Let's be frank about it. McCain has a better tax plan than Obama. Not only he gives some tax cut to the poor, he will also cut tax for the wealthy and big corporations, just in case they need it. McCain will cut tax for EVERYONE, not only the middle class and poor.
How will he balance the budget, if he cut taxes? He will freeze all domestic spending except the military. Sure, this will cripple domestic economy. But no worry, our corporations can always do business in other countries. And our military spending will definitely stimulate the economy of our friends in the middle east. Yes, tough economic time is ahead of us here in the US. But that is why we are asking you to put the country first.
Even freezing domestic spending would not balance the budget, because we are already running a half trillion dollar budget deficit. But, don't fret. The government can always borrow. We have been doing that in the last eight years! Why can't we continue doing that?
On the other hand, Obama only gives tax cut to those who need it. He asks the wealthy and the corporations to chip in a little bit more. That is socialism, my friends. Obama will reduce our military spending by ending the war in Iraq, and boost domestic spending to stimulate the US economy. He will give tax credit to small businesses that create jobs in the US, not ship jobs overseas. He will repair the crippling infrastructure, and encourage investment in alternative energy technologies. My friends, that does not work! That is government intervention. You democrats did that in the 90s, the early 60s, and the late 30s. The New Deal. The Great Society. Blah blah blah. Those are false hopes. They work for a while, until we republicans came in to crash them.
My friends, on November 4th, remember to vote for McCain.
Saturday, November 01, 2008
Thursday, October 30, 2008
Here we are again, 1% Fed Funds target rate
Yesterday, the Fed lowered the target rate for Fed Funds by 50bp to 1%, matching the lowest level set in 2003-2004 time frame under Alan Greespan. US Libor dropped less than 10bp on the Fed move. Clearly, the Fed simply cannot control the price of credit.
Fed action was matched by similar rate cuts in China and Europe. Stock markets in Asia seem to like the move. Overnight HenSeng went up more than 13%. US large cap was slightly down yesterday, while mid to small caps were broadly up. Today, the market followed through with a broad rally in the 2-3% range.
The congress today was deliberating on a potential fiscal stimulate package. Nuriel Roubini, the crazy economist of NYU, was testifying for such a stimulative spending package. Roubini tends to make exaggerated statements. But so far he has been right about the economy.
US government policy largely favors big businesses and financial institutions. When banks are running into problems, meaning they are over-leveraged or borrowed too much, the Federal Reserve lowers interest rate and inject capital to save them. But when it comes to ordinary consumer, if he or she borrowed too much, no one would come to the rescue. You know the financial institutions have a perverted way of doing business: they tend to lend to the rich at low interest rate. But when they lend to low-income households, they charge extraordinarily high interest rate. The poor on average are paying much higher borrowing costs than the rich. Is that fair? I guess it is :)
I have been thinking about gold-standard monetary policy. I used to be very supportive of that. But the current financial crisis made me think again. I think a gold-standard, or silver-standard for that matter, will collapse in a financial crisis when everyone is selling out risky assets to demand for cash. Under stringent gold-standard, there would not be sufficient liquidity (in this case gold money) to meet the demand. The whole system would crash. In the fiat system, the central banks can print as much cash as the market demands. The critical issue here is at what point it is appropriate for the central bank to intervene? In many cases, the central bank should not intervene, and let the financial market to work the trouble out by itself. But in situations like now, the central bank has to take drastic actions. Though it is rather difficult to determine where to draw the line.
Fed action was matched by similar rate cuts in China and Europe. Stock markets in Asia seem to like the move. Overnight HenSeng went up more than 13%. US large cap was slightly down yesterday, while mid to small caps were broadly up. Today, the market followed through with a broad rally in the 2-3% range.
The congress today was deliberating on a potential fiscal stimulate package. Nuriel Roubini, the crazy economist of NYU, was testifying for such a stimulative spending package. Roubini tends to make exaggerated statements. But so far he has been right about the economy.
US government policy largely favors big businesses and financial institutions. When banks are running into problems, meaning they are over-leveraged or borrowed too much, the Federal Reserve lowers interest rate and inject capital to save them. But when it comes to ordinary consumer, if he or she borrowed too much, no one would come to the rescue. You know the financial institutions have a perverted way of doing business: they tend to lend to the rich at low interest rate. But when they lend to low-income households, they charge extraordinarily high interest rate. The poor on average are paying much higher borrowing costs than the rich. Is that fair? I guess it is :)
I have been thinking about gold-standard monetary policy. I used to be very supportive of that. But the current financial crisis made me think again. I think a gold-standard, or silver-standard for that matter, will collapse in a financial crisis when everyone is selling out risky assets to demand for cash. Under stringent gold-standard, there would not be sufficient liquidity (in this case gold money) to meet the demand. The whole system would crash. In the fiat system, the central banks can print as much cash as the market demands. The critical issue here is at what point it is appropriate for the central bank to intervene? In many cases, the central bank should not intervene, and let the financial market to work the trouble out by itself. But in situations like now, the central bank has to take drastic actions. Though it is rather difficult to determine where to draw the line.
Friday, October 17, 2008
It feels good to agree with Warren Buffet
I have been saying here that it is insane to hold fast depreciating cash now, when the Fed is printing trillions of dollars of fresh new bills, and stocks are trading at extraordinarily low valuation. And I myself have been buying stocks hand-over-fist. Let me name a few example: Capital One (COF), trading below book value, with pristine balance sheet and more than adequate reserves for loan losses and credit charge offs. Western Digital (WDC), the best managed hard disk drive (HDD) companies out there, is trading at 4 times last year's free cash flow! As consumers generate more digital data (videos and photos), the demand for HDD will not go down, even there will be competition from flash memory storage products, which is much more expensive than HDD. Then there is Apple, trading 15x earnings, and has $23/share cash on the balance sheet.
OK, I am going to stop here. The point is that you can buy many great stocks at very cheap valuation.
Today, I am very glad to know that the investment guru Warren Buffet happens to think the same way. In his Op-Ed on today's NY Times, he urges investors to be "greedy" when others are running in "fear". He claims that he is buying US equities. Here is the reprint of his piece on NY Times:
-----------------------------------------------
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
OK, I am going to stop here. The point is that you can buy many great stocks at very cheap valuation.
Today, I am very glad to know that the investment guru Warren Buffet happens to think the same way. In his Op-Ed on today's NY Times, he urges investors to be "greedy" when others are running in "fear". He claims that he is buying US equities. Here is the reprint of his piece on NY Times:
-----------------------------------------------
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Wednesday, October 15, 2008
McCain is an angry old man in today's debate
This is the last of the three presidential debate. Obama maintained his cool and showed America that he is of the Presidential material. But McCain throughout the debate was agitated, constantly making faces and showing emotion. He does not look presidential at all. He was constantly on the attack of Obama. But when it comes to articulating his own policy stances, he failed to present a coherent message. We really don't know what his policy is except the repeated slogan of "cutting taxes" and "small government". I think tonight's debate has put "the nail on the coffin" of this election. Obama is going to win in a landslide.
Yet another brutal day for the financial market
Stock market continues to slide today, erasing almost the entire gains of Monday rally. Major indexes dropped between 8-9% today, shattering the hope of the investors for a near term recovery. Investor confidence is in short supply. Even commodities are trading broadly lower. Crude oil tumbled 5.9% to $74.03, down almost 50% since its peak earlier this year. A slue of bad economic news (retail sales and Fed Beige Book) underpinned today's dramatic sell off. Where is an end to all this?
There are now so many cheap stocks you can pick from. You don't have to buy those risky controversial names. You can now buy solid healthy global franchises at bargain prices. Where are the risk takers in America? I think a few years down the road when we look back, we would appreciate what a tremendous time this is to buy stocks extraordinarily cheap.
Mutual funds and hedge funds are forced to sell their stock holdings because investors are pulling money out in fear. Irrational. Investors are so irrational.
There are now so many cheap stocks you can pick from. You don't have to buy those risky controversial names. You can now buy solid healthy global franchises at bargain prices. Where are the risk takers in America? I think a few years down the road when we look back, we would appreciate what a tremendous time this is to buy stocks extraordinarily cheap.
Mutual funds and hedge funds are forced to sell their stock holdings because investors are pulling money out in fear. Irrational. Investors are so irrational.
Tuesday, October 14, 2008
We are witnessing history
The current financial crisis is probably a once-in-a-lifetime type of event. And I feel awed to be in the middle of it.
