September 30, 2008

2 bad bailout deals out and what is next at bat?

By admin

The bailout deal that was rejected on Monday by the House of Representatives was a bad deal. And the result was a Congress divided, a media blitz, polispeak galore, finger pointing, and a 777 point drop in the Dow Jones Index.

Most focus on the drop in the Dow Jones. The media love to play that up. I even heard the number increasing as the night went on. Some newscasters call the drop “a nearly 800 point drop”, or “nearly a 1000 point fall”. Talk about exploiting the facts to gain viewership.

The fact is that nothing that happens will stop the drop in the market. The second that short-sales are allowed back into the market, bigger drops will occur. All that stopping these trades has done is increase the power of the drop. Because while the numbers look big right now, the actual affect is not nearly as big. That’s because of the current value of the Dow Jones Index. But as the Dow drops, these big sell-offs become more meaningful and powerful. And they feed a bear market like honey.

But the bailout, now trying to be spun into a “loan” by pundits and politicians, is horrible. Because it fails to answer 2 simple questions. How much is being assumed in bad debt, and how do taxpayers get repaid?

The first problem goes like this. Under the deal laid out on Sunday, at least 3 separate payments would be given to Treasury Secretary Paulson to buy bad loans. The value of what he pays for the loan is unknown. Would he pay the original price of the loan, the current value, the real absolute value? No idea, nor was one required by the legislation. Thus he could buy all the bad debt at the top price, ensuring taxpayers could never break even or be repaid.

The second problem is that there has been nothing said on how taxpayers get the money back. The money is coming out of our pockets. We know that. To the tune of about $10,000 per person. And it will likely be collected from higher taxes for EVERYBODY. But how are we to be repaid. Will we get tax credits in the future? Or a check? Or guaranteed lower taxes (though how much lower and lower than what level is yet another question)? If you can’t say how we will get repaid how can we believe we ever will.

To deal with these 2 major issues the politicians that were trying to rush this version of the bailout proposed this bit of eyecandy. Executives would no longer get ‘golden parachutes’. Yea! It’s nice that the Government is in effect starting on the path to regulate how much money anyone should be paid. It’s very socialist of them. Still I can agree that paying someone that bankrupts or severely damages a company millions is folly. Though I see no problem paying them is they create a bigger stronger more profitable company than they took charge of. But the legislation is unclear if a great executive doing a great job is free of the same stipulations and restrictions.

And all of this says nothing to the power suddenly endowed to the offices of Secretary of the Treasury and Fed Chairman. They get control of more money than 1/3 the countries of the world make combined. And if you think that Congress can watch over those positions and keep them in check remember that it was the brilliant and attentive eyes of Banking Committee leader Barney Frank that said in July of 2008 that Fannie Mae and Freddie Mac could not fail, and that he saw no problems in the financial markets.

And another unseen problem of the bailout deal that was thrown out is its effect on the nation. This deal would have effectively kicked out the last leg holding New York as the financial center of the world. And it still might happen. And with that loss of status means tens of millions of dollars lost to the nation and New York State.

This is not a game with obvious consequences. Some things have to be thought about. And because some of those most responsible for this mess don’t want the blame, they are insisting on the most speed in passing the buck and a deal.

The bailout will cost over $1 trillion by the time it’s all said and done. The stock market will fall as the dust settles and every industry with debtors lines up to be next to be paid. And eventually things will improve. Such is the nature of markets and trade.

But if the main questions I have asked are not answered in future bailout proposals, because of the rewording of what the deal is called, or political favor to a Presidential candidate, or rushing to soften the ultimate downturn of the bear market, or just because no one was smart enough to ask, then the real cost will be far worse than just the money thrown away.

Rating 4.00 out of 5

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September 20, 2008

What’s another $50 billion in debt?

