U.S. Federal Reserve Chairman Ben S. Bernanke and Congress agreed Friday that the financial system – not the American taxpayer – should bear the costs of bank bailouts. Sheila Bair, head of the Federal Deposit Insurance Corp. (FDIC), wants the banks to ante up $45 billion – three years’ worth of deposit-insurance premiums – to bail out the fund that insures bank deposits.

When it comes to bank stocks, we all know that there were a number of Money Morning readers shrewd enough to buy Citigroup Inc. (NYSE: C) shares when the foundering giant’s stock price was below $1 a share.

If you’re one of those investors, good for you: With Citi’s shares now trading at nearly $4.70 a share, that shrewdness – or courage – has been amply rewarded.

But the question we have to ask at this point is: Why would anyone buy banks stocks right now?

Bailouts Revisited

When the Bush administration bailed out the banks last autumn, I opposed the bailout. But I understood the rationale for it. The Lehman Brothers Holdings Inc. (OTC: LEHMQ) bankruptcy had clearly done a lot of damage to market confidence. Thus, a series of high-profile failures – however well merited – could push the market into a behavioral funk that might take years to emerge from.

After all, as we were incessantly reminded, the banks were all intimately inter-connected – not in the least by the diabolical credit-default-swap market. So a big failure could trigger a mass-market meltdown.

That justified the immediate bailout back then. But it did not justify the continued existence of those banks and other financial institutions – especially Citi, Bank of America Corp. (NYSE: BAC) and insurance giant American International Group Inc. (NYSE: AIG) – a year after the bailout.

Even if there was an argument for preventing the immediate meltdown of those companies – to prevent panic – there was no good argument for allowing them to continue in business as zombies, distorting the market forever after. An orderly liquidation was what was really needed.

But if the plans called for these three bad actors to be liquidated, it should surely be happening by now. Two of the three have even kept their top management for the intervening year. The exception has been BofA, where Chief Executive Officer Ken Lewis is now being shoved – kicking and screaming – toward the exit. (However, I have no doubt he’ll end up being well rewarded for the indignity).

Japan’s ‘Lost Decade’

Economically, keeping banks and other companies alive after they should be dead is the mistake Japan made back in the 1990s. After Japan’s massive stock market meltdown, most of the banks were technically insolvent. A decline in the value of the stocks the banks held had gnawed away their capital, while their assets were shredded by the collapse in the value of their real-estate loans.

Despite this, Japan opted to prop up many insolvent companies, which kept the country’s entire banking system on life support until 1998 – hence the “Lost Decade” of financial legend. And a true resolution of the problem did not come until it was forced by Prime Minister Junichiro Koizumi in 2003. The result was more than a decade of economic stagnation and a mountain of public debt that actually exceeded 200% of gross domestic product (GDP).

For the banks themselves, the fallout can be even worse.

An ‘Artificial’ Market

At first blush, the profits of the last few months look pretty good. And the record bonuses being threatened on Wall Street suggest that all is fine. However, there are two problems. First, bank earnings have been propped up by an extraordinarily bank-friendly monetary policy, keeping short-term interest rates at close to zero and buying up more than $1.5 trillion of bad bank loans from the markets.

That simply can’t last. If it does, we’ll end up with a bad case of hyperinflation.

As for the bonuses, does anybody think that if Citi had gone bust, and ex-Citibankers were now selling apples on the street corners of New York, bonuses would be zooming so high?

If the market for overpaid bankers had been allowed to clear properly, they would no longer be overpaid.

If the Japan’s Nomura Securities (NYSE ADR: NMR) wanted to double its U.S. staff, as it announced Monday (an extraordinarily shareholder-hostile decision, given Nomura’s lousy U.S. track record), it could just lean out of its office and whistle, and a parade of ex-Citibankers, ex-AIG executives and ex-BofA execs would rush in, begging for scraps.

It appears that the concerns that Soros expressed are well justified.

A Grim Reaping For Bank Investors

Since there are more competitors in the market than there should be, once the Fed’s over-generous monetary policy is corrected, there will be too much competition, so bank profits will be squeezed. Conversely, there will be too many jobs in the industry, so banker pay scales will be artificially propped up.

If that’s a recipe for good shareholder returns, I’m a Dutchman.

There’s more. The populist fury against the banking system doesn’t look like it’s doing much about banker pay. However, it will almost certainly result in special extra taxes being levied on surviving banks, to pay for the bailouts.

The costs of those taxes will be passed through to shareholders, because competition from all the zombies that are still in business will prevent banker pay from being squeezed much. The extra levies that Bair, the FDIC chief, is employing to keep the deposit-insurance fund solvent also will fall on banks, although in this case it will be the small and medium-sized that will suffer the worst.

Squeezed profits, expensive staff, extra taxes and special FDIC levies – it doesn’t look to me as if there will be much left for bank shareholders.

Expect 2010 to be a grim year for them.

