SOROS - 'Two Moves' And Only A Bear Rally ?

Say what you want about BILLIONAIRE George Soros and what you may perceive his influence on U.S. party politics may (or may not) be, the truth is that few market participants have been as RIGHT (pun INtended) as the founder of Soros Fund Management when it comes to sound investment decision-making post the mid 2007 credit/mortgage bubble collapse. While the S+P 500 market index lost a sickening 39% in 2008, Mr. Soros astutely spent the year mostly betting against the volatile global markets and actually ended 2008 up 8% (FYI, the average hedge fund declined 19% in 2008). Through February 2009, Mr. Soros' management firms oversaw $21 Billion and its Quantum Endowment hedge fund was up 5.3% on the year.

Given his recent high-level of market 'RIGHT-eousness' (a technical term I coined for being right about the markets), Mr. Soros' interviews now approach those starring former Oppenheimer & Co. banking industry analyst, Mrs. Meredith Whitney, when it comes to being officially REQUIRED Viewing Material ('RVM'). In the below twenty five minute segment, Mr. Soros shares his valuable insight on several relevant, pressing financial market TOPICS including: The S+P 500's ongoing rally off its twelve year lows on March 9th, 2009 (the 27% gain is the largest percentage-based rally for the S+P 500 since 1933)...FASB's recent controversial decision to alter the definition of Mark-to-Market accounting (this will effectively allow U.S. banks to have much more accounting flexibility, or 'creative freedom', when it comes to judging the balance sheet value of their own notoriously large securitized asset loan portfolios including those distressed assets levered to residential and commercial real estate)...The current state of the U.S. financial system and the fundamentally insolvent state of affairs surrounding its largest 'zombie banks' including Citigroup (C) and Bank Of America (BAC)...Thoughts on the timing of a potential U.S. housing bottom...Global economic recovery thoughts focused on B.R.I.C. countries Brazil and China, ETC. :






Data Courtesy: Youtube + Bloomberg

GE's $50 B JOKER-Like Real Estate Exposure

Since April 4th, 2008, the stock of U.S-based 'super conglomerate' General Electric (GE) has been in an absolutely vicious, nauseating downtrend falling from $37.56 a share to today's difficult-to-fathom price of just $7.06/share (FYI, please note the fitting JOKER-like portrait of GE CEO Jeff Immelt above). GE, a once near $600 Billion GOLIATH of a company, has been crushed by the simultaneous burstings of the REAL ESTATE and CREDIT asset bubbles and seen its market value shrink a jaw-dropping 80% over the past 11 months!

The reason for the steep, GUT-wrenching decline??? The vast amount of Joker-like UNCERTAINTY surrounding the value of General Electric's ENORMOUS and OPAQUE
$650 Billion GE Capital business, and more specifically, its $50 Billion plus global REAL ESTATE portfolio. For some perspective, the size of GE Capital is roughly equivalent to the size of the U.S's 6th largest bank.

Further complicating matters is the Joker-like accounting methodology GE Capital currently uses to value its holdings. The world's largest maker of jet engines and power turbines told shareholders last week that only 2% of GE Capital Corp's $650 Billion portfolio of assets are being valued today based on current market prices (i.e: marked to market). According to CreditSights Inc, an independent bond research firm based out of New York, the remaining 98% or some $624 Billion of GE Capital assets (most of which are loans or senior secured debt tied to assets like aircraft) are being valued at levels that General Electric established many years ago! Per the bottom referenced Bloomberg link, here are some quick facts related to GE Capital's dubious real estate unit, GE Real Estate :


* GE Capital generated $8.6 Billion or 48% of General Electric's $18.1 Billion of profits in 2008...that compares with about 20% in the late 1980's...General Electric expects GE Capital to contribute $5 Billion of profits in 2009


* GE Real Estate profits fell by $1.1 Billion in 2008 (vs. 2007)...On January 23rd, 2009, GE stated that GE Real Estate will take more than $4 Billion in pretax losses and post an overall loss of about $500 million in 2009


* According to SEC regulatory filings, General Electric's commercial real estate business consists of both property and real estate loans. The company has stakes in or financing on 8,000 different properties scattered in 2,600 cities with an average investment of less than $10 million


* According to Keith Sherin, General Electric's Chief Financial Officer, GE has about $50 Billion of commercial real estate loans and $2.9 Billion of commercial mortgage-backed securities


* GE takes a conservative (...ironic that shareholders should actually read this word as 'DANGEROUS'...) approach in terms of accounting for the value of its real estate holdings as the company's 'mark to market' methodology is similar to the accounting used by real estate investment trusts. GE accounts for its property holdings at the price they paid for them and then chooses to depreciate the values over time rather than actually marking the assets to their current market values. According to GE spokesman Russell Wilkerson, GE's property portfolio currently generates about $1.7 Billion in profits while the company depreciates the assets by about $1.1 Billion per year. GE is currently forecasting loan reserves of (only) 2.5%.


