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?

The 2008 bank failures reached 25 on Friday when the Feds closed Haven Trust Bank in Georgia and Sanderson State Bank in Texas after market close.  Just a reminder, if you happen to have money in these two financial institutions, there is no reason to panic as the FDIC has insurance on all account up to 250K.

One bright spot in this news, the FDIC has already found purchasers who will re-open all branches on Monday.

With just over 2 weeks to go in the year, 25 bank failures is only 3 more than 2007.  While that is a high number, it’s not crisis mode (yet).  The rest of the economy may be…. Oh, and if you want the list of all 25 Banks that have failed this year, you can find it the the FDIC website.

Hmmm…Well, what did GM say?

 ”While we’re still the U.S. sales leader, we acknowledge we have disappointed you,” the company said in the magazine ad. “At times we violated your trust by letting our quality fall below industry standards and our designs become lackluster. We have proliferated our brands and dealer network to the point where we lost adequate focus on our core U.S. market. We also biased our product mix toward pick-up trucks and SUVs. And, we made commitments to compensation plans that have proven to be unsustainable in today’s globally competitive industry.”

The company just admitted it drove itself (no pun intended) into the ground. They made poor business decisions and now have no ability to continue operations without government loans…. Human impact aside, why should we bother supporting a bail out? 

Two things missing from the admission where a) we are sorry for operating our company in this fashion and b) here is how we are going to change.

Obviously, admitting any type of fault would place management in a questionable legal situation.  While they did run the company into the ground, why admit your mistake when shareholders could sue you?  More importantly, there was no evidence of change…. No plan as to how the company would avoid such a situation moving forward.

The only company I support in this process thus far is Ford due to strategic moves they made last year, and because they are claiming they do not need the money for operations but simply as a backstop incase things were to get worse (which I suspect they will). 

Basically, Ford is the only one with a plan and is acting accordingly.  If anyone should get “bailed out”, we should look in their direction.

I know I’m sounding repetitive now, as I’ve said this over and over, but I need to say it once again as I am very frustrated.  Uncertainty Creates Fear!

Now you one could call me paranoid, but now I have some ability to show just how the market is impacted when Bernanke and Paulson speak in public about the current state of the market.

Here is some evidence via Newsbusters:

That message and others like it have had an impact on financial markets. Altogether, it has lost a total of 2,507 points during the 21 days listed on the Federal Reserve Board’s Web site that Bernanke delivered public remarks. That’s more than half of the 4,127 points the market has lost in that time.

 

Jerry Bowyer, chief economic advisor to BenchMark Financial Network and columnist for National Review told the Business & Media Institute it is reasonable to assume this is more than just a coincidence and the barrage of live media coverage of Bernanke has something to do with it.

 

“Yup. It’s quite reasonable,” Bowyer said. “After all CNBC usually runs the Dow on a split screen with Bernanke speaking on the other. I’d also look at Paulson – same pattern seems to hold.”

 

It’s an issue of trust, according to Bowyer – Wall Street is leery of Washington.

 

“Big Picture: the investor class doesn’t trust the political class, even if they are Republican,” Bowyer said.

The administration needs to speak with one voice because the credibility of the U.S. is in question when public officials are providing two difference views of the situation.  It really makes it look like someone isn’t at the helm of the ship.

Surprise, surprise… the “Big Three Bailout” ballooned from $25 Billion to $34 Billion in a matter of weeks, $18 Billion going to General Motors alone.  The remainder will be split between both Ford and Chrysler.

A number of ways I feel as if automotive executives are using fear, preying on the general public’s worry about a “Greater Depression”, when comments like this are made:

“Failing to act now will hurt many American families and undermine our country’s economic recovery, far outweighing the costs related to supporting an industry that touches every district in every state of the nation,” Chrysler said.

“There isn’t a Plan B,” said GM Chief Operating Officer Fritz Henderson. “Absent support, frankly, the company just can’t fund its operations.”

Or what about this…

“We’re on the brink with the U.S. auto manufacturing industry,” Press told The Associated Press in an interview. “If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it’s a huge blow. It could trigger a depression.”

Not only are the executives trying to pander to the emotions of you and I, they are clearly trying to make this a political issue by saying “an industry that touches every district”.  

Really, how many people talk like this?  Do you ever say, “God, the economy is bad.  Every district in the country must be hurting.” 

No, don’t think so.

Let me ask you this.  Why should the American public provide a bailout when the companies cannot run their business?   Ignore the potential impact to the economy, which I do believe would be significant, and strictly look at this from a business perspective.

Sales, year over year, were down 47 percent at Chrysler and a 41 percent decline at General Motors.  It is true that all automakers saw a significant fall in sales, Honda, Toyota, BMW and VW all manage to turn a profit somehow.  There are not begging at the alter of Congress, are they?

We will see political posturing next.  Politicians will say how they don’t like the plan under consideration but that Bankruptcy of one or all three automakers is not an option.  A fuss will be made but the coffers will open, giving the companies more than the revised request of $34 Billion (over the next several months) due to “harder than expected economic conditions” and, in the end, either the U.S. will witness a bankruptcy of one or two manufactures and/or the sale to a competitor based outside of America.

Update: UAW Concessions

This is this first time I’ve seen the UAW talking about giving somthing up to help the industry.  It’s about time someone in the UAW brass wake up to see that without the Big 3 they are gone.

About three weeks ago I wrote the following:

I see the impact of economic conditions every day – people out of work, making hard decisions from one day to the next due to income related concerns – but this is nothing compared to about 30 years go, let alone the great depression.

