Van Santos

Anyone who even casually follows the financial market is well aware that today a horrific day in the Stock market.  While the Economy (and stock market) experienced a large amount of pain over the last 6 months, today appeared to be even more painful for a number of reasons.

• General Motors finally admits “there is substantial doubt” about their survival

Despite massive restructuring efforts, despite the loans provided by the government, and despite everything the company has said previously, General Motors finally admitted what the rest of the world already knew – the end of the road is close for General Motors.

Deloitte & Touche, the GM’s auditors, made the following statement: 

The corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern.

Having experience in the world of audit, this is the professional way of saying “Bankruptcy is going to happen”.  

The major question that is on the minds of most is how this bankruptcy take place?  Will the government act as the funding institution, propping up General Motors during the restructuring process, or will GM face a massive liquidation event pushing the into the pages of oblivion?

President Obama previously stated that he will not allow the American auto industry to fail, and Congress has already provided funding to GM and Chrysler, so what wouldn’t the Government act as the financier for a GM bankruptcy?  

Maybe government officials would fear the backlash from the general public.  

The world will not end when General Motors goes bankrupt, but it will be painful.  Other companies will suffer the same fate as a result and the stock market will whipsaw with uncertainty but we will all survive.  Politicians, however, may not survive the next round of elections if huge amounts of public funding are dedicated to propping up a company that has no hope of survival.

• The list of 19 banks undergoing a “stress test” was released:

 

Name	Total Assets (Billions)
1. JPMorgan Chase	2,175
2. Citigroup	1,947
3. Bank of America (1)	1,822
4. Wells Fargo	1,310
5. Goldman Sachs	885
6. Morgan Stanley	659
7. MetLife	502
8. PNC Financial Services	291
9. U.S. Bancorp	267
10. Bank of New York Mellon	238
11. GMAC	189
12. SunTrust	189
13. State Street	177
14. Capital One Financial Corp.	166
15. BB&T	152
16. Regions Financial Corp.	146
17. American Express	126
18. Fifth Third Bancorp	120
19. KeyCorp	105

 
What does this say to you?  The majority risk really falls within 6 institutions.  Unfortunately, institutions 2 and 3 are suffering the most on this list.

• 12% of U.S. Mortgage holders are either behind in their mortgage payments or in forclosure

This one is HUGE.  A record number of mortgage holders, 5.4 million, are delinquent in with their monthly payments.  

The Mortgage Bankers Association said Thursday the percentage of loans at least a month overdue or in foreclosure was up from 10% in the July-September quarter and up from about 8% a year earlier.

The scary part of this information, aside from the drastic rise, is the location(s) of the delinquent mortgages – Louisiana, New York, Georgia, Texas and Mississippi.  The mortgage crisis is spreading beyond the borders of California, Florida, Arizona and Nevada.  What was once a localized but highly publicized event is truly becoming a nationwide crisis.  

• Citibank hits an all time low… of 97 cents

I never thought the day would come where Citibank, once the largest bank in the world, dropped below the one dollar mark today.  While this not “economic” news it is important none the less as the price is a psychological indicator – the stock market believes that Citibank will not survive the financial meltdown.

And what does tomorrow bring?

Pundits and market watchers expect Friday to be an extremely volatile day – at 7:30 AM the new Unemployment rate will be announced. Economists predict unemployment to come in at 7.9%.  Lower and the market may celebrate.  Higher and the day may see a sell off at the open.

No one knows what awaits for us tomorrow, but it sure will be fun to watch…

UPDATE: 03/05/09 - Treasury Secretary Geithner’s choice for deputy withdraws

The person Treasury Secretary Timothy Geithner wanted as his chief deputy withdrew from consideration Thursday, dealing a setback to the understaffed agency as it struggles to address the worst financial crisis in decades.

Annette Nazareth, a former senior staffer and commissioner with the Securities and Exchange Commission, made “a personal decision” to withdraw from the process, according to a person familiar with her decision.

The decision followed more than a month of intense scrutiny of her taxes and multiple interviews. No tax problems or other issues arose during Nazareth’s vetting, said the person, who requested anonymity because Geithner’s choice of Nazareth was never announced officially.

So, did Congress find something in her past or did she simply get fed up of the inquisition?

Economic Musings – The US

Driving in today I heard that the latest GDP numbers for the 4th quarter and it turns out that the U.S. economy contracted 6.2% in the last three months of 2008. This ends up being significantly weaker than the 3.8% originally predicted at the beginning of the month.

Not only this is the worst GDP drop in 25 years, but the magnitude of the revision is truly astounding. When one looks at the unemployment numbers and the large waves of layoffs in the last two months, Q1/2009 could easily be on par – if not worse than – Q4/2008.

Economic Musings – International

Two days ago I commented that people need to look beyond our boarders for additional indicators of the economic climate. I specifically singled out Japan and Germany. Both countries saw significant contraction in recent months, but what about other countries?

Chilean industrial production fell the most in 10 years as output declined 8.9% year over year, another country we can add to the recession list.

By now it should be clear that this is a world wide recession and no country is safe.

Don’t understand the credit crisis? Watch this.

I know a number of people who do not fully understand the credit crisis and how the economies of the world ended up where they are today. Here is an outstanding cartoon that manages to explain a rather complicated situation in a very simple, yet effective method.

This is a must watch!

Civil unrest and government falter in other areas of the world…

• In German, Opel workers stage a mass rally demanding that GM (the Parent Company) keep their plant open.
• Saab, who just filed Bankruptcy in their home country last week, is also staging a protest against GM closing production facilities.
• The Latvian Government is on the verge of collapse due to the financial crisis.
• Greek farmers shut down airports and public services as a form of protest to the current economic conditions they face.