* GE's property includes office buildings, warehouses and apartments...about 71% of GE's properties are located outside of the U.S., primarily in Europe, Asia, Canada and Mexico


* GE owns about $22 Billion of real estate assets in Europe...about 1/3 of which consists of real estate debt and non-performing loans


* In November 2007, GE purchased $2.8 Billion of commercial real estate loans from England's Bradford & Bingley. According to Investment Property Databank, U.K. commercial property values had fallen only 3% from their July 2007 peak at the time of GE's purchase...now prices have fallen 37% from that peak


* In 2006, GE purchased Arden Realty Inc. for $3.2 Billion...at the time, Arden was the largest publicly traded land owner in Southern California


bloomberg.com/apps/news?pid=20601109&sid=ary2g22


Data Courtesy: Bloomberg

JUMBO Lenders + Borrowers Feel The Pinch

While the media continues to focus on the collapse of the U.S. subprime mortgage market, it is also worth noting the recent decline in lending activity and rise of delinquencies for the highest end of homeowner loans - JUMBO mortgage loans. According to LPS Applied Analytics, a mortgage data service based out of Jacksonville, Florida, about 2.6% of the homeowners who took out JUMBO mortgage loans during 2008 are ALREADY at least 60 days delinquent...while this rate pales in comparison to the current 20% delinquency rate affecting 2008 subprime borrowers, it is still significant because this is the fastest pace of Jumbo delinquencies in at least the last 15 years, when LPS began tracking the data.


* The national average for a 30 year fixed rate jumbo mortgage was 6.57% this week compared with 5.34% for a prime conforming loan. According to BanxQuote CEO Norbert Mehl, the spread between Jumbos and primes had been only about 20 basis points (0.2%) "for several decades"...however, since August 2007 + the collapse of the subprime mortgage market, the spread has consistently stayed in between 100 and 200 basis points (1.0%-2.0%)


* A prime conforming loan is a mortgage available to borrowers with top credit scores that is eligible for sale to either Fannie Mae or Freddie Mac...currently the Fannie-Freddie cap is set at $417,000 in most places and up to $729,750 in areas with higher home prices


* JUMBO lending activity slowed in the 4th quarter of 2008 to $11 Billion, or 4% of the mortgage market (vs. 14% in 2007)...the lowest quarterly amount since Inside Mortgage Finance started tracking data back in 1990


* Top 5 U.S. Jumbo mortgage lenders are: Chase Home Finance LLC., Bank of America (BAC), Washington Mutual (aka the artist formerly known as WM), Wells Fargo (WFC) and Citigroup (C)...the Top 5 Jumbo lenders originated a combined $55.3 Billion in jumbo loans during 2008, they lent just $4.3 Billion (less than 8%) of that total during the 4th qtr of 2008


* According to LPS Applied Analytics, the average credit score for a 2008 jumbo loan was 762


* President Barack Obama's Homeowner Affordability and Stability Plan, announced this week, has NO provision to help JUMBO mortgage borrowers


bloomberg.com/apps/news?pid=newsarchive&sid=ab4hyMC6aJf0


Data Courtesy: Bloomberg

The U.S.'s $9 TRILLION Bailout 'Plan'

Through February 10th, 2009, the U.S. government has pledged a total of about $8.8 TRILLION towards fixing the country's ailing financial system. Of this $8.8 Trillion committed, 'only' about $2 Trillion has been actually spent thus far.

* Please check out the details courtesy of the insightful New York Times link below:

nytimes.com/interactive/business/20090205-bailout-totals

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1.) The Government as Investor:

$4.6 Trillion

Spent: $921 billion

Includes direct investments in financial institutions, purchases of high-grade corporate debt and purchases of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

2.) The Government as Lender:

$2.4 Trillion

Spent: $666 billion

A significant expansion of the government's traditional overnight lending to banks, including extending terms to as many as 90 days and allowing borrowing by other financial institutions.

3.) The Government as Insurer:

$1.8 Trillion

Spent: $252 billion

Includes insuring debt issued by financial institutions and guaranteeing poorly performing assets owned by banks and Fannie Mae and Freddie Mac.

