Archive for the ‘Finance’ Category

News Link

Morgan Stanley, the second-biggest U.S. securities firm, told thousands of clients this week that they won’t be allowed to withdraw money on their home-equity credit lines, said a person familiar with the situation.

Most of the clients had properties that have lost value, according to the person, who declined to be identified because the information isn’t public. The New York-based investment bank will review home-equity lines of credit, or HELOCs, monthly from now on, the person said yesterday.

Wall Street firms including Morgan Stanley are ratcheting back on risks after the collapse of the subprime mortgage market and ensuing credit contraction saddled banks and brokerages with almost $500 billion of writedowns and losses. Consumers fell behind on home-equity credit lines at the fastest pace in two decades in the first quarter, the American Bankers Association reported last month.

“Morgan Stanley periodically reassesses client property values and risk profiles,” said Christine Pollak, a Morgan Stanley spokeswoman in Purchase, New York. “A segment of clients was recently notified of a change in the status of their home- equity line of credit, or HELOC, due to a change in the value of their property and/or their credit profile.”

Pollak declined to specify the dollar amount of the frozen credit lines. The firm’s global wealth management division, which doesn’t disclose how many clients it serves, had 8,350 advisers managing $739 billion of customer assets at the end of May, according to its second-quarter earnings report.

No Recovery Seen

“It’s evidence that they don’t think the economy is going to recover quickly,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who rates Morgan Stanley shares “outperform” and who owns some of the stock. “The fact that they’re trying to get ahead of the problem is very good.”

Morgan Stanley has already taken about $14.4 billion of losses related to leveraged loans and collateralized debt obligations. The clampdown on home-equity loans mirrors similar efforts by commercial banks, said David Hendler, an analyst at Credit Sights Inc. in New York.

“All consumer lenders and home-equity lenders are reassessing the environment given the pressure on housing and the economy,” Hendler said.

JPMorgan Chase & Co., the second-biggest U.S. bank by market value after Bank of America Corp., has notified 150,000 customers about changes in their home-equity lines of credit since March, said Christine Holevas, a Chicago-based spokeswoman.

Changes Made

In some cases the lines have been reduced and in other cases they’ve been suspended, depending on the change in home values, she said. The changes affect about 15 percent of JPMorgan’s home- equity credit customers, Holevas said.

Bank of America and Washington Mutual Inc. are among the other lenders that have frozen home-equity credit lines this year.

“Morgan Stanley customers are typically coming out of their wealth management side, so typically a high net worth customer,” said Christopher Whalen, co-founder of Institutional Risk Analytics in Torrance, California. “This shows you they are under the same pressures as everybody else.”

This may be a good time folks to look at what you have in your line, access if you may need it for a rainy day fund (like I will be doing) and see if taking out some of that money now before it disappears is a good idea.

Don’t forget about the interest rate you will be paying to take that money out. Best thing to do to offset it, is to put that money into a structured CD or online savings bank account that will at the very least give you some 4% interest rate on it. Most people are paying 6-8% on HELOC’s. Access if a 3% loss on that borrowing is worth it for emergency funds that may not be there later.


Read Full Post »

Shutdown UBS?

That is the call today by Senator Levin.
As if the banking industry needs anything else to be jittery about.
Are these folks up in DC that stupid?

News Link

Federal regulators should consider revoking the US banking license of the giant Swiss Bank UBS because of its role in helping wealthy Americans evade billions of dollars in taxes, Sen. Carl Levin (D-MI) told ABC News today.

“I don’t think that any bank that goes to the extent that UBS has gone through to avoid doing what their agreements with the United States require them to do, should be allowed to continue to do business unless they clean up their act,” Levin said.

UBS’s role in arranging “undeclared” accounts for an estimated 19,000 US citizens was one focus of a hearing by the Senate Permanent Subcommittee on Investigations, chaired by Levin today. The role of the LGT bank, owned by the royal family of Liechtenstein, was also investigated.

Levin said UBS practices resulted in its U.S. clients maintaining undeclared Swiss accounts that collectively held “$18 billion dollars in assets that have been kept secret from the the IRS.”

“They wanted secrecy. UBS gave them secrecy,” Levin said.

Levin revealed a list of “secrecy tricks” he said the UBS bankers used to carry out their tax haven schemes.

The list includes code names for clients, using untraceable pay phones, encrypted computers, fake trusts, counter-surveillance training, and shredding files.

