News What is wrong with the US economy? Part 2

[Astronuc]

Dow 30 - Prev. Close: 10,850.66
High: 10,847.79 as of ~10 am, 10/01/08)
Low: 10,648.68

52-Wk High: 10/11/07 14,279.96
52-Wk Low: 09/29/08 10,266.76
Down nearly 4000 points (~28%)

Dividend: 80.83
Yield: 3.04

The volatility is a bit ridiculous given that it is now driven solely on emotion (fear bordering on panic). That much uncertainty does not make for a healthy environment.

 

[OmCheeto]

The volatility is a bit ridiculous given that it is now driven solely on emotion (fear bordering on panic). That much uncertainty does not make for a healthy environment.

I asked a broker acquaintance of mine last night(do they have any friends left?), who was driving the market right now. I thought it might be the big wigs trying to scare the little people and get them all to call their congressmen to force the passage of the $700b bill. He said that it appeared that everyone was trading. Big and small investors.

He told me last week that this is usually how wall street profits. The market goes down, the little people sell, the big investors buy, the market goes back up, the little people lose, the big investors win.

He also said that only young people should have their money in risky investments. Old people like me should not gamble with their investments 3 years before retiring in the hopes that they'll "win big".

Old people!

I bought the kid a drink for his advice.

 

[Astronuc]

Buffett dives into GE amid "economic Pearl Harbor"
http://news.yahoo.com/s/nm/20081001/tc_nm/us_ge_buffett

NEW YORK (Reuters) - Warren Buffett's $3 billion commitment to General Electric Co is the latest attempt by perhaps the world's most revered investor to dive into a beaten-down company he believes has staying power, despite a global credit crisis he calls an "economic Pearl Harbor."

The billionaire's insurance and investment company Berkshire Hathaway Inc announced the preferred stock investment as GE, whose shares have slid about one-third this year amid concern over its financial services operations, set plans to sell $12 billion of common stock.

It came just eight days after Berkshire invested $5 billion in Goldman Sachs Group Inc in a similarly structured transaction.

Buffett admitted that both investments could backfire if the U.S. Congress fails to pass a proposed $700 billion plan to help the nation's banking industry reduce its stockpile of bad mortgages and other debt. Unlike much of corporate America right now, Berkshire does not need to borrow to do big deals.

"What Buffett has been waiting for years is finally happening: a period of sufficient market distress where he can negotiate terrific financial terms for Berkshire," said James Armstrong, president of Henry H. Armstrong & Associates in Pittsburgh. "He has been waiting for this for 10 years."

Omaha, Nebraska-based Berkshire agreed to buy $3 billion of GE perpetual preferred shares with a 10 percent dividend, generating $300 million of income a year.

Berkshire also gets warrants to buy $3 billion of GE common stock within five years at $22.25 per share, below its current level, and near the 5-1/2 year low it set on Sept 18.

"General Electric is the backbone of American industry," Buffett said on CNBC television. "They've become tainted as every company is that has to borrow a lot of money all the time. They're going to be around in five or 10 or 100 years from now and, if you buy at the right time, you'll probably make some money."

The Goldman investment included $5 billion of preferred shares with a 10 percent dividend and warrants to buy $5 billion of common stock at a discount.

GE shares closed down $1 at $24.50 on Wednesday, giving Berkshire a roughly $330 million paper profit on the warrants. The Class A shares of Berkshire rose $6,400 to $137,000.

Well some people are going to do very well in the current crisis, and others are not. Those already holding GE common stock will see a dilution of wealth.

Note that the Goldman preferred stock offers a 10% dividend yield. Compare that to the dividends of the common stock (Div & Yield: 1.40 (1.10%)) - what's wrong with this picture. And that is why the common stocks are overvalued.

 

[Jimmy Snyder]

Note that the Goldman preferred stock offers a 10% dividend yield. Compare that to the dividends of the common stock (Div & Yield: 1.40 (1.10%)) - what's wrong with this picture.

Preferred stock and common stock are very different things. For preferred stock, the amount of the dividend is a fixed dollar amount, as with a bond. When preferred shares are traded, the buyer and seller agree to what the dividend is worth based on the expectation that it will be paid and the price of other similar investments. A high dividend yield on a preferred stock is an indication that the market thinks the dividend payment is iffy. Compare this to the yields on junk bonds which also tend to be high. In general, there is a drawback to preferred stock in that since the dividend is a fixed amount, it can never rise even if the company does well. The expectation of profiting if the company does well is what keeps up the price of common stock. If the market expects a company will do well, then the price will rise and the yield fall.