After losing eight straight days, the stock market rocketed on Monday (yesterday) with all major indexes ending up more than 11%. Stocks around the world rose in double digit percentages yesterday, after central banks and governments around the world vowed to provide "unlimited" liquidity for troubled financial institutions. England led the pack by first nationalizing some of its major banks. European countries were all offering deposit insurance for bank deposits, in an attempt to preempt potential bank run.
International stock markets had nice follow-through upon yesterday's huge gain. Stocks around the world ended higher on Tuesday. US equities started off on a high note today, up around 3% in early trading. Treasury Department announced a plan to immediate inject $250B into nine major US financial banks (sure, Goldman is included, along with Morgan Stanley, Merrill Lynch, BoA, Citi, JPMChase, Well Fargo, Bank of NY Mellon, and State Street). But the early gain slowly fizzled, with the market ending slightly down.
I think the road ahead will still be rocky. Hedge funds are stocking cash preparing for a rush of investor redemption. That is why when stocks were moving lower, oil and gold were also moving lower. The only plausible explanation is that hedge funds are unwinding their long oil and gold positions to build up cash cushion for potential redemption. This can last for a quarter.
But the stocks are cheap. There are plenty of opportunities to find high quality names trading at depressed valuation.
This is probably also a once-in-a-lifetime opportunity to buy stocks extremely cheap.
After losing eight straight days, the stock market rocketed on Monday (yesterday) with all major indexes ending up more than 11%. Stocks around the world rose in double digit percentages yesterday, after central banks and governments around the world vowed to provide "unlimited" liquidity for troubled financial institutions. England led the pack by first nationalizing some of its major banks. European countries were all offering deposit insurance for bank deposits, in an attempt to preempt potential bank run.
International stock markets had nice follow-through upon yesterday's huge gain. Stocks around the world ended higher on Tuesday. US equities started off on a high note today, up around 3% in early trading. Treasury Department announced a plan to immediate inject $250B into nine major US financial banks (sure, Goldman is included, along with Morgan Stanley, Merrill Lynch, BoA, Citi, JPMChase, Well Fargo, Bank of NY Mellon, and State Street). But the early gain slowly fizzled, with the market ending slightly down.
I think the road ahead will still be rocky. Hedge funds are stocking cash preparing for a rush of investor redemption. That is why when stocks were moving lower, oil and gold were also moving lower. The only plausible explanation is that hedge funds are unwinding their long oil and gold positions to build up cash cushion for potential redemption. This can last for a quarter.
But the stocks are cheap. There are plenty of opportunities to find high quality names trading at depressed valuation.
This is probably also a once-in-a-lifetime opportunity to buy stocks extremely cheap.
Sunday, October 12, 2008
McCain finally showed some restrain
Attack on Obama from the McCain campaign in the past few weeks has really intensified. The strategy was to question the character of Obama, instead of discussing issues. He asked his supporters during a rally: "who is Obama?". His running mate Sarah Palin took on more direct and nasty role of attack, calling Obama "palling around with terrorists". McCain/Palin supporters have become increasingly vocal about their hatred towards Obama. The fact that Obama is leading McCain in major national polls makes these staunch republicans so mad. The madness seems to reaching to the boiling point which could have the potential to incite violence.
During the weekend, McCain wisely toned down his personal attack on Obama, calling him "a decent American". I am really glad to see this turn about. As to Palin, I really don't care. She is just a tool, a parrot. It is a joke that McCain selected her as VP candidate. That shows how desperate and irresponsible a McCain Presidency could be.
During the weekend, McCain wisely toned down his personal attack on Obama, calling him "a decent American". I am really glad to see this turn about. As to Palin, I really don't care. She is just a tool, a parrot. It is a joke that McCain selected her as VP candidate. That shows how desperate and irresponsible a McCain Presidency could be.
Thursday, October 09, 2008
Depression ahead of us?
Another brutal day on Wall Street. There seems to be no let up. The market did not have a single up day for the last eight days. The passing of the bailout last Friday did not serve to sooth jitter investors. Credit spreads remain wide, and stocks continue to sell off. Investors are shunning risky assets and parking liquidity in the "safe heaven" of Treasury bills. Most notable is that commodity prices are sliding as well, with crude oil now trading below $87, down from the peak of $147 set sometimes in March of this year. Gold edged up during this period of stock sell-off. But rise in gold price is not as much as I would have expected. It appears that the likelihood of going back to gold-based currency is very low (although that may be the right choice), because governments around the world are addicted to the power of printing money to finance spending without raising taxes.
Are you heading to a a 1929-style depression? Hardly. I think we have more financial tools now to prevent a depression from happening. I have long maintained we do not need a Federal Reserve (central bank) system to regulate the interest rate (or price of credit). In fact the Fed is incapable of regulating interest rate. Despite the rate cut Fed announced yesterday, Libor remains high. In normal situations, Fed action does affect the credit. But in times of financial crisis, Fed has very little power to influence the credit market. The Fed has pumped tremendous amount of liquidity (in the order of trillions of dollars) into the financial system, and in fact central banks around of the world have done the same. Yet banks are just hoarding the cash and refuse to lend.
Yesterday, UK government decided to take ownership of some of its banks. Today, Treasury secretary Paulson also indicated that the Treasury may buy stock shares of the troubled banks. It feels more and more like socialism. I guess when capitalism runs into trouble, socialism comes to the rescue. How ironic.
Notwithstanding the flaws of the Federal Reserve System and fiat money, I do think the Federal Reserve, if there is any use of it, is precisely designed for the current situation. Investors want to sell risky assets at depressed valuation and buy risk free Federal Reserve Notes? OK, keep coming. As long as the printing press at the Federal Reserve still works, there is infinite quantity of paper money to meet the demand. Someday these investors will realize what they are holding are worthless papers. Then they will start to come back into assets such as bonds and stocks.
In a long run, I think inflation will go up dramatically. Economic activities will be slow for a long stretch of time. Yes, there won't be a depression. But we are going to have multi-years of stagflation (stagnation + inflation).
For future reference, it is worthwhile to record the dramatic selloff of the stock market towards the afternoon of today. Here is what yahoo finance recaps today's financial market activities:
Stocks plunged Thursday, sending the Dow Jones industrial average down 679 points -- more than 7 percent -- to its lowest level in five years. Stocks took a nosedive after a major credit-rating agency said it might cut its rating on General Motors and Ford, further rattling investors already fretting over the impact of tight credit on the economy.
The Standard & Poor's 500 index also fell more than 7 percent.
The declines came on the one-year anniversary of the closing highs of the Dow and the S&P. The Dow has lost 5,585 points, or 39.4 percent, since closing at 14,164.53 on Oct. 9, 2007. It's the worst run for the Dow since the nearly two-year bear market that ended in December 1974 when the Dow lost 45 percent. The S&P 500, meanwhile, is off 655 points, or 41.9 percent, since recording its high of 1,565.15.
U.S. stock market paper losses totaled $872 billion Thursday and the value of shares over all has tumbled a stunning $8.33 trillion since last year's high. That's based on figures measured by the Dow Jones Wilshire 5000 Composite Index, which tracks 5,000 U.S.-based companies' stocks and represents almost all stocks traded in America.
Thursday's sell-off came as Standard & Poor's Ratings Services put General Motors Corp. and its finance affiliate GMAC LLC under review to see if its rating should be cut. The action means there is a 50 percent chance that S&P will lower GM's and GMAC's ratings in the next three months. GM has been struggling with weak car sales in North America.
S&P also put Ford Motor Co. on credit watch negative. The ratings agency said that GM and Ford have adequate liquidity now, but that could change in 2009.
GM, one of the 30 stocks that make up the Dow industrials, fell $2.15, or 31 percent, to $4.76, while Ford fell 58 cents, or 22 percent, to $2.08.
"The story is getting to be like that movie 'Groundhog Day,'" said Arthur Hogan, chief market analyst at Jefferies & Co. He pointed to the still-frozen credit markets, and Libor, the bank-to-bank lending rate that remains stubbornly high despite interest rate cuts this week by the Federal Reserve and other major central banks.
"Until that starts coming down, you'll be hard-pressed to find anyone getting excited about stocks," Hogan said. "Everything we're seeing is historic. The problem is historic, the solutions are historic, and unfortunately, the sell-off is historic. It's not the kind of history you want to be making."
The Dow ended the day at its lows, finishing down 678.91, or 7.3 percent, at 8,579.19. The blue chips hadn't closed below 9,000 since June 30, 2003, and haven't closed at this level since May 21, 2003.