Source: Hidden Traps Make Bank Stocks a Bad Deal

Source: Investment News Briefs Friday, September 4, 2009

The good news came in spite of a small jump in initial applications for state unemployment insurance, which rose by a more-than-expected 3,000 to 608,000 in the week ended June 13. Analysts polled byReuters were expecting claims to dip to 600,000 from a previously reported 601,000.

But analysts were largely focused on a trend in continuing claims, which tracks jobless workers who stayed on government benefit rolls.

Those claims plunged by 148,000 to a smaller-than-anticipated 6.69 million in the week ended June 6, the latest week for which data was available. That is the lowest number since May 9, and the largest one-week drop since November 2001, Reuters reported.

And in another sign the labor market may be thawing, the closely watched four-week moving average for new claims, which smoothes out short-term volatility, shrank to 615,750, the least since February 14.

The drop also halts a streak of 21 straight increases in continuing claims, including 19 that were records.

“The labor market remains weak but it’s starting to stabilize,” Maxwell Clarke, chief U.S. economist at IDEAglobal in New York told Bloomberg News. “An improvement in employment conditions and improvement in confidence go hand in hand with an improvement in consumer spending.”

Still others heralded the news as a harbinger of a recovery in the overall economy.

“Overall, we judge this report as another among a growing number of signs [however tentative] that the economy is beginning to stabilize,” Nomura Holdings Inc. (NYSE: NMR) economist Zach Pandl, wrote in a research note to investors, The Wall Street Journal reported.

After companies made deep job cuts earlier this year, the drop in claims is a welcome change for weary jobseekers battered by the recession.  Companies have slashed more than 6 million jobs since the recession began in December 2007.

Of course, the statistics don’t reveal whether workers on government rolls are successfully finding new jobs or dropping off because their benefits have simply run out after the normal allotment of 26 weeks.

Any drop in continuing jobless claims might be reflecting only the drop in initial claims, as fewer people join the rolls.

“It is unlikely that new hiring has picked up in any meaningful fashion,” Joshua Shapiro, chief economist with MFR Inc., a consulting firm, wrote in a note to clients, the Associated Press reported. “More probable is that long-term unemployed are starting to fall off the rolls.”

And the likelihood of significant hiring as the economy recovers remains in doubt.

As reported in Money Morning last week, U.S. Federal Reserve Bank Chairman Ben S. Bernanke threw cold water on hope for a full-blown economic rebound when he hinted recently that the U.S. labor market could well be facing a jobless recovery – an upturn in which the economy and corporate profits advance, but virtually no new jobs are created to compensate for years of layoffs.

The bankruptcies of General Motors Corp. (OTC: GMGMQ) and Chrysler LLC are likely to directly throw at least 32,000 more workers out of work in the coming summer months. And countless others at parts supply companies and other auto-related businesses may soon follow.

Nevertheless, a further reduction in continuing claims might be enough for some economists to call the recession over.

Bruce Kasman, chief economist at JPMorgan Chase & Co. (NYSE: JPM), said that a drop in the four-week average to 580,000 by next month would be sufficient to declare the recession over, according to theAssociated Press.

Kasman is chairman of the American Bankers Association’s economic advisory committee, a group of economists for large banks that this week predicted the economy will recover in the third quarter.

Source: Drop in Continuing Unemployment Claims Could Signal Onset of Recovery

Sales at U.S. retailers dropped 0.4%, the eighth monthly decline in the last 10 months, following a revised 1.3% drop in March that was larger than previously estimated.  Excluding auto dealers, sales fell 0.5%

Economists had expected an increase of 0.5% to 1.0%.  Since July, retail sales have shown increases only in January and February, and those were attributed to post-holiday sales.

The disappointing numbers indicate surging unemployment and the worst housing market in decades could temper consumers’ appetite for spending for years, analysts said. As long as consumer spending is muted, which accounts for about 70% of all economic activity, any recovery from the worst recession in over 50 years is likely to be slow and difficult.

“These numbers are certainly discouraging, a bit disheartening,” David Resler, chief economist at Nomura Securities (ADR NYSE: NMR) in New York, told Reuters.

The news sent U.S. stock index futures reeling to steep losses in New York trading, while government bond prices enjoyed their biggest gains in weeks.
There can be little doubt that soaring unemployment is curtailing consumer spending. Unemployed workers naturally cut back on purchases and recent statistics suggest those that are still working are increasing their savings rate.

Despite the fact that payrolls fell by only 539,000 workers in April, the smallest drop since October, the jobless rate climbed to 8.9%, the highest level since 1983. Economists surveyed this month by Bloomberg predicted the jobless rate would average 9.6% in 2010.

The same survey also showed consumer spending will be unchanged this quarter after rising 2.2% during the first three months of the year. Last month, economists had forecast spending would fall at a 0.5% annual pace in the second quarter.