Data Courtesy: New York Times

Whitney Believes U.S. Bad Bank = Bad Idea

Oppenheimer & Co. financial industry analyst Meredith Whitney is widely recognized on Wall Street as being one of the first individuals to accurately identify and predict the size and scope of the current economic woes facing the U.S.'s financial system. Mrs. Whitney correctly predicted and warned clients (via documented letters of research) of the oncoming financial industry meltdown back in October 2007, a full six months prior to the March 2008 collapse of (the artist formerly known as) Bear Sterns. As a result, her forward-looking financial system and policy thoughts are now officially REQUIRED viewing material...these come courtesy a Bloomberg TV interview aired recently on February 4th, 2009:



In addition to her insightful thoughts on the U.S. government's 'BAD BANK' proposal, Mrs. Whitney also advises investors to continue staying away from investing in the common stock of U.S. banks. Per about 8 minutes into the interview, Mrs. Whitney states: "...What we do know is that the existing banks need more capital for a number of reasons. If you are an existing shareholder, if you are an equity shareholder, then you are at the absolute bottom of the totem pole. Your risk is at the highest...Investors should NOT even consider owning banks at this point on an equity basis because you don't know what you're getting (owning) but you do know that with any change that occurs (due to government intervention), you are at the bottom of the totem pole. So your interests will be considered absolutely last by the government and in many cases, your interests will be 'crammed down'."


Data Courtesy: Bloomberg + Youtube

GROSS - Stimulus Bill Needs To Start With 'T'

During a February 5th, 2009 interview with Bloomberg TV, PIMCO managing director Bill Gross firmly expressed his belief that the U.S. government should be spending TRILLIONS, as opposed to just hundreds of billions, of dollars on stimulating the U.S economy in order to avert a 'mini Depression'.

Please find the complete 20 minute interview below:


* Bill Gross (about 9 minutes into the interview): "I don't think (the current proposed $800 Billion U.S. economic stimulus plan) is enough..there's debate back and forth and $700 and $800 Billion sounds like a lot of money (but) the problem is that there has been trillions of dollars of credit, bank capital and spending power extracted from this economy over the past 6 to 12 months...you can look at it from the standpoint of the wealth effect, you can look at it from the standpoint of lending of banks, or the shadow system, or all of that in combination, but the fact is that this economy requires support from the government, a check from the government in some form or fashion in the trillions as opposed to the hundreds of billions...I think President Obama was right, there's a potential catastrophe if Washington continues to focus on a hundred or two hundred billion dollars, we need something in the trillions."


Data Courtesy: Bloomberg + Youtube

The Fed's December 2008 FOMC Statement

Posted below is The Federal Open Market Committee's STATEMENT following its December 15-16th meeting on U.S. Interest Rate policy :

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"The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.

Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent."

www.federalreserve.gov/newsevents/press/monetary/

Data Courtesy: FederalReserve.gov

Subprime Slime Checkup

Since the beginning of 2007, banks worldwide have taken $693 Billion in writedowns and losses on loans, CDO's and other investments.

www.bloomberg.com/apps/news

Data Courtesy: Bloomberg

SUBPRIME Securitization Process FLOW

Double-click the below image to view a Process Flow of the SECURITIZATION process courtesy of the The Denver Post :

Data Courtesy: The Denver Post

The $30 TRILLION Securitization GAME

Credit Securitization is the banking process resulting from the bundling of both consumer and commercial loans (including mortgages) into packages of securities. According to Bloomberg, securitization is largely a 'shadow banking system' that funds most of the world's credit cards, car purchases, leveraged buyouts (LBO's) and of course, subprime mortgages. Since 2001, the U.S. created and sold more than $27 TRILLION worth of securitized assets. Per the below insightful Bloomberg article, some noteworthy points related to the now virtually non-existant 'Securitization Game' that previously accounted for as much as 20% of the BANKING industry's Total SALES during the past decade :

bloomberg.com/apps/news?pid=20601109&sid=a0jln3

* SECURITIZATION pools together loans and is intended to 'slice up' the financial risk of loan default...theoretically making borrowing cheaper for everyone (including the issuers - banks). Unfortunately, when abused by banks, the practice helped create and support a dangerous global 'Debt Culture' that enabled people to live beyond their means via easy access to debt that allowed them to purchase luxury cars and homes they otherwise could not afford.


* Before the invention of securitization, banks loaned money, received payments and profited from the difference between what the borrower paid and the bank's funding cost...During the mid-1980s, mortgage bond traders at Salomon Brothers devised a method of lending without using capital, a technique at the heart of securitization. It works by taking anything that has regular payments - mortgages, car loans, aircraft leases, music royalties - and channeling the money to a TRUST that pays bondholders principal and interest


* As the securitization game caught on, consumer borrowing/bank lending activity dramatically increased. According to the U.S. Federal Reserve, U.S. consumer DEBT tripled in the two decades after 1988 to $2.6 TRILLION !