Keep in mind that the market is relatively efficient. If one investment is better than another, money will flow rapidly in the expected direction until they balance, like heat in a closed system flows toward temperature equilibrium.

 

[Astronuc]

Deleveraging Society by David Paul
http://www.huffingtonpost.com/david-paul/deleveraging-society_b_130628.html

As illustrated below, our indebtedness--not just as a government but as a society--took off. As a percent of our national income, our cumulative debt burgeoned from a stable level of around 150% of GDP to 350% and counting.

That's a big problem that is not going to get fixed with the bailout. In addition to the $700 billion in funds to the financial sector, the bailout bill includes ~$100 billion in tax breaks and other obligations that will contribute to a greater federal deficit in FY2009. If McCain tries add another set of tax cuts, FY2009 will have an even great deficit.

The Senate's new economic rescue package is now worth over $800 billion.
http://marketplace.publicradio.org/display/web/2008/10/02/new_senate_package/

Interesting commentary!
Recession will inspire a new frugality
http://marketplace.publicradio.org/display/web/2008/10/02/farrell_new_frugality/

 

[kronon]

"Recession will inspire a new frugality"

Wouldnt that be nice.
But looking back at the economic expansions and contractions and expansions and contractions over the last 200 years would show otherwsie.

Banks will find borrowers for all the paper it considers safe to issue.

 

[Astronuc]

Stocks decline on unemployment, factory reports
http://news.yahoo.com/s/ap/20081002/ap_on_bi_st_ma_re/wall_street

NEW YORK - Stocks tumbled and credit markets remained tight Thursday after plunging factory orders and a seven-year high in jobless claims stoked fears that the government's financial rescue plan might not be enough to ward off a recession. The Dow Jones industrials fell nearly 300 points.

Investors appeared to be pulling more money out of the market and settling in for a prolonged economic winter. The main concern is that the $700 billion bailout plan won't be enough to stimulate growth, and the latest economic reports delivered on Tuesday demonstrate that the economy continues to struggle.

The government said the number of people seeking unemployment benefits rose last week and that demand at the nation's factories has fallen by the largest amount in nearly two years. The market is interpreting the Commerce Department report on factories as a sign that tight credit conditions are hitting manufacturers.

"The economy is what's driving this weakness," said Subodh Kumar, global investment strategist at Toronto-based Subodh Kumar & Associates. "I think now what's going on is a focus on the economic weakness in a whole bunch of areas."
. . . .

Tight credit and/or reduced demand - reduced revenue.

 

[Astronuc]

GE Announces Pricing of Common Stock Offering
http://biz.yahoo.com/bw/081002/20081002005635.html?.v=1
Thursday October 2, 9:22 am ET

FAIRFIELD, Conn.--(BUSINESS WIRE)--GE today announced that it priced an offering of 547,825,000 shares of its common stock at $22.25 per share. To the extent that the underwriters sell more than 547,825,000 shares of common stock, the underwriters have the option to purchase from GE up to an additional 82,173,750 shares.

http://www.clusterstock.com/2008/10/ge-we-had-to-slash-price-to-get-stock-deal-done

Well, GE raised the additional $12 billion it planned to raise after Warren Buffett injected $3 billion yesterday. But it had to price the stock at a gut-wrenching 9% discount to the current price, at $22.25. Demand was so weak, in fact, that the deal was priced below Warren Buffett's option on an additional $3 billion, which has a strike price of $22.50.

Not a good sign. Presumably things will turn up a little once the House votes on the bailout bill (assuming it passes). Yet if the economic picture doesn't improve dramatically, the markets will remain weak.

 

[turbo]

A $700 billion bailout will not stimulate growth because it is not targeted at people who spend their disposable income on consumer goods. 2/3 of our economy is driven by consumer spending, and with the rising costs of fuel and food, there is simply less disposable income to spend on consumer goods. Wait until heating season kicks in and people have to pay nosebleed prices for heating oil, propane, natural gas, etc. Retailers are going to be singing the blues this holiday season.

On a local note, a snowmobile club in the region is having a hard time drumming up members this year. Even though we had LOTS of snow and lots of riders last year, the high price of fuel piled on top of dues, registration fees, and insurance has forced lots of people to reconsider whether they can afford to run their sleds this year. There are a LOT of them out on front lawns for sale in this area.

