Finance Articles 2008-11-18

Fighting the financial crisis - story
- Henry Paulson pats himself on the back for what he is doing

Triumphant return of the gold bears

Five Things You Need to Know: Is This the Bottom?
- we have not yet seen the lows for the year based on my interpretation of some DeMark price exhaustion technique indicators as well as the state of credit markets.

How low will the S&P 500 go
- Nov 18, 2008 - Predicting 680

Could GE Collapse
- AAA record, but stock crashing from $53 to $17 - something is wrong.
- In mid-March 2008, Mr. Immelt publicly confirmed that GE would meet earnings expectations of $0.50 to $0.53 per share for the quarter ending March 31st. When GE reported earnings of $0.44 per share in early April, the world was shocked. The stock, which had reached a yearly high of $37, dropped 16%, to $31. Knowing that GE always has excess reserves to manage their earnings made the magnitude of the miss literally incredible.
- On September 25th, with the stock trading at $25.50, Immelt lowered GE's earnings guidance, suspended its $15 billion stock buyback plan and declared no outside capital was needed. One week later, he convinced Warren Buffet to invest $3 billion in the company by paying him an annual dividend of 10% while granting him warrants to purchase $3 billion of common stock at $22.25. GE then sold $12 billion of additional shares at $22.25 to the public.
- These weren't the actions of a company or CEO in control of its fortunes. AAA-rated companies don't have to pay 10% interest rates. Credit default swaps protecting against GE Capital default traded as if GE were a junk-bond credit.
- How can investors have confidence in a company that bought back 97 million shares for $3.1 billion at an average price of $31.69 in the first 9 months of 2008 - then issued $12 billion worth of stock at $22.25 in October?
- Not only did GE buy back $3.1 billion of stock in 2008, it also bought back $27 billion of stock in the prior 3 years at an average price of $36.46 - in effect, buying high and selling low. Were Mr. Immelt focused on something other than beating short-term earnings goals by wasting $30 billion on share buybacks, he wouldn't have had to beg Warren Buffett for $3 billion last month, and on very poor terms.

Failed trader fails to commit suicide in Brazil financial exchange - story
- 36 year old trader was in the interest rate futures pit, with $21 billion of dail contracts being traded

Chinese put $561 billion into rescuing their businesses.

Why is the dollar rising? - http://www.minyanville.com/articles/BBY--jwn-consumer-retail-recession/index/a/20019
- The estimates for the deficit next year are close to $1 trillion. But if the trade deficit is "only" $500 billion, that means that the appetite of foreigners for US debt will be less than half what is needed to finance the deficit. Where does the difference come from? US citizens and corporations, primarily banks, are going to have to buy the difference or the Fed will have to monetize a portion. Or rates on longer-term debt could go high enough to entice foreigners to buy US debt.
- Higher rates would be a drag on the US economy and especially the housing markets. They would also cost taxpayers a lot in additional interest-rate expenses. Total government debt is now $10.5 trillion, with the public (including non-US holdings) having $6.3 trillion. The average interest rate paid on that debt is 4.009%, and for fiscal year 2008 the interest expense was $451 billion. Add another trillion and the interest paid would soon rise to $500 billion.

story
- So I'm converting myself to a bank holding company.
- It's a strategic move that will allow me to accept deposits, which is pretty cool (I'll have to award interest to my depositors, of course, but that will fluctuate according to how deep and how often the Federal Reserve cuts interest rates, so I should be in the clear). But, more importantly, it will make me eligible for a piece of the $700 billion bailout.
- The way I see it, all I have to do is prove that I made some really irresponsible decisions, that I failed to spot trends and get out ahead of emerging technology, that I basically continued to operate like I was permanently stuck in 2004, when cheap money padded everybody's bottom line - and that I never, ever, once considered the possibility that the good times wouldn't roll in perpetuity.

Why Debt is now best bet - story
- "The national budget must be balanced. The public debt must be reduced. The arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced. If the nation doesn't want to go bankrupt, people must learn to work, instead of living on public assistance." - Cicero, 55 BC.
- I hope that this short analysis drives the point that, as absolute return investors, my firm has chosen Mortgage Backed Securities over stocks and Treasuries, as I feel they possess the best absolute return risk/reward characteristics. Corporates are cheaper than equities, and I doubt that neither the economy nor stocks can recover meaningfully until credit spreads begin to behave.

