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.....