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...