Nothing talks in Washington any louder than money. Today, the big spenders are betting against the land of the free and the home of the brave. But of course, if you’ve been paying attention, the action is no surprise.

If you invested in United States treasuries over the last year, you bought into the worst performing sovereign debt across the globe. Thanks to the Obama administration’s unending yearning to artificially pull the nation’s GDP into positive territory, investors are quickly raising their nose to the country’s ever-growing pile of debt.

In all of 2009, the Treasury Department received loans of $2.1 trillion from the world’s investors. It was an extraordinary year of borrowing that took the nation’s debt liability from $5.80 trillion to $7.17 trillion at the end of November.

Of course, with unemployment likely to show yet another rise later this week and some 45,000 businesses tossing in the towel over the last twelve months, Obama is not done spending yet.

Many experts believe 2010 will mirror the borrowing habits of 2009, when Geithner and the Treasury hit the auction market 79 times.

As we are seeing today, excessive borrowing can lead to strong market opportunities for well-positioned investors.

As long as Uncle Sam is spending more than he is pulling from the pockets of hard-working Americans, the value of the dollar will be at risk.

After a very strong December, the greenback is showing weakness today. It now trades at $1.4436 against the euro, a dip of more than a penny below the 2009 closing figure. A penny may not sound like much to the uninitiated, but a quick look at anything dollar-denominated tells a different story.

Oil is up, gold is up and the equities market is soaring. A turnaround in the dollar is just what we needed to get the pendulum swinging once again.

As I have said many times before, a falling dollar is good, but it can only drop so far before it turns out to be an utter disaster. Once the markets believe the bottom is going to fall out, it is all over for the security of the world’s top currency.

But that’s a problem we won’t have to deal with until the Fed pulls out of the game. Unfortunately, Bernanke’s likely to put the fiscal rejuvenation machine into reverse in the not-so-distant weeks ahead.

For now, however, it is time to make money while you can.

Any good contrarian investor loves the gold markets lately. I love it because we are raking in the gains over at TFN Strategic Trader thanks to recent swings in the precious metals market.

For nearly all of December, I took flak because of my gold-market pessimism. But folks that followed my advice saved themselves some big money as the shiny metal lost nearly 10% of its value.

But in the final week of the year, you may recall, I noticed the market was ready to change direction. On Thursday morning, with just a couple of trading hours left in the year, I made my move. I wrote my subscribers about a strategic option contract.

The move paid off. Thanks to gold prices surging by more than $26 per ounce today, the contract has soared by 44%. I am sure plenty of members are taking the one-day gains, but I’m holding out for more.

2010 will be the year of all years for currency and hard-asset traders. We are already proving it.

*** Here’s a question that will help you get the New Year off to a profitable start.

What do Medifast (NYSE:MED), Green Mountain Coffee Roasters (NASDAQ:GMCR) and Hansen Natural (NASDAQ:HANS) have in common?

The answer: They all make food or drinks designed to make you feel good. Even better, they comprise the three best performing stocks of the last decade.

Medifast, with its popular weight-loss diets, soared over 16,000% over the past ten years. Green Mountain, and its diverse coffee lineup, led investors to gains of 9,210%. And Hansen, the maker of a variety of popular drinks, is up by 7,022%.

Not bad figures for a time that most pundits are eager to call a lost decade. It is not surprising to see a decade that was so focused on consumer spending and short-term happiness to produce these kinds of figures.

Looking forward, however, into a decade when unemployment is creeping higher, discretionary spending is down and it is becoming hip to be frugal (finally, my time to shine), the three stocks listed above may give back plenty of their recent gains unless they reposition their product portfolio.

In ten years, it won’t be “fun” food we will be talking about. With the nation’s population growing by leaps and bounds, it will be staples like corn, wheat and water that dominate the headlines.

Don’t worry. We’ve got plenty of time to figure it out.

The biggest news to hit the markets yesterday was the Treasury Department’s report that the deficit in June totaled $94.3 billion. This monthly deficit pushed the deficit for the fiscal year to over $1 trillion dollars for the first time, and we still have another quarter to go until the fiscal year ends in September. It comes as no surprise to readers that the deficit is above $1 trillion, but what is a bit unnerving is the speed at which the red ink is flowing.

According to the Treasury department’s report, spending in June surged 37 percent to $309.7 billion while revenue fell 17 percent to $215.4 billion. June is typically a good month for revenues, and the reported deficit was the first since 1991. Individual and corporate tax receipts are falling while unemployment continues to rise. But the revenue picture isn’t nearly as bad as the other side of the ledger. The administration is just starting to ramp up the spending from the $787 billion stimulus package President Obama signed into law in February. And as Chuck has reported, the administration has already started to lay the groundwork for another big stimulus package.

Congress seems to be turning a blind eye to the deficit, why let some red ink keep them from accomplishing all they set out to do? Just this morning, the day after we surpassed the $1 trillion deficit mark for the first time, the democrats have unveiled their long awaited health care reform. The program, by most estimates will add another $1 trillion to the deficit over the next several years. Sure, I think we all would like to see an improvement on the current health care system, but what a time to try and shove it through congress! I’m sure you will start to hear a chorus of ‘deficits don’t matter’ by the media; as they try to convince all of us that these new programs are just too important to let a little thing like red ink keep them from passing.

But deficits do matter! Other than the fact that someone is eventually going to have to pay all of this debt off, financing this shortfall is going to continue to get more difficult. Interest rates will certainly rise from their current low levels, and for the fiscal year to date, the interest expense on the government’s outstanding debt was $320.7 billion. As rates rise, this interest component will also rise, chewing up a larger percentage of our overall spending. Rising interest payments will continue to push out spending for other, more productive programs and force either a reduction in government services, or a dramatic increase in government revenues. Look out for some dramatic tax increases!