 

[mheslep]

GE Announces Pricing of Common Stock Offering
http://biz.yahoo.com/bw/081002/20081002005635.html?.v=1
Thursday October 2, 9:22 am ET

http://www.clusterstock.com/2008/10/ge-we-had-to-slash-price-to-get-stock-deal-done
Not a good sign. Presumably things will turn up a little once the House votes on the bailout bill (assuming it passes). Yet if the economic picture doesn't improve dramatically, the markets will remain weak.

Again I don't know. Certainly not a good thing for shareholders but a big chunk of that is the hits being taken by GE Capital. The jobs, manufacturing, etc are elsewhere in GE. They seemed poised to gobble up a big share of the coming US wind market, already sold T Boone his wind turbines for Texas.

 

[Astronuc]

Maybe there will be some bargain hunting tomorrow, or in the news is bad, another down day. The markets are fickle at the moment.

If the House passes the bill over the weekend, then perhaps a rally Monday. But I expect more volatility in the month ahead.

Goldman Sachs is down about 50% from its high during the past year. It might be a good buy now - since its main competition have been beaten down.

In the long term GE should be a good buy.

But the economy seems to be struggling.

 

[jal]

You, (Astronuc), have been doing a good job of giving us good links to figure out what is happening.

Has anyone read the "new" bailout bill? I just found the following comments about the attached pork barrelling etc.
http://www.colonyinc.com/pdfs/1008chairmanscorner.pdf
Random Thoughts the Night before the Vote
Thomas J. Barrack, Jr.
--------
I hope that winter will not be too long.
jal

 

[fuzzyfelt]

Technically we're now in recession.

 

[Astronuc]

According to this article - Total Bailout Bill = $900 Billion
http://www.huffingtonpost.com/hale-stewart/total-bailout-bill-900-bi_b_127125.html

This guy really lays into the bill.

Between the $29 billion the Fed pledged to swing the Bear Stearns sale to JPMorgan in March, $100 billion apiece to rescue mortgage finance firms Fannie Mae and Freddie Mac, up to $300 billion for the Federal Housing Authority, Tuesday's $85 billion loan to insurer AIG and various other rescue deals and loans, taxpayers are potentially on the hook for more than $900 billion.

Think about that for a minute. $900 billion dollars, racked-up before your very eyes. This at a time when the federal government is already bleeding money. Note the following numbers from the Bureau of Public Debt:

09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

Currently the total outstanding debt = $9,634,090,464,815.55 (and rising)

And now, thanks the the geniuses in charge of the US government, we've got the following bills to add: . . . .

This bill apparently started at 3 pages, but it has now grown to 110 pages!
http://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008
http://www.house.gov/apps/list/press/financialsvcs_dem/ayo08c04_xml.pdf

http://en.wikipedia.org/wiki/HR1424

I think it includes raising the federal debt ceiling from $9.9 trillion to $11.3 trillion. It is expected the deficit will be about $400 billion FY2009. However, based on falling revenue (due to the recession), the deficit could go higher.

I think the bill needs to stripped of the tax breaks/credits.

How many people here are concerned about the federal insurance limit of $100,000 on a single bank deposit?

Goldman Sachs, Citigroup and JP Morgan Chase aren't going anywhere.

 

[OmCheeto]

How many people here are concerned about the federal insurance limit of $100,000 on a single bank deposit?

That's a really good question.

Another question I have is; why with the credit crunch, do I still get daily pre-approved credit card applications in the mail? I even got one from WAMU a week ago! Did someone forget to turn off the snail mail spam-bots?

Ok. I guess that's two questions.

 

[Astronuc]

On Wall Street, Reassurance Before the Fall
http://dealbook.blogs.nytimes.com/2008/09/30/on-wall-street-reassurances-cometh-before-the-fall/

Many chief executives of troubled companies put on a happy face for the public — right before their companies go off a cliff, Andrew Ross Sorkin notes in his latest DealBook column.

These efforts to bolster confidence, he writes, have become especially conspicuous amid the current financial crisis — with the C.E.O.s of firms like Bear Stearns, Lehman Brothers and most recently Wachovia, offering comforting words before the fall.

Are these assurances purely disingenuous or just a smart assessment of how quickly rumor can turn into a self-fulfilling prophesy?

Either way, says Mr. Sorkin, happy-talk executives put themselves in legal jeopardy. And
when we start seeing pictures of C.E.O. perp walks, the crime, he says, won’t be theft or some other kind of financial chicanery, it will be some kind of fraud — probably lying to the investing public.