The Dow's 2,271-point tumble over the last seven sessions is its steepest seven-day point drop ever. Its seven-day percentage decline of 20.9 percent is the largest since the seven-day plunge ending Oct. 26, 1987, when the Dow lost 23.8 percent. That sell-off included Black Monday, the Oct. 19, 1987 market crash that saw the Dow fall nearly 23 percent in a single day.
Broader stock indicators also tumbled Thursday. The S&P 500 fell 75.02, or 7.6 percent, to 909.92, while the Nasdaq composite index fell 95.21, or 5.5 percent, to 1,645.12.
The Russell 2000 index of smaller companies fell 47.37, or 8.7 percent, to 499.20.
A wave of fear about the economy sent stocks lower in the final two hours of trading after a volatile morning in which major indicators like the Dow and the S&P 500 index bobbed up and down. The Nasdaq, with a bevy of tech stocks, spent much of the session higher but eventually declined as the sell-off intensified. Still, its losses were less severe because of the relatively modest drops in names like Intel Corp. and Microsoft Corp.
On the New York Stock Exchange, declining issues came to nearly 3,000, while fewer than 250 advanced.
The sluggishness in the credit markets that triggered much of the heavy selling in markets around the world since mid-September appeared little changed Thursday following days of efforts by the Federal Reserve and other central banks to resuscitate lending.
Libor, the bank lending benchmark, for three-month dollar loans rose to 4.75 percent from 4.52 percent on Wednesday. That signals that banks remain hesitant to make loans for fear they won't be paid back.
The Fed and other leading central banks this week lowered key interest rates to help unclog the credit markets and promote lending to help the global economy. While a rate cut can take up to a year to work its way through the economy, the move was aimed as a boost to investor sentiment.
"We're stuck in a morass and I think it's going to take quite some time to come out of it," said Stephen Carl, principal and head of equity trading at The Williams Capital Group.
Demand remained high for short-term Treasurys, a refuge for investors willing to trade modest returns to protect their money. The yield on the three-month Treasury bill, which moves opposite its price, fell to 0.58 percent from 0.63 percent late Wednesday. Longer-term debt prices fell, with the yield on the 10-year note rising to 3.79 percent from 3.65 percent late Wednesday.
Investors across markets were mulling a plan being considered by the Bush administration to invest in hobbled U.S. banks as a way to stabilize the financial sector. The $700 billion rescue package signed into law last week allows the Treasury Department to inject fresh capital into financial institutions and obtain ownership shares in return.
Britain rolled out a similar plan, though no U.K. bank has received any investments. In Iceland, the government now has control of the country's three major banks as it struggles to contain the troubles there.
Wall Street is also looking for any effects of short selling now that a three-week ban imposed by regulators has expired. Short selling is a technique in which investors borrow shares in a company from a broker and sell them, hoping to buy them back later at a lower price. Essentially, it's a bet that a stock's price will fall. Short sellers can lose money if they have to repurchase the stock after it has risen.
Some analysts believe the unprecedented ban on short selling -- an effort to bolster investor confidence -- did more harm than good at a time of historic market volatility. They contend that short sellers help the market rally by covering their bets and creating demand for stocks.
"I think the market's way oversold. But I can't stand in the way of this falling knife -- I'd get sliced open," said Phil Orlando, chief equity market strategist at Federated Investors. "Investors are just saying, get me out at any price."
He also said that with the short-selling rule back in play, hedge funds might be shorting again to make up for their forced liquidations.
Energy names were among the biggest decliners as the price of oil fell and investors worried about a slowing economy. Exxon Mobil Corp. fell $9, or 12 percent, to $68, while Chevron Corp. fell $9.10, or 12 percent, to $64.
Light, sweet crude fell $1.81 to settle at $86.62 a barrel on the New York Mercantile Exchange, the lowest closing price since October last year.
Health insurer WellPoint Inc. fell $3.94, or 9.7 percent, to $36.50, while insurer and investment manager Lincoln National Corp. fell $9.66, or 35 percent, to $18.31.
The tech sector saw less selling than other parts of the market after IBM Corp. affirmed its forecast.
IBM fell $1.55, or 1.7 percent, to $89. Meanwhile, Intel fell 65 cents, or 4 percent, to $15.60 and Microsoft fell 71 cents, or 3.1 percent, to $22.30.
Consolidated trading volume on the NYSE came to 8.14 billion consolidated shares compared with 8.54 billion traded Wednesday.
In Asia, Japan's Nikkei 225 closed down 0.50 percent while the Hang Seng added 3.31 percent. In Europe, Britain's FTSE-100 fell 1.21 percent, Germany's DAX fell 2.53 percent, and France's CAC-40 declined 1.55 percent.
Are you heading to a a 1929-style depression? Hardly. I think we have more financial tools now to prevent a depression from happening. I have long maintained we do not need a Federal Reserve (central bank) system to regulate the interest rate (or price of credit). In fact the Fed is incapable of regulating interest rate. Despite the rate cut Fed announced yesterday, Libor remains high. In normal situations, Fed action does affect the credit. But in times of financial crisis, Fed has very little power to influence the credit market. The Fed has pumped tremendous amount of liquidity (in the order of trillions of dollars) into the financial system, and in fact central banks around of the world have done the same. Yet banks are just hoarding the cash and refuse to lend.
Yesterday, UK government decided to take ownership of some of its banks. Today, Treasury secretary Paulson also indicated that the Treasury may buy stock shares of the troubled banks. It feels more and more like socialism. I guess when capitalism runs into trouble, socialism comes to the rescue. How ironic.
Notwithstanding the flaws of the Federal Reserve System and fiat money, I do think the Federal Reserve, if there is any use of it, is precisely designed for the current situation. Investors want to sell risky assets at depressed valuation and buy risk free Federal Reserve Notes? OK, keep coming. As long as the printing press at the Federal Reserve still works, there is infinite quantity of paper money to meet the demand. Someday these investors will realize what they are holding are worthless papers. Then they will start to come back into assets such as bonds and stocks.
In a long run, I think inflation will go up dramatically. Economic activities will be slow for a long stretch of time. Yes, there won't be a depression. But we are going to have multi-years of stagflation (stagnation + inflation).
For future reference, it is worthwhile to record the dramatic selloff of the stock market towards the afternoon of today. Here is what yahoo finance recaps today's financial market activities:
Stocks plunged Thursday, sending the Dow Jones industrial average down 679 points -- more than 7 percent -- to its lowest level in five years. Stocks took a nosedive after a major credit-rating agency said it might cut its rating on General Motors and Ford, further rattling investors already fretting over the impact of tight credit on the economy.
The Standard & Poor's 500 index also fell more than 7 percent.
The declines came on the one-year anniversary of the closing highs of the Dow and the S&P. The Dow has lost 5,585 points, or 39.4 percent, since closing at 14,164.53 on Oct. 9, 2007. It's the worst run for the Dow since the nearly two-year bear market that ended in December 1974 when the Dow lost 45 percent. The S&P 500, meanwhile, is off 655 points, or 41.9 percent, since recording its high of 1,565.15.
U.S. stock market paper losses totaled $872 billion Thursday and the value of shares over all has tumbled a stunning $8.33 trillion since last year's high. That's based on figures measured by the Dow Jones Wilshire 5000 Composite Index, which tracks 5,000 U.S.-based companies' stocks and represents almost all stocks traded in America.
Thursday's sell-off came as Standard & Poor's Ratings Services put General Motors Corp. and its finance affiliate GMAC LLC under review to see if its rating should be cut. The action means there is a 50 percent chance that S&P will lower GM's and GMAC's ratings in the next three months. GM has been struggling with weak car sales in North America.
S&P also put Ford Motor Co. on credit watch negative. The ratings agency said that GM and Ford have adequate liquidity now, but that could change in 2009.
GM, one of the 30 stocks that make up the Dow industrials, fell $2.15, or 31 percent, to $4.76, while Ford fell 58 cents, or 22 percent, to $2.08.
"The story is getting to be like that movie 'Groundhog Day,'" said Arthur Hogan, chief market analyst at Jefferies & Co. He pointed to the still-frozen credit markets, and Libor, the bank-to-bank lending rate that remains stubbornly high despite interest rate cuts this week by the Federal Reserve and other major central banks.
"Until that starts coming down, you'll be hard-pressed to find anyone getting excited about stocks," Hogan said. "Everything we're seeing is historic. The problem is historic, the solutions are historic, and unfortunately, the sell-off is historic. It's not the kind of history you want to be making."