The huge deficit continues to worry our foreign investors, who have thus far financed all of our free wheeling spending. China, Russia, and some of the oil rich Arab states have all expressed their concerns regarding the security of US debt and the stability of the US$. Japan’s opposition party, leading in polls ahead of next month’s election, is the latest country to question the long term viability of the US$ as the global reserve currency. Japanese investors are the biggest foreign holders of US Treasuries after China, so the talk of diversification away from the US$ could have a big impact on the currency markets. “In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” said the opposition party’s finance minister in an interview. “Many countries are starting to diversify their reserves.”

The biggest currency gainers vs. the US$ yesterday were the commodity currencies of the Canadian dollar, Brazilian real, New Zealand dollar, and the Australian dollar. Yesterday Chuck let everyone know he had finally put the finishing touches on our latest index cd. It just so happens that the new index combines three of these top performers. The new index CD, named the Global Power Shift Index is a combination of the Australian dollar, Canadian dollar, Brazilian real, and the Norwegian krone. Chuck designed this new index CD to take advantage of commodity price increases which are bound to occur as the global economy starts to recover. Call the desk for more information on this newest addition to our stable of offerings.

The Australian dollar got a boost from the business sentiment which turned positive in June for the first time since December of 2007. This should help convince the central bank to keep interest rates stable as the Australian economy starts to show signs of a recovery. The kiwi also got a boost as Reserve Bank Governor Alan Bollard said “Early signs of a global recovery have now emerged.” Rates in New Zealand will likely remain stable as the commodity driven economies turn the corner.

Today and tomorrow will bring us a plethora of data, with PPI, Advance Retail sales, Business Inventories, and the ABC consumer confidence numbers today followed by the release of the CPI numbers, Empire manufacturing, Industrial production, Capacity utilization, and the minutes of the June 24 FOMC meeting to be released tomorrow. Thursday we will get the weekly jobs data along with the TIC flows and Philadelphia Fed index. We will close the week out on Friday with news on the US housing market with the release of Housing starts and Building permits. All of this data could bring some excitement to the currency markets, which have settled into a fairly stable summer trading pattern.

Currencies today 7/14/09: A$ .7878, kiwi .6336, C$ .8742, euro 1.3983, sterling 1.6317, Swiss .9227, rand 8.1989, krone 6.4653, SEK 7.8388, forint 197.26, zloty 3.1216, koruna 18.6183, yen 93.14, sing 1.4590, HKD 7.7505, INR 48.84, China 6.8328, pesos 13.654, BRL 1.9782, dollar index 79.97, Oil $61.10, 10-year 3.45%, Silver $12.935, and Gold… $926.19

That’s it for today…The home town favorites, Albert Pujols and Ryan Howard couldn’t quite get it done at the derby last night, but it sure looked like everyone had a great time. Three of the guys on the desk went down to the derby last night, and I actually saw both Mike Meyer and Tim Smith in the right field bleachers scrambling for one of Cecil Fielder’s 16 homers. My wife and I were lucky enough to get invited to tonight’s game by a good friend. I’ve heard we will have to be heading down a bit earlier than normal with President Obama in town to throw out the first pitch. Should be a great time; I just hope the rain holds off. Should turn out to be a Terrific Tuesday! Let’s go National League!!

Source: Blood in the Streets

After combing through the past 25 editions of the “Monthly Treasury Statement of Receipts and Outlays of the United States Government,” which is compiled and published by the Treasury Department’s Financial Management Service, we created the following chart.

Here’s what’s going on:

Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus — on average about $68 billion.

What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.

If the shortfall in individual and corporate tax revenue persists — and we expect it will — then the deep hole the government is already digging for itself will be that much deeper.

Using the government’s own expense projections, the revenue shortfall, even if it doesn’t worsen further, would push the fiscal 2009 budget deficit up to about $1.958 trillion. For reasons we’ve discussed at some length in The Casey Report, those expense projections are likely to be significantly understated.

Case in point, in January the government projected a $1.2 trillion deficit for fiscal year 2009… in March, just three months later, they upped the projection to $1.8 trillion. That $600 billion “adjustment” alone totaled more than any full-year budget deficit in the nation’s history.

Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.

That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.

In other words, events are rolling out almost exactly as we have been anticipating. Below, for example, are some useful excerpts from an April 3 article titled “Widening Deficits” by Casey Research CEO Olivier Garret. To quote…

In the midst of the Great Depression, the 1931 federal tax revenues had fallen by 52% from their 1929 highs. While we do not expect anything that dramatic in 2009, it would not be unrealistic to see a 20% to 25% reduction in cash flow from tax collections this tax season. Such a drop would pose significant challenges given that spending commitments are off the charts and climbing.

Later in that same article, Olivier continued,

In the absence of sizeable increases in tax revenues, it is quite clear that the lion’s share of the planned sales of Treasuries in 2009 cannot be met by demand from the market. Either the Treasury will have to raise interest rates significantly, or the Fed will need to step in very aggressively to support the planned auctions. Our expectation is that both will happen. Auctions will fail and the Fed will step in. The market will react to more printing by anticipating inflation and demanding higher interest rates. Once the cycle starts, it will be very hard to pull interest rates back.

We continue to stand by our December forecast that the 2009 budget deficit is more likely to widen to levels between $2.5 and $3 trillion rather than the CBO’s $1.8 trillion forecast. We also believe that inflation could start setting in as early as Q3 of 2009 and will accelerate sharply by 2010. Treasury Rates will start climbing and the era of cheap money will end, making it harder for overleveraged consumers, businesses, and governments to service their debt.

Olivier’s forecast of failed auctions and rising interest rates on Treasuries proved more prophetic as a May 7th story from Bloomberg reported:

Treasury 30-year bonds fell the most in four months as investors demanded higher-than-forecasted yields at today’s auction of $14 billion of the securities with the U.S. slated to sell a record amount of debt this year.

