Wednesday, July 29, 2009

Big Ben is Bumming

Dear Readers,

The long established checks and balances system has to some extent been
tested in the latest financial crisis. A test of the Checks and Balances system is in essence a test over of our democracy. As duly noted, Thomas Jefferson and Andrew Jackson were extremely suspicious of the financiers of the United States. They believed that if this class of individuals were given too much power, they could manipulate, and in essence run the entire country. According to the U.S.
Constitution, Article I Section VIII gives Congress the power to “To
coin Money, regulate the Value thereof.” However, after the Financial
Panic of 1907, Congress agreed that an institution should be created
which would “could provide a ready reserve of liquid assets in case of
financial panics and would also provide for a currency that could expand
and contract as the seasonal U.S. economy dictated.”

Glass-Stegal Act of 1933
It is important to review some of the safeguards that were put in place regarding the awesome power of the Federal Reserve in general, and the financial sector in particular The Glass-Stegal Act of 1933 went to great lengths to limit the power of financiers and their influence. Later this century, a growing number of lobbyists saw the act as antiquated and limiting. Two separate groups underscored positions on Glass-Stegal.

The argument for preserving Glass-Stegal (as written in 1987):
1. Conflicts of interest characterize the granting of credit - lending
- and the use of credit - investing - by the same entity, which led to
abuses that originally produced the Act.

2. Depository institutions possess enormous financial power, by virtue
of their control of other people’s money; its extent must be limited
to ensure soundness and competition in the market for funds, whether
loans or investments.

3. Securities activities can be risky, leading to enormous losses. Such
losses could threaten the integrity of deposits. In turn, the Government
insures deposits and could be required to pay large sums if depository
institutions were to collapse as the result of securities losses.

4. Depository institutions are supposed to be managed to limit risk.
Their managers thus may not be conditioned to operate prudently in more
speculative securities businesses. An example is the crash of real
estate investment trusts sponsored by bank holding companies (in the
1970s and 1980s).

The argument against preserving the Act (as written in 1987):

1. Depository institutions will now operate in “deregulated”
financial markets in which distinctions between loans, securities, and
deposits are not well drawn. They are losing market shares to securities
firms that are not so strictly regulated, and to foreign financial
institutions operating without much restriction from the Act.

2. Conflicts of interest can be prevented by enforcing legislation
against them, and by separating the lending and credit functions through
forming distinctly separate subsidiaries of financial firms.

3. The securities activities that depository institutions are seeking
are both low-risk by their very nature, and would reduce the total risk
of organizations offering them -- by diversification.

4. In much of the rest of the world, depository institutions operate
simultaneously and successfully in both banking and securities markets.
Lessons learned from their experience can be applied to our national
financial structure and regulation.[7]

This Week...

Big Ben Bernanke is struggling with Congress' new interest in his powers, and the far-reaching influence of the Federal Reserve. While Bernanke would like Congress to allow free-wielding power, it is Congress who has increased its scrutiny. According to Bloomberg News, "Bernanke is trying to deflect a bill, co-sponsored by 276 members of the House of Representatives, that would require audits of central bank operations, including monetary policy decisions, by the Government Accountability Office." While Ron Paul and others in Congress desire a Federal Reserve with accountability, Bernanke warns that giving too much over site... or in this case too many audits of Federal Reserve books, could lead to the loss of independence that gives the bank such flexibility.