The Dow ended the day at its lows, finishing down 678.91, or 7.3 percent, at 8,579.19. The blue chips hadn't closed below 9,000 since June 30, 2003, and haven't closed at this level since May 21, 2003.
The Dow's 2,271-point tumble over the last seven sessions is its steepest seven-day point drop ever. Its seven-day percentage decline of 20.9 percent is the largest since the seven-day plunge ending Oct. 26, 1987, when the Dow lost 23.8 percent. That sell-off included Black Monday, the Oct. 19, 1987 market crash that saw the Dow fall nearly 23 percent in a single day.
Broader stock indicators also tumbled Thursday. The S&P 500 fell 75.02, or 7.6 percent, to 909.92, while the Nasdaq composite index fell 95.21, or 5.5 percent, to 1,645.12.
The Russell 2000 index of smaller companies fell 47.37, or 8.7 percent, to 499.20.
A wave of fear about the economy sent stocks lower in the final two hours of trading after a volatile morning in which major indicators like the Dow and the S&P 500 index bobbed up and down. The Nasdaq, with a bevy of tech stocks, spent much of the session higher but eventually declined as the sell-off intensified. Still, its losses were less severe because of the relatively modest drops in names like Intel Corp. and Microsoft Corp.
On the New York Stock Exchange, declining issues came to nearly 3,000, while fewer than 250 advanced.
The sluggishness in the credit markets that triggered much of the heavy selling in markets around the world since mid-September appeared little changed Thursday following days of efforts by the Federal Reserve and other central banks to resuscitate lending.
Libor, the bank lending benchmark, for three-month dollar loans rose to 4.75 percent from 4.52 percent on Wednesday. That signals that banks remain hesitant to make loans for fear they won't be paid back.
The Fed and other leading central banks this week lowered key interest rates to help unclog the credit markets and promote lending to help the global economy. While a rate cut can take up to a year to work its way through the economy, the move was aimed as a boost to investor sentiment.
"We're stuck in a morass and I think it's going to take quite some time to come out of it," said Stephen Carl, principal and head of equity trading at The Williams Capital Group.
Demand remained high for short-term Treasurys, a refuge for investors willing to trade modest returns to protect their money. The yield on the three-month Treasury bill, which moves opposite its price, fell to 0.58 percent from 0.63 percent late Wednesday. Longer-term debt prices fell, with the yield on the 10-year note rising to 3.79 percent from 3.65 percent late Wednesday.
Investors across markets were mulling a plan being considered by the Bush administration to invest in hobbled U.S. banks as a way to stabilize the financial sector. The $700 billion rescue package signed into law last week allows the Treasury Department to inject fresh capital into financial institutions and obtain ownership shares in return.
Britain rolled out a similar plan, though no U.K. bank has received any investments. In Iceland, the government now has control of the country's three major banks as it struggles to contain the troubles there.
Wall Street is also looking for any effects of short selling now that a three-week ban imposed by regulators has expired. Short selling is a technique in which investors borrow shares in a company from a broker and sell them, hoping to buy them back later at a lower price. Essentially, it's a bet that a stock's price will fall. Short sellers can lose money if they have to repurchase the stock after it has risen.
Some analysts believe the unprecedented ban on short selling -- an effort to bolster investor confidence -- did more harm than good at a time of historic market volatility. They contend that short sellers help the market rally by covering their bets and creating demand for stocks.
"I think the market's way oversold. But I can't stand in the way of this falling knife -- I'd get sliced open," said Phil Orlando, chief equity market strategist at Federated Investors. "Investors are just saying, get me out at any price."
He also said that with the short-selling rule back in play, hedge funds might be shorting again to make up for their forced liquidations.
Energy names were among the biggest decliners as the price of oil fell and investors worried about a slowing economy. Exxon Mobil Corp. fell $9, or 12 percent, to $68, while Chevron Corp. fell $9.10, or 12 percent, to $64.
Light, sweet crude fell $1.81 to settle at $86.62 a barrel on the New York Mercantile Exchange, the lowest closing price since October last year.
Health insurer WellPoint Inc. fell $3.94, or 9.7 percent, to $36.50, while insurer and investment manager Lincoln National Corp. fell $9.66, or 35 percent, to $18.31.
The tech sector saw less selling than other parts of the market after IBM Corp. affirmed its forecast.
IBM fell $1.55, or 1.7 percent, to $89. Meanwhile, Intel fell 65 cents, or 4 percent, to $15.60 and Microsoft fell 71 cents, or 3.1 percent, to $22.30.
Consolidated trading volume on the NYSE came to 8.14 billion consolidated shares compared with 8.54 billion traded Wednesday.
In Asia, Japan's Nikkei 225 closed down 0.50 percent while the Hang Seng added 3.31 percent. In Europe, Britain's FTSE-100 fell 1.21 percent, Germany's DAX fell 2.53 percent, and France's CAC-40 declined 1.55 percent.
Friday, October 03, 2008
700B bailout package truned into $850B spending
Politics in Washington DC defies logic. Last week, the House vetoed the 700B bailout package with a 228-205 vote. Then the Senate took on almost the same exact bill, adding to that an additional $150B pork spending. Surprise, surprise, the bill passed both the Senate (yesterday) and the House (today). Bush signed it into law immediately after.
Will the bailout help? Certainly it will help the banks' balance sheet. But I do not think the lending activity will come back quickly. The credit spreads won't narrow in short term, either. What the bailout will do for sure is to ensure some of the big banks to make a lot of money.
JPMorgan took on WaMu with its mortgage portfolio at depressed value without paying anything for it. Bank of America earlier took on Merrill Lynch, which also has lots of mortgage exposure. Now Wells Fargo and Citi are battling for Wachovia. Last Sunday, Wells Fargo pulled out in the last minute from the negotiation of potential take over of Wachovia. Citi came as the rescuer, after FDIC sweetened the deal with some loss guarantees for Wachovia's mortgage assets. Now with the knowledge of the bailout package likely to pass, Well Fargo came back today with a better offer to acquire the entire Wachovia at roughly $7/share. Citi's offer was a measly $1/share, only for the banking portion of Wachovia. Citi was hoping that Wachovia to provide it with the much needed cheap domestic source of financing, as most of Citi's deposits are international, while its investments are more geared towards US. It seems that it would be a great deal for Citi. But Well Fargo, with the backing of Warren Buffet, came in to spoil it.
A lot of people may be surprised to know that shares of Well Fargo, JP Morgan and many other banks are trading close to 52-week highs. These banks will do even better with the Treasury's $700B to help them shed those "toxic" assets from their balance sheet.
You got to love capitalism!
Will the bailout help? Certainly it will help the banks' balance sheet. But I do not think the lending activity will come back quickly. The credit spreads won't narrow in short term, either. What the bailout will do for sure is to ensure some of the big banks to make a lot of money.
JPMorgan took on WaMu with its mortgage portfolio at depressed value without paying anything for it. Bank of America earlier took on Merrill Lynch, which also has lots of mortgage exposure. Now Wells Fargo and Citi are battling for Wachovia. Last Sunday, Wells Fargo pulled out in the last minute from the negotiation of potential take over of Wachovia. Citi came as the rescuer, after FDIC sweetened the deal with some loss guarantees for Wachovia's mortgage assets. Now with the knowledge of the bailout package likely to pass, Well Fargo came back today with a better offer to acquire the entire Wachovia at roughly $7/share. Citi's offer was a measly $1/share, only for the banking portion of Wachovia. Citi was hoping that Wachovia to provide it with the much needed cheap domestic source of financing, as most of Citi's deposits are international, while its investments are more geared towards US. It seems that it would be a great deal for Citi. But Well Fargo, with the backing of Warren Buffet, came in to spoil it.
A lot of people may be surprised to know that shares of Well Fargo, JP Morgan and many other banks are trading close to 52-week highs. These banks will do even better with the Treasury's $700B to help them shed those "toxic" assets from their balance sheet.
You got to love capitalism!
Sarah Palin avoided another national embarassment
Yesterday's vice president debate turned out to be less a spectacle many of us have been expecting. Frankly, I was waiting for another comedy show by Palin in front of the national audience.
By sticking to the rehearsed talking points, and avoid answering questions, Palin avoided another national embarrassment. The entire republican party and McCain campaign sighed a collective relief. Sure, she was not answering questions directly. Sure she just repeated what she was instructed to say. But that was far better a performance than the interview she did with Katie Couric.
I thought Joe Biden did a great job, better than Barack Obama did in his first presidential debate. He kept hammering at McCain, calling him no maverick on critical issues, and continuing the failed Bush policies both domestic and international.
