expected...the consumer has money to buy a 'great deal'...only fifty days until Obama is President....