“The second quarter is going to be tough,” Bill Cheney, chief economist at John Hancock Financial Services Inc. in Boston, said in a Bloomberg Television interview. “Consumers are losing their jobs, concerned about losing their jobs and losing wealth.”

Retail sales fell even as consumer confidence started to rebound. According to last month’s report by the Conference Board, a New York-based private research group, consumer sentiment jumped in April by the most since 2005.

Falling demand at electronics, furniture, clothing and grocery stores led the decline in sales.

Gas stations also reported falling receipts in April, even though fuel prices climbed, indicating Americans may be cutting back on driving just as the U.S. enters the usually busy summer months.

Imported petroleum prices were up 15.4% in April – the largest monthly rise since a 17% increase in March 2002 – after February and March figures were revised upwards to 5.3% and 7.9% respectively.

Sales at car dealers were among the few retailers to show an increase last month. Auto sales gained 0.2% after falling 2% in March.

Counter to an industry report last week, the government’s data said sales at clothing retailers decreased 0.5%.

According to last week’s report from the International Council of Shopping Centers, the New York-based trade group that measures sales at about 40 retail chains, April same-store sales rose 0.7%, the first gain since September.

Wal-Mart Stores Inc. (NYSE: WMT), the world’s largest retailer, said sales at U.S. stores open at least a year rose 5%. Other retailers that said first-quarter earnings exceeded their forecasts included Kohl’s Corp. (NYSE: KSS) and BJ’s Wholesale Club Inc. (NYSE: BJ).

Those reports had raised hopes that shoppers are returning to stores. But yesterday’s report had retailers preaching patience.

“We’re still working our way through the slowdown,” Mike Niemira, chief economist at the ICSC, told Bloomberg. “I think it will get better as the year progresses. The month of May will still be tough and I suspect by the summer that things will be a little broader in terms of the improvement.”

Source:  Plummeting Retail Sales in April Bury Economic “Green Shoots”

The Macquarie and Rogers China Agriculture Index is an investable index that will track price changes of the market “basket” of the agricultural commodities most commonly consumed in China. Macquarie Funds is the asset management arm of Australia’s Macquarie Group.

Macquarie actually created the product in November, and continued to operate it in December, when the China agricultural index posted a return of better than 11% – outperforming most agricultural indices and handily besting most stock markets in that part of the world, Asian Investor reported. That provided Macquarie Funds with the two-month performance needed to actually launch and start marketing the index.

“Apart from being the world’s most populous nation, China is [also] one of its fastest-growing and as such, Chinese dietary patterns should play an influential role in determining the prices at which agricultural produce is exchanged” Harry Krkalo, Macquarie Funds’ Singapore-based head of Asian retail funds sales, told Asian Investor. “Developing an investable index which effectively tracks the price changes of commodities with reference to the quantities of each agricultural product consumed in China is an innovative and exciting way to invest in the sector.”

Indices that track commodities are usually calculated utilizing so-called “supply-side” factors, and the commodity weightings are based on global production. The Macquarie and Rogers China Agriculture Index is unique because its component weightings are determined using current and projected data on commodities consumption in China.

The index allows investors to track – on a daily basis – the price changes of the agricultural commodities basket, and will ultimately enable investors to capture the price impact of current and potential changes in China’s food consumption patterns. What’s more, it also allows fund managers and other marketers of financial-services products to create and sell financial products that are linked to this innovative and topical theme. It uses exchange-traded futures contracts on physical commodities to do so.

The China agricultural index is the first one manufactured in Asia by Macquarie Funds, which is trying to use its geographic location to its advantage, and bolster its Asian presence. As of the end of September, Macquarie Funds had $53 billion in assets under management worldwide, including $1.5 billion sourced from investors in Asia.

“Macquarie is a leader in trading commodities futures. Jim Rogers has worked with other groups before but nothing specifically with China,” says Krkalo. “So when we put those bullet points down, a Chinese consumption-based product made sense and it is an interesting first index for us to roll out.”

From Investor to Icon

Rogers first made a name for himself with The Quantum Fund, a hedge fund that’s often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%.

It was after Rogers “retired” in 1980 that the investing masses got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as “Investment Biker” and the just-released “Bull in China.”

He also made some historic market calls: Rogers predicted China’s meteoric growth a good decade before it became apparent and he subsequently foretold of the powerful updraft in global commodities prices that fueled a year-long bull market in the agriculture, energy and mining sectors.

Rogers’ prescience is well known, and his candor and willingness to criticize the bailout strategies under way in Washington means that his comments almost always receive substantial media coverage.

Rogers sat down for extended conversations with Money Morning Investment Director Keith Fitz-Gerald twice in the past year. For the first of those two interviews, Fitz-Gerald traveled from his Oregon home all the way to Singapore, where Rogers now lives with his family. Rogers warned investors that there were tough times ahead for the U.S. dollar, and for the nation’s central bank.