Levin said UBS hid behind Swiss bank secrecy laws to hide its misconduct, and offered services in the US it was not licensed to provide.

UBS is the world’s largest private bank catering to wealthy individuals.

One of its bankers, Bradley Birkenfeld, has already pleaded guilty in the US to tax evasion and fraud and is cooperating with federal prosecutors in Miami.

In a plea agreement, Birkenfeld detailed how he said he had been trained by UBS to help wealthy Americans evade taxes.

In one case, Birkenfeld told prosecutors he purchased diamonds using a US client’s Swiss bank account and smuggled the diamonds into the United States in a toothpaste tube.

He called for passage of new laws to end tax haven abuses.

“Tax havens,” said Levin, “are engaged in economic warfare against the United States and honest, hardworking American taxpayers.”

Maybe if you stopped taxing the living shit out of peoples accounts they would keep the money here and increase the savings amounts in the US!? In turn increasing deposits in US banks, increasing the availably capital banks need to stay liquid.

Naa that would be crazy talk, they need to tax you when you make the money, tax you when you pay the govt for the money, tax you when you save the money, tax you when you invest the money, tax you for living on your property and tax you when you die so that your heirs can pay more taxes on that as well.

Moron! Fix the taxing system not shut down a bank!

Read Full Post »

These last couple weeks has been filled with more economic woes.

IndyMac has failed, mostly fueled by speculation of its demise which forced a run on the bank. Always a dangerous thing. Part of it, if not most of it was fueled by a letter written by Senator Chuck Shumer of NY on June 26th. Midday trading Friday (usually a light day) showed IndyMac up 75 cents. News of the run hadn’t trickled down yet.

News Link

The U.S. Senator who leads the Senate subcommittee that oversees the Federal Reserve and economic policy has written letters to federal bank regulators questioning the condition of IndyMac Bancorp Inc. of Pasadena, news services reported Friday.

Sen. Charles Schumer, a Democrat from New York, sent the letters to the Federal Deposit Insurance Corp., the Office of Thrift Supervision, the Federal Housing Finance Board and the Federal Home Loan Bank of San Francisco. The letters reportedly said Schumer is concerned IndyMac “may have serious problems with its current loan holdings, and could face a failure if prescriptive measures are not taken quickly.”

Schumer, who serves on the Senate Committee on Banking, Housing and Urban Affairs and is chairman of its Economic Policy Subcommittee, cited concerns that the bank’s condition is a risk to taxpayers and borrowers.

Moody’s Investors Service Inc. on Tuesday downgraded IndyMac.

Fast forward 2 days later and we begin to see lots of people making large withdraws from IndyMac, causing a run on the bank.

News Link

Battling rumors that it may collapse, Pasadena-based IndyMac Bancorp acknowledged Monday that its financial position had deteriorated but described the fears as overblown and said it was working with regulators to improve its “safety and soundness.”

IndyMac, a national home lender burned by the mortgage meltdown, went public after depositors lined up at San Gabriel Valley branches starting Friday to pull out their money. Striving to reassure them, the thrift said nearly all their deposits were insured by the Federal Deposit Insurance Corp.

Nonetheless, Elizabeth Brown closed four accounts totaling $200,000 Monday at an Arcadia branch where about 20 customers were lined up at noon, saying: “The only reason I’m panicking is if anything happens, my money is tied up.

“I don’t want to take the chance,” said Brown, 62, of Temple City. “I’m going to put my money somewhere else, and if they come back, I’ll come back.”

Rick McPherson, 64, said he grew worried after hearing news reports that IndyMac was struggling, and withdrew $1,000 he had at IndyMac.

“I’m not certain what happens when a bank fails,” said McPherson, a printer from Arcadia. “I don’t trust the economy right now.”

The concerns were triggered by Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, who said in public letters to the FDIC and other bank regulators Thursday that IndyMac “could face a failure if prescriptive measures are not taken quickly.” IndyMac said Monday that Schumer had created the “wrong impression” about the savings and loan’s risks.

IndyMac, which operates 31 offices and also takes deposits over the Internet, said the outflow of money increased on Saturday after continuing news coverage of Schumer’s remarks. The outflow Friday and Saturday totaled about $100 million, or about 0.5% of its total deposits of $19 billion, the company said.

That all happened over the weekend just 24-48 hours AFTER Schumers remarks.