“This is a problem,” said Chris Ahrens, head interest-rate strategist at UBS AG in Stamford, Connecticut, one of 16 primary dealers required to bid in Treasury auctions. “The market required a fairly significant discount to buy the bonds.”

Thirty-year bonds have lost investors 20.9 percent this year, Merrill Lynch & Co. indexes show, as the Treasury increases securities sales to help fund a swelling budget deficit. Yields climbed to a six-month high today as the auction drew a yield of 4.288 percent, higher than the 4.192 percent average forecast in a Bloomberg News survey of seven primary dealers. Demand was below average, judging by total bids.

The benchmark 30-year bond yield climbed 23 basis points, or 0.23 percentage points, the most since Jan. 5, to 4.316 percent, at 5:25 p.m. in New York, according to BGCantor Market data. It was the highest yield since Nov. 14. The 3.5 percent security due in February 2039 dropped 3 15/32, or $34.69 per $1,000 face amount, to 86 3/8.

The 10-year note yield increased 16 basis points to 3.345 percent, the highest since Nov. 24.

Two-year notes yielded 1 percent for the first time since March 18, while the rate on the three-month Treasury bill was 0.18 percent.

So, what does all this mean?

As per above, the rock-and-the-hard-place scenario we have been predicting is unfolding before our eyes. At this point, other than sharply changing course and letting the free market cope with the crisis through a brutal “survival of the fittest” scenario, the government is left with no other option than to accelerate its buying up of its own debt.

Which is to say, it must push even harder on the levers of its printing presses, further setting the stage for the massive period of inflation we continue to see as inevitable… and for the stunning rise in interest rates we are now positioning ourselves for in The Casey Report (and, you can too… learn more).

Source:  Tax Revenues Tanking

The problem, of course, is that if manufacturers can’t borrow to buy from suppliers, and wholesalers can’t borrow to buy from manufacturers, and retailers can’t borrow to buy from wholesalers, then consumers can’t get auto loans, credit cards, and mortgages.

The economy faces a serious headwind.

The companies in the toughest position, however, are those that are highly leveraged. Even though interest rates have fallen substantially, they aren’t able to access the credit markets (at reasonable rates) or increase their bank lines to get the liquidity they need.

And therein lies an enormous opportunity for investors like you and me – profiting from corporate takeovers.

Corporate Takeovers – Solid Companies vs. Weak Competition

Companies that have solid balance sheets and high levels of cash are now in a position to scoop up their weakened competitors through corporate takeovers. That allows them to purchase assets on the cheap and potentially increase their profit margins – by eliminating the competition – at the same time.

Let me give you a few examples.

• In the U.S. recently, drug giants Merck (NYSE:MRK) and Pfizer (NYSE:PFE) have unveiled deals to buy Wyeth (NYSE:WYE) and Shcering-Plough (NYSE:SGP), respectively.
• Chinese companies, backed by the dollar-flush Chinese government, have been on a shopping spree lately. Already this year, Chinese firms have announced more than 300 takeovers totaling nearly $68 billion.
• In the pharmaceutical industry, there is plenty of fair game. Many small biotechs, for example, are running out of capital. This dovetails nicely with Big Pharma’s shrinking drug pipelines.
• The gaming industry, too, is hurting bad. For instance, credit downgrades and potential bankruptcy hang over companies like MGM Mirage (NYSE:MGM) and Harrah’s. But Penn National (NASDAQ:PENN) is in a fine position to buy them or other weakened competitors.
• Look at the oil equipment leasing industry. Nabor Industries (NYSE:NBR) carries $4 billion in debt. (Earlier this year it had to pay 9.25% to raise $1.1 billion.)
• But Patterson UTI Energy (NASDAQ:PTEN) is laughing all the way to the bank. Its sound financial condition – and zero debt – are allowing it to invest millions in new equipment.

When the price of oil rebounds who will be in the best position to prosper? Clearly, it’s Patterson. That forces Nabor to at least consider the idea of putting itself up for sale.

This same corporate takeover scenario is playing out in multiple industries in markets all over the world.

How Many Potential Corporate Takeover Candidates Are In Your Portfolio?

Yet when I ask investors how many potential corporate takeover candidates they have in their portfolio, more often than not they simply shrug their shoulders and say “none.”

That’s unfortunate. Investor’s Business Daily recently reported a survey of institutional investors conducted by Boston Consulting. Over 80% of them agree that the current market represents a “once in a lifetime” opportunity for corporate takeovers.

My advice? Don’t rest on your laurels. Buy a handful of potential corporate takeover targets now – before all the new deals starting popping.

Good investing,

Alexander Green

Source: Corporate Takeovers: ‘Once in a Lifetime’ Investment Opportunities

Martin applied four criteria when examining banks’ health:

Banks that made profits in the very difficult fourth quarter of 2008 and first quarter of 2009 are probably in good shape, especially if their loan-loss provisions exceeded their charge-offs (the amount actually lost.)

Banks that lost money in the fourth quarter and first quarter may or may not be in terminal trouble; it depends on the amount of those losses and whether the red ink is expected to continue to flow going forward.

With the run-up in bank stocks in recent weeks, there’s been an accompanying rise in the ratio of share price to book value (stock price per share/book value per share). If that ratio is still below 30% – even after the recent price increases – the market lacks confidence in the bank’s ability to solve its own problems. Unfortunately, the market currently appears to be overly optimistic about some of the banks that still have considerable ongoing problems.

Management’s dividend policy is less of an indicator than it was just a few short months ago; several banks have sharply cut their dividends in order to repay the Troubled Assets Relief Program (TARP) capital they got in late 2008. Reasonably, profitable banks don’t want the government meddling in their business or compensation structures

This research revealed three “hidden gem” banks among the dross. They are (in alphabetical order):

BB&T Corporation (NYSE:BBT) – With $152 billion in assets, and a $3.1 billion TARP investment, this North Carolina-based regional bank has its primary operations in the Mid-Atlantic region. A recent share price of $23.42 meant that BB&T was trading at about 94% of book value. BB&T was profitable in each quarter of 2008 and in the first quarter of 2009, making $1.5 billion for all of last year and $271 million in first quarter of 2009. It maintained its dividend of 47 cents a share for first quarter of 2009, the only bank to maintain its full payout. The question, of course, it whether management will be tempted to follow fashion and cut the dividend next quarter; otherwise, it looks very solid.