Indeed, there is basically NO difference when it comes to national defense policy, health care policy, tax policy, and energy policy, between Bush and McCain. Most troubling, and most dangerous (I believe), is that McCain has shown no sign of changing the course from the misguided Bush's beating-the-chest cowboy foreign policy, which has strengthened US enemies and alienated US allies. If this policy would continue, and I believe it would under McCain, we would continue to spending $10B/month in Iraq for the foreseeable future. McCain wants to cut domestic spending to preserve defense spending (Iraq war). That will lead to domestic economic decline and further stimulate the economy of the middle east. Thanks a lot McCain, our "friends" in the middle east would say.
We've got to elect Barack Obama President of the United States.
By sticking to the rehearsed talking points, and avoid answering questions, Palin avoided another national embarrassment. The entire republican party and McCain campaign sighed a collective relief. Sure, she was not answering questions directly. Sure she just repeated what she was instructed to say. But that was far better a performance than the interview she did with Katie Couric.
I thought Joe Biden did a great job, better than Barack Obama did in his first presidential debate. He kept hammering at McCain, calling him no maverick on critical issues, and continuing the failed Bush policies both domestic and international.
Indeed, there is basically NO difference when it comes to national defense policy, health care policy, tax policy, and energy policy, between Bush and McCain. Most troubling, and most dangerous (I believe), is that McCain has shown no sign of changing the course from the misguided Bush's beating-the-chest cowboy foreign policy, which has strengthened US enemies and alienated US allies. If this policy would continue, and I believe it would under McCain, we would continue to spending $10B/month in Iraq for the foreseeable future. McCain wants to cut domestic spending to preserve defense spending (Iraq war). That will lead to domestic economic decline and further stimulate the economy of the middle east. Thanks a lot McCain, our "friends" in the middle east would say.
We've got to elect Barack Obama President of the United States.
Monday, September 29, 2008
How to make the Bailout work?
Bloody Monday: Dow dropped 777.7 (6.98%), largest single day point loss in history, and largest percentage drop since 9/11/01 terrorist attack (or more accurately CIA attack). Nasdaq did even worse, dropping 199.76 (9.14%). S&P 500 declined by 106.62 (8.79%). There was no place to hide. Energy was hit the hardest, and even Health Care sector could not escape the sell-off pressure.
After working over the weekend in an attempt to come up with a modified $700B bailout package, the Whitehouse and bipartisan congressional leaders worked out a bill to present to the House for a vote. The bill suffered a surprising and stunning defeat, with 228 nays and 205 yeas. This morning, we were greeted with the news that Wochovia sold its entire banking business to Citi for a mere $2B, or $1/share. It looks like we are going to have only a handful banks left after this turmoil. That is certainly not good for consumers.
What is the root problem of the current financial crisis? In a very simple term, many banks have mortgage securities on their balance sheet that they have no idea how much they are worth. As a result, no one knows whether the banks have sufficient capital to operate. Many banks refuse to lend each other for fear of counterparty risk.
For the main street, many corporations find it hard to re-finance their short term debt now that the commercial papers market almost dried out, because of the scare of money market funds, caused by Lehman bankruptcy and Prime Reserve's Money Market Fund breaking the sacred $1/share mark (it traded 97c) in last week.
It seems that the contagion is spreading quickly. And I start to feel we have to have some sort of rescue plan to address the root problems of the financial market, because the crisis boils over to the main street.
I think the $700B bailout plan in its original form (3-page proposal by Hank Paulson) was a scam. But the insurance proposal by the House Republicans is even worse. Taxpayers may incur even larger loss under that plan.
I think the critical component of any rescue plan should contain the provision that allows the Treasury to purchase the mortgage assets from the banks at a fair value, thus establishing a liquid market for the mortgages that are currently hard to value. Once a market is established, banks' financial health can be easily ascertained. That will lead to banks more willing to lend to other banks with sufficient capital. It should not be a bailout for the failing banks. It should be an intervention of the government to establish and maintain an orderly market for the mortgage securities. I think if the rescue plan is presented in this way, it would be much easier for taxpayers to swallow.
You may ask how the Treasury determines what price to pay for the mortgage securities? Ben Bernanke's idea of paying at the hold-to-maturity price is scandalous. That would be a huge give away to the banks. I think a so called "reverse auction" process is much fairer. Basically banks would submit their bid to sell their assets. Treasury would buy the lowest bidders up to a certain percentage of the total bids (say 50%).
To address the democrats demand that taxpayers should participate the upside of the banks recovery, we may demand the bidding banks to issue warrants to the Treasury valued at 10% of the assets the banks sold to the Treasury. When the banks' stock recovers in the future, Treasury can convert the warrants to non-voting shares in the banks and sell the shares for a profit.
One more thing I think we should be addressing is the potential inflationary effect of the bailout package. In short term, I do not think the bailout to be too much inflationary. But once the market returns normal, the excess cash in the system would create inflation pressure. That is why it is important that when Treasury sells the mortgages it bought from the banks, the proceeds should not be considered government revenue. It should be ear-marked to pay down the national debt, which was taken on to provide the initial bailout money.
But who am I? Who would listen to me? Washington politics is not determined by reasoning or what is right or fair, it is determined by the final compromise among different interest groups.
Sigh!
After working over the weekend in an attempt to come up with a modified $700B bailout package, the Whitehouse and bipartisan congressional leaders worked out a bill to present to the House for a vote. The bill suffered a surprising and stunning defeat, with 228 nays and 205 yeas. This morning, we were greeted with the news that Wochovia sold its entire banking business to Citi for a mere $2B, or $1/share. It looks like we are going to have only a handful banks left after this turmoil. That is certainly not good for consumers.
What is the root problem of the current financial crisis? In a very simple term, many banks have mortgage securities on their balance sheet that they have no idea how much they are worth. As a result, no one knows whether the banks have sufficient capital to operate. Many banks refuse to lend each other for fear of counterparty risk.
For the main street, many corporations find it hard to re-finance their short term debt now that the commercial papers market almost dried out, because of the scare of money market funds, caused by Lehman bankruptcy and Prime Reserve's Money Market Fund breaking the sacred $1/share mark (it traded 97c) in last week.
It seems that the contagion is spreading quickly. And I start to feel we have to have some sort of rescue plan to address the root problems of the financial market, because the crisis boils over to the main street.
I think the $700B bailout plan in its original form (3-page proposal by Hank Paulson) was a scam. But the insurance proposal by the House Republicans is even worse. Taxpayers may incur even larger loss under that plan.
I think the critical component of any rescue plan should contain the provision that allows the Treasury to purchase the mortgage assets from the banks at a fair value, thus establishing a liquid market for the mortgages that are currently hard to value. Once a market is established, banks' financial health can be easily ascertained. That will lead to banks more willing to lend to other banks with sufficient capital. It should not be a bailout for the failing banks. It should be an intervention of the government to establish and maintain an orderly market for the mortgage securities. I think if the rescue plan is presented in this way, it would be much easier for taxpayers to swallow.
You may ask how the Treasury determines what price to pay for the mortgage securities? Ben Bernanke's idea of paying at the hold-to-maturity price is scandalous. That would be a huge give away to the banks. I think a so called "reverse auction" process is much fairer. Basically banks would submit their bid to sell their assets. Treasury would buy the lowest bidders up to a certain percentage of the total bids (say 50%).
To address the democrats demand that taxpayers should participate the upside of the banks recovery, we may demand the bidding banks to issue warrants to the Treasury valued at 10% of the assets the banks sold to the Treasury. When the banks' stock recovers in the future, Treasury can convert the warrants to non-voting shares in the banks and sell the shares for a profit.
One more thing I think we should be addressing is the potential inflationary effect of the bailout package. In short term, I do not think the bailout to be too much inflationary. But once the market returns normal, the excess cash in the system would create inflation pressure. That is why it is important that when Treasury sells the mortgages it bought from the banks, the proceeds should not be considered government revenue. It should be ear-marked to pay down the national debt, which was taken on to provide the initial bailout money.
But who am I? Who would listen to me? Washington politics is not determined by reasoning or what is right or fair, it is determined by the final compromise among different interest groups.
Sigh!
Wednesday, September 24, 2008
The $700B bailout is a huge scam
Today some detail leaked out about the $700B bailout package that Hank Paulson has requested on behalf of the banks. Wall Street Journal had an article in a very obscure section disclosed some of these details:
First, it appears that the bailout is not restricted to mortgage debt or mortgage backed securities. Even credit card debt may be included. So this is intended to be a wholesale bailout for the pure benefits of the banks.
