Van Santos

Why do I have a feeling Fed Chairman Bernanke’s comments of “green shoots” will haunt him for the rest of his days.  Sure, he was trying to inject confidence in the market but without any real evidence of a recovery.  Economist Nouriel Roubini is once again point out there are weeds in with the “green shoots”

Here are the highlights:

• growing divergence between business sentiment surveys
• and industrial production, which is down sharply and receded another 1.1 percent in May
• U.S. jobless rate, already at a 26-year high of 9.4 percent, would reach 11 percent before it begins to ease
• few engines for growth given that U.S. consumers are tapped out
• Rampant inflation could lead to negative economic cycles like the ones that plagued much of the industrialized world in the 1970s

People continue to cheer when 500K jobs are lost instead of 600K, or when retail sales are down but not a much as the month previous.  Bottom line, we are not in a recovery as of yet.  You can cheer all you want but you are, ultimately, just cheering bad news.

We are back to 2006/7 gas prices and for what, exactly? It’s not demand. That has fallen by roughly 2 Million barrels a day. It’s not Geopolitical. While tension between Iran and Israel continues, what we are seeing is nothing new. We are now seeing two factors:

1) Oil producing countries need the money to fund government operations, therefore cut production to raise cost. (spoke about that here)

2) Now investors are looking at the economic conditions, see that inflation is coming and are turning to commodities as a way of protecting themselves, as well as hoping that the worst for the economy being over

Oil prices soared above $71 a barrel Wednesday to reach a 2009 high, as investors poured money into crude markets to protect themselves against the inflation risks posed by a weakening U.S. dollar.

Oil, which typically trades inversely to the dollar, has more than doubled in price in three months as traders also cheered news showing the worst of a severe U.S. recession is likely over. They brushed off data — such as a 9.4 percent U.S. unemployment rate in May — that suggest crude demand will remain weak. Even growing inventories have not checked crude’s stellar rise.

The bottom line here: this is Bull! If there was ever a time that the consumer should pay attention to the price of oil it would be now as our current situation shows how vulnerable we are to just about anything. There is no realistic reason oil should be this high. This is purely a profit drive by producers and investors.

On Monday Supreme Court Justice Ruth Bader Ginsburg put the future of the Fiat/Chrysler purchase in doubt by issuing a stay on the sale. Three Indiana pension funds are suing, claiming the bankruptcy is unfair to lenders such as themselves, while favoring other lenders who took less risk. Unfortunately for Chrysler, they had until June 15^th to complete the sale or Fiat could walk away.

Today, however, Fiat is sticking to their guns.

Italian automaker Fiat said Tuesday it will not turn its back on a deal to acquire a controlling stake in Chrysler despite a U.S. Supreme Court stay on the sale.

Under terms of the agreement, Fiat has the option to abandon the deal if it is not completed by June 15.

“Fiat won’t walk away from Chrysler,” Fiat spokesman Gualberto Ranieri said.

If Fiat does walk away, then Chrysler will have basically no choice to liquidate. While Fiat seems committed to the purchase, at this point, anything is possible.

UPDATE: Supreme Court will not block the sale.

As I looked over the business headlines today there was one headline that really, really stood out to me:  Microsoft to raise $3.75B in first debt offering.  

Why did this stick out?  Simply because this company is flush with cash.  As of 3/31/09 the company had roughly $25B in cash and short term investments, so, obviously, they were not having a hard time with funding.

If you look a bit into the justification MSFT gives as to why they are moving forward with the Debt Offering, you’ll see:

The software maker said it will use proceeds from the sale for general corporate purposes, including possible acquisitions and stock buybacks. 

First – a stock buy back is usually a very poor idea.  It really doesn’t help create that much value for the share holders.

Second – We’ve already established that Microsoft has piles of cash, why would they need to sell debt for “general corporate purposes?”.  Again, makes no business sense and adds no share holder value.

I think the reason for the offering is the “including possible acquisitions” that is mentioned in the SEC filing.  It would make more business sense to have cash reserves and funding acquisitions via debt – cheap debt – during times of economic hardship.

Has the target on Yahoo! suddenly increased in size?

The latest unemployment numbers are out and the situation continues to look grim. While layoffs slowed to 539,000 jobs lost in the month of April, down from 699,000 jobs in March, the unemployment rate continues to rise. The official government reported number currently stands at 8.9%, though the argument could easily be made that true unemployment is significantly higher.

Yes, the job loss rate slowed in April. That is nothing to get excited about, especially when you consider that this is the 16th consecutive month of job losses AND there is no sign of increased hiring activity. Simply put, the U.S. economy is far from recovery.

Only 4 months into the year, I still hold to my view that unemployment will hit 10% by the end of December.