State Street Corporation (NYSE:STT) – With $174 billion in assets, and a $2 billion TARP investment, this Boston-based bank is focused chiefly on serving institutional investors worldwide. Its recent share price of $37 meant that State Street was trading at 146% of book value. Its 2008 earnings per share (EPS) of $3.89 represented a year-over-year increase of 13%. First quarter net income down 16%, but State Street still earned $445 million. It pays a quarterly dividend of 24 cents per share. With a global business, conservative leverage and Boston management, State Street is a great risk. But it’s somewhat of an unexciting investment currently as securities issues and trading volume have fallen.

Bank of New York Mellon Corporation (NYSE:BK) – With $237 billion in assets and a $3 billion TARP investment, this New York-based bank has its primary operations in New York and Pennsylvania and has an institutional/corporate orientation. With its recent share price of $26.88, it is trading at 122% of book value. It reported 2008 net income of $1.39 billion, and first quarter profit of $322 million, after which the bank reduced its quarterly dividend from 24 cents to 9 cents a share. Looks solid to me.

U.S. Bancorp (NYSE:USB) has $266 billion in assets, and a $6.6 billion TARP investment and is a regional bank headquartered in Minneapolis that operates primarily in the Midwest and Northwest. A recent share price $18.97 means it is trading at 176% of book value. It reported a 2008 profit of $2.94 billion, and a first quarter profit of $419 million. U.S. Bancorp cut its quarterly dividend from 42.5 cents per common share to 5 cents a share, as it wants to pay back its TARP investment. This bank is in good shape, but its capital base would become too thin if it repaid TARP; I’m not sure I want to pay 11-12 times earnings for this stock when the dividend’s so low and the uncertainties are so high, as there’s still some chance of dilution, should it raise capital.

In its Feb. 17 presentation to the Treasury, GM proposed shrinking its debt 40% from $62 billion to $33.5 billion by modifying obligations to a union-retiree health fund, shedding 47,000 jobs, and persuading bondholders to accept less in an equity swap.

Now that the Treasury has rejected those proposals as too little too late, GM must find a way to come up with new cost-cutting efforts by slashing the debt even further and cutting more jobs in 2009.

The company will collect input from board meetings and the Treasury’s auto task force to create a framework for new discussions this week, sources familiar with the plans told Bloomberg News.

One measure of the company’s future performance which might be acceptable to the government would be to trim expenses so it can break even when U.S. vehicle sales are as low as 10 million to 10.5 million units, John F. Smith, GM’s group vice president for product planning told reporters last week.

The automaker had previously stated an industry-wide rate of 11.5 million to 12 million cars and light trucks as its break-even target.  By comparison, March deliveries declined for the 17th consecutive month to an annual rate of 9.86 million vehicles.

GM announced recently it would save about $1.1 billion when 7,000 union workers retire early or take buyouts this year and a new UAW agreement kicks in that cuts benefits and streamlines factory work rules.

The U.S. auto industry has cut 400,000 jobs over the past year and lost billions of dollars. After receiving $13.4 billion last year, GM has requested an additional $16 billion from the government to keep operating.  Chrysler LLC has also asked for a new round of funding.

Appearing on NBC News‘ “Meet the Press,’ Chief Executive Officer Fritz Henderson denied that bankruptcy was inevitable, but said the company was speeding up preparations for a possible court filing in case it is unable to meet the government’s requirements.

“Our preference is to do it outside of a bankruptcy process, but it would only be prudent to make sure that we’re planning for if we need to resort to that, that we can move and we can move fast,’ said Henderson

Under the terms of a court-supervised bankruptcy, GM would form a new company focused on its best assets, Bloomberg reported, citing people who asked not to be named because the details of GM’s preparations aren’t public.

That process might include a so-called 363 sale, a reference to a section of the Chapter 11 bankruptcy code that could create a new company from the assets and brands of GM, increasing the company’s survival chances.

But that’s not likely to help assuage bankruptcy fears in Michigan, where GM and the other big automakers have their headquarters and most significant operations.

There is “tremendous pain in our state” because of layoffs and financial losses in the auto industry, Senator Debbie Stabenow (D-MI) told Reuters.

“I do not support bankruptcy as the first, second or third option,” Stabenow said, adding that bankruptcy could shift pensions for GM retirees to the federal government.

GM Fights for Survival, Prepares for Bankruptcy

Summers, the director-designate of the National Economic Council, said President Obama has vowed to:

• Use the government’s “full arsenal of tools”to jump-start lending to both consumers and businesses.
• Reform oversight of TARP and any related responses to the ongoing U.S. financial crisis.
• Utilize “smart, aggressive policies”to reduce foreclosures.
• To toughen the requirements bailout applicants would have to meet before receiving any of the taxpayer-supplied federal money.
• And to try and attract private-sector capital in order to accelerate the end of the bailout program.

The Obama team sent the letter to congressional leaders yesterday. Earlier yesterday – even before the letter was sent – President-elect Obama asked the Bush administration to notify Congress of Obama’s intent to use the remaining TARP funds.

“President Bush agreed to the President-elect’s request,”White House Press Secretary Dana Perino said in a statement. “We will continue our consultations with the President-elect’s transition team, and with Congress, on how best to proceed in accordance with the requirements of the statute.”

A Democratic source in Congress told CNN News over the weekend that the Bush administration may soon request the funds, and Money Morning reported that the president-elect might make such a move.