Schumer in turn fired back days later that the run was not his fault but the Bush Administrations fault.

News Link

“The administration is doing what they always do, blaming the fire on the person who called 911,” Schumer said, according to the Associated Press’ story from the news conference in New York.

Remember folks, Politics and Finance – they are are all connected.

Schumer basically put his foot out too far on a bank that was already in a bit of distress and with his lone comments caused a major run on the bank in not only hours after, but days after as well. In the 11 days that followed, depositors withdrew more than $1.3 billion from IndyMac, leaving the bank unable to function. Via Fox Today cops were dispatched to calm the crowds as the news made its way to more people of the failure of the bank.

For Schumer to privately raise concerns within his oversight committee would be totally fine, for him to raise these concerns with a public letter are utterly ridiculous. That it was leaked from his office would should (I think) lead to an investigation. In Schumers supposed efforts to “save depositors” at the Bank, he created a much larger problem that hopefully does not trickle down to many other banks.

Fears at Wachovia have now started, as well as other banks.
Thankfully today Wells Fargo reported better than expected earnings.

On to the next problem.
Fannie Mae and Freddie Mac both seem to be on the path to a bail out from the federal govt.  The fed spelled their plan out on Monday as to what they are going to do with these two quasi public companies.

Yahoo News

Fannie Mae and Freddie Mac were volatile after tumbling last week amid concerns they would succumb to losses in their mortgage portfolios. The Fed said it would lend to the two companies “should such lending prove necessary.” Treasury Secretary Henry Paulson said his department is asking Congress for quick approval of a plan to expand its line of credit to the two companies and to make an equity investment in them if necessary.

Troubling indeed. Mae and Mac both have over 5 Trillion dollars in Mortgage debt that they hold. Taking on this massive amount of “assistance” would double the Nations Debt OVERNIGHT! Quite possibly causing the largest meltdown of History as American Bonds start to plummet over the massive debt incurred. A massive drop in the dollar, Oil doubling and total Chaos really.

Scary thought indeed. Are we to continue down the path that no matter how large you get the govt will bail you out of a crisis? Is that really what we want to create? A system where we say, get as large as possible, take out the most risk possible and then let the govt come in and bail us out.

That is not the free market economy we should be embracing.

Jim Rogers said more on Marketplace yesterday which is spot on:

Jim Rogers: Well, this plan is adding huge amounts of debt to the American government’s burden. Last weekend, we ran up $5 trillion, the same amount of debt that it took 200 years to accumulate. The world knows that’s an unbelievable burden added to any government, especially the one which is already deeply in debt. It’s bad for the economy, it’s bad for interest rates, it’s bad for inflation and it’s bad for the currency.

Jagow: As you say, $5 trillion in debt — that’s what Fannie and Freddie control; about half the U.S. mortgage market. How in the world can we let them fail?

Rogers: Well, it’s better to let them fail now if you ask me than wait two or three years when it’s going to be $10 trillion or who knows how much else because if we keep doing this, the United States government, who’s going to buy American government bonds? If you were a foreigner and you saw that the government added huge amounts of debt annually, would you continue to buy American government bonds? I mean, I wouldn’t and I’m an American.

Jagow: Alright, so if we don’t backstop Fannie and Freddie, what do we doe?

Rogers: Well, my view would be we let them fail and they’ll be reorganized in bankruptcy court. We’ve been having bankruptcies for a couple hundred years and for a few thousand years through the world. Let them go bankrupt, let them be reorganized, we clean out the system, I’d hope we put a few people in jail from Fannie Mae and Freddie Mac and we can start over. I’d rather do that, as painful as it’s going to be, than have to do it in two, three, five, whatever number of years it’s going to be.

Jagow: What do you think it will take to restore the confidence of foreign investors?

Rogers: Well, you’ve got to change the whole government structure of running up gigantic deficits in America and it’s going to cause some very radical changes. You know, most countries throughout history, when they’ve gotten themselves in financial trouble, they’ve never gotten themselves out unless they had a crisis or a semi-crisis. I’m afraid we’re going to be just like every other country and we’re going have to have our crisis or our semi-crisis and then maybe we’ll make some needed changes.

Politics however seem to be trumping sound financial moves. As we are seeing with the Bush Administrations latest moves to pump more liquidity into Mac and Mae. They are too large to let fail.