Friday, July 10, 2009

I wouldn't necessarily call it a return to the Smoot-Hawley Tariff of the 1930's, but readers should clearly digest the impact of G-8 leaders, and their push on green energies, and eco-friendly regulations... As it stands, there appears to be a growing rift between industrialized nations, and the rest of the world. As Obama led G8 countries in a push to adopt strict regulations on global warming, it was clear that the industrialized camp (those countries who are heavily industrialized... have a higher standard of living... are unionized... and produce industrialized products at a much higher cost) are competing against the up and coming countries like Brazil, China, and India whom for all intensive purposes would like to take the place of the industrialized nations. It is easy to demonize the non-G8 nations... and paint them into a corner as being the cause of higher green house emissions. Understand though, wealth and power are at the root of this discussion. And if people cannot read bwtween the lines on this one, then shame on them!!! while most research shows there is such a thing as global warming, and its consequences are dire, thi also stands as a clever way of setting up future trade barriers, and placing new stringent regulations on those nations who are growing the most rapidly...and sapping the wealth of the united States, and countiries in the Euro zne. At the end, I believe greed, power, and money will win out.

Debt for Sale

It worked for the United States under the Washington Administration... but will it work for California? This is the question that financial experts are wrestling with today as California was granted SEC clearance to sell their debt as a securities... A promise that if you loan the state of California money now, they will pay an investor back some time in the future with interest. The question becomes, is the purchase of California debt considered an act of investment or speculation? Consider the fact that the state of California is broke. True, it is one of the largest economic regions in the world. And in many ways, it shows an uncanny ability to leverage itself in ways that has created tremendous opportunities for wealth. However, the years and years of excessiveness is now being seen in massive deficits and budget short-falls. Excessive risk taking on one end, and excessive spending on the other has put California in a financial hole that it will not soon climb from. The question becomes whether it is smart to invest in California's debt. As an investment I would say hell no...however, if and when California debt becomes so excessive that it is no longer viewed as an investment, but more along the lines of a speculation, it may be time to consider that opportunity. A lesson from history would suggest that the Federal Government in some way shape or form will bail them out. Alexander Hamilton used this argument to start a national debt back in the 1788, and we have carried a debt ever since. If push comes to shove, the Feds will bail Arnold and friends out on this one!!!

Readers should not confuse Thursday's job report which showed a better than exected number with reality. The only holiday of the summer definitely threw off that number, and to be sure there were more pink slips waiting when people went back to work this week. For instance, some amusement park workers were laid off due to lower than expected attendance this summer. While we have been told that employment is "always" a trailing number in recessions, I believe we are well served to consider several other variables including a continuous job claims number that was over 6.5 milion. Throw into the mix a statistic that shows credit card default rates at a 35 year high, tapped out consuers who are now late on home equity loans, and emerging consumer driven problems for our neighbors to the North in Canada, there is no quick fix lurking around the corner. Please don't let the snake oil salesmen on CNBC convince you of something different. Aside from stimulus monies, the emperor has no clothes.

Interestingly enough, an article by Blomberg suggests that the recession will be over by 2010, and we will be in recovery mode thereafter. The report went on to suggest that there are signs that the housing industry has bottomed, which means there will be an opportunity to raise interest rates from 0%, to a 1% mark. When asked about the recent dip in stock prices “I think the market got a little bit ahead of the economy,” Fed Bank of St. Louis President James Bullard said yesterday in a Bloomberg Television interview. “I do not think the recovery is faltering. If you look at the projections that were made in December of last year, we’re right on track.” I'll let you be the judge on this one... another reportthis morning contradicted this sentiment...

Stretching the Dollar
I did want to mention a way to save a few bucks on health insurance deductibles. When you get a bill from a hospital, and call to question some of the charges or the rate to which the primary insurance company covers the bill, I have found customer service representatives to be more than ready to wheel and deal on deductible amounts. At the end of any conversation I have had of late, the last question I ask is "Is that the best you can do on the deductible charges?" On one bill the customer service representative knocked 15% off the bill. Another konocked off 20%. Evidently, these folks have been instructed to get money and get it now. This approach alone saved my family over $100.00 last month!!!

Sunday, July 5, 2009

Oreos and Iran... The Emperor's New Clothes...