A Rough Ride for TARP

The Treasury Department on Thursday said that it’s so far spent $267 billion buying preferred stock in financial institutions and U.S. automakers. But the agency held back on spending or even committing the remainder, reasoning that with Obama due to take office so soon, it would be better for the new president to disburse the rest of the money.

Late last week, congressional watchdog Elizabeth Warren said the Treasury Department has done nothing to make sure $700 billion in taxpayer-provided bailout money is used to buttress the weak U.S. mortgage market, which has been the key catalyst for the growing global financial crisis. Warren, who heads the Congressional Oversight Panel for the bailout program, told ABC News on Friday that there was no evidence the Treasury had used TARP bailout money to put a floor under the falling U.S. housing market by avoiding preventable foreclosures.

“There’s just no money that’s gone in that direction,”Warren said. “This one’s not even arguable. The TARP funds themselves have not been used in this way despite congressional statutes requiring them to do so.”

The congressional investigation is just the latest in a series of revelations demonstrating the possible misallocation of the taxpayer-provided bailout money. An ongoing investigation by Money Morning has detailed how banks have used the first $350 billion: They’ve used the capital to finance investments in other banks – including an investment in China – and to pay bonuses to executives. Then they audaciously refused to say where the money went, or how it was used, Money Morning has shown.

Ironically, the news that Obama is requesting the bailout money comes just as banks have started lobbying the federal government to go back to its original TARP proposal, under which the Treasury Department would actually buy back troubled mortgage assets. U.S. Treasury Secretary Henry M. “Hank”Paulson Jr. pulled the plug on that idea about two months ago, opting instead for the redesigned strategy under which the agency bought stock directly in the struggling banks, insurance companies and brokerage houses – as well as at least two of the U.S. “Big Three”automakers.

News that Obama was seeking the funds came just hours after President George Bush, speaking at his last regular White House press conference, said President-elect Obama hadn’t made any request for the funds.

“I told him that if he felt he needed the $350 billion, I would be willing to ask for it,” President Bush told reporters yesterday. However, he also “hasn’t asked me to make the request,” Bush told reporters.

Under the bailout legislation approved by Congress in October, the administration must formally notify Congress that it wants to access the second installment of $350 billion, CNNMoney.com reported. Unless Congress passes a resolution rejecting the request within 15 days, the Treasury Department can begin tapping the funds.

Even with the news that Bush will request the funds, the money won’t be available until the Obama administration is in office. Inauguration Day is Jan. 20 – a week from tomorrow (Tuesday).

How the new administration plans to spend the second half of the TARP funding has emerged as a major issue on Capitol Hill – almost as big as congressional concerns over the size and makeup of the Obama administration’s planned new stimulus package, an estimated $800 billion plan that includes tax cuts.

Lawmakers on both sides of the aisle have expressed unhappiness with the way Paulson, the treasury secretary, has deployed the first half of the $700 billion in TARP money. Congressional leaders object to how the Treasury Department made direct investments in banks with few strings attached and no process for tracking how the banks are using the money.

Leading Democrats in Congress have made clear that reducing foreclosures will be among their chief priorities for the use of the second half of TARP funds. In fact, House Financial Services Chairman Barney Frank, D-Mass., has introduced a bill that promises $50 billion of mortgage-foreclosure relief and toughens terms on companies that do receive taxpayer money.

However, after a meeting with key members of Obama’s economic team Sunday, Senate Democrats expressed optimism about plans to more sharply focus the bailout of the U.S. financial-services sector. With that newfound optimism, Congressional Democrats are now trying to drum up enough votes to keep critics from passing a measure that would block lawmakers from releasing the second half of the TARP rescue money, CNN.com reported.

Although a measure opposing the release of that money has been introduced into the House, passage of the bill would require a majority vote.

A Call for a Return to ‘TARP Classic’

Despite criticism of how the first half of the TARP money was deployed, President Bush earlier yesterday defended his administration’s approach to the bailout. He reminded listeners that there was a real concern the U.S. economy was poised for a total financial meltdown – especially back in the Fall, when there were widespread fears that the United States was headed for a reprise of the Great Depression.

What’s more, Bush said there are now signs that the U.S. financial markets are “beginning to thaw”- a sign that the TARP strategy is working. Treasury Secretary Paulson agreed, stating that the financial sector has been stabilized by the capital infusions.

Even so, the overall economy has endured a sharp decline in recent months. Companies have slashed workers at a rate not seen since the end of World War II, credit remains tight and companies and consumers alike have pulled back hard on spending.

And U.S. banks still hold hundreds of billions of illiquid mortgage-backed securities that, if downgraded, could spawn a whole new round of potentially ruinous write-downs. That’s why a number of experts in the financial-service sector are lobbying for a return to the earlier TARP premise – some wags are calling it “TARP Classic”- that would remove “toxic”financial assets from bank balance sheets.

Leading the charge for a return to what some might refer to as “TARP classic” is SIFMA, the Securities Industry and Financial Markets Association trade group that’s based in Washington.

“We need to get the markets moving again,” Tim Ryan, chief executive officer of the Washington-based Securities Industry and Financial Markets Association trade group, told Fortune. “We have no problem with capital injections, but if you do capital injections without taking care of the bad assets, it just causes the problem to go into hibernation.”

Ryan, a one-time U.S. Treasury official, is also a former director of the Resolution Trust Corp. (RTC), the government-created vehicle that cleaned up the savings-and-loan mess of the early 1990s – and did so ahead of schedule and under budget. Ryan said the lesson he learned from that role was that the only way to get banks to lend again is to get rid of the bad assets that keep them too scared to do so.

Others agree. In a whitepaper issued this week, the Organisation for Economic Co-operation and Development said that a study of financial crises over the past three decades suggests that isolating bad assets is a key to a successful response to a major market meltdown, Fortune reported.

Even the Congressional Oversight Panel headed by Warren, the congressional watchdog, criticized TARP for how it handled such initiatives as the government bailout of Citigroup Inc. (C) back in the fall.

