Gold Rally

The easy money has been made with the gold trade.  Futures hit a low of $681 in late October and have since rallied to $1008 (02/20/09).  The government has flooded the economy with dollars and future inflation is evitable (Obama’s pledge to cut the federal deficit in half by the end of his first term is laughable).  Everyone knew gold should go higher and it did – a 48% rally trough to peak.  Gold has also been bid up as it is also a flight-to-safety trade given the highly uncertain and tepid equities market.  However, gold is still off its all-time high of $1034 (March 17, 2008, Bear Stearns collapse).

Five years from now, I believe, gold and other precious metals will be trading at much higher levels, but recently, the gold trade has become very crowded.  That is, everyone (and I mean everyone), is buying gold or on CNBC saying you should buy gold.  Gold has since pulled-back to $930. 

Here's the rule to follow: Do not chase what everyone else is buying (or saying to buy).  Just because other people are buying does not mean you have to buy.  The thesis may be correct, but the price may not be correct.  When people say to buy something, it is probably too late.  Wait for the pullback and the pounding-the-table "buys" to subside to get a good entry point.

Financial folly: A (meager) defense of the nationalization of banks.

The famous John Bogle, founder of Vanguard Mutual Fund group, reminds his readers in Enough of an epigram from 18^th century Britain:

Some men wrest a living from nature and with their hands; this is called work.

Some men wrest a living from those who rest a living from nature and with their hands; this is called trade.

Some men wrest a living from those who wrest a living from those who rest a living from nature and with their hands; this is called finance.

Of course some people have always been skeptical of the real value finance holds. Tim O’Reilly, who, while being a very smart guy, is certainly not a finance guy, and about a month ago put out an essay on his blog likening our global economy to a Ponzi scheme in itself. Tim cites former World Bank economist Herman Daly, who was griping about the global crisis back in October last year.

As Daly puts it “Real wealth is concrete; financial assets are abstractions—existing real wealth carries a lien on it in the amount of future debt.” And while Daly made this statement to set up an obvious argument about how debt works, this point is illustrative for a different reason – why are financial assets abstractions?

Gao Xiqing, the president of China Investment corporation, a SWF that manages $200billion of China’s foreign assets, and makes the most newsworthy of China’s foreign investments (Blackstone, Morgan Stanley, etc), described financial assets in a recent Atlantic article this way:

First of all, you have this book to sell. [He picks up a leather-bound book.] This is worth something, because of all the labor and so on you put in it. But then someone says, “I don’t have to sell the book itself! I have a mirror, and I can sell the mirror image of the book!” Okay. That’s a stock certificate. And then someone else says, “I have another mirror—I can sell a mirror image of that mirror.” Derivatives. That’s fine too, for a while. Then you have 10,000 mirrors, and the image is almost perfect. People start to believe that these mirrors are almost the real thing. But at some point, the image is interrupted. And all the rest will go.

These assets are nothing more than contracts, and are conceived in acts of financial wizardry as quickly as they can be sold. Daly addresses this point head on:

Can the economy grow fast enough in real terms to redeem the massive increase in debt? In a word, no. As Frederick Soddy (1926 Nobel Laureate chemist and underground economist) pointed out long ago, “you cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest] against the natural law of the spontaneous decrement of wealth [entropy]”. The population of “negative pigs” (debt) can grow without limit since it is merely a number; the population of “positive pigs” (real wealth) faces severe physical constraints.

Fine. We get it. These things can be dangerous. Dividends in particular are financial weapons of mass destruction, as Buffet put it like a million years ago. But our economy creates a lot of really valuable stuff that only exists as an idea, as bits of information, not in any warehouse. Through an accountant’s eyes, how are derivatives fundamentally different from software, or insurance, or a new drug? Leverage is a complex and value-adding technology; one must know how much of it, of what type, and how and when to re-position it. Our problem with leverage was not that we had too much, but that we didn’t understand it. As entities de-lever, they are returning to positions where they won’t be in as much hot water the next time they get it wrong. This is akin to releasing a drug too soon, and finding out that it has a chance of killing people.

