The Economy Guy

Stocks blasted forward by 2% on optimism in the stock market.  The Euro, gold, and bonds went sideways.

Oil and gasoline jumped up as traders decided that oil was just too cheap.

In the news today……

Mortgage Rates HIT RECORD LOW – according to Freddie.  A 30 year mortgage is now 4.56%, the lowest since 1971.  A 15 year mortgage is 4.01%.  These are average interest rates (some higher, and some lower.)

GM to buy AmeriaCredit – for $3.5B.  Why?  In order to make more risky auto loans and expand its sales?  Risky loans were one of the evils that got GM into trouble in the first place.  As YOU own GM (the US taxpayer is a 61% shareholder), were you asked if this was okay?  Are you “represented” in Congress in this action?  I doubt it.  Oh, by the way, where does this $3.5B come from?  More to follow…..

Unemployment Claims – jumped to 467,000.  This is a “seasonally adjusted” number – so it isn’t real, but it does give one important message.  Getting is job is VERY HARD, and people’s demoralization over employment opportunities is realistic.

Existing Home Sales – FELL 5.1% on a seasonally adjusted annual basis – some fairly meaningless words to obviscate the truth.  The truth is that home sales are falling, and will continue to fall.   The “inventory” (that’s a word for the number of homes on the market for sale) rose 2.5% last month to 2 million homes – and this is a 9 month supply of homes if they sell at the current rate – but, the rate is falling, so it will just take longer to work off this inventory.  The median price of homes sold was $183,700, up 1% from last year – this is the only bright spark on the picture, but don’t hold your breath.

Congressional Confidence – hit an all time low of 11% today.  Rather than just crow about how much everyone hates Congress, I would like to take this opportunity to talk about what this means.  First of all, it means that we don’t like what Congress is doing “to us.”  We have a representative democracy, called a Republic, and the folks we vote into office to represent us better do it, or we will vote them out the next opportunity.  At least that’s the theory.  But, there is something fundamentally wrong with Congress today and yesterday too.  You might ask what Congress has to do with the US economy; but I think the majority of you know the answer to that question as I continually point out their insane, dumb and stupid economic decisions.  But, more importantly, I want to talk about the fact that we have been trusting Congress less and less over the years as seen in the following Gallup Poll graph.

 

It doesn’t matter what power is controlling Congress.  Americans are disliking their Congress more and more.  There is something “fishy” in America, and it is time we cleaned house once and for all.  My continuing opine to “Throw the Scumbags Out” is not the ramblings of an insane loner living in a cave.  It would fundamentally change this graph, and if we didn’t like the results of our elected representatives, we would throw them out all over again.  Think about this seriously.

Economyguy ALERT

If you are holding municipal bonds in your portfolio, it is important that you read this alert.  The medium term risk for municipal bonds is increasing as states, cities, etc are moving toward default.  While the FED will probably come to the aid of the municipal market to prevent a meltdown, it probably won’t come to the aid of any given city or state, and certainly wouldn’t hold up bond prices to protect investors.  The FED will let your muni bond portfolio devalue.  Most municipal bonds are not insured – so don’t count on that.

There are Credit Default Swap insurance available for municipal bonds.  Illinois and California bonds must pay over 350 basis points, as compared to Spain where it is about 280 basis points.  In other words, the markets are saying that a California or Illinois default is more likely than a Spanish default.

Compre the return on the  muni bond to US Treasuries, and you will probably find the amount of added interest is not great.  It certainly isn’t worth the increased risk of a falling bond market.  Consider eliminating muni bonds from your portfolio and replacing them with equivalent US Treasuries.  Consult your financial advisor and get a second opinion.  The purpose of this alert is to get you to start thinking for yourself.

Tonight’s Dinner Conversation…..

The new Financial Regulatory Law, and what it means to you….  Well, as you know, I am against this new law.  There is probably a good provision or two hidden among the massive legislation, but it will be hard to find as you must pay more, and more, and more, and more…. to get the services you already use.  For example, the “unfair or deceptive” practices identified by the FED prior to the law’s enactment have disappeared.

Here are my main objections:

1. The bill doesn’t address the root causes of the financial meltdown.  The root causes were low FED rates and Fannie/Freddie/FHA.  Here are some details:
   
   1. Without the FED low interest rates (to solve the stock market bubble) there could not have been the “teaser mortgage rates” that enticed people to take out impossible mortgages.
   2. Fannie/Freddie/FHA gave loan guarantees to banks making the loans in the first place – so there wasn’t any risk for the banks making the loans.
   3. So, today Fannie and Freddie continue to make those guarantees, and almost all mortgages today go to Fannie and Freddie.  The one big difference today from before = YOU ARE THEIR OWNER, and of course, you pay all the bills when they come due, and they’re coming……
   4. FHA continues to guarantee loans too, but one big difference.  FHA also is taking SUBPRIME mortgages today, and YOU OWN IT TOO.
   5. Congress put political pressure on Fannie/Freddie to take bad loans (think of Barney Frank), and nothing has changed with Congress.  Even the same people are there to harass Fannie/Freddie, and as the US owns them, they have more “say” on the way Fannie/Freddie operates.
      
2. “Too Big To Fail” is now a law.
   
   1. Do you remember as ALL politicians said that this new law would eliminate TOO BIG TO FAIL?  Well, they lied.  Now, the government MUST take over these banks if they are going bankrupt.  And guess who pays the bill AGAIN?  
   2. It also allows the government to take over any company that “in the mind of the government” could endanger the US economy.  That particular power is rather sweeping, qne therefore, dangerous.
      
3. It costs you more money.
   
   1. The new regulations touch every financial transaction you can think of, and many you can’t think of.
   2. Organizations must have “compliance officers” as employees of their organization to insure that they follow the new law.
   3. All this costs money.
   4. YOU WILL PAY – one way or another – either higher costs or lower services.
      

Are you happy yet?  Did you think it would be any different?  Remember who voted for it?  Who stood up against it?  I say (again), throw all the scumbags out at the next election.  They continue to do damage to YOUR pocketbook.  It’s more polite to say they are damaging the economy (fewer jobs, higher costs, bigger government) but in reality IT HITS YOUR WALLET/PURSE!!!!!!!!!!!!!!

And, as one small way of showing the results of this new law, the 3 rating agencies (S&P, Moody’s, Fitch) have STOPPED giving out their ratings as of yesterday so they can take legal advice on the new law.  You see, the new law makes their liable for their ratings, and they would have been sued out of existence when the economy blew up if this law had been around.  (Remember that they were putting AAA ratings on real JUNK, and were a big part of the problem.)  

The result of their actions are:

1. The bond market is frozen this morning.
2. No new bonds can be issued without a rating.
3. Maybe this is the beginning of a major revamp of the ratings system – top to bottom.
   

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,322 (up 202)
10 Year Treasury Bond – 2.93% (up 0.04%)
Euro – $1.2889
Gold – $1195 (up $4)
Oil – $79.08 (up $2.52)
Gasoline – $2.15  (up $0.08)