Not that we know. But they asked us anyway.

We report to you today from the banks of the Potomac. Our old friend, Congressman Ron Paul, organized an off-the-record discussion with several other members of Congress. The subject was the financial meltdown…and the bailout. We were there to talk, of course, but we were more interested in listening.

“You don’t understand,” said a Senate functionary we met later, “these people live in Bubble World. They’re protected from the real world by their staffs and by the system itself. You imagine that they would know what is going on. But they don’t. They know less than we do. And they’ll be the last to find out. They are so busy meeting constituents…dealing with donors…working out deals with their political parties and supporters…and feeling like big shots…they don’t really have any time to study the issues. So they count on staff and party committees to tell them what to say, how to vote…and what to think.”

Waiting in the corridor of the Cannon building, two men in grey suits walked by…we overheard this conversation:

“Did you vote ‘no’ on that last resolution? You we’re supposed to vote ‘yes.’”

“I thought I was supposed to vote ‘yes’ to cutting off the argument… as far as I’m concerned we’ve heard enough about Nancy’s problem with the CIA…”

“But that wasn’t about cutting off the debate, that was just technical…about allowing them to modify the previous vote…”

“What are you talking about…”

“I don’t know…I didn’t think it had anything to do with stopping all this gabbing about Nancy and the CIA…”

We take it for granted that Members of Congress often don’t know what they are talking about. But it is shocking to realize that they often don’t know what they are voting on either. And neither do the voters.

The Economist reports, for example, that the measures put before California voters in a recent plebiscite were challenged…not by the courts, but by a grammarian. She claimed they were worded in such a way that it was impossible for a reasonably intelligent person to understand what they were supposed to mean.

More on our visit to Capitol Hill:

*** Since the meeting was “off-the-record,” we can’t tell you who was there or what they said. We can only report what we had to say.

“Look…economies…and empires…go in cycles,” we began. We thought we ought to start with the basics, since we didn’t know what they thought.

“Growth…maturity…then, decline. That’s just the way it is. So in order to get an idea of what lies ahead you have to figure out where you are in the cycle.

“You never know for sure, but there are tell-tale signs. The credit cycle, for example, has been on an upswing in the US since the Great Depression. First, there was in-store consumer credit as early as the ‘20s. There was some mortgage credit…and some margin credit for investors too. But during the ’30s, the financial strain was so great that most people regretted their debt and paid it down. Or they defaulted.

“You could get a mortgage back then if you put 50% down…and paid it off in full in 3 to 5 years. And then Franklin Roosevelt set up the FHA…along with Fannie Mae. And pretty soon, you could borrow 80% of the house price and pay it off over 15 years.

“Major credit cards – Mastercard (NYSE:MA) and Visa (NYSE:V) – didn’t become widely used until the ‘60s. And then, credit began to rise more steeply. Total debt had been about 150% of GDP in the ‘50s and ‘60s…but it rose quickly after the ‘80s. By the 2000s, you could get a mortgage for 110% of your house price – an inflated price at that. And you could take 30 years to pay it off.

“As for credit cards, hardly a day passed when you didn’t get a new one in the mail….usually with a higher debt limit. Debt rose…and rose…and rose…up to 350% of GDP. And finally, the whole debt bubble blew up.

“You have to remember that the US economy – in fact, much of the whole world economy – came to rely on more and more debt as a way to expand. At first, a fellow could borrow $1.50…he’d spend it and invest it…and it would lead to an increase in GDP of $1. But, as time when by it took more and more debt to produce more GDP. The fellow would borrow a $1.50…but then, part of it would have to be used to pay the interest on what he borrowed before. Eventually, it was taking more than $6 to produce a single ounce of GDP.

“You can see that this won’t work for long. GDP is like national income. You can’t have debt increasing 6 times faster than income – at least not for long.

“But remember, the US economy depended on this debt-fueled growth. Without the extra credit, the economy will slip back…which is what is happening.

“We’ve reached a turning point. The financial industry has blown itself up. It realized that all those credits it had, from people who didn’t have the cashflow to repay their debts, weren’t worth what they were supposed to be worth. We’re now on the downhill slope of the credit cycle…and most likely, the imperial cycle too.

“What everyone wants to know is how long it will take before we have a genuine recovery. And then, everyone…everyone…seems to think that the government can stir up new growth by pushing more debt onto the public…this time, public debt. And get this…the feds are now adding debt to the system at a rate 4 times greater than the previous record.

“They…you…are running a budget deficit of $1.8 trillion this year. Could be higher. How much in extra GDP do you get from all that extra debt? Well, a good question…because GDP is now going backwards. The latest numbers show output going down at a 6% rate in the US. And that’s one of the world’s better rates. Exporters – notably Germany and Japan – are doing much worse. GDP is falling 14% in Germany. It’s going down at a 15% rate in Japan.

“So, the feds are adding trillions in new credit (debt) and getting no GDP growth from it — zero…zilch…nada. In other words debt is growing infinitely faster than GDP.

“How long can this keep going? No one knows. But one thing we do know is that the economy is not going to start up again and deliver good, old-fashioned, healthy growth. We’re in the process of de-leveraging. That is, we’re on the down-side of a credit cycle. We’re getting rid of debt, not adding to it.”

If we’d had today’s newspaper in front of us, we would have pointed at the headlines.

“Recession Turns Malls Into Ghost Towns,” says the Wall Street Journal. Malls are emptying out because they were built for a world that no longer exists. They were built for a world where people increased their debt and their consumer spending far faster than they increased their real incomes. Now that people are cutting back on spending – in order to reduce their levels of debt – they can no longer afford to go to the mall. As a business or an investment, malls have got to be bad places for your money.

“The private sector is not going to take on more debt,” we continued our explanation. “People know it doesn’t pay. And they’ve got too much already. The private sector is not going to begin a new growth period until they’ve paid off, worked out, defaulted on, or shirked a lot of their present debt load. We’ve estimated that they need to get rid of about $20 trillion worth. And that’s going to take time. And a lot of painful decisions by a lot of people. Bad business, investment and spending decisions need to be recognized…and fixed. Debt needs to be reduced.