In the second interview, Fitz-Gerald met with Rogers in Vancouver, British Columbia, where both were to speak at a major wealth management conference. During that April discussion, Rogers warned Money Morning readers that the U.S. financial crisis was destined to grow much worse – an assertion that echoed Fitz-Gerald’s own predictions and that’s also proved to be highly accurate.

In all his discussions, however, Rogers remains highly bullish on two things: China and commodities. The new index addresses both.

“I bought more [commodities] recently. I know that one of the few bull markets that I can see going up in the next five to 10 years is in agriculture,” Rogers said. “You may not have bull markets in cars or financial institutions or lots of other things, but I know the world is not going to stop eating.”

Roller-Coaster Ride for Commodity Prices

Commodity prices across the board have been whipsawed over the past two years. Food-and-energy prices soared in the last part of 2007 and continued their climb in the first part of 2008. In fact, as Money Morning reported in early April, food prices rose so far and so fast in the early part of last year that the leader of the United Nation’s World Food Programme warned that a “silent tsunami” of hunger was sweeping the globe.

But after the world commodities markets sold off sharply for most of the last half of last year, a committee made up of Rogers and key members of the treasury and commodities team in Macquarie Funds created the index.

“Macquarie is one of the largest traders of agricultural commodities globally and Jim Rogers is one of the world’s leading commodity investors so it’s a great partnership,” Matthew Long, Sydney-based executive director of Macquarie Funds, said in an interview with Asian Investor. “The index methodology is a refreshing way to approach investing in commodities and over time we believe that consumption patterns, particularly those of China, will increasingly influence agricultural prices. We expect the index to perform quite differently from existing agricultural indices.”

Macquarie Funds plans to launch, in the near future, a series of funds linked to the Macquarie and Rogers China Agriculture Index in the Asian region in addition to issuance in Switzerland, according to published reports.

“The investing public is still worried about where to put their money so any product launch for the next six months is going to be a carefully thought-out launch,” Krkalo says. “But this commodities index is interesting for both short-term and long-term reasons.”

In view of the projected demand for food over the next decade – especially with the emergence of the world’s largest middle class, taking place right now in China – the decline in food-based commodities was badly overdone, Macquarie’s Krkalo says. From a profit standpoint, the short-term opportunity stems from attractive valuations, while the long-run outlook is all about massive and growing global demand.

Krkalo and Rogers both make a strong case that everyone should be invested in commodities. Even with the big decline in prices that took place in the last half of last year, here in the U.S. market alone, for instance, prices for food in U.S. grocery stores jumped 6.6% last year – the biggest spike since 1980. If anything, that underscores yet again that inflation is a much bigger problem than government officials, or most economists, say it will be. It also calls into question the veracity of the statistics that say there was such a drop-off in prices.

Last year was the second one in a row in which U.S. consumers were forced to pay a lot more for their groceries, Money Morning reported. In 2007, food prices at supermarkets rose 5.6%. Prices rose only 1.4% in 2006.

Of all food categories, prices for cereal and baked goods hit U.S. consumers the hardest, zooming 11.7% in 2008 over 2007. Prices for meats, poultry, fish and eggs gained 5.1%. Fruits and vegetable rose 3.4%, while dairy products advanced 2.7%.

Asia’s Promise

Commodities indices actually outperformed stock markets in December, with the Dow Jones-AIG Agriculture Total Return Index and the Macquarie and Rogers China Agriculture Index posting returns of approximately 9.8% and 11.6% respectively, Asian Investor reported.

Most major Asian stock-market indices – including Japan’s Nikkei 225, Hong Kong’s Hang Seng, MSCI Singapore, Kospi 200 and the MSCI Taiwan – posted positive returns, the largest of which was the Kospi 200 with a performance of around 6.2%.

The worldwide financial crisis and the sell-off in stocks that’s resulted have singed the mutual-fund industry. Mutual-fund assets in Asia – excluding Japan – could drop by nearly 20% this year, and won’t equal last year’s record levels until 2010, Boston-based financial researcher Cerulli Associates reported back in October.

Assets in Asian funds soared 86% to $1.126 trillion in 2007, before dropping 12% in the first half of last year. Macquarie’s Krkalo told the China Daily that when markets improve, the region’s investors would scramble to find opportunities.

“Asian investors are really quick to move,” Krkalo said.

Asia’s fund industry is dominated by such heavyweights such as ING Groep NV (ADR: ING), Schroders PLC, JPMorgan Chase & Co.’s (JPM) JF Asset Management unit, and Prudential PLC, as well as Nomura Holdings Inc. (ADR: NMR) and Citigroup Inc.’s (C) Japan-based Nikko Asset Management unit, which the U.S. banking giant is trying to sell.

Source: New Index Combines Jim Rogers’ Top Two Profit Plays: Commodities and China

For optimists, the message here is that all hope for holiday retail sales is not yet lost. A National Retail Federation survey showed that only 47% of consumers have finished their holiday shopping and another 19% have not even started.  As a dismal 2008 comes to a close, the last die-hard eternal optimists are calling for a year-end Santa Claus Rally, as the government bailouts and U.S. Federal Reserve actions give investors some hope for 2009 and beyond.