It’s really scary how much can change in about 18 days.  Really scary.  During the time that has passed the following information became public.

• Housing starts were significantly less than expected
• Consumer prices dropped by 1%, the most ever in the 61 years of tracking pricing data 
• Jobless Claims are close to 1982 levels and unemployment is expected to hit 7.6% in 2009 
• The survival of GM, Ford, Chrysler and Citibank have all come into question (Granted, the big three have been in question for some time but their losses became massive in the last three months)
• The use of funds in the TARP switched from buying bad assets to purchasing stakes in banks providing no floor for bad mortgages
• Interest Rates are expected to go to 0 by mid January
• The TED spread, the difference between the interest rates on interbank loans and t-Bills, is showing signs that volatility is increasing again

All of these events point to more potential danger.  

What bothers me, aside from how quickly things are changing in the economy, is how this downturn reflects the great depression.  No, I am not talking about the Great depression that started in 1929 but the “Real” great depression (also known as the Long Depression) that started with the Panic of 1873.

In the Great Depression of 1929, economies of the world suffered huge drop in output and massive rise in unemployment all while deflation began to set in.  The root of the great depression can be traced to a number of things but a hyper stimulated economy, bank and political policies, plus the rise of income taxes are the overriding factors in causing events to unfold.

Sure, the U.S. (and the world) has seen a booming economy for some time, as well as poor bank and political decisions but the Long Depression of 1873 started with, of all things, mortgages.  

In the 1870s, much like the last several years, mortgages were quite easy to obtain and as a result a building boom took place.  The value of property seemed to skyrocket and borrowers took on significantly more credit than they could afford. Once the economies of the world realized that fundamental economic forecasts were overly optimistic a sudden market correction started to take place. 

Financial institutions started to collapse under the weight of bad mortgage debt, banks started to hold back credit, and interbank lending rates (what is called the TED today) skyrocketed.  The waves of the financial collapse caused small factories to shut their doors, unemployment rising to almost 25%, riots taking place in all major cities, and people roaming the nation looking for work.

Understand, I am simply drawing parallels here, I am not implying that this is our future.  I am not on some fatalistic kick that says the nations of the world are set to replay the past but the comparison of the current economic climate is scary with you look at what took place in 1873.

Assuming the actions take by economic powers worldwide hold off another depression, the environment is now set for deflation followed by massive inflation. While I don’t expect another great depression today, I think we will witness something the US has not seen in roughly 80 years – a falling standard of living and a declining middle class

Simply put, no one knows what is going to happen next.

Yes, the financial markets are hurting. Yes, credit is contracting. Yes, earning are shrinking… But this is hardly the worst economy in 100 years.

A few things:

• The last time the stock market was at 10 earnings or less was during the 1970s into the early 80s
• At the peak inflation during that period was 14.8% during that period; today it sits at 4.94%
• Unemployment during that period reached 10.8% versus the 6.1% today
• The marginal top tax income rate was (peak) was 69.125% compared to the 35% today (read more money in the pockets of the consumer now)

I see the impact of economic conditions every day – people out of work, making hard decisions from one day to the next due to income related concerns – but this is nothing compared to about 30 years go, let alone the great depression.

I’m just sayin’

Southwest airlines, one of the few profitable airlines left out there, swung to a loss for the first time in 17 years the company report on Thursday.  Guess what? The loss is due to rising energy costs.  Guess what? it’s because LUV overpaid for their fuel and is now a victim to “mark-to-market” accounting.

Years back Southwest Airlines started to hedge their fuel costs – paying a pre-determined price for a commodity in order to avoid large and often unpredictable shifts in pricing.  This is based on the belief that prices will continue to rise at a predictable rate which allows a service provider the ability to complete energy purchases before the price increases.  Problem is if the price of fuel on the open market falls below your cost paid the company needs to show a loss based on current account rules.

Hello Southwest, welcome to an accounting rule that doesn’t seem to be based in reality.

Another day is upon us, as is another Bailout bill. The Senate will vote this evening (7:30 Eastern) on a bill that is essentially the same except that it includes raising the FDIC insurance limit to $250,000 per account, up from $100,000, as well as the addition of a $8 billion tax cut for hit by natural disasters in the Midwest, Texas and Louisiana. Is this what the bill needs for Republicans to support the effort? If it passes the Senate, will the House pass the bill as well?

Wall Street seems to be asking the same questions as well as volatility is high in this trading session. The DOW is currently down 135 points, off session lows, trading at 10,713. As if the bailout wasn’t enough for traders to be worried about, more “mixed” financial data was released today, which may be adding to the down market.

Mixed, you ask? Yes – mixed. The manufacturing index fell to 43.5% in September, which is mighty close to indicating a recession, and mortgage applications plummeted 23% from the previous week. However, yesterday consumer confidence posted an unexpected rise and only 8,000 jobs were lost in the private sector for the month of September when Economists were forecasting a loss of 60,000.

While the stock market is quite volatile these days, and the credit markets are virtually frozen, I am starting to ask the question if the bailout is truly necessary. The world didn’t end when the first bill failed, business still went on, and there were not long soup lines… Yes, we will see the long term pain by not opening up the credit markets, mass bankruptcies and unemployment could be witnessed in the very near future but maybe that is what needs to happen…

I still view the whole situation as a correction, not a collapse and, as such, I am starting to waiver on the need for the bailout.

UPDATE: a few interesting tidbits

Want to see possible evidence the economy is slowing, the US has higher than expected crude supplies – translation: less oil is being used by consumers.

Investors are skeptical of the vote taking place this evening and they should be!