* Securitization's biggest (and perhaps most FATAL) innovation was 'OFF Balance Sheet Accounting'. If a bank couldn't sell a bond or didn't want to, the asset could be sold to a trust within a so-called 'Special Purpose Entity' (SPE), incorporated offshore in a place such as the Cayman Islands or Dublin. Issuing banks used SPE's to shift securitized assets OFF their books/balance sheets !


* With OFF Balance Sheet Accounting, a bank could originate $100 million in loans, sell off some to investors, transfer the rest to a Special Purpose Entity and not have to hold any capital (to protect against default). The profit could be as much as 1.25 % of the amount loaned, or $1.25 million for every $100 million worth of securitized assets issued...According to a former Chief Financial Officer of Lehman Brothers, Brad Hintz, "The banks could turn a low return on equity business into one that doesn't use ANY equity, which was the motivation for this...It becomes almost like a fee business because it requires no capital.''


* According to industry trade group Securities Industry Financial Markets Association, the U.S. created and sold more than $27 TRILLION worth of securitized assets from 2001...for some perspective, that's nearly twice the U.S.'s 2007 GDP of $13.8 TRILLION !


* According to the European Securitization Forum, securitizations in Europe increased almost SIXFOLD between 2000 and 2007, from 78 Billion euros ($98 Billion) to 453 Billion euros ($570 Billion)


* Because of the subprime-related economic BLOW-UP that began mid 2007, sales of securitized assets have fallen off a cliff...In the U.S., mortgage bonds issued by non-government affiliated entities plummeted to $10.8 Billion in the first half of the year, one-twentieth of the $241 Billion sold in the same period in 2007...Sales of European asset-backed securities, including bonds for car loans and credit cards, fell by 40% to 12.7 Billion euros in 2Q08. European CDO sales fell by 2/3 to 10 Billion euros.


Data Courtesy: Bloomberg

A Triple AAA Credit Rating SHAM

UNBELIEVABLE : http://www.cnbc.com/id/27321998

* Instant Messages exchanged between two Standard & Poors executives discussing a mortgage-backed security deal on April 4th, 2007 :

Executive #1: Btw (by the way) that deal is ridiculous.

Executive #2: I know right...model def (definitely) does not capture half the risk.

Executive #1: We should not be rating it.

Executive #2: We rate every deal. It could be structured by cows and we would rate it.

Data Courtesy: CNBC

PIN The Blame On The SEC ?

OK, I admit it - the Blame Game is often petty, annoying and almost always Unbecoming. But that's only when insignificant people assign it to inconsequential events. The current Credit Crisis can be a lot of things but its definitely not inconsequential. Former FDIC Chairmen can certainly be a lot of things but they're also most definitely not insignificant. Quite to the contrary + due to their banking system 'powers', they're in fact perhaps the most influential and important officials in the WORLD. With that said, former U.S. FDIC Chairman William Isaac believes that the SEC deserves the most blame for the banking system's recent meltdown. He also has very strong feelings on the SEC's 2006 decision that required banks to value their assets using the ' Mark To Market ' accounting method vs. the previous practice of ' Fair Value ' accounting. Check out the below link which contains the CNBC video interview...some quoted excerpts below:


http://www.cnbc.com/id/27100454

"...The SEC has destroyed $500 billion of bank capital by its senseless marking to market of these assets for which there is no marking to market, and that has destroyed $5 trillion of bank lending...That’s a major issue in the credit crunch we’re in right now. The banks just don’t have the capital to start lending right now, because of these horrendous markdowns that the SEC’s approach required...Once they declare that there’s a 'systemic risk', the FDIC at that point can say that we’re going to protect all general creditors when a bank fails. If they do that, then I think the banks will start lending to each other again...It’s just a lack of confidence, because we don’t know which banks are going to go next. And banks we never thought would go, have gone, and we don’t know how the government’s going to handle them..."

Data Courtesy: CNBC

The HOLY Economic Trinity - C, J and H

If you've been monitoring the performance of your heavily stock-weighted 401K and/or IRA plan at all this year then it should be of no surprise to you that the Stock Market is currently mired in a cruel and unusual DownTREND. Below are some 'Random Thoughts of BLOGiance' (RTOB) on why this occurred and, more importantly, what Variables/Indicators (Credit...Jobs...Housing) we need to see Flash 'GREEN' before we can be confident of seeing a fundamental REVERSAL of the DownTREND:

* WHAT?
Today's stock market is tied to Housing. Make no mistake about it, the United States' Stock Market Bull Run of 2003-2007 was fueled by an ARTIFICIALLY inflated domestic housing market (a Housing BUBBLE). FYI + If you're not a regular reader of this blog then please click on keyword 'recession' in the 'ETB Archive Keyword REF' on the right to find some posts related to the topic.