30 Reasons for Great Depression 2 by 2011 Story

1. Dot-com crash
2. Subprime meltdown - Fed Chairman Alan Greenspan's admission of his failures in congressional testimony, prove that if he and other Reaganomic ideologues weren't so myopic and intransigent about proving their free-market deregulation theories, they could have acted earlier and prevented today's colossal mess.
- Note: Not mentioned: What about Democrats demanding that banks loan in bad areas, or be accused of redlisting?
3. Megabubble cycles
30 'leading edge' indicators of the coming Great Depression 2 - Every day there is more breaking news, proof Wall Street's greed is already back to "business as usual" and in denial, grabbing more and more from the new "Bailouts-R-Us" bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas – anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.

30 indicators:

America's credit rating may soon be downgraded below AAA
Fed refusal to disclose $2 trillion loans, now the new "shadow banking system"
Congress has no oversight of $700 billion, and Paulson's Wall Street Trojan Horse
King Henry Paulson flip-flops on plan to buy toxic bank assets, confusing markets
Goldman, Morgan lost tens of billions, but planning over $13 billion in bonuses this year
AIG bails big banks out of $150 billion in credit swaps, protects shareholders before taxpayers
American Express joins Goldman, Morgan as bank holding firms, looking for Fed money
Treasury sneaks corporate tax credits into bailout giveaway, shifts costs to states
State revenues down, taxes and debt up; hiring, spending, borrowing add even more debt
State, municipal, corporate pensions lost hundreds of billions on derivative swaps
Hedge funds: 610 in 1990, almost 10,000 now. Returns down 15%, liquidations up
Consumer debt way up, now at $2.5 trillion; next area for credit meltdowns
Fed also plans to provide billions to $3.6 trillion money-market fund industry
Freddie Mac and Fannie Mae are bleeding cash, want to tap taxpayer dollars
Washington manipulating data: War not $600 billion but estimates actually $3 trillion
Hidden costs of $700 billion bailout are likely $5 trillion; plus $1 trillion Street write-offs
Commodities down, resource exporters and currencies dropping, triggering a global meltdown
Big three automakers near bankruptcy; unions, workers, retirees will suffer
Corporate bond market, both junk and top-rated, slumps more than 25%
Retailers bankrupt: Circuit City, Sharper Image, Mervyns; mall sales in free fall
Unemployment heading toward 8% plus; more 1930's photos of soup lines
Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists
China's sees GDP growth drop, crates $586 billion stimulus; deflation is now global, hitting even Dubai
Despite global recession, U.S. trade deficit continues, now at $650 billion
The 800-pound gorillas: Social Security, Medicare with $60 trillion in unfunded liabilities
Now 46 million uninsured as medical, drug costs explode
New-New Deal: U.S. planning billions for infrastructure, adding to unsustainable debt
Outgoing leaders handicapping new administration with huge liabilities
The "antitaxes" message is a new bubble, a new version of the American
dream offering a free lunch, no sacrifices, exposing us to more false promises

At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan's Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America's problems will take years and will burn trillions.
He sees "nothing but large increases in the deficit ... I think it would be worse than the depression. ... Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." It'll get worse because "the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government."
Reuters concludes: "Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes. 'I just want to get people thinking about this, and to realize this is a road to disaster,' said Whitehead. 'I've always been a positive person and optimistic, but I don't see a solution here.'"

Home builders lamenting economic crisis - Sandy Dunn, Chairman of NAHB story

Tough times getting even tougher in Sin City

Recession tightens grip on Las Vegas as visitation, spending fall off a cliff

MGM Mirage (MGM:MGM Mirage
Last: 10.65+0.07+0.66% 4:01pm 11/18/2008
MGM 10.65, +0.07, +0.7%) , Boyd Gaming (BYD:Boyd Gaming Corporation
Last: 3.90-0.02-0.51%
4:05pm 11/18/2008
BYD 3.90, -0.02, -0.5%) and Las Vegas Sands (LVS:las vegas sands corp com
Last: 6.26-0.27-4.13%
4:00pm 11/18/2008
LVS 6.26, -0.27, -4.1%)
Wynn Resorts (WYNN:wynn resorts ltd com
News, chart, profile, more
Last: 38.92-0.54-1.37%
WYNN 38.92, -0.54, -1.4%)

story
Construction costs decreasing