Behind the Scenes - Potpourri

The Federal Reserve Board has rejected a request by the U.S. Treasury Secretary for a public review of the central banks' structure and governance because they feel it is a threat to their independence. Again, I think that 'transparency' is very important at this time in our country and this is a second attempt to prevent the public from seeing clearly, the first refusing to provide the list of banks receive government loans that I discussed in previous blogs.

The FDIC is looking at borrowing money from the big banks to get their funds to cover ongoing bank failures versus from the U.S. Treasury. Bankers and lobbyists strongly support this so there is a red flag here. This marriage is interesting in the respect that these banks have government loans and here is the government borrowing their own money in some respect. Does this make sense?

Also, on a similar subject, AIG's CEO has requested that the government trim the interest rate and extend the time to repay their loans back. And the government is actually considering it as reflected in the stock price. This example of taking care of the 'big' guy and letting the individual follow a less apealing path is inconsistent and another red flag.

As I mentioned in previous blogs, when the foreclosures reach bottom, then we know that recovery is underway in a practical sense, although in a statistical sense all the experts say that the recession is over. We know that the banks having been holding off putting foreclosed homes on the market, and they also have been holding back from foreclosing on delinquent mortgage holders. Given this delay, I see the housing recovery extending at least another year. And I saw that commercial real estate prices declined 1% in June and 5.1% in July; an overall decrease of 31% since last year. So this sector is now picking up steam and guess who holds the mortages; banks. Keep an eye on these statistics. It makes practical sense that this part of the real estate market will follow the path of the residential market. I won't be surprised if the government tries to intercede.

Watching the stock market barely moving up or down during this month, on a daily basis is very interesting. It is acting contrary to its historical past and I'm wondering what is going on behind the scenes.

Finally, I want to mention a subject that I usually don't. The top general in Afghanistan said that without more troops, the battle will be lost within a year. Ms. Clinton came out and pushed back against his warning and said that there are 'very expert military analysts who say the exact opposite'. The general also has been told by the Pentagon not to request troops. This situation creates much consternation for me as I lost high friends in the Vietnam war, so I have some experience with this kind of behavior by those who don't listen to those who are in the know. To be in the know, you have to experience it, then you move away from theory and opinions. I definitely think we should withdraw from that country. History shows that more troops is not the answer. Ask Russia. They spent years fighting in Afghanistan and finally withdrew because they could not win. Yes, they were there for a different reason, but it does not matter. This one time we can history and change the pattern of this country. Otherwise, history will be given the opportunity to repeat itself, and it seems that is what the human does.

Irrational Exuberance

As Greenspan coined, 'irrational exuberance' this is certainly happening in the banking and insurance industries this week led by AIG, FNM, FRE, and C. All of these companies are owned to some degree by the taxpayer i.e. AIG 80% (note: A draft of the Treasury document that was left out in the final version called AIG "highly speculative"). The word is that hedge funds have jumped in which tells me that this tower is being built on sand and it will only take a sprinkle to sink it. I see companies like ABK, B of A, ETFC and so on are being pulled up by the momentum.

My fire continues to burn brightly around the Federal Reserve and its continued effort to keep the information as to what banks received what emergency loans a secret. They are now preparing an appeal.

Sign of the Times

The DOW has reached 6821 as I write this, exacerbated by AIG losing $61B, the largest company quarterly loss in history.  The company insures 30 million U.S. policy holders, operates in 130 countries, and provides insurance for 100,000 companies.  The federal reserve and treasury still maintain that they have to rescue them because of the 'systemic risk' to the global financial system.  In addition to the $150B invested, another $30B is on its way. This is a deja-vu with more to come.  The share price is $.48; last year it was close to $50.  This company should be broken up into several companies, giving it less power to disrupt the financial world when there are earthquakes like what is occurring at this time. Citi is trading at $1.40 as a result of the latest government intervention.  BAC is trading at $3.31.  Even though the president said the banks are going to remain private, the action taken with Citi still crucified the shareholder, also diluting his intention. 