Citi received $25 billion of TARP money in October, and the Treasury Department insisted that any bank that received federal bailout infusions were now healthy. Unfortunately, Citigroup’s shares plunged, forcing the government to come to the rescue a second time only one month later. That second time around, the government has to provide an additional $20 billion in return for preferred stock, while also providing a $306 billion loan guarantee.

Source: Obama Requests Release of Second Half of $350 Billion TARP

Well… Another day of doldrums in the currencies, with the bias, what little there is, to buy dollars. The stock jockeys received some manna from heaven yesterday when it was announced that the U.S. Treasury Department is considering a plan to halt the slide in home prices that would lower mortgage rates using Fannie Mae and Freddie Mac. The plan could reduce rates for newly issued loans to as low as 4.5%.

Here’s a snippet of the story that ran in the Wall Street Journal yesterday…”Government officials are under pressure to stem foreclosures, which underpin much of the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners and lenders.

Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. Fannie and Freddie guarantee a large proportion of all new home loans made in the U.S.”

OK… So they came up with a plan… I have to think about this a bit, as I see the “good” it could do, but there’s always a “bad” to these things too, and once again, I’m sure it circles around the fact that Gov’t is going to be in the mortgage business… We inch closer and closer, all the time to socialism folks… It all began when they mandated that in a free country we HAVE to wear seat belts… Now don’t get me wrong, I wear them because I believe it’s the safe / right thing to do, but shouldn’t that be MY choice and not the mandate of the Gov’t? Any way, please don’t flood my email box with notes telling me how wrong I am on this… It won’t help, this is what I believe, period!

Whew! I really went off on a tangent there, eh? OK, before you begin to think I’m a nut case… Let’s get back to currencies and economies!

The Reserve Bank of New Zealand (RBNZ) did cut rates, as I suspected, by 150 BPS yesterday… This brings the total of rate cuts by the RBNZ since September to 325 BPS! I think the RBNZ truly believes that global inflation is taking a major step backwards… And it probably is to a degree, but the RBNZ had better be ready to go the “other way” once this slide in inflation tips back… Of course I don’t believe we’ll see that for some time (6-months at least), so go ahead and frolic in the sun with rate cuts while you can RBNZ… Just be ready, that’s all I’m saying…

Bond holders of New Zealand issues have to be frolicking in the sun for sure, and their “locked in yield to maturity” is now, at least 150 BPS, if not 325 BPS higher than new issues, which makes their bonds “more valuable”…

U.K. Prime Minister Gordon Brown unveiled a scheme to allow borrowers experiencing a temporary loss of income due to the downturn to defer mortgage interest payments for up to two years. The U.K. Gov’t will guarantee the lenders against the risk of loss from the deferred payments… That’s going to be quite interesting to see how that plays out… But shoot Rudy, if the Gov’t is going to let you go Ollie, Ollie, oxen free on your mortgage payment for two years, with NO bad stuff happening to you and your credit, I can see the mortgage holders lining up on the right for this!

The U.S. Fed Reserve’s Beige Book that usually gives us an indication of what to expect in the next FOMC meeting, which will take place December 16th, printed yesterday… And it could be probably listed on Amazon under “horror” books! Put away the sharp objects folks, for it’s not just me ranting about these problems any longer, the Fed Reserve, your Central Bank, you know, the people that are supposed to be protecting the value of our currency, by providing price stability, and full employment (and are failing miserably at both!), now are ADMITTING that the problems are real… Here’s a short review from the Beige Book…

Based on data collected prior to November 24th, the Beige Book painted a grim picture of the outlook for growth in the fourth quarter. Lenders tightened standards for loans and lending contracted over the period. Several districts noted increases in delinquencies and defaults.

Consumer spending, which played a lead role in the growth downturn in the third quarter, was reported to have weakened.

Hey, this little tidbit came across my screen yesterday… The number of days that the S&P 500 has moved up or down by more than 5% during the Trading Day… 1950 – 2006 34 days… 2008 44 days! With 22 of them coming since October 1st!

Talk about volatile! WOW!

OK… One of my fave economic writers, Caroline Baum, wrote a piece on Bloomberg that caught my eye… Hey! That makes sense now, since I really can only see good out of one eye! Anyway… Here’s a snippet of the story by Caroline Baum, titled, “Bernanke should buy Buicks instead of bonds”…

“It tells you just how far we’ve come when the headline, “Fed May Buy Treasuries,” gets a reaction.

Buying Treasuries is the age-old way of adding reserves to the banking system, setting in motion the money-creation process.

Historically, these so-called permanent open market operations were designed to have no impact on the shape of the yield curve. The goal was simply to satisfy the banking system’s demand for reserves.

Treasury securities used to make up the lion’s share of the Federal Reserve’s balance sheet. No longer. As of Nov. 28, the Fed held $476 billion of securities carrying the full faith and credit of the U.S. government, less than a quarter of its balance sheet. One year ago, the comparable figures for the Fed’s Treasury holdings were $780 billion and 90 percent.

When the banking system starts functioning again, and the Fed has to mop up all the excess reserves banks are holding instead of lending, the reality is “it doesn’t have enough Treasuries,” said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.

Banks were holding $605 billion of reserves in excess of the amount required as of Nov. 19. “Maybe the Fed will have to raise reserve requirements,” Kasriel says. “It’ll be 1937 all over again.”

Many Great Depression scholars, including the late Milton Friedman and Anna Schwartz, point to the Fed’s doubling of reserve requirements in 1936-1937 as triggering the second leg down in the economy, which was recovering in the mid-1930s.”

OK, back to me… All this talk today is causing me to search for something “fun” to talk about, because it’s all been gloom and doom, eh?