Letting a company fail, no matter how large they are, will cause some pain, locally, hell even nationally. But in the end after the dust settles the market finds its way back if you let it. We saw the collapse of Enron, Worldcom (sure they are different animals) but in the end, the market corrected itself. Another company came in and took over the gap for Enron and along we went for the last 5 years in economic expansion.

All these things do is cause knee jerk reactions by Congress. Such as the new move to stop short selling. Does that now mean that my shorts on JP are no longer valid? WTF?

What kind of Capitalism are we running here?

News Link

The U.S. Securities and Exchange Commission subpoenaed Wall Street’s biggest firms and hedge-fund advisers in a widening effort to crack down on suspected manipulation of Lehman Brothers Holdings Inc. and Bear Stearns Cos. shares, said three people with knowledge of the matter.

The SEC’s enforcement unit demanded information from investment banks including Goldman Sachs Group Inc., Deutsche Bank AG and Merrill Lynch & Co., according to two of the people, who declined to be identified because the inquiries aren’t public. The Washington-based regulator is seeking trading records and e- mails, one of them said.

The subpoenas mark a new front in the broadest U.S. investigation of Wall Street trading since state and federal regulators targeted mutual-fund abuses in 2003. The SEC issued an emergency order yesterday curtailing short selling in financial stocks, including Lehman and mortgage-finance companies Fannie Mae and Freddie Mac. The agency also is examining whether securities firms have adequate controls to thwart misconduct.

“The SEC is trying to determine whether there was illegal manipulation of market prices, and that is far easier to do if you have a broad sweep,” said Tamar Frankel, a law professor at Boston University.

Lehman has been known for taking out loans on B and C Paper. Those are the most riskiest loans. That is why they are being shorted. Their books tell the story of a company that will not post profits and in fact will post losses for probably the next 2 years.

I’ll end this with some failed logic by Paulson:

Mr. Paulson walked lawmakers through his logic. By giving him the authority to spend an unlimited amount of money, he said, the markets would accept that the government’s commitment is solid, and that would increase confidence.

Quite the opposite Mr. Paulson. Bonds tells the tale of that failed logic as well as the drop of the dollar yesterday.

Read Full Post »

The recent foreclosure ‘crisis’ is getting out of hand. Not because of the numbers involved, that was to be expected as the market corrects itself, but with people that were perfectly willing to buy a home not long ago and are choosing to walk away from their responsibilities on the properties.

News Link

Capitol Weekly reports that newly elected California Congresswoman Laura Richardson walked away from the mortgage on her $535,000 Sacramento home, letting the house slip into foreclosure and disrepair less than two years after she bought it with no money down.

“While being elevated to Congress in a 2007 special election, Richardson apparently stopped making payments on her new Sacramento home, and eventually walked away from it, leaving nearly $600,000 in unpaid loans and fees,” the publication reports.

Richardson, a Democrat from Long Beach, declined to comment for the Capitol Weekly story, and her office did not immediately respond to a request for comment from LA Land.

Capitol Weekly, citing tax records at the Sacramento County assessor’s office, reports “… in January 2007, Richardson took out a mortgage for the entire sale price of the house — $535,000. The mortgage amount was equal to the sale price of the home, meaning she was able to buy the house without a down payment, even though the housing market was beginning to turn. A March 19, 2008 notice of trustee’s sale indicates that the unpaid balance of Richardson’s loan, which is held by Washington Mutual, is more than $578,000 –$40,000 more than the original mortgage.”

In addition to 100% financing on the home itself, the report quotes the woman who sold the house to Richardson as saying she also gave Richardson $15,000 toward closing costs.

The weekly also reports Richardson’s residence quickly became an eyesore, angering neighbors. The report says she recused herself on two key house votes on government efforts to address the foreclosure crisis.

Nice way to set the example.
Not long ago Jose Conseco walked away from his mortgage and home as well saying “it didn’t make sense to keep making payments anymore on a home that was worth less”. People like this are going to DESTROY future home borrowers ability to get into a home.

The people walking away from these mortgages should be held personally liable from homes that they are willingly walking away from simply because the appraised value went down on the home. They should be forced to pay for the resale of the house to the bank, the fees involved in fixing the property for sale and held liable for the difference in the amount the home wound up selling for in foreclosure.

The recent passage of a bill in the Senate Banking committee which will probably pass in the house is also a dangerous precedent that I have spoken about before.