What’s the solution? Well, we can start with improving our financial regulation, which has proven pretty soundly that it is less than useless – it’s dangerous. I don’t have the time in this article to discuss the many things we should probably be doing to fix regulators and rating agencies, but I do want to address one concern: complexity. The GAO (Government Accountability Office) had this to say in a recent report entitled A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System:

As new and increasingly complex financial products have become more common, FASB and SEC have also faced challenges in trying to ensure that accounting and financial reporting requirements appropriately meet the needs of investors and other financial market participants. The development and widespread use of increasingly complex financial products has heightened the importance of having effective accounting and financial reporting requirements that provide interested parties with information that can help them identify and assess risk. As the pace of financial innovation increased in the last 30 years, accounting and financial reporting requirements have also had to keep pace, with 72 percent of the current 163 standards having been issued since 1980—some of which were revisions and amendments to recently established standards, which evidences the challenge of establishing accounting and financial reporting requirements that respond to needs created by financial innovation.

CFO Blog mentioned this report two weeks back (it’s where I found that quote), and elaborated:

Accounting rulemakers have struggled to keep pace with financial innovation… But missing from this statement of the bleeding obvious is the fact that many of the 'financial innovations' in question were innovative because they were slick end-runs around accounting rules. Structured finance, by definition, is some form of leverage whose structure is complex enough that the letter of accounting rules does not apply. Ditto for hybrid securities, intended to win preferential accounting and tax treatment.

What does this issue have to do with nationalizing our banks? Nassim Taleb, recently stated on Charlie Rose that banks should be treated as utilities. The entities that take the real risks, the sophisticated investment vehicles like hedge funds, will still have role, albeit significantly smaller, and under the explicit understanding that they will never be bailed out again. Could this stronger control restrain us from making big bets on complexity that we do not yet understand? Could government oversight allow for economists to have a greater sense of how finance works, and allow for us to design better models for control? Perhaps, although we can probably be just as certain of the inefficiencies and restrained growth that comes with bureaucracies and government oversight.

Should we nationalize banks? Should bank holding companies just be plain-vanilla utilities? I have no idea, but I do know that we don’t seem to understand how the modern capital markets really function. And even if we do, we definitely don’t have the transparency and the appropriate control systems in place to organize this system to our predictions and analysis will be relevant. Would having our government oversee these capital markets help our economists develop the appropriate theories to understand our world? If so, it sure sounds a lot like communism. Not that we’re not pushing that envelope anyway.

Bringing it all back to Tim O’Reilly and Daly’s arguments, they promote a “steady state” economy. With the arguments I have made in this post, I will continue this week to discuss the merits and the issues with a steady state model as I see them.

Market Summary: Mon. Jan. 26, 2009

Something I noticed today that was not talked about too much in the news was the significant amount of job cuts announced.

1)      Home Depot will lay off about 7,000 workers (2% of workforce), and it will exit its EXPO business.

2)      Caterpillar will eliminate 20,000 jobs (almost 18% of workforce).  The company also reported earnings that missed expectations.  Q4 net income was $1.08 per share (compared to $1.50 per share a year earlier) while analysts were expecting $1.30 per share.   

3)      Sprint Nextel will cut 8,000 jobs (about 15% of workforce).  The job cuts will save the company about $1.2 billion each year.

4)      GM will cut 2,000 jobs (3% of 64,000 employees) at plants in Ohio and Michigan.  The last time GM made a profit was in 2004 when the company employed 111,000 workers.

5)      Deere will cut about 700 jobs (just over 1% of workforce) at factories in Brazil and Iowa.

6)      ING, a Dutch financial company, will lay off 7,000 workers (about 5.5% of workforce).

7)      IBM reported that it eliminated 1,400 sales jobs (about 3.5% of workforce) last week.

Companies are going to great lengths to lower costs and the easiest and fastest way is to reduce the number of employees.  Obviously, these companies are behind the curve, but I look at it as a positive sign. 

I became much less bearish on my outlook for the economy and the stock market after I attended University of Illinois’ town hall meeting where the school’s budget and plan to cut cost and over the next few years was discussed.  It takes a great deal of time for large institutions to make changes (especially financial ones), and when these big institutions finally realize they need to make changes the worst is already behind them.  In no way am I saying that the economy will bounce back and the stock market will zoom higher, but for now, people know things are bad and they are finally making the appropriate decisions to deal with the stagnant economy.   