But such blind optimism too often ignores a key point or two. The Dallas-based Neiman Marcus, for instance, just announced that its third-quarter earnings plunged 84% because of its aggressive discounting, the Dallas Morning News reported. And since the discounting will continue, so will the decline in profits, the high-end retailer conceded.

With even luxury retailers discounting to try and salvage something from the holiday shopping season, the outlook for lackluster sales and even-more-lackluster earnings feeds into an already dour outlook for the U.S. economy.

And if that doesn’t squelch the optimists’ ardor, then a looming revision in the third-quarter gross domestic product (GDP) – last reported as minus 0.5% – will almost certainly bring them back to the realities of the sluggish economy.

It may even force those optimistic economists to finally say: “Bah Humbug.”

That GDP report is due out tomorrow (Tuesday).

Market Matters

Though perhaps it’s wishful thinking, there are some analysts who point out that one or more of any number catalysts could jump-start the economy and the financial markets in the New Year, putting the past few miserable months in the rearview mirror.  They argue that the trillions of dollars in bailout money pumped into the financial system should finally start to provide badly needed liquidity; the Fed seems intent to do “whatever it takes” to reverse, or at least blunt, the current downturn (even if runaway inflation may be a repercussion down the road); an “Obamanomics” stimulus plan could create new jobs, while enhancing the country’s aging infrastructure; risk-free Treasury yields at 0.00% should start to look less and less attractive, prompting investors to look into stocks and non-government bonds again. Just a few last minute items to add to the holiday investment-shopping wish list.

Sadly, Bernie Madoff saw to it that his investors will have a holiday season to forget as the list of prominent victims grew each day: Real estate mogul Mort Zuckerman, U.S. Sen. Frank R. Lautenberg, D-N.J., Hollywood movie mogul Steven Spielberg, Spanish bank Banco Santander SA (ADR: STD), France’s BNP Paribas SA, Nomura Holdings Inc. (ADR: NMR), and many charitable foundations and non-profit organization were among the people and institutions victimized.

Plenty of finger-pointing has been directed at the U.S. Securities and Exchange Commission (SEC) for failing to uncover some rather obvious signs of wrongdoing through the years. As Money Morning reported even before the official announcement was made, U.S. President-elect Barack Obama tapped FINRA Chief Executive Officer Mary L. Schapiro to head the SEC during this time of turmoil. Congrats on the appointment, I guess?

The Detroit Big Three automakers received early holiday cheer as the U.S. Treasury Department will release $17.4 billion of Troubled Asset Relief Program (TARP) money in return for potential equity stakes and other concessions from management and unions.  General Motors Corp. (GM) and Chrysler LLC will be the recipients, while Ford Motor Co. (F) pursues – for now – the go-it-alone strategy. Meanwhile, Chrysler will be shutting down all of its North American production plants for at least a month and also will begin charging dealers large fees on unsold cars that remain on their lots after prolonged periods.  In perhaps a sign of things to come, a consortium of 14 companies – including 3M Co. (MMM) and Johnson Controls Inc. (JCI) – have asked for $1 billion in government funding to begin manufacturing state-of-the-art batteries for electric cars.  The move is reminiscent of action taken by computer chip firms decades ago that helped make the industry more competitive domestically. (Johnson Controls also announced last week that it would invest $90 million to open a lead-acid-battery-production plant in China’s green-power energy industrial center in Changxing Economic Development Zone of Zhejiang province, Alibaba.com reported).

Energy traders disregarded the decision by the Organization of Petroleum Exporting Countries (OPEC) to cut production by a record 2.2 million barrels a day, fearing lack of compliance by its members. Instead, traders chose to focus on the shrinking demand in the sluggish economy as oil prices briefly fell below $35a barrel to levels not seen since 2004.

Goldman Sachs Group Inc. (GS) reported its first-ever quarterly loss and Morgan Stanley (MS) followed with a shortfall of its own.

FedEx Corp. (FDX) posted a higher profit, but gave a dire outlook and announced major compensation cuts for senior management (and benefits cuts for the rank and file).  Stocks were relatively flat as investors digested the latest on Madoff, the auto bailout, and significant Fed actions.

Economically Speaking

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

Too bad Fed Chief Ben S. Bernanke couldn’t punctuate that last statement with a hearty “Ho, ho, ho – happy holidays.”

After setting the target for the Federal Funds rate at 0.00% to 0.25%, the Federal Open Market Committee (FOMC) policymakers revealed they are studying other measures and may purchase U.S. Treasuries at some point in an effort to stimulate the financial markets.
There are already some signs that the central bank’s action already are working. Mortgage rates have dropped dramatically and borrowers are taking advantage of refinancing opportunities to save on future interest payments.  Investors are finding value in corporate and municipal securities, as certain high-quality issues are yielding more than 6% more than comparable Treasuries. Meanwhile, Japan’s central bank followed suit with a rate cut (to 0.1%) of its own.