Second, Paulson and Bernanke believed that these bad debts should be priced based "held-to-maturity: formula, not the current book value. So the bailout is a complete giveaway to the banks.
You may not understand what held-to-maturity (HTM) valuation accounting means. Let me explain, when a bank purchased a debt security, it paid, say, $1000 for that debt. Under HTM, the debt will always be listed as $1000 in value, no matter what the current value of the debt may be. Obviously most of the debt securities that the banks are holding now have declined significantly in value, because the debtors don't have the ability to pay in many cases. It is very common some of the debt securities are trading at below 30 cents on the dollar. That means the $1000 asset that the bank holds is now worth only $300. Yet Hank Paulson and Ben Bernanke would like to give the banks $1000 (HTM value) for the assets that worth only $300.
Now you understand that the whole bailout is a scam. It is a scheme to enrich the banks at expense of taxpayers! How dare they are! They thought the public is so gullible that they would not even understand what is going on. That is why they brazenly requested $700 B complete giveaway for their friends on the Wall Street. When asked why $700 billion? You know what they answered: "we don't know. It is an arbitrary number!"
People, are you really so sheepish that you are willing to be fleeced? You got to stop this criminal deception!
By the way, the US government does not even have $700B to spare. It has been running budget deficit since Bush took the White House. National Debt already stands over 10.6 trillion dollars. Where is this money coming from? It is going to come from printing from paper! That means inflation will for sure to go up. It is just a form a stealth tax on all the savings of ordinary people.
I am really sickened by this. All these criminals! Because they think people are so stupid that they can get away from it.
A lot of people argue that we have to do this bailout. No, we don't. Yes, the banks are not lending right now. That is healthy, because US is already overly in debt. We all need to de-leverage. That means many banks will HAVE to go bust! We cannot simply re-inflate the financial system to create another bubble! We need to take the pain. The banks first, then American consumers. Yes, we have to pay higher interest rate. Borrowing will be more difficult. Consumer spending will slow down. But That would be normal. Isn't overspending and over borrowing that got us into this mess in the first place? Why do we want to give $700B easy money for the banks so they can lend unscrupulously and invest badly again?
You have to watch this video. God bless Marcy Kaptur, the Democratic Representative from Ohio.
First, it appears that the bailout is not restricted to mortgage debt or mortgage backed securities. Even credit card debt may be included. So this is intended to be a wholesale bailout for the pure benefits of the banks.
Second, Paulson and Bernanke believed that these bad debts should be priced based "held-to-maturity: formula, not the current book value. So the bailout is a complete giveaway to the banks.
You may not understand what held-to-maturity (HTM) valuation accounting means. Let me explain, when a bank purchased a debt security, it paid, say, $1000 for that debt. Under HTM, the debt will always be listed as $1000 in value, no matter what the current value of the debt may be. Obviously most of the debt securities that the banks are holding now have declined significantly in value, because the debtors don't have the ability to pay in many cases. It is very common some of the debt securities are trading at below 30 cents on the dollar. That means the $1000 asset that the bank holds is now worth only $300. Yet Hank Paulson and Ben Bernanke would like to give the banks $1000 (HTM value) for the assets that worth only $300.
Now you understand that the whole bailout is a scam. It is a scheme to enrich the banks at expense of taxpayers! How dare they are! They thought the public is so gullible that they would not even understand what is going on. That is why they brazenly requested $700 B complete giveaway for their friends on the Wall Street. When asked why $700 billion? You know what they answered: "we don't know. It is an arbitrary number!"
People, are you really so sheepish that you are willing to be fleeced? You got to stop this criminal deception!
By the way, the US government does not even have $700B to spare. It has been running budget deficit since Bush took the White House. National Debt already stands over 10.6 trillion dollars. Where is this money coming from? It is going to come from printing from paper! That means inflation will for sure to go up. It is just a form a stealth tax on all the savings of ordinary people.
I am really sickened by this. All these criminals! Because they think people are so stupid that they can get away from it.
A lot of people argue that we have to do this bailout. No, we don't. Yes, the banks are not lending right now. That is healthy, because US is already overly in debt. We all need to de-leverage. That means many banks will HAVE to go bust! We cannot simply re-inflate the financial system to create another bubble! We need to take the pain. The banks first, then American consumers. Yes, we have to pay higher interest rate. Borrowing will be more difficult. Consumer spending will slow down. But That would be normal. Isn't overspending and over borrowing that got us into this mess in the first place? Why do we want to give $700B easy money for the banks so they can lend unscrupulously and invest badly again?
You have to watch this video. God bless Marcy Kaptur, the Democratic Representative from Ohio.
Monday, September 22, 2008
Hank a lot (Mother of all Bail-outs)
Over the weekend, Treasury Secretary Hank Paulson deviced a $700 billion bail-out package for all the banks, to take on the underperforming mortgage securities on their balance sheet. Christmas came to the Wall Street early this year. Hank a lot, Paulson!
Most striking is the boldness of Paulson's request. He basically asked for a blank check to do whatever he sees fit. He specifically requested that no court oversight should be allowed! Yeah, we should all trust that Hank Paulson won't do anything hanky panky with his old Wall Street pals. Give me a break! Talking about put a fox to guard hen house!
The reason for the bail out sounded very solid. They have depicted a near apocalyptic outcome if the bailout is not done right now: financial melt down, multi-year depression, loss of jobs, close of factories, end of the civilization as we know it. Fear. No, even more than that. Terror. They want to terrorize all of us into submission (accepting the bailout proposal). I think they have done similar thing very successfully: they have used our fear of terrorism to slowly take away the liberty from us. They have succeeded in doing that. Now they will succeed in taking away our hardly earned savings! American people are gullible sheep! High finance is so complex and who understands it? Let's just trust that these people are doing the right thing and have us taxpayers' interest at their hearts. LOL.
Is this $700 B bail out necessary? Absolutely no. The only argument for the bailout is that: banks have all but stopped lending, even after the Fed vowed to wide open its check book to offer low-interest loans for these banks (through the Fed discount window). So the thinking goes like this: if banks stop lending, economy will grind to a standstill.
Not so fast. As I have pointed out, consumers are de-leveraging: not borrowing! Corporations other than the financial industry are in very good shape. Most of them have sufficient cash cushion to weather the storm. In fact, Microsoft just announced today it is using the cash on its balance sheet to buy back $40 Billion worth of its own stock. So corporation can live without borrowing at least for now.
So it is not end of the world if banks stop lending. Banks will never stop lending anyway. It is their business. If some banks stop doing that, that will cause their own demise. Why would they do that? They are doing it now ONLY TO HOLD THE PUBLIC HOSTAGE. They are acting like cry baby: woo, woo, if you don't bail us out, we will not lend.
We should not cave in. We should not allow them to socialize their losses. When they were making huge profits, they did not ask us to share with them. They dished out hundreds of millions dollars of bonuses to their top executives. Now they are asking us the poor taxpayers to rescue them! Take a hike! You could die. There will be others taking your place! Capitalism does not lack risk takers.
The moral hazard is tremendous. They are all trying to get big so they will be regarded to be too big to fail. Bank of America has bought MBNA, CountryWide, and Merrill Lynch. Wachovia does not want to stay behind. It is trying to buy Morgan Stanley. Nobody wants to end up like poor Lehman, right?
All these banks seem to have a put option written for them against the taxpayers, if you understand what a put option means. This all started from 1998 LTCM bail-out engineered by Alan Greenspan. They used to call it "Greenspan put". More accurately, it should be called "taxpayer put".
Now the $700B bailout package seems to be set in stone. I still think it could work in taxpayers favor if sufficient oversight and accountability are present. We cannot let these banks to dump their bad debts to us at inflated prices. And we also need to make sure we can sell these debts at fair market value later on. If we can accomplish that, the taxpayers may not lose too much in the end. If we allow Hank to do whatever pleases him, then we will have a big bill to pay, for generations to come.
We know American households are broke, and the government is even more broke. We don't have the $700B. We did not have the $39B used to bail out Bear Stearn. Neither the $200B plus for Fannie and Freddie. Nor the $85B for AIG. Where is the money coming from? Printing press. We live in a fiat money system. Worthless paper can turn into green dollars, not so magically. It is a form of stealth tax. We all pay for it, not knowingly. It is reflected in higher prices we pay for food, energy, and everyday stuff. In another word, it is called "inflation". Instead of letting the asset (real estate asset) bubble to burst completely, the Fed is trying to print more money to keep it inflated. No wonder oil price today rocketed up more than $16 to >$120/barrel, largest single jump ever! Hank a lot, Paulson! Way to go Ben!