“And that’s why this downturn is not going to end tomorrow.”

If we’d had the mall example in front of us, we could have explained that a mall represents a kind of bubble-era investment that now needs to be restructured. After America’s industrial age was over, the country found itself with empty factories and warehouses. They were mostly written off and destroyed. Some were converted – into lofts and shopping malls. Now that the retail age is over, we’ll have to find new uses for malls too.

“This is going to take time,” we told them…and then we took a break to listen…and eat some shrimp.

Source: What We Told the Chiefs of ‘Bubble World’

The stress-test results are expected to show that the 19 banks may have to raise between $100 billion to $150 billion – or even more – in new capital. Investors will cause the shares of the strong players to zoom northward, and will likely savage the shares of the weakest players.

“I can’t think of a time since I’ve been watching banks when there’s been so much uncertainty about the true value of a key set of assets,” Douglas Elliott, a fellow at the Brookings Institution, a Washington think tank, told Reuters.

The U.S. bank stress tests have transfixed the world financial markets for weeks, exacerbating the ongoing financial crisis – worsening the U.S. recession and shaking economies around the world. That’s escalated the burden on the still-new Barack Obama administration and on the U.S. Congress.

The banks being tested include Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), and Goldman Sachs Group Inc. (NYSE: GS). All told, the 19 banks hold two-thirds of total U.S. bank assets.

“Most banks will have to raise capital in some form,” Friedman, Billings, Ramsey Group Capital Markets Group (NYSE: FBR) managing director Paul Miller told Reuters. “The capital raises will be much bigger than people think.”

Miller said that uncertainty about what the tests might reveal has made banks stocks “uninvestable” in the near term.

The issue for investors is that “you just don’t know how the government is going to view it,” Miller said.

Public release of the stress test results is set for Thursday. The government is scheduled to brief the top officials of the banks themselves tomorrow (Tuesday).

Although all but one of the 19 major U.S. banks the government has stress-tested reportedly passed, many skeptics believe the banks are still using all sorts of accounting dodges to keep from revealing just much they still hold in toxic assets and bad loans, National Public Radio reported.

Why wait for the U.S. Treasury Department’s bank stress test when Money Morning can highlight the four secrets that will let you separate the winners from the losers in the U.S. banking system?
Call it the “Money Morning Bank Stress Test.”

Money Morning Contributing Editor Martin Hutchinson last week evaluated the 13 largest U.S. banks and rated them as either “Zombies,” “Walking Wounded,” “Risky But Proud,” and “Hidden Gems,” and concluded that nine of the banks pose some degree of risk. But he also found that four of the financial institutions are “Hidden Gems” that might be worth a look for investors.
On Thursday, we’ll finally see how it all plays out.

Market Matters

Chrysler LLC filed for bankruptcy and then forged a potentially “game saving” partnership with mighty Fiat SpA (OTC ADR: FIATY), Italy’s largest car manufacturer.  General Motors Corp. (NYSE: GM) will be saying good bye to its Pontiac brand (any interest, Fiat?).  Bank of America’s Ken Lewis was stripped of his board chair, but will continue to put out fires from the chief executive office.   Earnings season moved forward and Exxon-Mobil Corp. (NYSE: XOM) did NOT set a new record for a change.  International Business Machines Corp. (NYSE: IBM) bucked the cost-cutting trend and actually raised its dividend.

With Treasury set to release the stress test results on Thursday, rumors are circulating that Bank of America and Citigroup may be in need of additional capital, though both are pleading their cases.  Meanwhile, Citi began lobbying for permission to pay retention bonuses to key employees [it worked for American International Group Inc. (NYSE: AIG) and Merrill Lynch (NYSE: SQD)], who may seek the greener pastures of other (ailing) financial institutions.

Telecommunications firms were in the spotlight early in the week as chipmaker Qualcomm Inc. (Nasdaq: QCOM) raised its revenue outlook and Verizon Communications Inc. (NYSE: VZ) actually announced increased earnings in the first quarter.  Verizon may be teaming up with Microsoft Corp. (Nasdaq: MSFT) to develop its own touch-screen cell phone to cut into Apple Inc.’s (Nasdaq: AAPL) iPhone market share.

Drugmakers Pfizer Inc. (NYSE: PFE) and Bristol-Myers Squibb Co. (NYSE: BMY) posted quarterly results that beat Wall Street expectations, as did The Dow Chemical Co. (NYSE: DOW) and Starbucks Corp. (Nasdaq: SBUX), though the latter’s major restructuring (store closures) prompted a 77% decline in profits.

MasterCard Inc. (NYSE: MA) confirmed that 2009 will be a challenging year, though rival Visa Inc. (NYSE: V) beat earnings estimates, as debit card usage increased, resulting in greater fee income.

The Procter & Gamble Co. (NYSE: PG) struggled last quarter, with weaker sales, as shoppers traded down to lower-priced consumer goods.  Exxon-Mobil, Chevron Corp. (NYSE: CVX), and Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) were victims of the declining global demand for oil.  Still, Exxon’s long-term outlook remains strong as the company continues pouring money into development projects to be fully prepared once the recession ends.  In fact, management even boosted its stock dividend.

Economically Speaking

While the U.S. Federal Reserve seemed to offer some “cautious optimism” about the overall direction of the economy, the policymakers avoided any sugarcoating and hedged their comments for fear of an unforeseen development (such as the “swine flu,” also known as the A/H1N1 flu).

While the virus quickly expanded across the globe, most of the worst cases have been limited to Mexico, where the already depressed economy will be further impacted from business closures and travel restrictions.

When SARS (Severe acute respiratory syndrome) hit in 2003, China’s gross domesic product (GDP) was estimated to have been hurt by about 1%; According to early projections by Moodys Corp.’s (NYSE: MCO) Economy.com, the Mexican economy will contract by 6.2% in 2009 (revised from the -4.5% estimate to account for the flu).