More details of the Obama stimulus plan emerged during the week and his economic team pegs the total package at about $800 billion (or more than $1 trillion by the time Congress adds its required “pork.”).  Tax cuts of up to $100 billion will serve as the most immediate stimuli, with construction (infrastructure), energy and healthcare among the industries that will benefit the most over time.

The data of the week revealed that his package can not arrive soon enough.  Housing starts fell by 18.9%, to a record low, and declining building permits did not offer much promise for future construction. Another forecasting release, leading economic indicators, fell for the second consecutive month; in fact, over the past six months, the index has experienced its worst decline since 1991.

The inflation picture remains favorable, though naysayers find pessimistic views in that data as well.  The November consumer price index (CPI) fell 1.7%, the largest decline on record (since 1947), as gasoline prices plummeted by 29.5%. While the deflation-mongers claim that falling prices will force consumers to delay purchases (for when they become even cheaper), others point out that gas purchases can not be delayed, as people have to get to work (and few are choosing to ride their bikes or shift into mass transportation).  In reality, plunging gasoline serves as a stimulus package without any government interaction (though OPEC is getting involved).

Weekly Economic Calendar

Source: If Holiday Retail Stats Don’t Have Economists Saying “Humbug,” Tuesday’s GDP Report Certainly Will

Indeed, those analysts will watch to see how the stock-and-bond markets open this morning (Monday) as investors “vote” on whether the deal is a good one or not. A lot will depend upon what the so-called “experts” have to say about the long-term prospects of any deal (or non-deal) – and what strategies those experts tell investors to adopt:

Should they avoid “risky” equities at all costs and look to the “safe-haven” of commodities? And can you label the commodities sector as “safe” during a market in which oil can shoot up $25 a barrel in a single day? And what about money markets, which most investors view as the safest of investment plays: Are more money-market funds close to “breaking the buck,” a trend that threatens the most conservative of investors?

Congress seems more concerned about affixing blame than fixing the problem, so it’s little wonder that while there was a lot of finger pointing, few of our elected officials were analyzing their own roles in – and responsibilities for – this mess. There were no admissions of that one of the root causes was the lack of legislative oversight. Surely, the next Congress will seek to prevent similar calamities in the future and will rush to enact new (though not necessarily better) laws and regulations.

While everyone already realizes the economy is sluggish, this week will bring further confirmation through reports on labor (unemployment rate, non-farm payroll), manufacturing (ISM index, factory orders), and the U.S. consumer (income/spending, confidence). Some positive surprises sure would be nice.

Market Matters

Ah, the theater of politics…let the grandstanding begin. Apparently, when a U.S. treasury secretary, Federal Reserve chairman or even a president speaks, House Republicans (and a presidential candidate) don’t listen (especially in an election year). Throughout the week, Congress grilled the powers-that-be about the specifics of the $700 billion government bailout plan; at one point, they appeared to have reached an agreement by adding provisions on executive compensation and equity interest in those participating firms. But before the “I’s” were dotted and “T’s” crossed, disgruntled House of Representative members offered their own “insurance-based” plan (that, of course, included tax breaks), which U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. and many banking experts called “unworkable.” U.S. Sen. John McCain, R-Ariz., (apparently now a renowned economist) appeared to have sided with this vocal minority, ceased campaigning, and even tried to reschedule the first presidential debate to focus on these matters (and to further pander to certain constituencies), while Sen. Barack Obama, D-Ill., preached “change”).

Meanwhile, U.S. Federal Reserve Chairman Ben S. Bernanke warned that inaction could lead to “recession, higher unemployment, and increased foreclosures.” Even global investing icon Warren Buffett, whose Berkshire Hathaway Corp. (BRK.A, BRK.B) just made a confidence-building, $5 billion investment in Goldman Sachs Group Inc. (GS), urged Congress to act now and said “he could understand the anger… but action was needed.”

While most people would agree that the bailout is far from an optimal solution, inaction could lead to the worst economic times since the Great Depression. Despite the politicizing, some form of a deal most likely will be passed (and just in time for Congress to hit the campaign trail). But it will take years to evaluate the plan’s effectiveness.

While much of the country focused on the bailout, the negative ramifications of the financial meltdown continued. Washington Mutual Inc. (WM) was taken over by the Federal Deposit Insurance Corp. (FDIC) and became the largest bank failure in history. WaMu’s assets were promptly sold to JP Morgan Chase & Co. (JPM), which jumped into first place in terms of domestic banking deposits.

Meanwhile, Goldman Sachs and Morgan Stanley (MS) moved beyond the old investment-banking model to become bank holding companies with the hope that their newfound abilities to accept deposits will improve both their liquidity and their overall operations (even with the increased regulatory oversight). Morgan Stanley also bolstered its balance sheet by selling a 20% interest to Japan’s Mitsubishi UFJ Financial Group Inc. (ADR: MTU), while its country counterpart, Nomura Holdings Inc. (ADR: NMR), bought the Asian operations of Lehman Brothers Holdings Inc.’s (OTC: LEHMQ) for $225 million.