* What caused the housing market to be ARTIFICIALLY inflated?
The 'demand' side of the housing price equation (Economics 101 - prices are determined by both supply and demand). Demand for housing was artificially pumped up during the bubble primarily because of the UNPRECEDENTED, Loose lending standards of banks. Exotic loan types including Subprime, Interest Only, Option ARMs, Alt A mortgages, etc. were created by institutional lenders at an UNPRECEDENTED rate and deemed affordable even though their terms were incredibly MISUNDERSTOOD. Many banks approved mortgages for customers without accepting down payments and also without even VERIFYING the INCOMES of homebuyers. Would you ever give $100,000+ to someone whose income you cannot verify?? Would you ever give $100,000+ to someone whose JOB you cannot verify?? STUPIDITY at its finest and most greediest degree.


* Why were banks irresponsibly creating risky mortgage products?
In a hands-OFF Regulatory Environment (thank you good for nothing SEC...thank you ignorant Federal Reserve...thank you incompetent WHITE HOUSE), banks were allowed the room to give into GREED via engaging in absolutely reckless risk (mis)management. From 2003 to 2007, financial institutions were making ridiculous amounts of money from this less than honest practice. Not only were banks making money off of selling the suspect mortgage to a homebuyer, they were also passionately involved in a now nefarious process of 'repackaging' these same mortgages into complex assets/derivatives commonly referred to as 'mortgage-backed assets' (FYI - It is these types of shoddy assets that the U.S. Treasury is now scrambling around to purchase from the country's biggest banks with the recently approved $700 Billion TARP deal). During the boom, 'mortgage backed assets' were produced in UNPRECEDENTED numbers for both residential and commercial loans and became a phenomenal investment for banks and brokers as long as housing prices kept going UP. While the risk is now readily apparent, before the collapse in U.S. real estate prices, these once incorrectly perceived low risk assets were a favorite of banks, hedge funds and institutions of all types as they were yielding as much as 8-12% a year. Banks and brokers alike (including Countrywide Financial, Bear Sterns, Lehman Brothers, Wachovia, Bank of America, Citigroup, etc.) were loading up on these now crippling assets because it provided them a 'sure-fire' way to prop up/inflate their company earnings (profits). Hedge funds loaded up on these assets because their delicious double-digit yields provided them a 'sure-fire' way to outperform the annual returns of their stock market 'benchmarks' (i.e: indices like the S+P 500, Nasdaq, Dow Jones 30, etc.). Enough with the background..


* What needs to happen for the stock market to REVERSE?

TIME

CREDIT needs to stabilize.

TIME

JOBS need to stabilize.

TIME

HOUSING prices need to stabilize.

As mentioned above, the HOUSING boom from 2003-2007 was fueled by incredibly LAX (and sometimes fraudulent) lending standards resulting from the illegitimate, greedy, reckless decision-making of virtually unsupervised banks. During the boom, Joe 'six pack' could get a mortgage without having his income verified and without paying any money down. Those days are OVER. As a result of this subprime-induced mess, the easy credit days are gone. For emphasis' sake, please humor me and allow me to say this again (let it resonAte) - the easy credit days are GONE.

Besides just affecting the ability of Joe to get a mortgage, the now 'polluted' CREDIT markets (polluted because they're clogged with 'bad' assets including the aforementioned mortgage-backed assets) have become FROZEN and are adversely impacting the ability of even LARGE businesses to borrow from banks. Forget the consumer (because that's what banks now appear to be doing re consumer loans for autos, mortgages, tuitions, etc.), banks are also FRIGHTENED to lend these days to other banks and businesses due to the very real fear of 'counter-party risk'. We are still in a perilous time and today's 'Here Today, Gone Tomorrow' business environment (witness the rapid dissolution of former business GIANTS including AIG, Merrill Lynch, Bear Sterns, Lehman Brothers, Wachovia, Fannie Mae, Freddie Mac, etc.), are 'forcing' banks to keep their money to themselves. The White House and Federal Reserve need to do all that they can to diminish counter-party risk and restore confidence back to the financial system and more specifically, the practice of lending.


Once the credit markets are repaired and business activity has at least the CHANCE to resume, we should hopefully see some stability in the jobs market. Why are jobs and job losses CRUCIAL for our stock market ? It's quite simple really...as previously stated in this post, the stock market is currently tied to the performance of the housing market. Unless you're rich, if you want to buy a home then besides needing good credit you also need to have a stable JOB in order to afford the monthly mortgage payments. If the economy keeps losing jobs each month (according to the U.S. Labor Department, the economy has lost over 760,000 jobs thus far in 2008...including a loss of 135,000 in September alone), then the pool of potential homebuyers will continue to shrink. If the homebuyer pool shrinks then so does DEMAND for housing. If Demand for housing continues to fall then so will housing prices. If housing prices continue to fall then so will the STOCK MARKET.