By admin

Written by Michael Vass

The stock market was falling, the Government spent a quarter of a billion taxpayer dollars to bailout selected financial companies, and plans were being made to spend almost $1 trillion dollars on the bad debt still floating in the market. While all this is happening House Speaker Nancy Pelosi is trying to promote increasing the debt of the nation even more. How kind.

House Speaker Pelosi, who still has not publicly acknowledged her substantial investments in alternative energy, is now pushing a $50 billion stimulus plan which is similar in some ways to they prior $168 billion stimulus plan that was enacted earlier this year. That early stimulus check failed to do anything except push-off the eventual downward trend in the economy.

I was never in favor of the stimulus check plan. It was a waste of money. With the problem of foreclosures and slower growth the initial checks were used to pay down on debt and mortgages, as opposed to the purchases of new goods that was hoped for. Which seemed obvious to me.

This time Pelosi wants to spend the money

“…that would fund road, bridge and other construction projects, help low-income families pay upcoming winter heating bills, give more food stamps to the poor and help states pay the higher costs of health care for the poor.”

This plan is a little bit smarter than the first but still does nothing to help the people that need it most. Unless you work in construction building a road or bridge will not directly affect you. So that is a waste, and money best spent at the local or state level. Giving poor people more food does not help them learn skills or get jobs that will help them not be poor anymore. Though I agree letting people starve is not nice, in the long run it only trains them to rely on the Government more, as they have been trained to do since the 1970’s.

Of course another problem about the higher costs of food is directly tied to Nancy Pelosi’s investment portfolio. As is the higher cost of heating oil. Nancy Pelosi has held off discussions of domestic drilling for nearly the whole year so far. She has supported everything that will limit this drilling. She wants to build up alternative energy exclusively.

It will take at least 10 years, if not more, to effectively create any alternative energy sources. The one source currently being pushed is corn-based ethanol. Because it’s based on corn food prices are going up. Because only 5 states in the nation have pumps with ethanol, and the fact that only 2 allow public purchases there is a glut of ethanol. And Government mandates will increase that glut by 60% next year.

So effectively, Democrats and Speaker Pelosi are hurting the poor with their plans, and this additional stimulus plan is a band-aid on the wound they inflicted.

I have to wonder how this stimulus plan will help anyone. I have to wonder how this will do anything more than just temporarily hold at bay the problems Democrats have enforced in the nation.

Will this bill pass? Of course. Politically the timing is perfect. The Government is already bailing out the financial sector for $1 trillion, what’s another $50 billion. And how bad will a Presidential candidate look if their Party refuses to pass a bill that targets the poor. The average American does not connect one dumb political idea with another, nor do they see the connection of all these things to the domino effect they create in the future. So it will happen.

Of course that means that the Government will swell further, and the economy will worsen. And the taxpayers will become poorer, at all income levels. These issues are not a rich versus poor issue. If the economy is bad, every American is affected. And the plans being put in place are just trying to push those problems off the minds of Americans till just after the election.

Speaker Pelosi is deceptive in her refusal to acknowledge her personal benefit from her politically based ideas. Senator Obama, in supporting this idea, is ignorant of the real fundamental issues causing the problems. Democrats are too absorbed in political gain to deny this act of futility.

Still never fear, this bill will pass. It will also do nothing to benefit anyone. Especially when crude oil prices increase over the winter as they always do. Especially as food prices go higher as more ethanol is created and sits unused. Especially as domestic drilling sits on the background delaying any potential help it can garner to the public because its ultimate benefit won’t happen for several years (just as alternative energy will take a decade or more to be effective).

But not to worry, bigger Government, larger wastes of tax money, increased national debt, and inept plans from Congress are ok by Democratic standards. Just elect Senator Obama and continue a Democrat-led Congress and they will ensure that the Government will take care of you more; instead of you taking care of yourself. Because they know better. Just look at their record and you can tell.

Rating 3.50 out of 5

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July 14, 2008

Predicting the U.S. economy for 2nd half 2008 and 2009

By admin

Written by Michael Vass

**This post can also be found at Breaking News Blog**

Well how much fun are you having today? If you hold investments, it may not be a fun day at all.

