The Economy Guy

Bonds were the “safe haven.”  All international monies moved to the US and bought bonds – forcing the Dollar higher and bonds below 3.5%.  This looks like the FED must reduce rates in the near term.

Oil and gasoline continued their downtrend below $90 as all markets think the world is going into a recession – therefore will use less energy.

Gold surged up today on all the fears around, and remains a reasonable buy at its current level.

In the news today….

It’s all about the markets.  So, when Congress DIDN’T pass the $700B legislation, stocks fell 777 points.  Today, the first day after Congress DID pass the $850B legislation, stocks fell 370, but was down almost 800 points at one time.  Do you remember that some Congressmen/women were intimidated by the original 777 point fall, and the public started calling them worried about their 401K’s,  and pensions?  That 777 point drop convinced some lawmakers to pass the next bill.  However, the market has no emotions or loyalty – it only represents the fear and greed of all the people owning stocks.  Not a pretty picture right now for all those 401Ks and Pensions.

We haven’t heard about any pensions failing yet, but we will in the next year.

Dinner Conversation Tonight

Let’s talk about Wachovia – right now we have a right between Citigroup and Wells Fargo – both trying to buy the Wachovia assets. The FED is now stepping into the middle of the fight – and will probably direct that some of the assets go to Citigroup.  

Why would the FED favor Citigroup – even if it costs taxpayers more money this way???

Could it be that Citigroup actually NEEDS the assets of Wachovia to stay afloat?

Everything else went sideways, except Gold that fell $11 – Gold is now a major BUY.

In the news today….

Congress passed the (now) $850B bailout bill.  Everyone pilled on their favorite pork, and all of Congress should be voted out of office for not just addressing the issue.  

Wells Fargo bought Wachovia today in a share swap that does NOT require any FDIC guarantees.  What happened to Citigroup?  They required FDIC guarantees, and didn’t pay as much as Wells Fargo.  This is a great example of the market working without government intervention.  The original FDIC intervention forced a Citigroup marriage, and could have cost taxpayers some money.

The real news was the job loss report – 159,000 jobs were lost last month.  This was far greater than anyone expected, and foretells the recession that will become absolutely more visible through the remainder of the year.

Tonight’s Dinner Conversation

The current symptom of the problem (NOT the cause) of the problem we are facing is the housing market meltdown.  Does that make you sit up and question the sanity of all the news reporters?  I hope so.

The housing house of cards was caused by having toxic mortgages become common in the US economy, and Fannie / Freddie were the vehicles of giving out these toxic mortgages to buyers who they KNEW couldn’t afford the mortgage.  Why would a profit motive company with Fannie or Freddie do that?  Because they were told to do it.  Who told them?  And what was their motivation?  

That’s the question for you to ponder.

Bonds continue to rally as the “safe haven” for money coming out of stocks.  People are just nervous and selling stocks and putting the money in bonds right now – a “safe play.”

The Dollar had a major rally today, and Gold had a major fall off in price.  Gold is now a BUY – and we bought some in our household today.

Oil and gasoline continue to plummet as a recession is clearly written on the wall.

In the news today….

Everyone is waiting for tomorrow to see what the House will do with the Senate’s bill.  It is no longer $700B, it is now $800B.  It’s so nice to be so rich.  Or, are we??

Sen. Reid caused a run on insurance company stocks today by announcing that an insurance company that everyone knew was at the brink of bankruptcy.

Unemployment claims hit 497,000 last week, the highest since 9/11 (anything over 400,000 is cause for recessionary concern.)  However, don’t get too excited because a lot of those claims came from the hurricane damage areas.

Factory Orders fell 4% last month – a lot more than anyone expected.

Commercial banks have upped their borrowing to $44.5B each day from the FED – this is about a 10% increase, and shows the strains on the banking sector from the liquidity crisis.

UBS has said they will be announcing a quarterly gain for the last quarter.  This is great news for anyone as big as UBS to have turned the “profit” corner.  This could be the first of the old merchant banks showing that things are actually getting better – in spite of their “bellying up to the trough for the bailout slop.”

Food for Thought Today….

Here is the million (or trillion??) dollar question – Will the government bailout actually work?  The core idea is for the government to purchase the toxic securities, and then everything will be hunky dory.  But, what happens if the banks still don’t want to lend to each other?  Is there another shoe out there ready to drop – that the financiers know about, but we don’t know??

For sure, the US is going into an even more severe recession.  As everyone knows, I think we are already in a recession.  But, the government numbers are going to prove it in the 4th quarter.  What does this decrease in spending in the US economy do to our liquidity crisis?  No one is talking about that.