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Lastly, I know I'm omitting some significant details re the ongoing recession (I, much like many others, could write a full blown-out THESIS on this subject including a bunch of great colorful statistics PROVING how dire the situation really is)...but the main purpose of this post is to simplify the explanation and catch people up to speed on the FACT that there are REAL factors driving down the stock market. Most stocks are down dramatically from their highs at the beginning of 2008 but that fact alone IS NOT A REASON TO BUY. The mentality of an opportunistic long term investor during this time should be to allow the downtrend to run its course while waiting patiently with some cash (at least 20-50% CASH makes sense) on the sidelines until the fragile situation with Credit, Jobs and Housing stabilizes.


Without a backdrop of all 3 occurring, stocks will NOT be able to act rationally and more importantly, the market will NOT be able to Reverse its DownTREND.


Be patient as these issues could take months and even YEARS (yes, YEARS) to resolve, depending basically on both 1.) LUCK and 2.) the Effectiveness of our country's Leadership (The President, The Federal Reserve, The dopes at the SEC, Congress, etc). The stock market will ultimately become investible again but the $60 TRILLION question is, how LONG will that take ? ?


While NO ONE including yours truly can tell you with confidence HOW LONG it'll take for the stock market to bottom, the purpose of this post is to inform you about WHAT INDICATORS you need to look out for (CREDIT...JOBS...HOUSING) so that you can identify when the fundamental bottom has occurred + invest accordingly/opportunistically.

A $700 Billion DROP In The Market BUCKET ?

Will the Bush Administration's recently proposed $700 Billion 'RTC 2' Financial Rescue Plan prove to be just a DROP in the proverbial Market BUCKET ??? THAT becomes the $60 TRILLION financial system question after digesting the below insightful data courtesy of Douglas Cliggot, the Chief Investment Officer of Dover Management Group:

* According to 2008 data made available from the Federal Reserve, The U.S. financial sector began the year with approx $62.7 TRILLION worth of banking assets ($700 Billion is about 1.1% of this)

* About 20% or $5 TRILLION of this $62.7 TRILLION was effectively transferred earlier this year from the private sector to the public sector with the nationalization of Freddie Mac (FRE) and Fannie Mae (FNM)...leaving U.S. banks with approx $57 TRILLION of outstanding assets ($700 Billion is about 1.2% of this)

* Of the $55 TRILLION in public U.S. banking assets, the face value of outstanding U.S. mortgages currently represent approx 25% or $14 TRILLION of this amount

* Applying a 10% DEFAULT RATE (probably a fair assumption given the current morose state of the U.S. economy) to U.S. banking assets (including loans of all types - residential, commercial, consumer including auto, etc.), would result in about $5.5 TRILLION of U.S. assets being wiped out...a somewhat TERRIFYING amount of wealth destruction considering the fact that the U.S. financial sector entered 2008 with only $4.6 TRILLION in total equity capital (equity capital: the sum of money raised from owners of a company via the issuance of stock + retained earnings) !


Data Courtesy: Douglas Cliggot + CNBC

CHART - % Of Delinquent U.S. Mortgages

Per the below August 04, 2008 Chart from the New York Times...a somewhat sobering look into the SHARE (%) of DELINQUENT Subprime, Prime and Alt-A Residential Mortgages (click on the chart for a LARGER image) :




Data Courtesy: New York Times

Washington's $700 Billion 'RTC' Rescue Plan

In order to avert an all out CRISIS in the U.S. financial system, the Bush administration is seeking UNPRECEDENTED authority to step in as a 'Buyer of Last Resort' for up to $700 Billion worth of U.S. mortgage-related assets. Per the below Bloomberg link, DETAILS of the $700 Billion RTC-type rescue plan :


* The plan seeks 'unchecked' power from Congress (the bill would prevent courts from reviewing actions taken under its authority) to buy $700 Billion in bad mortgage investments...for some perspective, this sum is roughly equivalent to the combined annual budgets of the Departments of Defense, Education and Health and Human Services

* The proposal would raise the United States' national debt to $11.315 TRILLION from $10.615 TRILLION and require the U.S. Treasury secretary Hank Paulson to report back to Congress three months after Treasury first uses its new powers, and then semiannually after that

* Types of 'Assets' covered under the plan include: home loans, mortgage-backed securities, commercial mortgage- related assets and, after consultation with the Federal Reserve Chairman, Ben Bernanke, "other assets, as deemed necessary to effectively stabilize financial markets''...Treasury may buy only assets issued or originated on or before September 17th, 2008

* Hank Paulson is also asking for the power to hire asset managers and award contracts to private companies...The Treasury may hire managers to purchase the assets through 'reverse auctions', seeking the lowest prices