Back in the 4th quarter of 2007 I said I believed the Dow Jones Industrial Index would hit 11,000. I thought this would be a move in the late 1st to 2nd quarter. I was wrong… on the timeframe. But this is not a pat yourself on the back kind of moment.

With Indy Mac having failed and fears rampant over whether Freddie Mac and/or Fannie Mae will follow there should be no doubt that the Dow will cross into the 10,800 area on Monday. Add crude oil prices that are continuing to rise on fears from Iran and you get a bad situation. But perhaps the real culprit for this current situation is the Fed (Federal Reserve).

The Fed has been providing banks extra money to ensure their solvency, but not requiring that loan reserves be increased. It’s kind of like stopping a leak in your tub by adding more water. The problem is not getting fixed and may get far worse. And all the panic about the mortgage industry seems to have done nothing but whip up polispeak from political candidates and political parties, each looking to sway voters.

Loan reserves must be raised at all financial institutions. That especially means Fannie Mae and Freddie Mac. And several institutions need to fail. That of course means that some people will lose their homes. Nothing can, or should be done about that.

When I some will lose their homes I don’t just mean the roughly 4% of homeowners that are in default. I include in that group those that will fail this winter due to the cost of heating oil increases. I expect that in total some 7% of homes are in danger of foreclosure this year. While it’s not a nice thing to say, they need to lose their homes for the economy to survive.

This is not unlike the enormous wash-out that occurred when the internet bubble broke in the stock market. Money was lost, as it should have been, and opportunities were created. Those that made bad financial decisions, whether corporate or individuals, lost and others benefited from that loss. It’s a standard cycle in the markets.

Of course what is likely to happen is that Congress (with it’s 9% approval rating – sure to go lower) will take taxpayer money and bailout homeowners and financial institutions alike. Thus more water will fill the leaky tub. Undoubtedly the current Administration will be blamed (even more than they should) and the war in Iraq (and possibly Afghanistan) will be identified as the cause of all these ills. Which is false.

The outcome will probably be a surge for Senator Obama, who prefers a bailout. This may lead to him being elected and higher taxes to pay for that bailout. And if anyone thinks a bailout of this size will be limited to just the top 1% of the nation they are insane.

I believe, looking at current factors several things are highly probable:

While each of these items may or may not happen they are all interrelated. I expect each item to happen, at least to the degree I stated, generally in the timeframe given.

As money tightens, gold will be a hedge and prices for all precious metals will soar again. Credit will get severely crunched, and credit card rates will fly. The debt load on the average American will increase from the current $6,000 to $8,500. Most of this increased debt will be from higher energy costs. Thousands of small businesses will shutdown.

As a result of all these things I expect that the Dow Jones will drop to 10,200 by December. If I am correct about Congress and Senator Obama – for the reasons stated – then I further expect a drop to 9,300 during 2009. A significant bear market indeed.

The main problem is that the solutions being looked at now raised taxes and increased liquidity, fail to resolve the actual problem. And the combination will weaken the dollar, to a point where holding U.S. bonds is unattractive. I won’t even mention the increase in retirees and Social Security.

But there is opportunity. I see the housing markets as a great buy, for those willing to hold for 5 years. Buys in the secondary city markets will probably do best having a lower purchase cost and holding value better.

Several financial stocks will be excellent buys. Some have far better balance sheets than others, but will be blasted by the same investor fears as those in bad shape. Companies like Citigroup are trouble spots as they reinsure their own loans and thus hide them better on the balance sheets. Financials will lead the markets down, but they also will signal the start back.

Coal will likely start to regain interest in the quest for alternative energy sources. I expect nuclear energy will also get a push, with at least 1 new nuclear plant being authorized to be built in 2009. I expect a call to switch to ethanol produced by grass and sugar to go initially unheeded until mid-2010. Further harming the ethanol push is the fact that there will be a glut of ethanol by mid-2009 through 2011.