Under the bill, the Federal Housing Administration would back as much as $300 billion in new mortgages, allowing lenders to refinance the most threatened home loans. The cost of failed loans would be covered not by taxpayers but by fees paid by mortgage originators to Fannie Mae and Freddie Mac, the federally chartered companies that buy mortgages from banks and other lenders.

Lenders would have to refinance the loans at less than the home’s current value, taking significant losses. Borrowers would be required to split any profits on the eventual sale of the house with the government.

The days of self responsibility are gone. In comes the nanny state. This can’t possibly end well. I’ll await the bottom of the slippery slope.

Read Full Post »

This is not the first time, nor the last time that we will hear of this but I read it today and found it to be so disingenuous that I wanted to share it.

News Link

“Let me be clear, privatizing Social Security was a bad idea when George W. Bush proposed it, it’s a bad idea today,” Obama said. “That’s why I stood up against this plan in the Senate and that’s why I won’t stand for it as president.”

Bush proposed a Social Security plan in 2005 that focused on creating private accounts for younger workers, but it never came up for a vote in Congress. Democrats strongly opposed the idea and few Republicans embraced it.

Obama said McCain would push to raise the retirement age for collecting Social Security benefits or trim annual cost-of-living increases. Obama has rejected both ideas as solutions to the funding crisis projected for Social Security in favor of making higher-income workers pay more into the system.

Actually it was Clinton whom first proposed Privatizing Social Security. A move that at the time was praised quietly by Democrats, and the suddenly the mood shifted when Bush mentioned it. Partisan politics at its best there folks.

Read Full Post »

Bull or bear the truth is everyone is trying to figure out where we go from here. As always, the small investor is probably just as lost as the talking heads are to sort things out. Has the recent runup in the market indicated a bottom or is it just a blip? One thing you can count on is that there are plenty of people who will try to profit in the short term without any clear notion of a longer term trend. Conservative investors are often on the bearish side, partly from risk aversion and more than likely part envy. If you want to climb that wall of worry, there are plenty of factors to point to looking for the economy to slide back down. A few of them are related to the stories that have unfolded thus far in this economic slowdown but have not resolved. The big three are:

Housing – We haven’t seen the end yet to house price drops and those equity lines aren’t very robust at the moment. This year certainly looks like a down year as we work through this and next year isn’t going to set any records. I think most people would view a flat year as a big step forward. But the foreclosures aren’t over and there won’t be much help on the equity side for several years to come for recent home buyers or those who are highly leveraged with additional mortgages and lines of credit. The Feds may role out some help but with a complicated issue they are far more likely to pull their usual ready, fire, aim approach and either accomplish nothing or take a step backward.

Credit – The Fed has made clear that they aren’t going to stand for much turmoil in the credit markets and won’t let any major institutions go under. But for those who are looking for credit, they are finding the new rules considerably different. Credit is still an issue for Main Street as credit card debt is starting to increase, although we may be seeing a seasonal bump. With low inflation, meaning small wage increases, and the home equity piggy bank having been raided for too much, too often, consumers waiting for their stimulus checks are more than likely making ends meet by using their credit cards. It will be a far smaller bubble than the housing bubble but could well be more severe for the average person. With declining house values, unsecured personal debt can be financially deadly.

Energy – It has taken about eight weeks since we convincingly crossed $100/bbl oil to add right around 25% to the price. Another eight weeks would put us in July and a 20% increase going forward would bring the magical $150/bbl oil to reality. What’s to prevent that continued runup? A stronger dollar? Doubtful as the Fed is merely taking a pause, not increasing rates anytime soon and the major European central banks are holding pat. Demand may not be going up in the US much, if at all, but the rest of the world, particularly places where there is subsidized gasoline, are still gobbling up whatever is out there. And despite OPECs protestations that there just aren’t any buyers for more oil, they haven’t exactly tried to make more oil available except for a minor current blip. And now energy, particularly in the form of gasoline and diesel, are showing their potential to work through the economy in ways we haven’t seen before. More and more people are starting to think about the cost of gasoline as even reasonably short trips, by US standards, can gobble up 20 or 30 dollars worth of gas. The lunacy of doing science in DC is becoming clear as with one stroke of the pen with biofuel support they have buggered up not only the energy industry but agribusiness as well and left the consumer swinging in the breeze.