And the final random thoughts for this post…

It’s the weekend and I need a break - time to get away from the stresses of work, the world, and life in general.

I’ll be having dinner with my Parents on Sunday, which will be enjoyable, and I expect to watch The Curious Case of Benjamin Button as well.

There will be no cooking, exotic or otherwise… though I do have a few new things I want to try. One specifically is the Paprika Chicken Roast over @ ReTorte! Wandering Coyote really has some good food selections.

Finally, my review of The Prodigy’s Invaders Must Die will come this evening…

Until then!

A few weeks back I posted a chart from dshort.com that compared the last four bear markets, well they’ve updated the chart to reflect the recent market activity.

You can click the image to get a clear view.

What does this information say thus far?  Well, the S & P crash of 2008 was larger than the DOW crash of 1929.  It look as if a short term bottom was established as the S & P is up more than 10% from it’s low, but is the selling and downward pressure over?  Looking at the VIX, it sure looks like things have really calmed down…

Frankly, I wouldn’t be throwing money into the market just yet.

Important to note: The 51% drop in the S & P does not mean we are in a Depression

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.

The Consumer Confidence Index, or the optimism of the U.S. economy, is now at 59.8, up from 58.5 (August). That was a small, unexpected, rise for the month of September as economists were expecting a rating of roughly 55%.

The information was gathered before the political mess known as the financial bailout took place so any fear the consumer / general public is experiencing is not yet reflected in the data.

If Fear, uncertainty and doubt (FUD for you sales and techie types) is still in the market over the next few weeks, expect this number to fall - along with spending.

There was some concern that the bill was not going to pass the House today and, sure enough, it did not. The Bush Administration, Secretary Paulson, Chairman Bernanke and senior Democratic leadership all supported the bill but the majority of Republicans did not. As a result, the bill appears to be dead in the water.

The DOW was down roughly 700 points after the bill was defeated but this bill is not about the Stock Market, it’s about the credit markets. This bill was designed, fundamentally, to help open up the credit markets. If one looks as at the current Government Bond rates the 3 month yield is at less than one percent - that is to say there is NO MONEY AVAILABLE.

This crisis is about credit, plain and simple. Without credit business cannot spend and growth will stall - if not decrease. Personal credit will dry up and households will not be able to make large purchases such as cars, washers and home improvements. Students may not be able to get loans for college…. and it can go on and on.

What I am not seeing here is leadership on the Republican House side. Where are the leaders making their case as to why they are not passing the bill and what the course of action is? Where is the Republican House leadership and why can they not deliver the votes they need?

For the very, very first time I am truly worried about the financial situation in the United States.

UPDATE: Voting Record

Care to see the AYES/NOES on the bill, you can check it out here.

UPDATE 2

You have to be kidding me - Republican Leadership is blaming Speaker Pelosi for being bipartisan as to why the bill failed. Supposedly she was too negative.

Yes, she hammered the Bush Administration - and I do not agree with what she had stated - but how petty is that if that is truly the case.

Here is the speech (in RealMedia format)

Here is another version - flash player based

So the general feeling is Republicans did not vote due to the fact that she was hammering the current administration. Again, I don’t agree with what she has stated but this is a time to put politics aside and get the deal done.

UPDATE 3

John McCain is shooting back at Barack Obama and Nancy Pelosi. Both sides, no matter what is said, need to wake up.

UPDATE 4

To play politics for a second - the Democrats have the majority in the House of Representatives and could pass the Bill on their own if they truly wanted to.  If that is the case, how come this failed because of the Republicans?

With the Lehman bankruptcy filing it was a foregone conclusion that the stock market was going to be hammered today. The DOW opened down almost 300 points - Energy, Basic Materials, Conglomerates and Financial were hit the hardest.

This is a sell due to Lehman along with falling oil and weakness in the dollar, but what a sell off it is. Just focusing in the Investment Services sector for a second, look at where stocks sit as of right now (11AM ET)

Lehman Brothers (LEH) - 0.20 - down 94.4%
AIG (AIG) - down 42%
Bank of America (BAC) - down 15.23%
UBS AG (UBS) - 17.83 - down 13.44%
Morgan Stanley (MS) - 34.16 - down 8.25%

AIG is in the downward spiral Lehman was facing, all this because of exposure to bad debt with real estate. Based on reports in the media AIG is searching hard for funding and may not be able to avoid a liquidity crisis.

One has to ask where will the pain end? Ironically, the answer seems to be when the housing market stabilizes. It’s funny the investment instrument that helped create the current situation may be the thing that can put a stop to this mess. The only issue is that it may be a long time off…

Another bank hit the skids today - Silver State Bank in Nevada.

Silver State had 12 branches in Nevada and Arizona as well as loan offices in Nevada, Utah, Colorado, Washington, Oregon, California and Florida.  As of June 30th, Silver State had $2 billion in assets and $1.7 billion in deposits.  All insured deposits will be assumed by Nevada State Bank and brances will be open on Monday.

Ok, a small bank isn’t too bad but there is news that Fannie Mac and Freddie Mac will be taken over by the government this weekend.  In terms of big business events, this one is HUGE.  According to the article the cost to the tax payer is yet known but you can be 99.999% sure that any share holder equity will be wiped out.  (Translation - the stock will be worthless)

While I would never have been a long term share holder of either company, I think it is highly irresponsible for for Treasury Secretary Henry Paulson to come out and claim there would be no Bail Out of either company. Also, in July, each company said they had plenty of capital to withstand the mortgage meltdown.  Either conditions drastically changed or the companies were lying to investors, as well as the public.

Expect banks to continue to fail over the next several months but, remember, we are not in a banking collapse, we are experiencing a correction.