Bond rates will be more attractive in 2009 than today with the likely increases in interest rates. Of course inflation rises will remove that benefit.

There may be other sources of opportunity but they will be guided by factors including but not limited to:

That is the outlook that I have based on what is currently ongoing in the world today. Some of this is just my on interpretation, some my deduction. But I believe that if only ½ of my expectations occur, the general outcomes as stated are accurate.

But look around and determine your own answers. Better to be prepared than taken by surprise.

Rating 3.00 out of 5

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May 21, 2008

Is a new Dollar a waste of time and money?

By admin

Written by Michael Vass

If you are anything like the average person in America when you think of the Treasury you might think of the IRS first. Some may think of the Federal Reserve. Even a few may think of the Secret Service. But how many would think of a dollar bill?

Obviously we all know that the Treasury is responsible for making the money we all use every day. And of the trillions of dollars made in the past 40 years or more, little has changed besides the signatures on the various denominations. In fact the Dollar has remains the same for so long that the term greenback, or greenmail, and so on are easily recognized to represent or involve the U.S. currency.

It’s also obvious to anyone who has lived overseas or collects currency from overseas (or as close as either neighboring nation) that we are a rarity in the world. We are currently one of the few nations that can claim a uniform size and color to its currency. But that was until today.

Why? Because there exists another thought that some Americans think of when they think of the Treasury or the currency. It’s along the lines of “pain in the a**”. And their reasons for saying so have merit. Because they are Americans that have problems with their vision or are blind.

So I can understand their issue. Every bill looks the same as another. It can be quite difficult to work out. But this is hardly a new issue as I mentioned before.

In fact, when the Government was sued because of how the Dollar looks and feels they went into court and said just that. The blind and vision impaired have long ago adapted to the currency question, and that to make changes would cause extreme financial difficulty. But the Court of Appeals wouldn’t buy it. So there may be changes in the works shortly.

Now I am not a fan of changing the Dollar. I agree that the cost is not justified, near term or long term. More aesthetically I always dislike the way European currency was of differing sizes and colors. It reminds me of Monopoly money more than a currency. I just never could take it too seriously. And with some of the exchange rates I’ve seen in my life, some of those currencies were worth just about that.

But perhaps more than that I disagree with the Courts reasoning. They seem to be creating laws from the bench. They are creating arguments that prosecutors are supposed to make. And they are doing so with a sarcasm that is, in my opinion, unbefitting judges of their level.

“The court said using the government’s logic, people could argue there’s no need to build wheelchair ramps because people without use of their legs can crawl or ask for help from strangers.”

That logic, if it has been summarized correctly, is insulting. The comparison doesn’t work unless you want to adopt an ultra-liberal interpetation. Such an interpetation is fine – if you are not a judge making a landmark decision. If for no other reason this makes them wrong.

Of course there are many overseas that have their own snarky, bitter and twisted, bollox comments about America finally following their lead. But since I don’t make fun of those currencies, even though some of their bills look more like poor hankercheifs – and are valuable enough to be used as one – I’m not going to pay attention to that.

What do you think? Do you want an orange Dollar bill the size of maybe a Candyland set money, and a blue 5 Dollar bill the sice of a small envelope? Do you think that the inevitable lobbying for a pink currency bill, or a yellow bill, or a black one is worth your taxes? Is this the issue we really want the Treasury to increase their budget (and inevitably our taxes that fund their budget) on? Or would you prefer to keep the dollar the same and get a better tax code, or maybe a better Fed Chair that can stay on top of the economy? 3 Judges have made their decision for you, but at least you still get an opinion here.

Rating 3.00 out of 5

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2 bad bailout deals out and what is next at bat?

What’s another $50 billion in debt?

Predicting the U.S. economy for 2nd half 2008 and 2009

Is a new Dollar a waste of time and money?

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