Told You So—The Next Market Blowup
July 22, 2008, 11:25
Filed under: Market Trends | Tags: ,

Amex is doing BAD:

Profit in the company’s U.S. card business dropped 96 percent to $21 million from $580 million a year earlier as provisions for losses more than doubled to $1.5 billion from $640 million. Uncollectible debt in the unit rose to 5.3 percent of loans from 2.9 percent a year earlier.

Told you so…I didn’t think it would happen SO soon, but it makes sense for Amex and all other credit card companies to feel the heat right now.


Does a Second Stimulus Package Make Sense?

Does a second stimulus package of $50 billion make sense for the US economy? No.

A stimulus is one way that the government injects its money into the economy. Congress would approve this measure in the hopes that $50 billion additional dollars in consumers’ hands will increase consumption, throw cash at struggling manufacturers, and improve the overall economy. I have no doubt that the stimulus package would have some positive effects on the economy, but the overall effect would be negative. Let me explain:

  1. Increased government spending will increase inflation. By releasing cash into the system, the Treasury will essentially devalue the dollar. This will make imports (virtually everything Americans buy) seem more expensive. In other words, consumers will need more dollars to purchase the same goods they were buying one year before. This is inflation.
  2. Oil is denominated in dollars. Devaluing the dollar will make oil seem expensive, creating inflationary pressure on all oil related products, services, and actions. Driving to work will cost more, shipping goods will cost more, and making products will cost more. All of this drives prices up, further increasing inflation.
  3. The stimulus wouldn’t solve the underlying problems in the market—the market is undergoing a self-correction on the mortgage front and a self-correction on the oil front. The recent bank failures (IndyMac) makes me think that the mortgage part of the crisis is in the process of bottoming out, or is at least close to bottoming out. Once you hit the bottom, there’s no where to go but up. We will hit the bottom with or without an additional $600 dollars in stimulus money since bank failures are tied to already purchased assets (stinky loans) and not current economic performance.
  4. The oil correction is a little more complicated. Oil prices are sky rocketing because China, India and Russia have booming economies. Growing economies demand oil, and increased demand causes the price of oil to rise. Oil is used to produce just about everything, so the price of just about everything rises. The world is paying for the good-fortune of these emerging economies. Prices are unarguably at unsustainable levels, so the market will have to correct itself. Either demand will fall (i.e. manufacturers will have to make less goods because the cost of oil for those additional products raises the price so much that consumers are unwilling to purchase the goods) or the market will create more efficient technology/processes to compensate for the higher cost of goods. Again, an extra $600 of stimulus money will not solve the problem in the long run. It will only cause manufacturers to momentarily increase production since consumers have a one-time shot of purchasing those marginally more expensive products that we just talked about.  Once the money is spent, manufacturers will have to stop making “additional units given how expensive the raw materials are getting, lowering demand and helping the market find equilibrium again.

A second stimulus package will not solve our current economic woes. Ms. Pelosi, don’t push for it.

Some Comments ARE Stupid
July 15, 2008, 11:25
Filed under: Market Trends | Tags: , ,

Martin Hutchinson and Lauren Silva had the dumbest idea, ever, printed in the WSJ today.  Their argument: Close Fannie Mae, gradually.  “Of course,” they say, “it wouldn’t then be practical to shut Fannie and Freddie Quickly.”

The kicker: “Meanwhile, the GSEs, now in the private sector, could start cutting their salary scales toward civil-service levels. The higher fees and compensation savings combined would compensate taxpayers somewhat for any bailout costs.”

That’s a dumb idea. Fannie and Freddie are financial service companies.  Paying Fannie and Freddie staff “civil-service” salaries will ensure the flight of both company’s best talent.  These men and women will run to the investment banks and work there, because no one ever settles for a low salary if they can get paid much more elsewhere for the same type of work. Duh.

What happens if Fannie Mae and Freddie Mac lose their best talent? The intellectually inferior staff that stays will undoubtedly make more mistakes.  Whoever (i.e. taxpayers) backs the companies’ liabilities will have to pay for these mistakes.

And, for the record, all of Wall Street is in shambles.  The decision makers at Fannie and Freddie are no different from the executives at all of the other banks that have been writing down losses. It seems, for now, that the talent pool runs evenly throughout all of the finance institutions playing with mortgages these last years. Change the salary pay, and things will get better at some banks and much worse at others.

Jim Rogers, STFU.
July 14, 2008, 11:25
Filed under: Market Trends | Tags: , , ,

This guy has got to shut up. He’s a major global investor that managed to get an entire Bloomberg article written about him today. He is quoted saying that Fannie and Freddie are basically insolvent and that the recent “bailout” is an “unmitigated disaster.”


He has shorted Fannie Mae stock, so he stands to win a lot of money if investors get skittish and bring the price of Fannie/Freddie stock down. He’s trying to manipulate the markets against the agencies. That’s self-serving and I don’t like it one bit. That’s why I’m telling this guy to STFU.

I should also add that Bloomberg should get its wrists slapped for airing the views of a clearly biased (he shorted the stock!!) “expert.”

Obama’s Health Care Plan Makes Sense
July 14, 2008, 11:25
Filed under: Politics | Tags:

Obama wants to offer tax rebates to small businesses that offer health insurance to its employees. My father’s small company falls into this category. I’ve gone over his financials, and health insurance is his largest fixed expense. It cripples their profitability, but health insurance is necessary so he pays for it anyway.

Under the Obama plan (ripped from Hillary Clinton):

“Small businesses would get a refundable credit of as much as 50% on the premiums they pay on behalf of employees.”

The plan would cost about $6 billion a year. That’s not bad. I love the plan because it would make a positive, tangible impact on my father’s bottom line.

Warren Buffet, Don’t Let Me Down
July 12, 2008, 11:25
Filed under: Market Trends | Tags: , ,

A few months ago, early May 2008, Warren Buffet said that the worst of the ongoing economic crisis had passed for Wall Street. Consumers would still feel the heat, he said, but at least Wall Street had gone over the hump.

IndyMac failed, Fannie Mae and Freddie Mac are (supposedly) on the brink as well.
What happened to my favorite oracle???

UPDATE:  The Treasury had to step in to help Fannie and Freddie out. Also, IndyMac was taken over by the FDIC. Three major market players stumbled, and one (IndyMac) is down for sure. I still think Mr. Buffet is Da Bomb but maybe he is getting a little rusty.

My Agency Prediction Gains Ground (or not)
July 11, 2008, 11:25
Filed under: Market Trends | Tags: , ,

This was quoted on dealbreaker and the NY Times:

Conservatorship, which could wipe out existing shareholders and humiliate past and present executives, is appealing because of the signal it would send to the market. Some key members of the Bush administration’s economic team believe putting Fannie into conservatorship would create stability in the housing market without sapping discipline from financial markets.

Recall my post on 7/7/08, well a conservatorship would effectively remove the charter as stated in my blog. I don’t know how I feel about this yet

Update (1:00pm) Secretary of the Treasury says:

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said in a statement in Washington. President George W. Bush told reporters separately that the two firms are “very important institutions” and that he discussed market “concerns” with Paulson earlier today.

They’re trying to calm Fannie/Freddie shareholders from selling their stock out of fear that the conservatorship would wipe them out. Secretary Paulson is trying to calm the markets and since his job effectiveness depends on his credibility, the guy can’t lie.