UPDATE: The TRUE Unemployment number is…

Above I noted that the 8.9% unemployment rate is debatable. Why is that? The 8.9% represents “Totally unemployed, as a percent of the civilian labor force”.

Got that? Good. When one looks at “Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers” then unemployment jumps to 15.8%

But what is this whole “marginally attached workers” thing you speak of?

Simply put, a marginally attached worker is a person who currently is neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.

They are the despondent, those who have given up hope. So, take those who still are looking for work (hopeful) and those who are not (given up) and one arrives at 15.8% - that is your TRUE unemployment number.

If you take a quick trip down memory lane you will recall there was significant debate as to releasing the bank stress test data.  When will the government?  Should the government?  How will they do it?  

You get the point.

Anyway, the data is due to be reported this week and the information that is leaking out seems to be a bit disturbing - 10 of the 19 banks will need to raise capital.

The U.S. is expected to direct about 10 of the 19 banks undergoing government stress tests to boost their capital, according to several people familiar with the matter, a move that officials hope will quell fears about the solvency of the financial sector.

The exact number of banks affected remains under discussion. It could include Wells Fargo & Co., Bank of America, Citigroup Inc. and several regional banks. At one point, officials believed as many as 14 banks would need to raise more funds to create a stronger buffer against future losses, these people said, but that number has fallen in recent days.

Looking a bit deeper into the news that is in the press, the really disturbing information starts to find the light of day:

Bank of America Corp(BAC.N) has been deemed to need as much as $34 billion in additional capital, according to the results of a government stress test, a source familiar with the results said on late Tuesday.

Bank of America spokesman Scott Silvestri declined comment

Remember that Bank of America was considered to be surviving institution.  While the acquisition of Merrill was significantly more difficult than expected, the government had already provided support due to the situation.  

If the information out now is to believed, and Bank of America does need an additional 34B, what does that mean for the financial institutions deemed at risk, such as Citibank?  Better yet, what does it mean for the “solid” companies such as J.P. Morgan or Wells Fargo. 

The data release date is on 5/7… it will be interesting to see how the market reacts.

Yesterday I raised the question “what’s up with the mix signals on the economy?” The economic numbers just didn’t seem to match what the Federal Reserve was saying. I simply couldn’t see how the world is ending mentality gave way to a 6 week market rally and the Fed to say things are fundamentally sound.

Jim Rogers, a one time monster hedge guru, just isn’t buying the economic and stock market recovery:

I am not buying U.S. companies mainly because I think we may have seen a bottom but I don’t think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn’t last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system. The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.

It’s laughable on its face, but politicians think they’ve got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.

For the record, I do think that mark-to-market rules need to change but they would not solve the problem.

I’m slightly confused as to why the Federal Prosecutors would be willing to offer Bernie Madoff a guilty plea. This is the man behind the largest Ponzi Scheme in the history of, well, Ponzi Scheme as he stole roughly $50 Billion of funds.

With the “rock solid case” prosecutors had, which included testimony from his son and documents showing he never committed the trades he stated, why simply offer him 11 felony charges? Yes, this will most likely result with Madoff spending the rest of his life in prison, but was justice served on behalf of the people he swindled?

I could potentially see the Feds making would be related to the potential costs of a trial. They could say this man already cost thousands of people Billions of dollars, so why spend more tax payer money when the Madoff was willing to admit guilt and go away quietly?

Looking at this situation with a bit of skepticism, I wonder what information Madoff provided to the Government that would cause prosecutors to stop short of taking this mans head and putting it on top of a take at Wall and Broad.

Two things I can think of…

1. Madoff showed the SEC and Federal Regulators how he managed to scheme the system for so long. Simply put, he pointed out the flaws.
2. The Government wanted to “protect” the “investment” system and avoid publicizing how Madoff truly made money – by off book lending to less than reputable individuals.

I believe that Madoff was involved in some form of money laundering and organized crime outside of the United States. Most of his money was moving through Eastern Europe, which has little regulation, and would allow for him to act as a “black bank”. Terrorists need funding too, and they happen to utilize these “black banks”, so it wouldn’t be a stretch.

Wouldn’t it look real bad for the U.S. government if Madoff laundered funds purchased the explosives used in attacks in the UK or Spain… or funding for a covert paramilitary operation by “agents” (read Contractors) of our government.

I think this case provides more exposure for the government and the financial system, that is why the plea was offered. And, as a result, government won’t have to put their dirty laundry up in the yard for all to see.

A visual guide to the fall of GM…  very well done. (via wallstats.com)

With a new years comes hope of better times for the stock market.  Here is a remind of how far we’ve fallen in the last year, thanks to dshort.com.  While the decline is significant, make sure you take notice of the other bear markets as well.

Obviously, as during any bear market up and downs seem to come for no reason while the bottom is being established. The question that is now in mind is this: is a bottom in place?