Re-inventing economics: Part 1

One of my favorite bloggers, Fred Wilson, recently questioned the relevance of economists, especially after their inability to predict, as well as (arguably) correct this current global economic crisis. Fred cites Umair Haque, who griped that “We can't fix today's problems unless we change yesterday's rules. But economists -- and the models they rely on -- are bounded by yesterday's rules.”

Now I’ve got no patience for people who try to ignore the past because they of sensationalism or some naive idea that this time it’s all different. However, we can always improve on the past, so in this post is the first of two very potent ideas I’ve read about recently pertaining to a shifting opinion in modern economics.

Nobel Laureate Joseph Stiglitz (well, Economics isn’t one of the REAL Nobel Prizes, but everyone treats it that way) has put out a paper with a handful of other clever clogs describing a fresh look at economics based on modern networks theory. They developed their paper using data pulled from banks and certain firms in the 2004 Japanese credit market.

The paper basically argues that the old way of looking at markets through “the average, or most probable, behavior of the constituent” does not best describe the true “dynamics of the system,” when that system is made up of autocatalytic processes.  Autocatalytic processes are simply processes that grow on their own (self-perpetuating), and in this case, they become very important when they grow faster than the average, or most probable process. This type of growth can be “scale-free” or “scale-invariant,” which means the bits and pieces that make up the whole all grow at different rates, so after time some processes become more important than others.

So to put it simply, Stiglitz & co basically said that we should use a theory that doesn’t ignore the rare (i.e. not average or most probable) processes, when those processes can grow at astonishing rates, and become very important (e.g. processes that caused this crisis). “The real world is controlled as much by the tails of distributions as by means or averages” (page 2).

And not that this is new: apparently “the relevance of scale free distributions in economics (e.g. of firm size, wealth, income, etc.) is now extensively recognized, and has been the subject of thorough investigation in the econophysics literature” (page 2). I don’t even want to imagine what econophysics is. Regardless, people apparently haven’t given much consideration to how this type of thinking relates to credit markets, UNTIL NOW! The authors purport “…Japanese credit market shows that the credit relations between banks and firms are scale-free, and the standard representative agent plus normal distribution framework is badly equipped for dealing with it” (page 2).

I could be wrong, but I’m pretty sure this is basically chaos theory (which has been around for decades) meets the credit market.

An example the authors give is “the failure of a firm heavily indebted with a bank may produce important consequences on the balance sheet, or the financial status, of the bank itself. If a bank’s supply of credit is depleted, total supply of loans is negatively affected and/or the rate of interest increases, thus transferring the adverse shock to the other firms. Therefore the study of structure of the links and their weights allows to gain some insights in the financial stability of the economic system and to develop new economic policy tools” (page 2). This all looks to be pretty obvious – surely anyone with a passing interest in economics or finance recognizes the interrelatedness of these processes. Joe and Co just look like they’re one of the first guys to decide to map out and measure those links and their weights, this time in a controlled experiment (2004 Japan).

Network theory is an analysis of the interrelationship between nodes and links. In the case of this paper, nodes are banks and firms, while links are debt/credit contracts those banks and firms hold.

I don’t have the patience (or probably the intelligence) to wade through the actual research, but the conclusion offers some interesting opinions on how lessons learned from this data can maybe produce useful tools to stem future crises.

Basically Joe & Co think that “instead of a helicopter drop of liquidity, one can make “targeted” interventions to a given agent or sector of activity.” Presumably, if you use network theory to understand how problems of, say, liquidity arise, then you can surgically fix the problem at its source. Of course, in order to put this into practice, economists would both need to satisfy a tall list of demands:

1. 1.      Have at hand all of the relevant data (this probably means every balance sheet for every relevant institution as well as every debt contract [both of which of course must include homeowners’ personal finances and their mortgages]
   
2. 2.      Intimately understand all of these autocatalytic processes (of which in a modern economy there must be potentially millions)
   
3. 3.      Be able to act quickly enough to solve the problem before it gets out of hand
   

Sounds like the job for a totalitarian, dystopian, and super-intelligent government. But let’s be honest, wouldn’t access to that degree of information be every economist’s dream? Or perhaps this will all be possible, now that we are building petaflop computers that can probably manage the work, and we own all of the banks anyway…

 

Market Summary: Fri. Jan. 23, 2009

Capital One (COF), a credit card company, reported poor fourth quarter earnings and gave a very negative outlook.  For the quarter, COF lost $3.74 per share while analysts were expecting a profit of $0.33.  The company set aside $1 billion for bad loans, and expects unemployment to rise to 8.7% and home prices to decline another 10%.  The company’s CFO said that “the really big risk to our outlook isn’t 2009, but it is what 2010 might look like.”  The company also said that 7.08% of its credit card and auto loans were in default.  During the third quarter, this figure was only 5.85% (Source: WSJ).      