The Fed plans to leave rates at near 0.0% and stands prepared to purchase more Treasury and mortgage-related securities to keep the economy moving in the right direction.

The first quarter’s gross domestic product (GDP) highlighted a relatively hectic week on the economic front.  While the economy contracted from January through March at a worst-than-expected 6.1% clip, analysts found some positives deep within the release, as consumer activity actually picked up during the quarter.

The spending component rose by 2.2%, after falling by 4.3% in the fourth quarter.  Additionally, a decline in inventories hindered the release; however, economists point out that such a reduction indicates that manufacturers have scaled back production and will not be burdened with excessive supplies that may need to be deeply discounted to be sold. As demand slowly returns, they will be able to boost production once again.

Meanwhile, consumer confidence surprisingly soared to levels not seen since November 2008, which is especially good news, since the consumer accounts for about two-thirds to 70% of the activity in the economy.

Weekly Economic Calendar

Source: Market Moves Will Remain on Hold Until Bank Stress Test Results Are Released Thursday

But their pleas fell on unsympathetic ears as Obama pressed forward with plans for enhanced consumer protection laws that go beyond credit card restrictions approved by a U.S. House committee Wednesday.

The credit card executives requested the White House meeting as they face outcries of anger from beleaguered cardholders and Congress.  Representatives from a “who’s who” of industry leaders attended, including Citigroup Inc. (C), Wells Fargo & Co (WFC), JPMorgan Chase & Co. (JPM), Capital One Financial Corp. (COF), Visa Inc (V) and MasterCard Inc (MA).

“They’re saying that the economic recovery will take longer if Obama takes punitive action against lenders, but the Obama folks…need more of an explanation,” Linda Sherry, director of national priorities at Consumer Action, a watchdog group that tracks credit-card practices, told Bloomberg News.

As unemployment and credit card delinquencies rise, card issuers are on the hot seat for imposing large late fees and slamming delinquent customers with huge interest rate increases.

Delinquencies are soaring throughout the industry in concert with unemployment, which reached a 25-year high of 8.5% in March. Charge-offs, which are loans that banks have given up on, increased to an average of 8.02% in February from 4.53% a year earlier, Bloomberg reported.

Capital One reported a $111.9 million first-quarter loss on higher reserves for soured loans on Wednesday. Bank of America reported a $1.8 billion first-quarter loss in its credit-card services unit.

Lenders have tried to protect themselves with late fees, tightening credit limits and closing accounts, angering both lawmakers and consumers.

The meeting came a day after a bill to curb credit card fees and limit penalties cleared a key panel in the House of Representatives

The legislation – called the Credit Cardholders’ Bill of Rights – stops credit card issuers from imposing arbitrary interest rate increases and penalties and halts onerous billing practices. A separate version of the bill is under review in the Senate.

Legislators have expressed outrage that many card issuers have received government bailout money under the Treasury’s Troubled Asset Relief Program, essentially paid for by the U.S. taxpayers who use the cards and are saddled with the high fees.

President Obama’s economic adviser, Lawrence Summers, last weekend accused the companies of enticing consumers with aggressive marketing campaigns and deceptive interest-rate terms, encouraging them to become “addicted” to credit.

The White House specifically wants any legislation to limit issuers’ ability to charge fees when customers exceed their credit limits. Obama’s chief of staff, Rahm Emanuel, recently told House Financial Services Chairman Barney Frank that Obama also wants card issuers to offer longer terms for introductory, low teaser rates.
The administration also wants card companies to apply excess payments first to balances with the highest interest rates, and to tell customers how long it will take to pay off their balances if they only make minimum payments.

The banks are saying the proposed regulations will make matters worse by raising costs, restricting credit, and ultimately hurting borrowers more.

“If the government keeps changing rules, it may make it harder for consumers to get credit,” Ken Clayton senior vice president of card policy at the American Bankers Association in Washington, told Bloomberg.

“It means less credit available to vast numbers of Americans at the very wrong time,” he said.

Why pass up guaranteed money when it’s just sitting there waiting to be collected? That’s what we thought when analyst Martin Hutchinson pointed this out to us: On May 28, investors can collect $3,177 in guaranteed cash from just one stock. And by June 4, you can increase that amount to $4,201. Martin’s written a report on how to collect this money yourself. And you can hear him talk about it in his special video report attached. As he explains, just take a few simple steps by April 26 and you’ll pocket some nice income. The deadline is firm… and the companies guarantee this money. This is something worth taking a look at.Just Go Here.

Source: Obama Pushes Credit Card Issuers on Fees, Rates

]]> http://www.contrarianprofits.com/articles/obama-pushes-credit-card-issuers-on-fees-rates/15926/feed 1 http://www.contrarianprofits.com/articles/global-investing-news-briefs-friday-february-6th-2009/13093 http://www.contrarianprofits.com/articles/global-investing-news-briefs-friday-february-6th-2009/13093#comments Fri, 06 Feb 2009 16:30:59 +0000 William Patalon III http://www.contrarianprofits.com/?p=13093 MasterCard Posts 4Q Profit; Buffet’s Berkshire Investing in Swiss Re; Rogers Staying Out of Russia; Ford in Volvo Talks with Geely Auto; Louis Vuitton Misses on Earnings; Brown Refuses to Ban Bonuses; Mortgage Rates Jump; Retail Trade Group Wants Tax Holidays

• Warren Buffet’s Berkshire Hathaway Inc. (BRK.A, BRK.B) is investing 3 billion Swiss francs ($2.6 billion) in Swiss Reinsurance Co. (ADR: SWCEY ). Swiss Re, which is expecting a net loss, said it is also seeking another 2 billion francs on the capital…

This from Penny Sleuth:

On Monday morning, the sun was shining extra bright for one Southern Californian firm. The small specialized health care business of Advanced Medical Optics (NYSE:EYE) experienced a truly perfect day. At least, its investors did.