Most striking is the boldness of Paulson's request. He basically asked for a blank check to do whatever he sees fit. He specifically requested that no court oversight should be allowed! Yeah, we should all trust that Hank Paulson won't do anything hanky panky with his old Wall Street pals. Give me a break! Talking about put a fox to guard hen house!
The reason for the bail out sounded very solid. They have depicted a near apocalyptic outcome if the bailout is not done right now: financial melt down, multi-year depression, loss of jobs, close of factories, end of the civilization as we know it. Fear. No, even more than that. Terror. They want to terrorize all of us into submission (accepting the bailout proposal). I think they have done similar thing very successfully: they have used our fear of terrorism to slowly take away the liberty from us. They have succeeded in doing that. Now they will succeed in taking away our hardly earned savings! American people are gullible sheep! High finance is so complex and who understands it? Let's just trust that these people are doing the right thing and have us taxpayers' interest at their hearts. LOL.
Is this $700 B bail out necessary? Absolutely no. The only argument for the bailout is that: banks have all but stopped lending, even after the Fed vowed to wide open its check book to offer low-interest loans for these banks (through the Fed discount window). So the thinking goes like this: if banks stop lending, economy will grind to a standstill.
Not so fast. As I have pointed out, consumers are de-leveraging: not borrowing! Corporations other than the financial industry are in very good shape. Most of them have sufficient cash cushion to weather the storm. In fact, Microsoft just announced today it is using the cash on its balance sheet to buy back $40 Billion worth of its own stock. So corporation can live without borrowing at least for now.
So it is not end of the world if banks stop lending. Banks will never stop lending anyway. It is their business. If some banks stop doing that, that will cause their own demise. Why would they do that? They are doing it now ONLY TO HOLD THE PUBLIC HOSTAGE. They are acting like cry baby: woo, woo, if you don't bail us out, we will not lend.
We should not cave in. We should not allow them to socialize their losses. When they were making huge profits, they did not ask us to share with them. They dished out hundreds of millions dollars of bonuses to their top executives. Now they are asking us the poor taxpayers to rescue them! Take a hike! You could die. There will be others taking your place! Capitalism does not lack risk takers.
The moral hazard is tremendous. They are all trying to get big so they will be regarded to be too big to fail. Bank of America has bought MBNA, CountryWide, and Merrill Lynch. Wachovia does not want to stay behind. It is trying to buy Morgan Stanley. Nobody wants to end up like poor Lehman, right?
All these banks seem to have a put option written for them against the taxpayers, if you understand what a put option means. This all started from 1998 LTCM bail-out engineered by Alan Greenspan. They used to call it "Greenspan put". More accurately, it should be called "taxpayer put".
Now the $700B bailout package seems to be set in stone. I still think it could work in taxpayers favor if sufficient oversight and accountability are present. We cannot let these banks to dump their bad debts to us at inflated prices. And we also need to make sure we can sell these debts at fair market value later on. If we can accomplish that, the taxpayers may not lose too much in the end. If we allow Hank to do whatever pleases him, then we will have a big bill to pay, for generations to come.
We know American households are broke, and the government is even more broke. We don't have the $700B. We did not have the $39B used to bail out Bear Stearn. Neither the $200B plus for Fannie and Freddie. Nor the $85B for AIG. Where is the money coming from? Printing press. We live in a fiat money system. Worthless paper can turn into green dollars, not so magically. It is a form of stealth tax. We all pay for it, not knowingly. It is reflected in higher prices we pay for food, energy, and everyday stuff. In another word, it is called "inflation". Instead of letting the asset (real estate asset) bubble to burst completely, the Fed is trying to print more money to keep it inflated. No wonder oil price today rocketed up more than $16 to >$120/barrel, largest single jump ever! Hank a lot, Paulson! Way to go Ben!
Thursday, September 18, 2008
Finally someone is bold enough to say something about the crimes Bush/Cheney have committed
This is a reprint of a news item from the Associated Press
Vermont candidate to prosecute Bush if she wins
By JOHN CURRAN, Associated Press Writer Fri Sep 19, 3:45 AM ET
BURLINGTON, Vt. - Lots of political candidates make campaign promises. But not like Charlotte Dennett's. Dennett, 61, the Progressive Party's candidate for Vermont Attorney General, said Thursday she will prosecute President Bush for murder if she's elected Nov. 4.
Dennett, an attorney and investigative journalist, says Bush must be held accountable for the deaths of thousands of people in Iraq — U.S. soldiers and Iraqi civilians. She believes the Vermont attorney general would have jurisdiction to do so.
She also said she would appoint a special prosecutor and already knows who that should be: former Los Angeles prosecutor Vincent Bugliosi, the author of "The Prosecution of George W. Bush for Murder," a new book.
"Someone has to step forward," said Dennett, flanked by Bugliosi at a news conference announcing her plan. "Someone has to say we cannot put up with this lack of accountability any more."
Dennett and two others are challenging incumbent Attorney General William Sorrell, a Democrat, in the Nov. 4 election.
Bugliosi, 74, who gained fame as the prosecutor of killer Charles Manson, said any state attorney general would have jurisdiction since Bush committed "overt acts" including the military's recruitment of soldiers in Vermont and allegedly lying about the threat posed by former Iraqi dictator Saddam Hussein in speeches that were aired in Vermont and elsewhere.
"No man, even the president of the United States, is above the law," said Bugliosi.
The White House press office didn't respond to a request for comment Thursday. But Republican National Committee spokesman Blair Latoff denounced Dennett.
"It's extremely disappointing that a candidate for state attorney general is more concerned with radical left-wing provocation than upholding the law of Vermont," Latoff said. "These incendiary suggestions may score points among the most fringe elements of American society, but can't be settling for anyone looking for an attorney general."
Anti-Bush sentiment runs deep in Vermont. It's the only state Bush hasn't visited as president, and one whose liberal tendencies make it unlikely he will.
In 2007, the state Senate adopted a resolution calling for Congress to begin impeachment proceedings against Bush and Vice President Dick Cheney.
Last March, the towns of Brattleboro and Marlboro voted to seek indictments against Bush and Cheney over the war, and dozens of other towns voted at town meetings to call for his impeachment.
Sorrell, who is seeking a sixth term, said he doesn't believe a Vermont attorney general would have the authority to charge Bush.
"The reality is, in my view, that unless the crime takes place in Vermont, then I as the attorney general have no authority under Vermont law to be prosecuting the president," Sorrell said.
Vincent Bugliosi, left, speaks at a news conference in Burlington, Vt., Thursday, Sept. 18, 2008. Bugliosi, the author of the book, 'The Prosecution of George W. Bush for Murder.' was in Vermont to support the candidacy of Progressive candidate for attorney general of Vermont, Charlotte Dennett, right.(AP Photo/Toby Talbot)
Vermont candidate to prosecute Bush if she wins
By JOHN CURRAN, Associated Press Writer Fri Sep 19, 3:45 AM ET
BURLINGTON, Vt. - Lots of political candidates make campaign promises. But not like Charlotte Dennett's. Dennett, 61, the Progressive Party's candidate for Vermont Attorney General, said Thursday she will prosecute President Bush for murder if she's elected Nov. 4.
Dennett, an attorney and investigative journalist, says Bush must be held accountable for the deaths of thousands of people in Iraq — U.S. soldiers and Iraqi civilians. She believes the Vermont attorney general would have jurisdiction to do so.
She also said she would appoint a special prosecutor and already knows who that should be: former Los Angeles prosecutor Vincent Bugliosi, the author of "The Prosecution of George W. Bush for Murder," a new book.
"Someone has to step forward," said Dennett, flanked by Bugliosi at a news conference announcing her plan. "Someone has to say we cannot put up with this lack of accountability any more."
Dennett and two others are challenging incumbent Attorney General William Sorrell, a Democrat, in the Nov. 4 election.
Bugliosi, 74, who gained fame as the prosecutor of killer Charles Manson, said any state attorney general would have jurisdiction since Bush committed "overt acts" including the military's recruitment of soldiers in Vermont and allegedly lying about the threat posed by former Iraqi dictator Saddam Hussein in speeches that were aired in Vermont and elsewhere.
"No man, even the president of the United States, is above the law," said Bugliosi.
The White House press office didn't respond to a request for comment Thursday. But Republican National Committee spokesman Blair Latoff denounced Dennett.