Based on what Capital One said, we should not expect a quick recovery anytime soon.  2009 just began and COF is already preparing for a bad 2010.  Many analysts are expecting credit cards and auto loans to be the next shoe to fall.

Citigroup tapped the government’s Temporary Liquidity Guarantee Program for $12 billion.  This money is guaranteed by the Federal Deposit Insurance Corp. (FDIC) making it the highest rated debt.  This is the largest debt offering under this program since its inception on November 25, 2008.  When will the government just cut its losses and let Citigroup go under?

Freddie Mac also announced it will need $35 billion of government TARP money. 

Market Summary: Thurs. Jan. 22, 2009

Negativity returned to the market today, but stocks managed to finish well off their lows.  Stocks were down more than 3% this morning, but only finished down 1.5%.  Even though stocks lost ground, there was no flight-to-quality trade as investors actually sold Treasurys today (yields up).  When investors are willing to take on more risk – financials, growth names (infrastructure, energy, and materials), and emerging markets – the market will turn higher.

Down-beat news from Microsoft set the tone for the markets today.  The company announced that it “will cut as many as 5,000 jobs, the first companywide firings in its 34-year history.”  Net income for the fourth quarter was $0.47 per share, but analysts were looking for about $0.50.  Revenue also fell short of expectations by about $500 million.  The stock finished down 12% and did not rally when the market turned higher in the afternoon.  It actually closed near its lows.   

Recently, there has been a clear divide between the tech winners and losers.  Winners: Apple, IBM, Google, Hewlett-Packard, and Research In Motion.  Losers: Microsoft, Intel, Dell, and Yahoo. 

Worse-than-expected economic data also weighed on the markets.  Initial jobless claims were 589,000 last week – 46,000 more than expected.  Also, continuing claims increased to 4.61 million.  December housing starts and building permits were both below expectations.  Crude oil inventories increased 6.1 million barrels last week – 4.7 million more than expected (Source: Briefing.com).      

The most surprising news story of the day was John Thain, the former Merrill Lynch CEO, getting fired from Bank of America.  Much controversy has surrounded the Bank of America acquisition of Merrill Lynch because Merrill reported a $15.4 billion fourth quarter loss.  What problems did Merrill Lynch have that Bank of America did not know about?  Was Merrill hiding something?  On top of his firing, it was reported that Thain spent over $1.2 million to redecorate his office when he became CEO.  He spent $87,000 on area rugs and $25,000 for a table.  Ridiculous!  He deserves to get fired.     

After hours Google reported stellar earnings that handily beat expectations.  

Market Summary: Wed. Jan. 21, 2009

We saw a relief rally from yesterday’s massive sell-off, although stocks are still down over the two-day period.  Stocks got a little over-sold yesterday (especially the financials), and investors went bargain hunting today to buy the stocks of good companies on the cheap.

Here’s the news: 

1)      FDIC Chairman Sheila Bair commented that “banks are solvent” and “well-capitalized overwhelmingly.”  Either she is lying to assuage Americans’ concerns or she does not know what she is talking about.  Banks are in desperate need of capital, especially the large institutions with lots of mortgage-related securities, as they are rapidly burning through the TARP funding that was just distributed.

2)      Talks of forced nationalization of UK banks continue to scare investors.  Barclays was down 19% and Lloyds was down 12.5%.  The UK government owns a 70% stake in Royal Bank of Scotland and a 43% stake in Lloyds.

3)      Financials led the market higher after news broke that several bank insiders purchased shares.  JPMorgan’s Jamie Dimon bought $11.5 million of stock, and Bank of America executives purchased about $3 million of stock.  Insider buying is considered a bullish sign for a stock.   