You see, Abbott Laboratories (NYSE:ABT) announced that it intends to acquire AMO for $22 per share in cash. That’s about 149% above it’s $8.85 Friday close. It took 18 years for the S&P 500 to bring those kinds of gains. Seriously, you’d have had to invest in February 1991 to realize a 149% gain today.

Most investment advisors compare their expected returns to benchmark indexes like the S&P 500 or the Dow Jones. Even small-cap specialists compare their gains to the Russell 2000. But, why in the world would you want to wait 18 years to grow your money, when there are investments you can buy on a Friday afternoon and cash out on Monday for the same return.

So the question before us is: how can you double your money like AMO investors?

AMO is a rare case when investors oversold a company’s stock and a large competitor takes advantage. To benefit from cases like these, you need to find similar scenarios. Let’s walk through AMO’s story…

Finding a Mega Value

AMO sells vision-correction technologies and products for a wide variety of patients. For instance, no one sells more LASIK surgical devices – used in more than 90 percent of all U.S. refractive surgical procedures – than AMO. The company also holds the number two spot in the cataract surgical devices market and the number three position in the contact lens products market.

Now, without serious research there’s simply no way for me to tell you any more than that. Frankly, I don’t know much about this industry, and since the jump already occurred, I don’t need to.

But apparently, Abbott Laboratories did do that research and figured that AMO was still a buy at a 148% premium. The point is, Abbott realized how important it was to control the top spots in these fields.

Over 60% of 60+ year olds have cataracts. In the next 11 years, the number of 60+ year olds globally is expected to increase 43%. Simply put… the older you are, the more chances you’ll need AMO’s technologies. And with more older people than ever, the demand is rising. You don’t have to be an eye expert to realize what Abbott was thinking.

On top of a great looking future, AMO was also incredibly cheap just last week. Abbott is basically paying a total $2.8 billion for a company that produces $1.1 billion in revenue per year. In just two and a half years, the company’s revenue will merit the investment.

Sure, it’s not a highly profitable company yet, but it is in the black. AMO is already turning a profit, which is just another stream of income for Abbott even before synergies are realized.

Back to how this affects you…

If you know what to look for, you can be in on the next AMO. Below is a quick list of criteria to look for when searching for a buyout candidate:

• Value – are the company’s price-to-earnings, price-to-sales, and price-to-cash flow ratios low?
• ROI – has the company made smart investment decisions? Will there be a lot of useless intangible assets lying around that would disinterest a potential owner?
• Industry – is the company in a growing or contracting industry? Is it an industry that is conducive to mergers and acquisitions?
• Profit – is the company profiting already, or at least have a profitable horizon?
• Debt – is the company carrying high debt? Would a potential buyer use the debt situation to lower its buying price?
• Synergy – is the company’s business model flexible, and can a potential buyer save costs by synergizing departments?

Of course, each company is different, and each acquisition is different. It takes some serious studying to find great buyout candidates. But done right, and you can save yourself 18 years of waiting around in the stock market. If you find the right candidate, you might just multiply your money in hours, not years.

Source: How to Find a Buyout Candidate

Briefings for top congressional Democrats were to start either over the weekend or today (Monday), a senior transition-team official told The Associated Press late last week. President-elect Obama is slated to meet today with House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., in a Democratic strategy session that is likely to focus on the economic recovery package.

It’s time to look forward, not back. The 111th Congress meets tomorrow (Tuesday), and a comprehensive economic stimulus package is at the top of its agenda.  Hopefully, the lawmakers can put partisan bickering aside (fat chance) and have a bill in place for President-elect Barack Obama’s signature soon after his Jan. 20th inauguration.

Experts are looking for a stimulus package of $800 billion to $1 trillion (“pork-barrel” projects included), although the Obama administration officials claim they will trim away any unnecessary fat.

Don’t expect much joy from retail-land as a trade group projected that December sales plunged by more than 1% with J.C. Penney Co. Inc. (JCP) (-11%), Kohl’s Corp. (KSS) (-10%), and Target Corp. (TGT) (-8%) among the primary victims.  As Money Morning predicted in a recent “Buy, Sell or Hold” column, discounter Wal-Mart Stores Inc. (WMT) is believed to have benefited most from the economic weakness with sales projected to have risen by 3% in December. While the holiday numbers seem dire at best, gift card sales don’t show up in the data until they are redeemed so retailers have one last opportunity for positive news in January (and beyond).

Unemployment data highlights this week’s news reports and a 12th straight month of labor contraction is a foregone conclusion.

As for stocks, the so-called “January Effect” states “as the first five days of January go, so goes the market for the year.” Let’s hope the full week sets a nice tone for 2009 (not a bad start).  The first trading session of the New Year on Friday got things off to a fine start. The Dow Jones Industrial Average soared 258.30 points, or 2.9%, pushing the 30-stock blue-chip index back up over 9,000 to its highest close in two months. The Dow ended trading on Friday at 9,034.69.

Many investors closed their books on 2008 a few weeks early, but took some opportunities to rebalance their portfolios for 2009.  The Dow experienced its worst year since 1931 and the Nasdaq and S&P 500 indexes have fallen almost 45% since their 2007 highs. Foreign markets suffered similar fates, for instance, with Japan’s Nikkei having plunged 42% last year.

On Friday, trading was thin and the economic backdrop was dour, but it still felt “good to get off to a good start on the first trading day of the year,” Fred Dickson, chief market strategist at the investment firm D.A. Davidson & Co. told The Washington Post. “Even though all the economic data is discouraging, I think there’s a psychological lift to starting off the year on solid footing.”

Investors actually shrugged off a report from the Institute for Supply Management that showed that manufacturing activity contracted to a 28-year low in December. All but one of the stocks in the Dow posted gains – JP Morgan Chase & Co. (JPM) being the only loser. General Motors Corp. (GM), Alcoa Inc. (AA), The Boeing Co. (BA) and Citigroup Inc. (C) posted the biggest increases in the Dow.