Still the Greatest
Dear Readers,
As we celebrate our country's Independence once again, I wanted to remind readers of all the things that make it great... perfect...of course not... but the simple things we take for granted such as the unalienable rights which Thomas Jefferson mentioned in the Declaration of Independence Life, Liberty, and the Pursuit of Happiness. Governments are created by the people, and get their legitimacy to govern from the people. Any government that does not seek the people's will... or the legitimacy of those that the government is supposed to represent is no better than oppression by tyranny... Let's look around the world for a moment... China is a great economic power to which to one can deny. However, the people have no true freedoms. The government censors their internet, represses any mention of Tenimen Square, and often times dictates what the people will do as opposed to what they wish to do... At the end of the day, the majority of Chinese will push for the same freedoms that the west has...
According to Jefferson "That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed." An amazing statement if you thin about it. i would like to think that every time we hold an election in this country, we are in fact holding some type of peaceful revolution...

Iran and the Oreo

Make no doubt about it, the leadership in Iran is feeling a bit of heat. If it is the state of protest that still exists in the country (albeit underground protests),there is also a sense of illegitimacy that is increasing tension among the ruling elite. Throw into the mix a fledgling democracy to the west, and another to the east. To be sure, this is probably one of the most under-reported, and under-recognized stories in the media, if not only on Main Street. To be sure, the future of the Middle East may lie in what happens in this region over the next two to three years... Godspeed to those who are creating democracy. I also want to remind readers that the most unhealthy part on an Oreo in the creamy center... made up up factory created fats known as hydrogenated fat... Kind of reminds me of Iran...
The economic significance would be a long position on oil and gold in this scenario. i would also look specifically for companies who draw their oil fro reserves other than this area of the world.

The Emperor's New Clothes
I always laugh when I hear the story of the Emperor's New Clothes. Maybe it is the naivety of the Emperor... maybe it is his arrogance... I know part of it is the swindle that has taken place. the best part of all, is the fact that the emperor is parading himself in front of the people with nothing on...

Like fund manager Kirby Daley , I believe that stock market rally is a lot like the emperor's New clothes. Aside from the stimulus money that is currently pumping into the economy, there is no real growth (unless you are counting the unemployment line).
A sustainable rally,just like a sustainable economy is built on growth of legitimate businesses not simply emergency government spending. With all the positive spin on the economic recovery, no one has really that of the scenario where the worst has yet to come." (2) Daley is also considering low interest rate investments where a hedge in taken against inflation... and the loan can be paid back over time with worth-less (as opposed to worthless) dollars. He considers a 30 year mortgage on distressed property to be a legitimate idea.

Daley is also mindful of crumbling consumer confidence. Not simply an unemployment rate that is hoovering near 10%, but people who are starting to find a knack for thrift. I even met a doctor who is talking about fixing things in his own house... something that was unheard of two years ago!!! For instance, if the Cash for Clunkers program were to gain passage in Congress, it could create a new revenue stream for car manufacturers. Let's face it, a company like Toyota who will eventually pick up some market share from the GM and Chrylser bankruptcies in the future needs real help in the here and now. Facing an unprecedented loss (the first in 71 years), TM realizes that credit markets in the United States, and a desire for their product have created current losses at $1.6 billion through March, and could eventually hit double digits by year end. (3)

CSTR Last blog I mentioned my Red Box experience. I even made reference to Red Box Killing the Video store. on our trip to Tennessee, I noted a Red Box in a McDonald's. Now it is next to impossible to get anything into a McDonald's. However, upon further research we have found a business relationship between the two entities. A Red Box in every McDonald's would mean MASSIVE leverage.

However, I am always mindful that innovation in the information age comesquicky... And when it hits... it is often fast and lethal in the business world. I believe the day of DVD rentals is approaching a rapid end. More than likely, we will witness on-line video stores via cable or satellite. Maybe even via the internet. That would turn the lights off on Red Box, Blockbuster, and any other brick and mortar business.
at $25 per share of CSTR, this might be a short candidate, especially it the stock hits $30.00 via half-baked speculation.