It has been reported that there is a run on safes and guns in the US right now.  That’s because people are worried that when (not if for those folks) they take their money out of the bank, can they protect it??  A run on a bank is not a pretty thing.  Wachovia and WaMu both had “silent” runs on their banks, and that definitely PUSHED them into bankruptcy.  If a bank loses its deposits, it has to rein in loans – and that’s tough right now.

Bonds are still a place for “safe haven” money.  People who are nervous of having their money in stocks can purchase treasuries or money market funds, and know they’ll be getting interest, with little to no downside.

The Dollar and gold moved sideways today too.

Oil and gasoline fell as supplies were higher than traders expected.  Any excuse will do to move this crazy market.  Also, my private investigation of gasoline prices in AZ shows that prices are about $0.75 too high right now – based on the futures price.  Someone is making a bundle of money by buying low, and selling (at the pumps) high.

A new government program is kicking off today to help 400,000 homeowners who have those lousy mortgages, but don’t want to lose their home.  They must be paying at least 31% of the income in mortgage payments, and have made 6 months of payments to qualify, as well as bought their house last year or earlier.  Mortgage companies and banks must voluntarily reduce the principle and terms of the note – and there is the real rub – will they do it, and if so, by how much??  PS – what about those terms – banks can make a lot of money on the terms of a note.

For those of you who care about LIBOR – it’s used in some ARMs and private lending – will be interested that the credit crunch has driven LIBOR up to a near term record 4.15%.  LIBOR is the London Inter Bank Offer Rate, and represents the interest that one bank pays another, when borrowing overnight.  This is what happens when banks just don’t lend to each other – and are scared of doing it.

That implies that our crazy market has produced some VALUE out there.  The question for you to answer tonight is “What investments are currently priced at 50% of their value?”  (Value is the Present Value of all future cash flow from the investment.)

Some of the things that I think of are Corporate Bonds, Some Stocks (although I don’t like stocks), Closed End Funds (lots paying over 10% interest), ????

Basically all the other market unwound part of the gains/losses they made yesterday.

In the news today….

Congress is talking about having a new bill drafted for the bailout.  The people who voted against the bill yesterday are saying they want a new bill drafted from the bottom up; not just a rehab of the last bill.  While it won’t take many more votes to pass it this time around, it would be a major market disaster if it fails a second time the vote is taken.

FDIC recommended that its limits be raised from $100K to $250K per account.  Both candidates have endorsed this recommendation.

July home prices fell 16% in the last 12 months.  And, this is the major cause of the problem with that toxic paper.  If house prices continue going down, Paulson will be coming back for a second major injection of funds from Congress – assuming the first one passes.

The Dollar went sideways with the Euro losing value, but the Yen gaining value.  One great difficulty for currency investors is “What currency is strong?”  It’s not the Dollar, but with the USA not fixing the financial mess – all the other currencies look very vulnerable too.

Gold went up slightly – a great sign in this chaos.  Gold is a clear winner in a crisis.

Oil dropped over $10 today with gasoline dropping too.  Donald Trump was interviewed on TV today, and he said oil would drop, and continue dropping and might hit $20 again – and the Middle Eastern countries couldn’t do anything about it.  We’ll see.

By the way, did anyone besides myself miss what was really in that bill that failed?  I never saw any details discussed or published – only generalizations.  If the government is going to spend $700B of our money, I really would appreciate some TRANSPARENCY – and that’s why Congress earns its low rating again.

When Donald Trump was interviewed on TV today, he made one very astute comment in my opinion.  He said “Why is Congress giving money go buy toxic paper, and NOT asking for some good paper too?”  Put yourself in any similar negotiation, and you would ask the same thing.  I consider Donald Trump’s comment as very illuminating on the lack of thinking in Congress.

The meltdown continues with the banking sector:
• Wachovia is now part of Citigroup – and Citigroup now states that “we are too big to allow to fail.” - comforting words??
• Pieces of Lehman are being purchased.
• 26% of Morgan Stanley is now owned by Japanese company – Mitsubishi.
• FORTIS bank sold 49% of itself to the Dutch, Belgian and Luxembourg governments
• Germany bailed out the No.2 real estate mortgage company – it had a $51B line of credit – this is a big one.
• Iceland bailed out one of its banks
• The UK took over the Bradford & Bingley bank.

The FED pumped $630B into the financial systems of the world today – by expending the limits on some key lending methods.  Now, that’s some bucks.