Citigroup shares rose 6.4% to close at $7.14 after the bank revealed it would not be paying bonuses to its top executives [For more details on the Citi announcement, check out this related story in today’s issue of Money Morning]. Financial stocks also got a boost from a report that the U.S. Treasury Department said it would consider insuring toxic assets at large firms from unlimited future losses, just as it did for Citigroup in November.

General Motors shares soared 14% to close at $3.65 a share on Friday after financing company GMAC LLC said that as part of its $6 billion federal bailout and decision to become a bank, it will no longer have the exclusive right to provide low-interest loans to borrowers who buy General Motors cars and trucks. The change may help GM sell more vehicles, and rely less on GMAC’s ability to provide credit. GM sales fell 41% in November after GMAC had significantly tightened credit the prior month, leaving many prospective buyers unable to borrow.

The Standard & Poor’s 500 Index advanced 3.2%, or 28.55 points, to close at 931.80, while the technology-heavy Nasdaq Composite Index climbed 3.5%, or 55.18 points, to close at 1,632.21.

The Dow has now risen for three consecutive trading sessions. But the market still has a long way to go to recover from a year that handed the Dow a 34% decline, its biggest drop since 1931, and left the S&P down 38% for its worst performance since 1937. The Nasdaq was down more than 41% for the year.

“We still think the market bottomed on Nov. 20, and 2009 will show a continuation of the 25% rally we’ve seen the past six weeks,” Phil Orlando, chief equity strategist with Federated Investors, told The Post. “The economy will start to improve by mid-2009, and stocks are starting to discount that now.”

Market Matters

Though the year-end fanfare and fireworks were lackluster at best, investors put a disastrous 2008 in the rearview mirror and looked forward to better times ahead (or more of the same). While many had hoped for a last minute Santa Claus rally, the fat man did make an appearance over the last two weeks of the year, though results were modest and contributed little to overall holiday cheer.

Amid light volume, investors seemed content to take some time off to lick their collective wounds, analyze what went right (a very short list, indeed!) and wrong (much too long a list to reproduce here), and set their sights on 2009 (or update their résumés).  As has become the norm, the news headlines were dominated by the usual suspects: The bailout deals (financial and auto), the Bernard Madoff scandal, retail, and energy prices.

While much of the financial crisis has involved residential loans, Foresight Analytics predicts that commercial mortgages will become the next ax to fall as property developers take their place in line for the next federal bailout.  The continued freeze in credit and a vast recession could set the tone for an array of hotels, shopping centers, and office complexes to move toward default.

The afore-mentioned GMAC represented the latest non-bank to become a bank as the U.S. Federal Reserve approved its charter and the U.S. Treasury Department opened its Troubled Asset Relief Program (TARP) pocketbook to the tune of $5 billion (and another $1 billion for parent GM).  Soon after, the financing company (rather bank) announced plans to offer 0% loans for certain GM models in an attempt to jumpstart the auto sector  (Now, that’s what TARP was designed to do).

A Credit Suisse Group AG (ADR: CS) analyst quickly put a damper on these “positive” developments by downgrading GM to an “Underperform,” and claimed the company could still fall into bankruptcy.  Bernard Madoff turned over a list of his personal assets to the U.S. Securities and Exchange Commission as the befuddled agency attempted to track down that missing $50 billion.  Meanwhile, those “lucky” Madoff investors who managed to take distributions may be forced to give that money back as lawsuits apply a six-year “claw back” provision on past redemptions.

While Amazon.com Inc. (AMZN) reveled in the unexpected delight of its best holiday season ever, MasterCard Inc. (MA) predicted that most retailers were not so fortunate.  Its SpendingPulse unit projected that total holiday sales declined by 2.5% to 4% from last year’s levels and the International Council of Shopping Centers (ICSC) predicted more store closings in 2009.

Turmoil in the Middle East and a dispute between Russia and Ukraine served to advance the energy markets as oil prices jumped above $46 a barrel on the first trading day of the New Year.  For the most part, traders (and speculators) continued to take their cues from the weak global economy (and sluggish demand) as oil prices have fallen more than $100 a barrel since mid-July.

Economically Speaking

The economic data of the past two weeks did little to instill confidence that the U.S. recession will be short-lived or to promote an expectation that a rebound is imminent.  The manufacturing sector remained weak as durable goods orders fell for the fourth straight month and the ISM purchasing managers’ survey revealed widespread pessimism as it hit its lowest reading in 28 years.

Consumer confidence dropped to an all-time low, as individuals remained worried about their jobs and were hesitant to spend on much beyond the bare essentials (bad news for retailers).  Third-quarter gross domestic product (GDP) was again reported as down 0.5%, and most analysts expect a far worse showing for the fourth quarter.

On the housing front, both existing and new home sales continued to decline in November and median prices tumbled on a national level.  The drop in mortgage rates, however, prompted a surge in refinancing activity and borrowers may soon have a few extra bucks in their pockets to contribute to the economy.

On that note, all hope is not lost. As the government continues to pour money into the mortgage markets, the most optimistic of analysts believe that the same housing sector that started the downturn eventually will lead the economy out of its doldrums.  Home prices are affordable; mortgage rates are extremely low; and the incentives are there for those who can take advantage, meaning there’s perhaps a slightly brighter light at the end of the tunnel.

Weekly Economic Calendar

Source: Obama Stimulus and January Effect Will be the Week’s Top Stories

Monday’s activity showed another decline in gold open interest…down 2,312 contracts. Tuesday’s sell-off brought another o.i. decline in gold of 906 contracts. Without doubt, yesterday’s activity will show a further decline when the data becomes available later this morning.

In silver, Monday showed a decline of 1,600 contracts and Tuesday’s o.i. was up (surprisingly) by 730 contracts. I would suspect that Wednesday’s activity will show a further decline in open interest.