4)      Shares of Wal-Mart were downgraded because “the incremental benefit it realized from consumer trade-down in 2008 might not repeat itself in 2009.”  I agree with this analyst.  Wal-Mart has rallied significantly from its September 2007 lows even though its earning have not kept pace.  When the market turns Wal-Mart will be left behind along with many of the defensive stocks.

5)      Warren Buffett purchased another $272.2 million of Burlington Northern (BNI) shares.  Buffett’s 21.75% ownership in BNI makes him the company’s largest shareholder.

6)      US Bancorp reported quarterly profit of $0.15 per share, which fell short of the $0.18 estimate.  During the quarter the bank quintupled the amount set aside for loan losses.  Shares were down 20% in the morning, but actually finished the day in the green.  This is one financial company that actually made money in the fourth quarter.  Pretty impressive!

7)      Apple reported quarterly results after the bell that handily beat estimates.  Despite Steve Jobs’ illness, the company is still performing and remains a “buy.”  The company reported earnings of $1.78 per share.  Analysts were expecting $1.40.  Revenue also beat expectations and rose 5.8% year-over-year.  Quite impressive numbers given the state of the consumer and economy.

8)      Intel announced it may cut up to 6,000 jobs. 

9)      Hedge fund investors withdrew a record $152 billion in the fourth quarter of 2008.  

Market Summary: Tues. Jan. 20, 2009

As I said in my last post, as the financials go so does the market.  Stocks finished the day down 5.3% and the financials (XLF) were down 16.5% (when I say stocks I am referring to the S&P 500).  Today’s news simply reiterated the fact that all financial institutions are in trouble (at home and abroad) and remain a “sell.”  They are simply not investable.  How are they going to make money in the future?  Will they even be public companies?

 The big losers:

-         State Street Corp  -59.04%

-         Barclays  -42.62%

-         PNC Financial Services  -41.40%

-         Bank of America  -28.97%

-         Regions Financial  -24.22%

-         Wells Fargo  -23.82%

-         JPMorgan  -20.73%

-         Citigroup  -20.00%

-         Goldman Sachs  -18.96%

European banks have been under pressure too.  Concerns are mounting that Royal Bank of Scotland may be nationalized by the British government.  The company lost $41 billion in 2008 and the British government is exchanging its preferred shares of common shares that could give it 70% ownership in the bank.  Because of this news the British Pound was crushed today.  It trades at its lowest level versus the Dollar in almost eight years. 

The U.S. government is way ahead of European governments in terms of financial aid and bailouts.  Look for weakness in Europe, specifically Britain, to continue.  

-         Fiat is in talks to acquire a 35% stake in Chrysler.  There is no cash involved with this transaction, and it is not a merger.  The companies would get access to each other’s plants and technology. 

-         Meredith Whitney explained what is going wrong at Citigroup.  Its “core problem is that it simply doesn’t make money in any of its businesses except Smith Barney, which it is in the process of selling.”  After the bell, Citigroup announced it is cutting its dividend to $0.01 from $0.16.  

-         Here is a good article that discusses the oil market.  There is an estimated 80 million barrels of oil being held on offshore tankers in order to take advantage of the steep crude curve.  That is, buying cheap crude today (spot market), storing it on these tankers, and then selling it in the future at a higher price. 

-         After hours, IBM reported earnings that beat estimates.  Shares are up 4% in after hours trading.

-         Obama took office today.  But guess what?  Nothing changed about our economy.  It still stinks!

-         The government has given Citigroup $45 billion in loans, but the company’s market cap is only $15.3 billion.  The government should just buy the company outright, do what it wants with the good and bad assets, and avoid all the added uncertainty and fear that is plaguing the financial markets.

Market Summary: Fri. Jan. 16, 2009

Citigroup and Bank of America led the markets lower in the morning; however, a midday reversal (for the second day in a row) helped stocks finish in the green.  The financials are to blame for the steep declines in the stock market as concerns mount about the health of these large institutions.

Let’s wind the clock back to November 4 when the S&P 500 closed at 1,005.75.  Everyone was concerned about Citigroup’s capital position, and on November 21 when the government finally stepped in to help Citigroup the market bottomed at 741.02 – a 26.3% decline.  During this same time shares of Citigroup were down 74.3%.