General Electric Co. (GE) reduced its earnings expectations, ended its stock repurchase program, and hold its dividend steady through 2009, thus becoming another victim of the financial crisis. This will be the first time in 32 years that it won’t boost its dividend.

Instead of crawling out of bed this morning and heading straight to the coffee pot, I went straight for my filing cabinet. I had to check to see if my passport was still current and valid. After all, if I want to put my thumb on the pulse of the American economy I will have to head to Asia, especially Japan.

Tokyo’s banks and brokerage firms have been cutting checks as fast as they can sign them during the last day or so.

Most notably, Nomura Holdings bought Lehman Brother’s Asian, European, and Middle-Eastern operations. It got the strategic holding at an incredible price that will ensure the bank is competitive for decades.

Of course, its shareholders are not the only ones celebrating today. Mitsubishi Financial Group grabbed a 20% share of Morgan Stanley, making it a major player on Wall Street.

Finally, one of Japan’s largest banks, Sumitomo Mitsui Financial Group, is soaring in value as it is about to dump several billion yen into Goldman Sachs, giving Warren Buffet some company as he counts his new shares.

The Asian Invasion

If you thought Asia was slowly creeping into the American economy and taking much of our superiority away, just wait. Japan’s leverage was just increased multi-fold. These banks have cash (to the tune of $15 trillion), low exposure to the subprime mess (less than $8 billion in losses), and now have their hands on a vital part of Wall Street at incredibly low prices.

A lot of short-sighted investors are mumbling this morning, “So what, the Asian economy is just as slow if not slower than America’s.”

They may be right, for now. But what happens in five or ten years when the world is on top of its next bubble cycle?

Japan now has a lot more leverage on its side. For a country like the United States, that is about to expand its global debt to new heights and that depends on Asia for just about anything that is cheap, more power in the hands of our competitors is far from a good thing. It is a very, very bad thing.

The repercussions of this Wall Street collapse will not end once Washington hands over its blank check. That will be just the beginning. Lehman Brothers and its fallen brethren are gone forever and Asia now has a permanent and strong presence on Wall Street.

As an investor looking for opportunities, it is important to start concentrating overseas. There are some great opportunities created by this market turmoil. Keep your eye on the Asia markets and buy when the chance arrives.

There are profits to be had. You just have to know where to look.

Source: Asia invades Wall Street: Japan goes on a buying streak

U.S. markets sank yesterday (Tuesday) as a quick turnaround on the proposed bailout legislation seemed less and less likely as criticism for Paulson’s plan in its current form became more widespread.

At the New York close, all three major U.S. indices had reversed early morning gains to head into the red. The blue-chip Dow Jones Industrial Average Index posted a loss of 161.52 points (-1.47%), closing at 10,854.17. The tech-laden Nasdaq Composite Index dropped 25.64 points (-1.18%), to 2,153.34. And the broader Standard & Poor’s 500 Index lost 18.87 points (-1.56%), to settle at 1,188.22.

U.S. Treasury Secretary Henry Paulson and U.S. Federal Reserve Chairman Ben S. Bernanke both testified before Congress yesterday to urge lawmakers to quickly approve the proposed $700 billion government banking bailout plan.

The two financial pointmen of the bailout plan both testified in favor of the proposed legislation before the Senate Banking Committee. Paulson’s $700 billion bailout plan, unveiled over the weekend, has been criticized for the sweeping new powers it affords the Treasury department with little congressional or judiciary oversight.

Speaking of his plan to stabilize the financial markets, Paulson said, “We must do so in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both small and large, and the very health of our economy.”

Paulson went on to say that while the roots of the current financial crisis go back many years, the government must act now to save not only Wall Street, but Main Street as well. If left unchecked, the current financial crisis “would threaten all parts of our economy,” the Treasury Secretary said. In a rare departure from his prepared remarks, Bernanke urged Congress to not only pass the proposed bailout legislation in its current form, but to pay above market value for distressed financial assets.

“Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,” Bernanke said in his unscripted testimony before the Senate Banking Committee, Bloomberg News reported. “If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.”

Bernanke said paying a premium for the bad assets that could no longer be sold on the open market would help “unfreeze” the credit markets and boost the U.S. economy.

Congressional Critics

But legislators seemed reluctant to rubber stamp Paulson’s barebones $700 billion bailout plan.

Many Democrats balked at granting such far-reaching powers to the Treasury Department without further Congressional or Judiciary oversight.

Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, on Tuesday called the language in the plan “so troubling” and said it “cannot last” as part of the legislation, NPR reported.

One outspoken critic of the plan went so far as to take out a full-page ad in The New York Times likening Paulson’s plan to communism.