I think a lot of people are wondering what the heck happened with these companies, and how many more distressed companies and bad CEOs there are. Perhaps some real action will be taken with respect to CEO compensation, such that it really does relate to job performance.

I don't see how financial services companies justifies the compensations of the CEO or directors when there is a whole team of other people who use other peoples money to take a risk. It seems more like a racket to me with intermediaries taking their percentage without exposing themselves to any risk at all.

 

[Jimmy Snyder]

Technically we're now in recession.

Technically, we're in a recession when the nber says we're in a recession. The nber has not said that we're in a recession. So technically, we're not now in a recession. Don't give up hope though.

 

[BobG]

On Wall Street, Reassurance Before the Fall
http://dealbook.blogs.nytimes.com/2008/09/30/on-wall-street-reassurances-cometh-before-the-fall/
I think a lot of people are wondering what the heck happened with these companies, and how many more distressed companies and bad CEOs there are. Perhaps some real action will be taken with respect to CEO compensation, such that it really does relate to job performance.

I don't see how financial services companies justifies the compensations of the CEO or directors when there is a whole team of other people who use other peoples money to take a risk. It seems more like a racket to me with intermediaries taking their percentage without exposing themselves to any risk at all.

More like exposing themselves to a very unlikely risk. Here's a really simple (overly simple, in fact) article on the logic behind the risk: Double or nothing.

Of course, people in the financial market are usually pretty smart. The key part of the logic is that home prices always go up. You're flipping a weighted coin, which makes the likelihood of losing extremely small. At least until the new fad of reverse mortgages eventually matures and you have a lot of houses that have to be sold to a population that's declining or at least growing at a much slower pace. (Here's one case where the consumers might be smarter than the financial folks.)

Having a credit crisis now is pretty unexpected. Having one eventually is practically a certainty. Which means we'll go though this again regardless of how this one turns out.

 

[mheslep]

...How many people here are concerned about the federal insurance limit of $100,000 on a single bank deposit?

The bailout bill will increase deposit insurance to $250,000 [http://thomas.loc.gov/cgi-bin/query/F?c110:5:./temp/~c110a9fMTD:e116130:" ], a mistake, without any corresponding action to increase the FDIC insurance fund, another mistake. The deposit cap was increased from $40,000 to $100,000 by Congress in 1980, the subsequent S&L scramble to take in more deposits helped cause the 80/90's S&L fiasco.

 

[LowlyPion]

The bailout bill will increase deposit insurance to $250,000, a mistake, without any corresponding action to increase the FDIC insurance fund, another mistake. The deposit cap was increased from $40,000 to $100,000 by Congress in 1980, the subsequent S&L scramble to take in more deposits helped cause the 80/90's S&L fiasco.

Actually I think it doesn't really matter.

The move looks to be intended to slow down the volatility of those thinking to move money around unnecessarily, contributing to short term volatility. I rather think that the extra cost is nil. It's just psychological. I also think that it is short term, and if it is going to remain in force will result in greater restriction down the road to assure that proper risk premium is assessed.

 

[Astronuc]

It's the $100 billion in tax breaks that trouble me, in addition to the disposition of $700 billion. It's not clear to me that there is a plan to get to the bottom of this, i.e. that there is an remedial action.

It seems to me from the outside, that Congress would have this problem drops off the radar screen as it slips into the past. Then it will be business as usual.

Financial market reform
Commentator Karl Denninger, author of The Market Ticker, has proposed a plan to restore trust in the financial system starting with (1) balance sheet transparency (2) an exchange for OTC derivatives, and (3) limiting leverage to 12:1. Transparency, because it increases the information available to investors, allows more accurate risk assessment and derivative pricing. An exchange increases the liquidity of derivatives. A return to historical leverage limits (e.g. 12:1) helps identify those institutions that are over-leveraged while rewarding those more conservative. He argues that addressing the problem with these reforms in place makes the process of restructuring failing firms more fair and orderly, and far less costly.