Volume on Tuesday and Wednesday was very light, once you take the spreads and switches out. It’s very easy for the market price to be influenced in either direction…and right now, the influence is down. It’s difficult to say how much further this can continue, as there are damn few tech funds left to flush out…especially since we aren’t seeing the 50-day moving average broken to the upside…or new low prices. Either of these occurrences would bring either more buying or more selling…depending on the direction of the move.

Without question, the short position of the Commercial traders is now the lowest it’s been in at least three years…especially in gold. There’s a limit to how low they can go, because the moment that nobody wants to cough up their long positions (regardless of the price) the bottom is in. But as a matter of note, two US bullion banks are short 51% of the entire Commercial net short position in gold, and 81% of the entire net Commercial short position in silver. (I thank Gene Arensberg for that info.) I believe that the two banks in question are JPMorgan and HSBC USA (NYSE:HBC). Ted Butler thinks that it’s only JPMorgan (NYSE:JPM) that’s left… and I’m not about to disagree with that

As I’ve said before on this issue…when you’re the tallest hog at the trough…there’s not a lot that you can’t get away with when the Comex and Nymex do nothing to enforce the rules against their obscene and grotesque concentrated positions.

I’ll sum up the last couple of business days in the markets by saying that we are on the verge of complete collapse in the equity and financial markets. What you see out there is a total financial, economic and monetary hallucination which, despite the best efforts of banks and governments, is imploding faster than they can pump it up.

I see in a Financial Times story out of London yesterday that John Thain, CEO of Merrill Lynch (NYSE:MER), warned that “the global economy is entering a slowdown of epic proportions, comparable to the Great Depression”. (Note to John: This is old news, but I’m glad to see that even you can finally see it. – Ed) I note in another Financial Times story that the Russian Central Bank has signalled its intentions to allow a significant devaluation of the rouble…even though they just raised their interest rates to 12%. I see that American Express (NYSE:AXP) is seeking approval to become a bank so it can get its share of the TARP money. Will Visa (NYSE:V) and MasterCard (NYSE:MA) be far behind? And lastly, Goldman Sachs (NYSE:GS) lost another 10% of its ‘value’ yesterday. Talking about GS, I note in a story out of the L.A. Times that GS “urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.” Does this sort of behavior out of GS surprise me? Not in the slightest.

I have two stories today…the first is about ex-Goldman Sachs’ boss, Hank Paulson, and his continuing efforts to save AIG (NYSE:AIG). It’s a Wall Street Journal story that wasn’t available on the Internet and is posted here as a GATA dispatch and entitled “New AIG Rescue is Blessing for Banks”…and that it is. The link is here.

My second offering is yet another commentary on a return to the gold standard. This story appeared in the Washington Times the other day. The author, Lawrence Hunter, is former staff director of the congressional Join Economic Committee and currently president of the Social Security Institute. The story is entitled “Obama’s Golden Opportunity” and the link is here.

I never expect anything good from government. And here I refer to the institution itself. How can you, considering that its main products are wars, pogroms, prosecutions, persecutions, taxation, regulation, inflation, and assorted idiocy. These aren’t just accidental characteristics; the actual essence of government is coercion, and coercion is not a good thing. Worse, the people drawn to ’service’ of the State aren’t the ‘best and brightest’, as their propagandists put out, but the worst and dullest; they’re people who believe in organized coercion. Who else could even consider working for such an organization? That’s why ‘throwing the bums out’ is a pointless exercise in self-delusion. – Doug Casey, caseyresearch.com

When I look at the future, whether it be next week, next month…or next year…I see nothing but the smouldering ruins of what used to be a world economy and its associated financial and monetary systems. Nothing of what currently exists, will remain…and the “Greater Depression” will be upon us.

And on that cheery note…I’ll see you on Friday.

Source: And Then There’s This…Thursday, November 13th, 2008

This from Today’s Financial News:

All across America, huge companies are selling at deep discounts. One of those companies is General Electric (NYSE:GE). It is one of the most prominent, well-known and successful companies in the world, yet its shares are selling for prices just shy of half what traders were getting one year ago.

In fact, GE has not been this cheap in over a decade. The last two times shares of General Electric were this cheap, investors more than doubled their money in the following few years.

Imagine having the opportunity to purchase shares of the company for just $22 this time last year when shares were peaking at $42.

Investors would have pushed their own mothers out of the way for that kind of opportunity.

Let’s face it. General Electric has been in business for a long, long time. And it will remain in business for an even longer period of time. Because the company is such a diversified mega-conglomerate it has the power to withstand immense turmoil.

A Wall Street panic like the one we saw recently is nothing new to this Blue Chip. GE has endured huge price declines many times in its past. Each and every time it did, share price rebounded dramatically higher than where it started.

As I write, GE’s fundamentals are in ranges we have not seen in a very long time. With a reading of just 9.6, the company’s price-to-earnings ratio is insanely low. It should be twice that figure, at least. The downturn has created the ultimate value play.

That is why Warren Buffett recently wrote the company a check for $5 billion so he could get his hands on the profit potential. You do not become the nation’s richest person by paying too much for something. Follow his lead.

Shares of GE are priced at levels we should not see except during the most catastrophic economic events. We are nowhere close to that situation. Granted, the company’s earnings will suffer over the next few quarters. But the decline will not be anywhere close to justifying this huge share price decline.

General Electric is oversold. Warren Buffett knows it. I know it. Now you know it.

Buy shares of the company and wait for the rebound. In just a year or two, when shares are once again trading for $40 and more, you will be very, very glad you did.

Discover what it is like to be rich

Since we are following in the footsteps of Buffett, how about we take another piece of his sage advice…

Buffett is constantly discussing his investment philosophy: buy what you know and use. This theory is why Campbells Soup and McDonalds have remained relatively unscathed by the credit crunch.

To learn about the next undervalued superstar, all you have to do is open your wallet. I bet you have a few credit cards stashed in there.