Sweden’s Riksbank announced a 175 BPS rate cut this morning. WOW! Another Huge cut, makes you think that the Bank of England and European Central Bank might have something up their sleeves too! And in Canada, their Central Bank doesn’t meet until next week, but Canada has other problems going on, as there are rumblings about a suspension of Parliament…

The Governorator, Arnold Schwarzenegger, has called a Fiscal Emergency for the state of California… I feel like he won’t be the only governor to do so… You see, the Federal Gov’t is giving all it’s McLovin’ to Financial Institutions right now, and the States are hurtin’ for certain… The states that have for decades told the Fed Gov’t to “get out of their business”, will now be knocking on the Gov’t’s door, and be the next in line to ask for bailouts…

And then, one final thought before going to the Big Finish… I saw this yesterday, and almost fell out of my chair! (now that would not be a good thing!) Let’s see what your take is on this….

I know that sure seemed as though the Fed and Treasury had found every last way of pushing off debt from one generation to the next, BlackRock’s Peter Fisher has thought of a clever new one: a 100-year treasury bond. That way, the government can keep borrowing money to finance today’s bailouts, and won’t really have to start bleeding cash until after most of us are dead and gone…

Let’s hope that thought by Peter Fisher doesn’t even cross the minds of Paulson and Bernanke!

Currencies today 12/4/08: A$ .6470, kiwi .5365, C$ .7945, euro 1.2640, sterling 1.46, Swiss .8245, ISK 261, rand 10.2585, krone 7.17, SEK 8.3430, forint 207, zloty 3.0650, koruna 20.3425, yen 92.55, baht 35.70, sing 1.5275, HKD 7.7510, INR 49.85, China 6.8820, pesos 13.62, BRL 2.4790, dollar index 87.22, Oil $47.16, Silver $9.57, and Gold… $769.35

Source: Buying Buicks Instead Of Bonds

Citi’s shares have plunged 50% this week – including 26.4% yesterday, when they dropped $1.69 each to close at $4.71. It’s the first time since 1994 that the shares closed below $5.

Citigroup, once the biggest U.S. bank with a stock-market value of $274 billion at the end of 2006, dropped yesterday to about $26 billion, slipping to the last spot after Minneapolis-based U.S. Bancorp (USB) in a list of the Top 5 U.S. banks as measured by market value. Neither a plan by Chief Executive Officer Vikram S. Pandit announced this week to cut costs by shedding 52,000 jobs, nor an endorsement by billionaire Saudi investor Prince Alwaleed bin Talal, a longtime Citigroup investor, seemed to allay investor fears that the bank could stop the year-long run of losses that now totals $20 billion.

“Investors right now aren’t convinced that we’re done seeing dead bodies on the Citigroup balance sheet,” William Fitzpatrick, an equity analyst at Optique Capital Management Inc. in Milwaukee, told Bloomberg News. “That’s what the sell-off is, concern over more and more losses over the next couple of quarters.”
Citigroup spokeswoman Christina Pretto declined to comment on the board meeting. She reiterated a statement made by the New York-based company earlier this week that it has “a very strong capital and liquidity position and a unique global franchise.” Citigroup shares were up 88 cents at $5.59 in German trading today, Bloomberg reported.

Including the $25 billion infused as part of the U.S. Treasury Department under the $700 billion Troubled Asset Relief Program (TARP), the company has at least $50 billion of capital in excess of the amount required by regulators to qualify as “well capitalized.” Capital is the cushion banks must keep on hand to absorb losses and protect depositors.

Bank stocks all took hits on concerns a global recession may deepen. JPMorgan Chase & Co. (JPM), the biggest U.S. bank, fell 18% to $23.38, while No. 2 Bank of America Corp. (BAC) declined 14% to $11.25 and Wells Fargo & Co. (WFC) fell 7.7% to $22.53. U.S. Bancorp fell 6.4% to $22.12, Bloomberg said.

After yesterday’s market close, Ladenburg Thalmann Financial Services (LTS) analyst Richard X. Bove of sent out a research note reiterating his “Buy” rating for Citi, arguing that the bank has positive net free cash flows, a strong capital base, and a diversified business base. In the end, Bove says, “cash flows are all that matter,” and that it would “take a Depression every bit as large and long as the 1930s debacle to shake this company’s viability … I would be a buyer of this stock.”

Bove is considered one of the top banking analysts, and has consistently made  the correct calls about the crisis. It remains to be seen if he’ll be right this time.

Citi this week agreed to buy back $17.4 billion of assets remaining in a series of funds known as structured investment vehicles, or SIVs, after it previously agreed to guarantee the liabilities in those funds.

In a separate story Wednesday, Wall Street banking analyst David Trone said that he expects higher credit costs and additional losses to force Citi to take $3 billion in write-downs in the year’s final quarter, a realization that prompted him to boost his quarterly loss estimate for the company and cut his target price for the stock.

“The key question is whether management will be able to continue to find buyers for business units, which is necessary to fortify the capital base against further credit losses and write-downs,” Trone, an analyst with Fox-Pitt Kelton Cochrane Caronia Waller, wrote in a research note to clients.

Fox-Pitt boosted its quarterly loss estimate for Citigroup from its prior projection of only 8 cents a share all the way to 79 cents a share. The brokerage then cut its profit estimate for 2009 from its earlier estimate of 69 cents per share all the way down to 28 cents, Reuters reported.

Trone, who rates Citi shares as performing “In Line” with the general market, cut his target price on the shares from $20 to $16. From Tuesday’s closing price of $8.36 a share, even that lower target price would represent a return of 91%.

Worries about Citigroup’s problem assets will continue to weigh down investor confidence, Trone wrote. Thus, while Citi is definitely a “cheap” stock by one key measure, it isn’t necessarily a bargain.

“Citi trades below tangible book, although we believe this is at risk given still-large problem asset exposures,” Trone wrote.

Citi said it’s moving the structured investment vehicle assets into a portfolio of assets held for sale. The transfer allows the SIV funds to fully repay maturing debt obligations. It will be accounted for as a “cashless” transaction, since the funds were essentially already on Citi’s balance sheet. In fact, the assets will be labeled as being “available for sale” basis, meaning changes in their value will affect the company’s balance sheet equity – but not its earnings, Reuters reported.