OK, so those are pretty gloomy but what about the other side? For each of the areas I point out above, the argument can be made that they are “old news”. Wall Street hates uncertainty but as soon as they get the feeling that all the bad news is out there, they feel better going forward. Writedowns may continue but everyone thinks they have a pretty good handle on who is going to be affected and by how much. The stimulus checks are starting to hit checking accounts and whether they go to paying down bills or new purchases, they will have an effect. Wall Street is now able to count on Benny and the Feds not letting anything serious happen to the good ol’ boys. With the exception of Wall Street, there hasn’t been much in the way of employment issues that are causing concern. Slowdown, yes. But serious recession, no. In fact, the most recent numbers are also saying things aren’t that bad. With the Fed taking a break from further rate cuts, the dollar should eventually firm which will be good for exporters, at least the dollar isn’t going back up which would hurt them. First quarter earnings were not that bad and there will probably end up being more upside surprises than down side. Projections going forward are being lowered but to Wall Street that is just prudent and with lower expectations, it is easier for companies to beat the Street and get stock up spikes.

Those are all good reasons why we may have bottomed and make looking at returning to equities look attractive. But I haven’t mentioned the biggest factor that may be driving this. The old saw goes that Wall Street alternates by being driven by fear and greed. And if it is at all close, greed wins. All the Gordon Gecko’s on the street just can’t wait to call the Bentley dealer up and remove that “hold” they put on their order. We went through 12,800 and have touched 13,000 but are once again showing that the market doesn’t make any move convincingly. Are we heading back to lower levels or are we just doing the normal backing and filling we need before a move up? Good question. That greed component has been on the back shelf for a while and every broker, investment banker, talking head, and CEO are straining at the bit to get back to business as usual. Personally, I have put about half the investable funds that I had in cash back into equities. Whether the market falls and lets me back into stocks I want to hold at a better price or whether it continues up, I can average costs and come out well, I hope. At least I should be in position to take some money off the table or rotate after the election and still get the current long term capital gains tax. Besides, we will know a lot more about the economy and the election outcome between now and then and can then act with a better data base. But I am not convinced that the impact of this current economic situation really warrants all the declarations that the worst is over that we have had. Having said that, I also don’t underestimate that greed component. There has been a lot of money made, and lost, with the bubbles of the last ten years and being a conservative investor doesn’t mean you aren’t willing to profit when the opportunity presents itself.

Read Full Post »

Are we in recession? Are we going to be in recession? Does it make any difference? Does it make any difference to me? For most of us, only the last question is important. We are coming up on the end of earnings season and, all things considered, it wasn’t that bad. The Federal Reserve that oscillates between being worried about inflation and unemployment, had a pretty good week with the better than expected employment stats on Friday. Wall Street has been waiting to declare recession, declare the worst is behind us, and then get back to business as usual and the talking heads sure want to proclaim the worst over and encourage everyone to go back paying those commissions.

But, have we just had a shallow downturn and the DJIA is just doing what it does being a leading economic indicator and is forecasting what will happen six months from now? Good question. The large multinationals in the Dow have held up pretty well all through this. The techs have already been rebounding. The financials are still a buying opportunity and it is clear that Benny and the Feds aren’t going to let any of them go under. But will we be seeing a V shaped recovery? Best answer is a firm “maybe”. Benny B. has a few arrows in his quiver but basically, interest rates and printing money are the big ones he has and he has gotten to the point of needing to be very careful with them both going forward. There may be more rate cuts in the future but listening to Benny’s testimony, I think he wants to wait until the third quarter to see what the effect of the stimulus package and the rate cuts will be. Of course, that is barring anything dramatic happening. But Benny doesn’t have as many bullets left in the rate cut revolver as he had some months ago. And the rate cuts are not filtering to the rest of the economy to any great extent. Of course, as they cut, the dollar weakened and commodoties took off. Now if Benny and the Feds are through with rate cuts, the dollar could find a measure of stability but it won’t head back up in value until we start increasing rates and that is going to be a ways off. And of course it takes two to tango when trying to alter exchange rates. The rest of the world decided that inflation was more of an issue than economic growth or unemployment so they have by and large been on the sidelines as we cut interest rates. If we start raising rates will others, particularly Europe, start cutting rates? Doubtful. And in that scenario, the dollar is not in for a big run anytime soon.