What gets me is this stuff:

Tax breaks and credit extensions for the following:

• "Certain wooden arrows designed for use by children" (Sec 503) [11]
• Wool research (Sec. 325)
• Film and television productions (Sec. 502)
• Litigants in the 1989 Exxon-Valdez oil spill (Sec. 504)
• Virgin Island and Puerto Rican rum (Section 308)
• American Samoa (Sec. 309)
• Mine rescue teams (Sec. 310)
• Mine safety equipment (Sec. 311)
• Domestic production activities in Puerto Rico (Sec. 312)
• Indian tribes (Sec. 314, 315)
• Railroads (Sec. 316)
• Auto racing tracks (317)
• District of Columbia (Sec. 322)

A House leader accused the Senate of legislating "by blunt force" without public-consent. Senate has also been accused of "sweetening" the bailout to force its passage by the opposing House.

http://en.wikipedia.org/wiki/Propos...inancial_system#Senate_vote_October_1.2C_2008

 

[Astronuc]

Congress apparently just passed the Bill.
http://news.yahoo.com/s/ap/20081003/ap_on_go_co/financial_meltdown

The final vote, 263-171 in the House, capped two weeks of tumult in Congress and on Wall Street, punctuated by daily warnings that the country confronted the gravest economic crisis since the Great Depression if lawmakers failed to act.

 

[turbo]

Now we see what happens when we throw money at Wall Street. I predict that since there will be little or no benefit to the working class, whose consumer spending drives most of our economy, the economy will continue to tank and the neo-cons will try to come back for another "urgently needed" dip at the trough. Stocks of some companies who stand to get bailed out of bad paper they are holding will rise on those expectations, but I don't expect any up-turn in consumer spending, which bodes ill for the manufacturing sector and for retailers.

 

[Ivan Seeking]

Actually I think it doesn't really matter.

The move looks to be intended to slow down the volatility of those thinking to move money around unnecessarily, contributing to short term volatility. I rather think that the extra cost is nil. It's just psychological. I also think that it is short term, and if it is going to remain in force will result in greater restriction down the road to assure that proper risk premium is assessed.

Yes, a simple move intended to prevent further disaster - a run on the banks.

 

[edward]

I still can't decide whether to call it a bail out or a sell out. A lot of pork was thrown into get the votes to pass the bill. They keep mentioning the people on main street, how about the people on the side streets?

If the government gets stupid and turns the management of the toxic funds over to some, no bid wacko company, housing prices could tumble even faster than with no bail out. If too many homes hit the market all at once it will be another crisis,this time on side street America.

Back during the savings and loan debacle a Phoenix investor named Wolfswinkle owed $380 million on 6,000 acres of land north of town. He filed for bankruptcy and the Resolution trust ended up with the property.

Four years later the Resolution Trust sold the property to a group of investors which included Wolfswinkle. The selling price $180 million.

We can't afford to have that kind of garbage going on this time around. There are going to be a lot of former bankers with money in their pockets just waiting for the fire sale prices.

 

[Ivan Seeking]

How many people here are concerned about the federal insurance limit of $100,000 on a single bank deposit?

The concern is for small businesses.

 

[Astronuc]

The concern is for small businesses.

OK - that I can understand. I was thinking of individuals.

I can see a concern for small businesses being able to make payroll.

 

[Ivan Seeking]

According to this article - Total Bailout Bill = $900 Billion
http://www.huffingtonpost.com/hale-stewart/total-bailout-bill-900-bi_b_127125.htmlThis bill apparently started at 3 pages, but it has now grown to 110 pages!

One news anchor on CNN had a copy on his desk yesterday. According to him and several other reports, as of yesterday, the bill was up to 450 pages.

 

[turbo]

OK - that I can understand. I was thinking of individuals.

I can see a concern for small businesses being able to make payroll.

That provision meant something to me personally, but I could have lived without it. It's a much different story for small farms, timber operations, etc who need someplace to park profits so that they can invest in new or upgraded equipment when necessary. If you are a small wood harvester, and your feller-buncher craps out, can you come up with the cash or ready credit to replace it so that your crew of harvesters, truckers, etc can keep working? If a large $$$$$$ piece of agricultural equipment craps out, can you repair or replace it promptly enough so that you can harvest your potatoes before they rot in the ground? In the absence of ready credit, such businesses need liquidity, and they need to be able to get at that money on short notice, at times. It would be pretty disconcerting to have lots of cash deposits in money-market or savings accounts, and have those banks fail just before harvest time (if you are a farmer) or when pulp mills are experiencing a shortage of wood and increase the prices they pay you (if you are a logger).

 

[edward]

The concern is for small businesses.

The concern was for small businesses but now every savings account will be covered, including those who want to pull money out of risky investments and stash it. This could be a dangerous move without proper funding for the FDIC.

Why didn't they just increase the amount covered by the FDIC to $250,000 for just business accounts?

They had over 450 pages of legislative jingo to do it in.