Back in December, Citigroup agreed to support the SIVs, which at the time held roughly $49 billion of assets. At one point, the bank’s SIVs were actually “off-balance-sheet” entities, holding roughly $100 billion in assets.

A SIV is a fund that borrows money by issuing short-term securities at a low interest rate and then lends that money by purchasing long-term securities at higher rates of interest. If managed correctly, fund investors can make a profit from the difference.

SIVs proliferated, and were in widespread use by investment banks and other financial institutions. But they ran aground when the credit crisis caused the demand for short-term bonds and commercial paper to evaporate. SIVs saw the value of their holding plummet, forcing institutions such as Citi – which had been operating the funds as off-balance-sheet funds – to prop them up with financial support.

This is the latest move Citigroup – one of the hardest-hit by the worldwide financial crisis – has been forced to make as it struggles to get back into the black. Citi has notched losses in each of the past four quarters, including a $2.8 billion loss in the third quarter, and has taken in excess of $40 billion in write-downs.

On Monday, Citi unveiled plans to cut more than 50,000 jobs in the “near term” and slash expenses by 20% to preserve capital as it faces a global slowdown that’s expected to push well into 2009. The cuts are on top of the 23,000 jobs eliminated so far this year and are part of CEO Pandit’s plans to whittle the bank’s work force down to 300,000. By the time Pandit puts down the corporate-cost-cutting machete, he’ll have lopped off about 20% of the company’s work force.

At its peak at the end of 2007, Citigroup had a work force of 375,000.

Just last week, as Money Morning reported, Citigroup announced the release of 10,000 employees, and said it was boosting interest rates an average of 3% for about one-in-five of its credit card holders.

Source: Citigroup Board to Meet Today to Weigh Options for Embattled U.S. Banking Giant

But it doesn’t feel like we’re there just yet…

So far, the Treasury Department, Federal Reserve and FDIC have cobbled together about $2 trillion worth of bailout programs, along with an unknown-trillion-dollars worth of implied and actual guarantees. What do we have to show for all of this financial firepower? Nothing more than a smoldering pile market capitalization and implausible declarations of victory.

Bailouts aren’t all bad, they’re just mostly bad. They’re bad because they tend to subsidize failure, rather than to underwrite future success. Failure consumes capital investment, success multiplies it. Like UN food programs, bailouts tend to land in the hands of crafty despots, rather than needy orphans. In other words, bailouts tend to produce exactly the sort of capital misallocation that prolongs economic stasis and impedes recovery.

When the TARP tosses billions of dollars at a hodgepodge of finance companies, for example, does it actually save anything of long-term economic value or does it merely preserve museum pieces?

The Treasury has funneled $150 billion into the AIG cesspool, but the beleaguered insurance company continues to stink up the place. The company just posted a fresh $25 billion loss in the third quarter, and is probably amassing another multi-billion-dollar losses for next quarter. And yet, somehow, in the tortured logic of the powers that be, it’s okay to waste $150 billion on AIG, but not to waste $25 billion on GM, Chrysler and Ford.

The logic, if you can follow this, is that AIG’s failure would be a “systemic risk,” GM’s failure would merely be a catastrophic. To be clear, GM doesn’t deserve a bailout any more than AIG does…or any less. AIG miscalculated in such a spectacular fashion that it will receive six times the money that GM will NOT receive. Does that make sense?

In some ways, yes. No one wants a systemic risk walking around on the streets. But at the same time, what do we gain over the long term by resuscitating a model of incompetence like AIG, when we could be investing billions in lots of competent enterprises.

If the brain trust at AIG did not realize that policy-holders sometimes file a claim, too bad for AIG. It should go bankrupt. A blind monkey could write an insurance policy without considering the risk of a claim. A blind monkey could also figure out that if you write lots of policies on the identical risk – or family of related risks – you can kiss your actuarial assumptions goodbye. But blind monkeys almost never rise to the top ranks of a major insurance company.

We’ve got nothing against blind monkeys, but we don’t believe they should receive multi-billion bailouts from the Federal Government. Because, you see, when blind monkeys fail, sighted mammals can take their place, and usually operate a business more successfully. That’s called, “Economic Darwinism”…and we could probably use a little more of that about now.

If we’re going to waste $700 billion…or $2 trillion…let’s waste it on the folks who are building successful businesses…not on the folks who have demonstrated a penchant for colossal failure. Alternatively, let’s waste it on the folks who are trying to save their homes. In other words, let’s waste it on the effort to restructure existing mortgages. As a last resort, we could waste $2 trillion subsidizing journalists who write daily financial columns containing the words, “Rude Awakening.” But this would truly be a last resort.

If the government really wanted to INVEST the TARP funds, rather than squander them, it would buy a $25 billion interest in America’s nine BEST companies (whatever those might be). But that’s not the TARP’s mission. The TARP’s mission is to throw good money after bad, with the hope that the bad money becomes good again.

Good luck.

The TARP, itself, is a troubled asset. In fact, this particular tarp is beginning to look an awful lot like a shroud – an ornately embroidered gossamer that the Treasury Department is wrapping around the lifeless remains of the financial sector. The Treasury Department continues to insist that this shroud…er, tarp…will restore the financial sector to new life and vitality. We don’t believe it.

The financial sector is more King Tut than Lazarus. It will not come back to life, at least not in anything resembling its current form; it is dead already. The pyramids and the gold and the perfumes did not make King Tut any less dead. His 5-star Egyptian mummification/spa treatment did not bring him back to life. Likewise, dressing the ashen frame of brain-dead finance companies in $700 billion worth of bailout baubles will serve only one purpose – to send $700 billion into the afterlife as well.

Don’t send your money there too. Beware the financial sector…still.

Source: Bailout Fatigue Syndrome