All of the major credit card companies – names like Visa (NYSE:V), Mastercard (NYSE:MA), and American Express (NYSE:AXP) – have seen their valuations drastically reduced during the recent bear market. None of them are as undervalued as Discover Financial Services (NYSE:DFS) and its powerful Discover Card brand.

Selling for less than $11, down from over $32 less than two years ago, shares of the company are a downright steal.

Again, this company and its products are in a very strong position. No matter what happens in this economy, people will still use their credit cards. And even if every American cuts their cards to shreds, Discover still has a strong network in 184 other countries.

Like I mentioned above, all of the major credit card companies have been hit hard in recent weeks. And all of them have created fantastic buying opportunities. But only Discover adds a powerful technical investing layer to the mix.

Over the next few weeks and months, we are bought to hear the mainstream media discussing record-breaking delinquency rates. More people than ever will be late with credit card payments as the economic machine grinds to a halt.

For the nation as a whole, folks that cannot afford to pay their credit card bills is a terrible thing. But for credit card companies, like Discover, that are allowed to charge huge annual interest rates and levy fees for just about everything, late payers create a wealth of revenue streams.

Shares of the company are trading right at all-time lows. It means no investors have ever bought shares of this company at prices this cheap. It also means if anybody wants to sell, they would have to do it at a loss. It puts a solid floor under share price and is a phenomenon technical investors love.

Even if the economy were to take a strong downward slide, Discover’s firm price floor would help avoid any serious share-price decline. It will also create a catapulting function as the market and the economy rebound.

As long as you buy shares below $12, your position should create some fantastic profits.

The coal industry cannot die

While we are on the subject of investing in what we know and use, let’s discuss another product that we are both using right now, electricity.

Electricity is the commodity this world depends on every second of every day. And chances are the electricity your computer is using as you read this report was created by coal. It is a good bet because about 50% of this nation’s electricity is generated by burning coal.

If you have heard any of the presidential debates, coal is going to be a major energy focus over the next four or eight years. Both candidates are pushing for increased growth in the clean-coal industry.

That means coal is not going away anytime soon. But if an outsider were to look at the prices for the raw material or the share price of the companies mining and selling the indispensable fuel, they may be inclined to believe coal’s days are numbered.

They would be dead wrong.

Coal will play a vital role in the global economy for decades, if not centuries, to come. Thanks to new technologies, coal can be burnt in an ultra-efficient, super-clean process. It can even be used to make the fuels that power our cars, trucks, trains, and planes. Coal is the next “super fuel.”

One company poised to take advantage of any growth in the coal-producing industry is James River Coal Company (NASDAQ:JRCC). It is yet another company with shares trading for just a fraction of what they were a few months ago.

Right now, you can get your hands on shares for just less than $20.

In June, they would have cost you over $60. This time next year, they will likely cost you at least that much.

There are two important facts to understand about the coal industry.

First, there is a global coal shortage. Demand far outstrips supply no matter where in the world you go. China, India, Australia, and Russia are desperate to get their hands on more fuel. Fortunately, the United States has over a quarter of the world’s coal supply in our own backyards. Finally, we have the power in our hands.

The second thing you need to know is that once a coal-fired generating plant goes online, it cannot afford to shut down. It will need a continuous supply of coal for decades to come. It is just the opposite of nuclear-operated facilities. A nuke plant only needs fuel every twenty years or so. Coal plants are addicted to fuel.

Combine a nearly constant demand stream with a lack of supply and every economist will say you have a perfect recipe for profits. Throw in a stock price that has been unduly beaten down because of unfounded fears of an industry slowdown and you have an opportunity to score big time as share price rebounds.

James River Coal Company is trading well below dirt-cheap territory. Take advantage of Wall Street’s mistakes and buy shares under $22 while you still can.

An American classic

Finally, there is one more all-American company investors absolutely must know about. This one is truly a Blue Chip selling at penny-stock prices.

Take a look at a chart of Ford Motor Company (NYSE:F) and you will see a history of ups and downs. The company is in the heart of a highly cyclical industry constantly expanding and contracting. But no downturn has ever been as big as this one.

A decade ago shares of Ford were selling for over $37. Today, you can get them for less than $3.

It is the price of a mere cup of coffee at Starbucks and is a price Ford shareholders have not seen since the Reagan administration.

Granted it may be a long time before the company sees shares trading for over $35, but it certainly will not be long until we see them at $10 or even $15.

The domestic auto industry has reached its bottom. It is impossible to argue any other way.

Just look at the deal General Motors (NYSE:GM) and Chrysler are working to create. Obviously, if it can get its hands on Chryslers strong Jeep and minivan lineup, plus billions of dollars in desperately needed liquidity, General Motors will be a major benefactor. But so will Ford.

The auto industry will consolidate. There will be one less major competitor. Prices will begin to rise and margins will increase substantially. This is a deal that could save Detroit and make a lot of smart investors rich along the way.

But there is even better news.

Just recently, Congress handed Detroit automakers its own version of a rescue package. It came in the form of $25 billion in loans. The deal gives the automakers an insurance policy that will ensure they make it through this latest cyclical downturn. After all, no politician will ever let Ford go belly up on their watch.

Experts agree by 2010, the nation’s car industry is going to embark on a serious upswing. The cars that Americans bought during the last boom cycle will be wearing out, Detroit will have a new, high-tech product lineup, and customers will once again be walking into showrooms with pockets full of cash.

You can wait for the company to start making big headlines and get shares at $10 or more. Or you can invest at penny-stock prices and hold onto the shares as Ford gets back on its feet.

In less than 24 months, we will be entering the fourth-quarter of 2010. This credit crunch and recession talk will be in the history books. Most importantly, your shares of Ford will be worth three or four times more than they are right now.

Investors have an exciting road ahead. We have made it through the worst of the market turmoil. The economy is going to slow but it is finally back to fundamental investing. No longer will we see wild swings wiping out entire sectors. Now the weak will be eliminated and the strong will flourish.