What does this mean going forward? Maybe the bad news is behind us. Wall Street really hates to not look like the smartest guys in the room so if they believe that all the bad news is out there, they can go back to pumping and dumping. The important issue is now becoming whether we have seen the worst in the economy and whether there is a possibility of another shoe dropping. A short list of the factors that have not been dealt with would include:

– Real Estate – No quick fix here and the best guesses are now out to 2010 for a return to growth with another down year in 08 and a stagnant one in 09. For all the posturing in DC, there isn’t much that can be done or likely will be done other than to make this issue a political one for the election. There will not be any big increase in home equity to borrow against anytime soon. And the low rates mean that there could be a short respite from the resets. But with the tighter requirements on lending, many people are going to find they will not be able to refinance and the reset is still going to happen over time. So just because Wall Street desperately wants to believe they have seen the light at the end of the tunnel this week, Main Street might not feel so inclined until more aspects of the real estate mess have to be worked through and it will take time.

– Energy – May is typically the weakest month for oil pricing and this one will not be much of an exception. Here in Cali my guess is that we will easily see over $5/gal gasoline this summer. We are sitting at right around $4/gal now and this isn’t a peak month. More worrying for the energy companies is that demand has finally started to fall in the US. As people convert to more fuel efficient vehicles, they tend to stick with them for years so demand may not reappear here. But demand in other parts of the world will increase and that is going to make for a competitive marketplace with a bidding war. No, energy isn’t going to experience a big drop from either a stronger dollar or increased supply. It is just going to take an ever bigger bite out of people’s budget. Will gasoline and then natural gas and heating oil next winter force an inevitable slowdown in the economy going forward? And this one is not going to be a time limited event. People may find it difficult to buy their fifth cell phone in two years as it gets closer and closer to $100 to fill a car up with a tank of gas.

Dollar – A weak dollar is making an attractive environment for exports. Shame we don’t make more here but we don’t and haven’t for years. Whatever bump there is for exports from a weak dollar is about as good as it is going to get right now. If the dollar plateaus or even starts to strengthen, that will be it. There won’t be any opportunity to export our way out of this downturn. Imports are now seeing price increases although in a perverse turn of events, my company purchaser has told us that we are seeing better pricing on such things as office supplies than we have seen in years. Maybe this is just excess inventories working off but if you are interested in big ticket imported goods, sooner rather than later might be a way to save a few bucks. Once the dollar does strengthen, I doubt we will see it return to values we have just been through.

Politics – In a bad economy, the party in power is historically tossed out. Not a good sign for the Republicans. Whether the Republicans can keep the WH or not might be a pyrrhic victory. The Dems will almost certainly keep or even consolidate control of Congress. If the Dems take the WH, as the odds say they most likely should, then it is yet another factor for the economy to handle. I wouldn’t invest anywhere in healthcare with either the Clintons or Obama in the WH. And, to paraphrase Dan Rostenkowski, the Dems haven’t met a tax they didn’t like. Whether you feel we need to raise taxes or not, doing so with a fragile economy is the worst sort of folly. The Republicans are a party that has lost its way and cannot claim to be the party of reduced government size and spending as they should have been doing so people may not view them as an alternative. Whatever the outcome, the closer we get to November, the more focus will shift to the political side and its potential impact on the economy. The recovery that may appear to be underway this week could quickly be forgotten as the markets hedge the bets on the election outcome. That alone can induce a second dip. And, just as we have seen with the corn/ethanol debacle, if both parties try to outbid each other with a feel good economic package, the long term effects could be far worse than any short term bounce to get votes.

These matters are great fodder to academics to write books on or for the greedy on cable TV to once again look for ways to prey upon the unwary investor. But if it is your own money for your own lifestyle or retirement, these matters are more than just mental exercises. Have we seen the worst of the recession? Are we now going to be in recovery? Are we seeing a “head fake” that is just going to allow some minor portfolio rebalancing or have we seen the worst? Is the economy in the US still slowing with more fundamental issues yet to be addressed or potentially a “double dip” downturn yet to happen? I wish I knew. But being invited to share thoughts and perspectives that I have access to on this blog is a privilege and I will certainly take advantage of it. Guerilla economics is nothing to look down on. One thing I have seen is that the supposed experts on Wall Street or in DC normally haven’t a clue what is going on in this country. The internet is a great way to solicit input or be exposed to other views. Of course, most of it is worth what you pay for to get it. These are unique times in the economy and the financial world in general. Getting a handle on what is going on, and maybe finding a way to profit from it, is the name of the game for me.



Read Full Post »

Older Posts »