We have recently found ourselves in a similar situation, this time it involves Bank of America and its need to raise more capital to help with its acquisition of Merrill Lynch.  Also, concerns at Citigroup about selling assets to raise capital have weighed on the market.  On January 6, the S&P 500 closed at 934.70.  On Thursday the market bottomed at 820 – a 12.3% decline.  During this same time shares of Bank of America were down 49.7% and shares of Citigroup were down 53.1%.

Here’s the news:

-         Citigroup announced that it will split into two companies, Citicorp (good bank) and Citi Holdings (bad bank).  “Citicorp will be home to the company's retail banking and credit card businesses, its corporate and investment bank, Citi Private Bank and a transaction services unit.  Citi Holdings would house brokerage and asset management units…and a 49 percent stake in a new brokerage venture with Morgan Stanley. It would also hold local consumer finance operations…Citi Holdings would house $301 billion in assets that received government backing in a November rescue package.”

-         Citigroup also reported a quarterly loss of $1.72 per share.  Analysts were predicting a loss of $1.32 per share.

-         Bank of America (BAC) received $20 billion in TARP money and a guarantee from the government on $118 billion of its assets.  BAC received this money to help with its Merrill Lynch acquisition.    

-         Bank of America reported a quarterly loss of $1.79 billion and Merrill Lynch (B of A’s newest acquisition) reported a quarterly loss of $15.31 billion.  BAC also reduced its quarterly dividend to $0.01 from $0.32 to preserve cash.  Some are questioning whether or not the CEO’s knew that the Merrill results were going to be horrific and why they would let the acquisition get done.  Merrill lost $16.4 billion in failed hedges.     

Is the worst behind us?  Or is there more pain to come from the banks?  The talk is that Wells Fargo (WFC) will need to raise more capital to help with its acquisition of Wachovia.  WFC reports its quarterly results on January 28.  On December 1, the well-renowned analyst Meredith Whitney was asked if she could sell one bank which one would it be.  Her response was Wells Fargo.  On January 14, Whitney reiterated her negativity towards the financials. In other news…

-         Chrysler Financial received a five-year $1.5 billion loan from the government in order to entice buyers with no-interest financing.

-         Circuit City will close all of its stores after it failed to find a buyer.

Market Summary: Thurs. Jan. 15, 2009

The Dow and the S&P 500 finished up a few points, but the tech-heavy NASDAQ was the winner finishing up 1.5%. Stocks reversed on little news midday after being down about 2%.

Here’s the news:

1) JPMorgan reported fourth quarter income of $0.07 per share. Not including a one-time gain, the company actually lost $0.28 per share. JPM wrote down $2.9 billion worth of assets and tripled its loan-loss provisions for bad debt. CEO Jamie Dimon said the company remains committed to paying its dividend. Shares finished the day down 6%.

2) Bank of America is close to receiving $15-20 billion in TARP funds from the government. The company could also receive $120 billion in guarantees on losses from bad assets. When Citigroup received its bailout money, it got $20 billion and $306 billion in guarantees. Shares of BAC were down 18.5% on the day.

3) As expected, the European Central Bank cut its benchmark interest rate 50 basis points to 2%. President Jean-Claude Trichet said inflation risks are “broadly balanced” and he does not expect rates to go to zero. The Euro was unchanged on the day as this move was expected.

4) General Motors lowered its U.S. auto sales estimate to 10.5 million units in 2009 from its previous estimate of 12 million. GM will receive a $5.4 billion loan from the government on Friday as part of a previously announced rescue package.

5) Shares of Wells Fargo finished the day down 12.5% after an analyst said the company may need to raise $10 billion and cut its dividend in order to complete its acquisition of Wachovia.

6) Shares of Citigroup were down as much as 25% today on concerns the company might need more government assistance. Citi has already received $45 billion from the TARP.

7) Apple was only down 2.3%, much less than some people thought, after CEO Steve Jobs announced he will be taking a leave of absence until July. There was a report that Jobs may be having his pancreas removed. Jobs had pancreatic cancer in 2004. Here is an article that discusses the premium built into Apple stock because of Steve Jobs.

8) Crude oil for February delivery fell below $34, but March crude oil (the more frequently traded contract) finished at $43.50. Crude oil futures are at about the same prices as they were one month ago when the January contract was expiring.