Also, companies like GE who are part of the DOW 30 is being hammered with a price of $7.64 this morning, one that Mr. Buffet has invested heavily in.  It's a sign of the times; solid companies being traded at prices not imagined before.  And there are so many firms trading as penny stocks now that the SEC is looking at altering their procedures in terms of the requirements of companies falling into this group.

I do see a pinpoint of light.  We went to Redding yesterday, visiting 5 different stores, to look at big ticket items, and noticed  movement in this area.  In conversation with the employees, we heard that people are using their tax refund to purchase big ticket items.  This is a sign, in my opinion, that Mr. Bernanke may be right in saying that the worst will be over in 2009.  For those of us who are invested, I think the prudent action is to stay the course as long as the company or fund appears to be managing in a way to come out intact.

The Relationship of October with the Stock Market

October is being October.  What is happening is not surprising except that it is happening on a much larger scale.  The U.S. market only dropped 2% today.  The foreign markets are a different story.  Japan falling 952 points, the largest drop in 21 years.  Russia dropping 10% and stopping trading until Friday, and Brazil also with a 10% drop, and the beat goes on.  Raise yourself above the earth and all the activity going on here.  This is a time of global change.  It's starting at the top and will affect all of us individual inhabitants.  We need to be creative and look for new ways of thinking and doing in this world.  Obviously, for those of us living today, we are ready to face the challenge, individually and collectively.  With this approval of the $700 billion bailout, we knew before it would be more than $1 trillion.  Today, we loaned AIG double digit billions in addition to the $85B.  Then it comes out that this company spent close to half a million at a California resort to have a rest and relaxing adventure for their top insurance sales people.  This kind of excess is being exposed and will continue to keep the passion energy high to make sure change is permanent and not forgotten easily.  There needs to be a purge and it is underway.  Look at this as part of our history and the timing for a 'fall.'  I think the market will settle above 8,000.  By that time there will be much purging in places that we have not even imagined.  I appreciate your own thoughts.

Red Flags

Emotions of the collective are ruling the roost.  The European markets are showing their level of confidence in what congress is doing with the proposed bailout by the Feds.  With a big run to commodities, especially oil at a jump of $25 in one session, that is a sure sign that there is information in the subconscious about to surface that reflects a stark picture of our financial system.  

Democrats and Republicans are working to add more to what the Fed recommended to stabilize the system.  Making the government have access to owning the company's stock who sells the 'toxic mortages' is a form of nationalization like what happened with Frannie, Freddie, and AIG.  This dilutes the value for the stockholders, like you and me.  Even those big mutual funds and institutions holding shares are made up of contributions by the individual.  Now we have an idea of the exposure of number of companies that may have their shares diluted by just looking at the list where short selling is not allowed.  The list grew bigger today.  

One other addition I would like to comment on is a provision to help mortgage holders prevent foreclosure.  What about those who have the financial capability to pay their mortgage, yet walked away because the loan is worth more than the home?  What percentage of the overall defaults are made up of these individuals?  They do not need to be rescued.

Going back to my original post of 9/15 and talking about the 'Big Bang,' the latest is the collider is out of commission for at least two months.  I predict there is a timeline similar for the markets and the turmoil to continue.  

Fed Investments

Based on the Fed deciding to 'loan' $85B to AIG today, and also own 79.9% of the firm does not compute.  It seems they now own the majority of the largest insurance company in the world, adding to their portfolio of FRE and FNM.  I can't imagine how much more debt they are exposed to with insurance liability along with being exposed to several trillion of mortgage guarantees. Is there a limit as to how much this country can create by printing money and still look 'stable' as the S & P recently determined? Is there an invisible line that we are close to crossing to the point of no return where the market will determine the direction of the financial system?  If so, that means the collective consciousness will have the power.  Thoughts to consider as we enter day 3 instability with the stock prices of the financial sector.