The Presidential debate is on tonight – so I got that prediction wrong.  I wish both candidates the very best.

Wachovia and Citigroup are in discussions on a merger – this is very preliminary so should be ignored – except for the fact that both of these banks are in financial trouble, and should be put on the ‘watch list.’

Tomorrow is easy to predict right now.  Stocks will be DOWN big time at the open.  How they do throughout the day will be determined by statements of credible Congressional sources.  Tomorrow’s opening is like shooting fish in a barrel.  By the way, is there any doubt now why the SEC has stopped ‘naked shorts’ on all financial stocks (about 900 stocks)?

Bonds are increasing interest rates – day after day.  The Bond market has voted on the bailout, and it’s negative for the economy and bonds are predicting inflation.  They could be wrong, but that’s what the market is saying right now.

The Dollar went sideways.

Gold fell a little – and gold too will be up tomorrow morning.

Oil jumped a little today.

In the news today….

It’s too bad that no one in Congress listened to Greenspan in 2005 when he talked about all the troubles with Fannie/Freddie.  Of course those scumbags who are head of the key Congressional committees were around then too, and were  ‘in the pocket’ of Freddie/Fannie.  Congress has let us down again, and the chickens are coming home to roost right now.  Congress is pointing fingers at the those ‘greedy Wall St execs.’  (And those execs deserve all that finger pointing.) Congress should look in the mirror.  I would like to see all their salaries and pensions stopped (for their lack of service to the citizens of America.)  I hope all the readers of this article know the position their representatives in the House and the Senate have taken on economic issues over the past years.  Vote accordingly.

President Bush held a meeting in the Oval Office today (including McCain and Obama) plus all the usual suspects.  Obama had scheduled a press conference at the end of the meeting – and he scheduled it before he went into the meeting.  That showed way too much confidence in my opinion – as well as ‘playing politics’ in the middle of this crisis.  He didn’t show up after the meeting.  That was the first indication that something “has gone wrong.”  This is a very serious problem, and there are serious misgivings about giving Paulson sole, unfettered control of $700B.  Part of his demands are that no one – not even Congress – can challenge any of his decisions.  Does that make you nervous?  It makes a bunch of Senators nervous.

Today it was a (rumored) given that McCain would be going to the debate on Friday night.  I predict he won’t be going.  The problem is too big, and needs all Senators in DC – not in Mississippi.  It’s not clear what Obama is doing behind the scenes – but, he didn’t want to go to DC today and only went because the President invited him.  Politics are riding high in this situation, but I want the economyguy readers to look through the fog of politics and looks for what’s really happening regarding a resolution of the bailout.  So far, the bailout is NOT part of the presidential race – and Obama and McCain agree on most important points.

One minor point in the news is that JP Morgan is going to purchase the branches and deposits of WaMu.  Good-bye WaMu.

In the news today….

The main news today was that Congress rejected the Paulson/Bernanke $700B bailout plan.  Sen. McCain stopped his campaign to work on the bailout exclusively – even cancelling Friday’s debate.  Sen. Obama said he would work to get a bailout plan through Congress – but wants the debate on Friday.  At least politics continue.  Pres. Bush will be talking about this issue tonight to get pressure on Congress to pass something.

Is this a serious issue?  Yes.  You probably heard that McDonald’s can’t get a loan to put new coffee machines in its stores across the US.  Why?  Banks won’t loan money to anyone for any reason.  This is very serious.  My bet is that Congress will pass something – there is just too much at stake.  When?  Next week.

Oil, gasoline, gold and the Dollar just gave up a small amount of their recent gains/losses – so not much news there today.

In the meantime, Warren Buffett’s Berkshire Hathaway purchased $5B worth of Goldman Sachs – and this is a major vote of confidence in the US economy by Warren Buffett – and in my opinion, he purchased the one company least affected by all those lousy bets on the housing market.  Goldman Sachs came out of this mess fairly unscathed – but, they clearly needed some money too.

The markets are now worried that the Bernanke/Paulson bailout plan just won’t work.  After the Freddie/Fannie fiasco of giving Paulson all the money he needed, the current $700B seems like that last guess was fairly worthless regarding the crisis.  Do these guys really know what’s going on?  You decide.

I am worried when the President says we are fixing the “root cause” of the problem with this bailout.  In my opinion, the root cause of the problem is not the housing market, or a credit crisis – they are just symptoms of a much bigger problem – the US trade deficit which keeps pumping money into the US and causing bubbles that burst.  It is also causing a major deflation (cause of the liquidity crisis) and a major meltdown in the value of the US Dollar.