The ad shows Paulson, Bernanke and President George Bush raising a flag with the familiar communist symbols of a hammer and sickle with tombstones reading “private enterprise” and “capitalism” in the background.

“They are raising the new flag,” said Bill Perkins, the Houston-based venture capitalist who paid for the ad in a telephone interview with Reuters. “We’ve become a socialist-communist country in the form of trickle-down communism.”

Even some Republicans are voicing their opposition, calling for executive compensation caps for firms that benefit from the proposed plan. But the administration, along with Paulson and Bernanke are urging a speedy passage to the bill in its current form.

“I fully feel the urgency. But the truth is, we have to be given the time to do this right, or you’ll be up here in a year or two asking for another $100 billion or more,” Democratic Sen. Jon Tester of Montana told Paulson on Tuesday.

Wall Street Bargain Bonanza

While politicians and pundits debate the merits and flaws of the government’s proposed bailout, one foreign firm was taking decisive action to capitalize on the credit crisis.

Nomura Holdings Inc. (ADR: NMR), Japan’s second-largest bank, continued its buying spree of Lehman Brothers Holdings Inc. assets (OTC: LEHMQ) at rock-bottom prices. Nomura picked up Lehman’s Asia holdings on Monday and now can add Lehman’s Europe and Middle East operations to its list of acquisitions from the bankrupt Wall Street investment bank.

Nomura did not disclose the purchase price for Lehman’s equity and security operations, saying only the figure was “nominal.” After having paid just $225 million for Lehman’s Asia-Pacific holdings, it is all but certain Japan’s largest securities firm got a good deal in Europe as well.

]]> http://www.contrarianprofits.com/articles/credit-crisis-update-proposed-bailout-faces-opposition/5695/feed 0 http://www.contrarianprofits.com/articles/japan%e2%80%99s-nomura-snapps-up-lehman/5648 http://www.contrarianprofits.com/articles/japan%e2%80%99s-nomura-snapps-up-lehman/5648#comments Tue, 23 Sep 2008 14:32:24 +0000 Jennifer Yousfi http://www.contrarianprofits.com/articles/japan%e2%80%99s-nomura-snapps-up-lehman/5648 Nomura Holdings Inc. (ADR: NMR) yesterday (Monday) snapped up bankrupt Lehman Brothers Holdings Inc.’s (OTC: LEHMQ) Asia assets, and is close to inking a deal for its European units as well. Tokyo-based Nomura will pay $225 million for Lehman’s Asia-Pacific operations. As part of deal, Nomura will take on 3,000 former Lehman employees in the region.

 

“The businesses we are acquiring are hugely successful with excellent management and staff. This is a once-in-a-generation opportunity,” said Nomura Chief Executive Kenichi Watanabe of the deal, MarketWatch reported.

“Our ability to capitalize on this opportunity in spite of such volatile markets reflects our financial strength and demonstrates how well we have managed the credit crisis. This deal is validation for our strategy,” Watanabe said.

PricewaterhouseCoopers LLP is…

]]> Nomura Holdings Inc. (ADR: NMR) yesterday (Monday) snapped up bankrupt Lehman Brothers Holdings Inc.’s (OTC: LEHMQ) Asia assets, and is close to inking a deal for its European units as well. Tokyo-based Nomura will pay $225 million for Lehman’s Asia-Pacific operations. As part of deal, Nomura will take on 3,000 former Lehman employees in the region.

 

“The businesses we are acquiring are hugely successful with excellent management and staff. This is a once-in-a-generation opportunity,” said Nomura Chief Executive Kenichi Watanabe of the deal, MarketWatch reported.

“Our ability to capitalize on this opportunity in spite of such volatile markets reflects our financial strength and demonstrates how well we have managed the credit crisis. This deal is validation for our strategy,” Watanabe said.

PricewaterhouseCoopers LLP is leading the search for buyers of Lehman’s European assets. Unnamed sources close to the deal named Nomura as the final suitor for the European units. Barclays PLC (ADR: BCS), which earlier acquired Lehman’s North American operations for the bargain basement price of $1.75 million, had only been interested in the equities division.

“We are now focusing on one party as they are interested in acquiring a wider team, which should result in a better deal for staff and creditors,” PwC partner Dan Schwarzmann said, but declined to identify the sole bidder by name. “Given the complexity of Lehman Brothers, these negotiations are difficult, but I’m hoping to give certainty to all involved in the short term.”

Many felt the purchase of Lehman’s Asia and European units was a good fit for the expansion-hungry Nomura.

“Nomura’s global hub for this business is London, rather than New York, so bidding for Lehman’s European operation makes sense,” Wataru Kasatani, senior financial analyst at Meiji Dresdner Asset Management, told Reuters. “Lehman’s Asia operation will also add value to what Nomura has been doing in Asia.”

Source: Japan’s Nomura Broadens Horizons With Purchase of Bankrupt Lehman Assets

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