* The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program

* Most provisions of the proposal will expire 2 years following the date of enactment

* The plan will include curbs on executive pay for the companies whose assets the government will be buying

* The proposal will also most likely include a plan to stem mortgage foreclosures, which may involve tapping the loan-modification abilities of the Federal Housing Administration (The FHA), the Federal Deposit Insurance Corp. (The FDIC), Freddie Mac (FRE) and Fannie Mae (FNM)

bloomberg.com/apps/news?pid=20601087&sid

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FYI, This is NOT the first time a MASSIVE 'bad asset purchase' plan similar to one above has been proposed + ultimately implemented by the U.S. Government to avert crisis in the financial system:


* According to Wiki, "The Resolution Trust Corporation (RTC) was a United States Government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision, as a consequence of the 1980s-90's U.S. Savings and Loan Crisis... In 1995, its duties were transferred to the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation. Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 Billion."


http://en.wikipedia.org/wiki/Resolution_Trust_Corporation


Data Courtesy: Bloomberg + Wikipedia

RTOB: Six Reasons To BANK On Goldman

Six Fundamental LONG TERM Reasons to Own Goldman Sachs (GS) :


1.) The IN$IDE Boys :
Please refer to my 7/21/08 post titled 'Goldman Sachs - Inside Boys To The Rescue' for more information on this (use the ETB 'Archive Keyword Reference' on the right to search for this post using keyword 'Goldman Sachs'). Bottom line, GS is on the INSIDE...and EVERYONE else seems to be on the OUTSIDE.


2.) The UNSCATHED (What Credit Crisis ??) :
GS is one of the select FEW financial players that have, thus far, been relatively UNSCATHED by the ongoing U.S. Credit Crisis. Because of disciplined, proprietary RISK MANAGEMENT and execution Goldman has NOT had to take on significant 'write downs' on shoddy assets...UNLIKE the majority of global financial peers including: Lehman Brothers (LEH), Citigroup (C), Bank of America (BAC), Merrill Lynch (MER), Wachovia (WB), Wells Fargo (WFC), UBS, etc.


3.) ONCE In A Lifetime MARKETSHARE Opportunity :
Because Goldman has been relatively UNSCATHED by the recent Credit Crisis (see point #2 above), GS is in an IDEAL position of being able to use its assets MUCH more productively than its peers. Instead of having to use its assets and existing capital to internally 'patch holes'/shore up the soundness of its Balance Sheet, GS is able to use its capital more productively and actually take advantage of the market's current Asset 'Fire Sale' (kinda like a 'clearance' shopping event...just about all of GS's peers are unloading assets in a 'Everything must GO!' fashion) to GROW its business. The departure of Bear Sterns (BSC) ALONE is a great reason to own Goldman. Throw in the CARNAGE currently being suffered by competitors Lehman Brothers, Merrill Lynch, etc. and Goldman Sachs is in PRIME position to soak up some Attractive LONG TERM brokerage MarketShare (whether its in Asset Management, Equity/Bond Underwriting, Commodities Trading, Mergers and Acquisitions, etc.).


4.) The Massive Stock Buyback :
While most U.S. financials are scrambling to RAISE Capital (mostly by diluting the shares of stock owned by existing shareholders), Goldman is doing the exact opposite via BUYING BACK ITS OWN STOCK and returning Capital to its shareholders. Which financial would you rather own - An investment that is RETURNING you money vs. One that is DILUTING/reducing your money?! For the record and per my 6/22/08 post titled 'GS 2Q08 Earnings Recap', Goldman has 62 million shares remaining in its authorized share repurchase program...this represents about $9.5 Billion or 16% of the company's total FLOAT/shares outstanding.


5.) DEMONSTRATED Competence of Management :
The executive management team of Goldman Sachs is often referred to as 'the Smartest Guys in the Room'...regardless of WHO's in the room. With all due respect to Google (GOOG), Goldman is probably the smartest company in the WORLD. For validation's sake, look NO further than how GS has executed its brokerage business during arguably one of the country's most HISTORICALLY trying times for financial institutions. Save The 1990 U.S. Savings and Loans Crisis (fyi + for more info on this ERA you can refer to my 7/14/08 post titled 'The U.S. Savings and Loans Crisis'), most banks have never seen a market environment THIS difficult. For empirical evidence of GS's track record of execution during the ongoing Credit Crisis, please refer to the ETB 'Archive Keyword Reference' under 'Earnings' or 'Goldman Sachs'...in there you will find the details behind a couple of impressive, recent GS quarterly reports courtesy of my proprietOHRI GS quarterly 'Earning Recap' posts.