Invest in the strong companies while their prices are dirt cheap and watch your profits grow as Wall Street figures out how to fix this mess. In just a few years, the credit crisis will be behind us and some huge profits will be in your pockets.

Source: Blue chips at penny stock prices

• Visa Inc. (V) and MasterCard Inc. (MA) have settled an antitrust suit with Discover Financial Services Inc. (DFS) rather than go to trial, sending Discover shares up almost 13% yesterday (Tuesday). Discover had filed a lawsuit against the two credit card processors seeking $6 billion in damages. The suit alleged that MasterCard and Visa prevented member banks from issuing Discover cards, Reuters reported.

• Daimler AG (DAI) yesterday (Tuesday) announced it would cut 3,500 jobs and close two North American plants in response to declining sales growth. The German automaker also plans to discontinue its Sterling-brand truck line, MarketWatch reported. The plant closures will affect Daimler’s St. Thomas, Ontario and Portland, Oregon plants.

• Apple Inc. (AAPL) will for the first time sell a MacBook for less than $1,000 during the coming holiday season, Chief Executive Officer Steve Jobs announced yesterday (Tuesday). “Demand is going to be good,” Jobs said of the MacBooks, Bloomberg News reported. “We’re making a lot of them.”

• Johnson Controls Inc. (JCI) yesterday (Tuesday) projected a 16% decline in earnings over the next fiscal year. The Milwaukee-based company manufactures car batteries and seats and has suffered as auto sales declined in the United States and abroad. “While we believe recent economic weakness was clearly partly priced in, our sense from management is that automotive on both sides of the Atlantic is proving much tougher than expected,” JPMorgan Chase & Co. (JPM) analyst Himanshu Patel said in a research note Tuesday, The Wall Street Journal reported.

• Light, sweet crude for November delivery yesterday (Tuesday) fell $2.56 to settle at $78.63 on the New York Mercantile Exchange, amid signs of dwindling world energy demand. Gasoline prices have followed oil’s precipitous decline, falling 23% from the record average of $4.14 a gallon reached July 17 to $3.163, according to auto club AAA.

• The Bush administration said yesterday (Tuesday) that the deficit for the budget year ended Sept. 30 was $454.8 billion – more than double the $161.5 billion recorded in 2007. It surpassed the previous record of $413 billion set in 2004. Some analysts believe that next year’s deficit could easily top $700 billion, according to The Associated Press.

• PepsiCo Inc. (PEP) said yesterday (Tuesday) that it would eliminate 3,300 jobs and close down six plants in an effort to save $1.2 billion over the next three years, The Associated Press reported. The announcement came as the company reported a 9.5% drop in third-quarter profit. The job cuts equate to roughly 1.8% of Pepsi’s global work force of about 185,000 employees.

SOurce: Global Investing Roundups Wednesday, October 15th, 2008

This from The Daily Reckoning:

Fear is back.

Delayed…denied…denounced…fear is back – and he’s mad as hell.

This week, panic set in. On Monday, the Dow fell more than 350 points. After such a big drop, you’d expect a big bounce. But not yesterday [Tuesday]. Stocks just kept falling, with the Dow down another 508 points.

Oil rose $2 to $90. The dollar held steady at $1.36 per euro. And gold rose $22. Coin dealers say they can’t keep up with the demand for bullion coins. No wonder; smart investors are looking for shelter. You can still join them – get in before the price of the precious metal skyrockets further. See here.

It’s full-scale war, in other words, with the forces of inflation in full retreat – even rout.

Investors await every bit of news like dispatches from the front lines. Will the Dow hold at 8,000? When will the Fed cut rates? Can our soldats keep the huns out of Paris?

The news comes fast – too fast to take it all in. Russia has lent 4 billion euros to Iceland – ‘we’ll work out the terms later,’ said the nice Russkies. The Russians are also pumping $37 billion into its own banks. England says it will bailout its banks – with 50 billion pounds of equity and another 200 billion in loans.

The Australians already cut their key rate by 1%. And the Fed, the ECB, the Bank of England and Swiss, Canadian and Swedish central banks made emergency rate cuts. While coordinated rate cuts do happen on occasion – the Fed and the ECB made cuts following 9/11 – joint statements announcing a cut at multiple banks is a rarity. But in this market, we suppose anything is possible.

In the United States, the Fed says it will buy commercial paper; that is, it will buy up loans made to U.S. companies…or even loan the money directly to troubled firms. And not just financial firms. General Motors says it is turning off the lights at all its European production plants.

The poor lumpeninvestor doesn’t know what to make of it. It seems like only yesterday he was told that everything was all right. Alan Greenspan said so. So did Hank Paulson. And Ben Bernanke. And George W. Bush. We have the strongest economy in the world. We’re unbeatable. Our economy is so dynamic! Our financial sector is so inventive! We’re just so damned smart!

The Japanese can live with a 20-year slump if they want. The Europeans never seem to get their economy revved up. But we Americans know how make an economy hum – just give the consumer more credit!

But when the cycle turns from greed to fear…all that credit is like excess fuel in a crash landing. It tends to explode. When a bank takes a loss – say, from its holdings of sub-prime debt – the fractional reserve credit system sends out sparks. A loss of $100 million causes as much as $1.5 billion in credit to go up in flames. As the credit disappears, so does the leverage that kept up asset prices.

So far this year, the world has lost $20 trillion in market capitalization. By September, U.S. property was down a total of about $6 trillion over the last two years. That’s why the feds are losing this fight – they’ve got much less fire power. They’ve just passed a bill to put $700 billion back into the system – buying up Wall Street’s mistakes. The Fed is loaning another $900 billion, according to yesterday’s report. Put all the bailout spending together and you get a figure that is still not even 10% of what Mr. Bear Market has taken away.

Yes, it’s all working against us now…the credit…fractional banking…and our own emotions.

Source: Fear is Back…and Mad as Hell