9) Mortgage foreclosures were up 81% in 2008.

10) Motorola announced it would cut another 4,000 workers.

11) The Senate voted 52-42 in favor of releasing the second $350 billion of TARP funds.

12) House Democrats are planning an $825 billion stimulus package which includes $275 billion of tax cuts.

Market Summary: Wed. Jan. 14, 2009

Stocks had their worst day of the year finishing down just about 3%. Continued worries about financial companies’ health dragged the markets lower. The decline was broad based as 95% of the S&P 500 stocks were lower on the day. The majority of commentary I hear on CNBC is now bearish (finally) and stocks are at a much fairer value today than they were early last week. I have begun to make my “wish list” of stocks I want to buy on any further weakness – you should do the same. I do believe, though, that stocks will continue to decline as more and more companies report poor earnings, give cautious 2009 guidance, and lay off more workers. Nothing new, but the market needs to do a little catching up to the downside.

Here’s all the bad news from today:

1) December retail sales fell 2.7%. Analysts were expecting a decline of 1.2%. Everyone knows retail sales have been weak, so this really should not have been that big of a surprise.

2) Crude oil dipped below $36 per barrel. Once again, today’s inventory report was bearish, that is, it showed signs of increased supply.

3) Nortel Networks filed for Chapter 11 bankruptcy. “Nortel Networks Capital has more than 100 creditors owed $100 million to $500 million.” Watch out for companies with too much debt. With expensive credit any company that has debt coming due this year should be sold.

4) Deutsche Bank announced it lost $6.3 billion in the fourth quarter and will only issue a $0.50 dividend compared to 2007’s $4.50 pay-out. Shares of DB were down over 9% on the day. Barclays, another European bank, was down 14.5% after announcing 2,000+ job cuts.

5) Shares of Citigroup were down 23% today! There is talk that the company will get broken up even further, and investors are becoming more and more displeased with CEO Vikram Pandit.

6) After the bell, there was a report that Bank of America is close to receiving a second round of TARP funds from the government. The reason? BofA needs more cash to help with its Merrill Lynch acquisition. Shares are down more than 25% in the last five days.

7) After the bell, Apple announced Steve Jobs will be taking a leave of absence until July because his health problems are “more complex” than he had thought. Shares are down about 7% in after hours trading. Some are saying Apple mishandled this situation because just last week Jobs was healthy but had a treatable hormone imbalance.

8) Under Armour, Tiffany, and Bunge issued earnings guidance that was below analysts’ estimates.

Market Summary: Tues. Jan. 13, 2009

Stocks were flat on the day, but energy and financial names were the leaders. Morgan Stanley agreed to pay Citigroup $2.7 billion for a 51% stake in Smith Barney. After the market close, Citigroup announced it is also considering selling CitiFinancial, its consumer lending unit. Citigroup is slowly shedding assets to raise much needed cash.

In a speech today, Federal Reserve Chairman Ben Bernanke said “more capital injections [into banks] and guarantees may become necessary to ensure stability and the normalization of credit markets.” He also explained that “fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system.”

Let’s go back to “The Dollar versus the Euro (and Yen)” from my January 4^th post. So far the Dollar has rallied significantly against the Euro. The Euro finished the day at 1.315, well off its December 18^th high of 1.4687. During that same time, gold (a hedge against inflation) is down $55. In regards to pumping trillions of Dollars into the economy, people are focused on the near term effects (economic stimulation) rather than the long term effects (inflation).

According to Treasury Inflation Protected Securites (TIPS), traders are expecting consumer prices to only increase 1.66% over the next five years. That is, they expect minimal inflation. How can you figure out this number? A 5-year US Treasury note yields 1.46%. A 5-year TIPS yields 1.13%. The difference between the two yields is the expected annual inflation rate over the duration of the securities. Right now traders believe we are in and will remain in a deflationary period.

I heard some CNBC commentators debating about Obama’s stimulus package and the proposed tax rebates/credits. Obama believes these tax rebates/credits will stimulate spending, but I do not think so. The recipients have two options – spend it or save it. I would bet that the majority of the baby boomers will be saving their tax rebates/credits. They need to make up for the 30-40% decline in their retirement portfolios. Sorry, Barack, saving the economy is not as easy as you think!