6.) The CHEAP, Single Digit P/E Multiple :
While 'cheap' is of course relative, it should be noted that Goldman Sachs is trading at just 7.5 x 2008's expected earnings. Goldman's Forward 2009 P/E is currently 10. Despite its EXECUTION BRILLIANCE as a company, GS as a stock has been taken down like the rest of its financial cohorts...the company's stock is currently Down 28% year to date (GS is down 13% year over year). Anecdotally saying, If you're looking to build a CORE investment position in GS then you gotta believe that 10 x 2009 Earnings (or $150/share) represents an attractive entry point.


Full Disclosure: I own shares of GS.

The U.S. FDIC's 2Q08 Bank 'PROBLEM List'

The U.S. Federal Deposit Insurance Corp 'PROBLEM' List of Financial Institutions is arguably the WORLD's Most important list that doesn't actually list or name ANYthing. Nitpicky 'list' issue aside, the report provides some valueable 'numeric' PERSPECTIVE on the current (sorry) state of the U.S.financial industry. The FDIC is a Washington-based bank regulator that insures deposits at 8,451 financial institutions with $13.3 TRILLION in assets. Today the FDIC presented its quarterly 'Problem List' and disclosed that it was actively monitoring/overseeing 117 U.S. financial institutions it deemed as troubled for the quarter ended 6/30/08. In other words, the FDIC believes that there are at least 117 financial institutions (mostly banks) in the United States facing a credible risk of insolvency (bankruptcy).



FDIC 2Q08 'Problem List' Stats (paraphrased from the Bloomberg link below):

bloomberg.com/apps/news?pid=20601087&sid=afbiu

* Regulators rate FDIC-insured banks on a numerical scale (1 being the highest and 5 the lowest) using their CAMELS system evaluating: Capital, Asset quality, Management, Earnings, Liquidity, Sensitivity to interest-rate or market risk - and other fiscal measures. Banks are ranked on a numerical scale, with 1 being the highest and 5 the lowest. A rating of 4 or 5 places a bank on the 'Problem List'.


* Out of 8,451 U.S. members, the FDIC was carefully monitoring 117 'problem' institutions as of 6/30/08 (1.4% of ALL member institutions are 'problem' institutions)...117 'problem' FDIC-insured lender institutions represent the highest amount in 5 years


* The FDIC 'Problem List' grew by 30% over the past quarter (from 90 at the end of 1Q08 to 117)


* FDIC-insured lenders reported 2Q08 profit of $4.96 Billion vs. $36.8 Billion in the same quarter a year ago. (FDIC Member Bank Profits were Down 87% year over year !)...2Q08's profit of $4.96 Billion was the second-lowest net income reported since the fourth quarter of 1991 (throwback to the 1990's Savings and Loans Crisis ERA...speaking of which, feel free to check my related 7/14/08 post titled 'The U.S. Savings and Loans Crisis')...behind the $600 million reported in the fourth quarter of 2007


* FDIC-insured lenders reported 1Q08 profits of $19.3 Billion (2Q08 profits were down $14.34 Billion or 74% quarter over quarter/'sequentially')


* Funds set aside by banks to cover loan losses/writedowns more than quadrupled to $50.2 Billion from $11.4 Billion in 2Q07...A year over year loan loss/writedown provision increase of 340% !


* Loans 90 Days or more Overdue, deemed troubled by the FDIC, jumped 20% to $162 Billion from $136 Billion in the first quarter. Real-Estate Loans accounted for almost 90% of the rise in the past three quarters !


* To date, Nine U.S. financial institutions have FAILED/Collapsed in 2008...California-based mortgage lender IndyMac Bank's recent failure will cost the U.S. deposit insurance fund about $8.9 Billion, exceeding a $4 Billion to $8 Billion estimate, said Diane Ellis (the associate director of financial- risk management).


* The FDIC's deposit insurance fund fell 14% to $45.2 Billion and the Reserve Ratio (the FDIC's balance divided by insured deposits) was 1.01%...The FDIC is required to shore up the fund when the ratio falls below 1.15%... In order to 'shore up' the fund, the FDIC will consider a plan in October to replenish the account that will likely require an increase in the premiums charged to banks


* Lenders on the 'Problem List' had total assets of $78.3 Billion at the end of the second quarter, triple the $26.3 Billion in the first quarter...The FDIC said IndyMac's assets represented $32 Billion of the increase.


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* FYI + per Wikipedia, The FDIC is a United States 'government corporation' that was created by the Glass-Steagall Act of 1933 during The Great Depression. The FDIC's function is to provide deposit insurance which guarantees the safety of checking and savings deposits in member banks...currently the FDIC provides insurance protection of up to $100,000 per member-bank depositor.



Data Courtesy: Bloomberg