"It's extremely disappointing that a candidate for state attorney general is more concerned with radical left-wing provocation than upholding the law of Vermont," Latoff said. "These incendiary suggestions may score points among the most fringe elements of American society, but can't be settling for anyone looking for an attorney general."
Anti-Bush sentiment runs deep in Vermont. It's the only state Bush hasn't visited as president, and one whose liberal tendencies make it unlikely he will.
In 2007, the state Senate adopted a resolution calling for Congress to begin impeachment proceedings against Bush and Vice President Dick Cheney.
Last March, the towns of Brattleboro and Marlboro voted to seek indictments against Bush and Cheney over the war, and dozens of other towns voted at town meetings to call for his impeachment.
Sorrell, who is seeking a sixth term, said he doesn't believe a Vermont attorney general would have the authority to charge Bush.
"The reality is, in my view, that unless the crime takes place in Vermont, then I as the attorney general have no authority under Vermont law to be prosecuting the president," Sorrell said.
Vincent Bugliosi, left, speaks at a news conference in Burlington, Vt., Thursday, Sept. 18, 2008. Bugliosi, the author of the book, 'The Prosecution of George W. Bush for Murder.' was in Vermont to support the candidacy of Progressive candidate for attorney general of Vermont, Charlotte Dennett, right.(AP Photo/Toby Talbot)
Did I just call the bottom of the market yesterday?
Maybe yesterday was the capitulation. Today the stock reversed the trend of early slide and ended up fast and fierce. Dow was up 410 points, going back up above the 11000 level, ending up 3.9%. Nasdaq was even giddier, up 100 points, or 4.9%. S&P 500 was up 50 points, or 4.3%. Wachovia Bank(WB), which was rumored to be in talk to buy Morgan Stanley, powered up a whopping 59%.
In the morning, news outlets reported that the central banks of various countries were working with the Fed in a coordinated way to provide sufficient liquidity for the banks around the world. Even that news failed to change the sour mood on the Wall Street. Dow erased an earlier gain of close to 200 points, and traded down more than 140 points in the middle of the day. Then there was a report that the Government is contemplating on setting up an entity to "absorb" the bad debt banks are carrying on their balance sheet. This entity would be modeled after the Resolution Trust Corp (RTC) set up in late 80s by the government during the savings and loan crisis. The idea is that the government entity would purchase bad mortgage debt from all the banks, and sell it to investors. The entire process may take several years. Saddled with the bad mortgage debt, banks currently are very cautious in lending to businesses and individuals. With out bank lending, economy may grind to a halt, the end result of which is unthinkable (multi-year depression). With the government taking over the bad debt, banks will be freed of these "toxic" assets and start to lend again, which will slowly lead to economic recovery.
I guess this may be the best option out of all the worst ones. This is what often referred to as "privatizing profit and socializing loss" of the US financial system. Tax payers are left to hold the bag when banks gambled with depositors' money. When banks are making billions of profit, tax payers don't get to share with it. But now when they are making huge losses, tax payers have to shoulder them. Is this "laissez faire" capitalism?
Yesterday I was questioning the wisdom of selling assets for cash by investor mass. Today it is becoming even clearer that cash is worthless. But people are just so frightened by risk that they are doing irrational things. That is why they have been selling all risky assets, including even money market, in exchange for safe cash, which is treasury bills. Annualized 3-month treasury yield went to almost ZERO! In some case, people are willing to buy treasury bills at negative yield. Talking about insanity! We are living in a fiat money society. Money is a piece of paper. Central banks can print as much as you want. Oh my Lord, what a bunch of blind!
Buy stocks (but be choosy), believe me. Stock is incoming producing asset, unlike commodities which yield no income. I don't want to buy fixed income in this situation when the Fed's printing press is running 24/7.
In the morning, news outlets reported that the central banks of various countries were working with the Fed in a coordinated way to provide sufficient liquidity for the banks around the world. Even that news failed to change the sour mood on the Wall Street. Dow erased an earlier gain of close to 200 points, and traded down more than 140 points in the middle of the day. Then there was a report that the Government is contemplating on setting up an entity to "absorb" the bad debt banks are carrying on their balance sheet. This entity would be modeled after the Resolution Trust Corp (RTC) set up in late 80s by the government during the savings and loan crisis. The idea is that the government entity would purchase bad mortgage debt from all the banks, and sell it to investors. The entire process may take several years. Saddled with the bad mortgage debt, banks currently are very cautious in lending to businesses and individuals. With out bank lending, economy may grind to a halt, the end result of which is unthinkable (multi-year depression). With the government taking over the bad debt, banks will be freed of these "toxic" assets and start to lend again, which will slowly lead to economic recovery.
I guess this may be the best option out of all the worst ones. This is what often referred to as "privatizing profit and socializing loss" of the US financial system. Tax payers are left to hold the bag when banks gambled with depositors' money. When banks are making billions of profit, tax payers don't get to share with it. But now when they are making huge losses, tax payers have to shoulder them. Is this "laissez faire" capitalism?
Yesterday I was questioning the wisdom of selling assets for cash by investor mass. Today it is becoming even clearer that cash is worthless. But people are just so frightened by risk that they are doing irrational things. That is why they have been selling all risky assets, including even money market, in exchange for safe cash, which is treasury bills. Annualized 3-month treasury yield went to almost ZERO! In some case, people are willing to buy treasury bills at negative yield. Talking about insanity! We are living in a fiat money society. Money is a piece of paper. Central banks can print as much as you want. Oh my Lord, what a bunch of blind!
Buy stocks (but be choosy), believe me. Stock is incoming producing asset, unlike commodities which yield no income. I don't want to buy fixed income in this situation when the Fed's printing press is running 24/7.
Wednesday, September 17, 2008
Is this capitulation?
Holy! We got a brief reprieve yesterday. But today is another brutal carnage on the Wall Street. Dow is down almost 450 points, or 4.1%, Nasdaq down 109 points, 4.94% (!), and S&P off by 57 point, 4.71%. This is breathtaking! Dow is now below 12000. Gold shot up almost 12% and silver up more than 14%. All these was precipitated by the Fed's $85B bailout of AIG. Fear! Is this the final capitulation? It certainly feels like. I have gone though the dot com bust. I thought that was brutal. Lord, Lord, Lord! Please save us!
In my yesterday's post, I analyzed that Corporate sector (Business Sector, outside of the financial) of the US economy is pretty healthy. It is the government sector and household sectors that are debt-ridden and under strain. Judging from retail sales and consumer spending, I think households are starting to de-leverage and repair the balance sheet by cutting spending. But the government sector has yet to show any sign of restrain in spending. That is because the twin wars are costing us dearly. We GOT TO STOP the senseless and wasteful wars! We may not be able to end it abruptly. But certainly we have to start the process of pulling out of Iraq! That is why it is so crucial to elect Obama, and pressure him to rein in defense spending.
I understand why people sell financial stocks. But I don't get it why people are selling shares of perfectly healthy and strong companies such as Intel and Cisco. We are living in fiat money society. Cash is worthless paper. Why sell the income-producing assets (common stock) in exchange to fast depreciating cash?
I guess fear is now the dominant force of the market. I think when everybody is selling assets and demanding cash, (the Fed will keep printing cash to meet the demand), the smart move would be to go against the herd. But you have to have the stomach to take it.
Confidence takes a long time to restore. We are still in the dark tunnel.
In my yesterday's post, I analyzed that Corporate sector (Business Sector, outside of the financial) of the US economy is pretty healthy. It is the government sector and household sectors that are debt-ridden and under strain. Judging from retail sales and consumer spending, I think households are starting to de-leverage and repair the balance sheet by cutting spending. But the government sector has yet to show any sign of restrain in spending. That is because the twin wars are costing us dearly. We GOT TO STOP the senseless and wasteful wars! We may not be able to end it abruptly. But certainly we have to start the process of pulling out of Iraq! That is why it is so crucial to elect Obama, and pressure him to rein in defense spending.
I understand why people sell financial stocks. But I don't get it why people are selling shares of perfectly healthy and strong companies such as Intel and Cisco. We are living in fiat money society. Cash is worthless paper. Why sell the income-producing assets (common stock) in exchange to fast depreciating cash?
I guess fear is now the dominant force of the market. I think when everybody is selling assets and demanding cash, (the Fed will keep printing cash to meet the demand), the smart move would be to go against the herd. But you have to have the stomach to take it.
Confidence takes a long time to restore. We are still in the dark tunnel.
Tuesday, September 16, 2008
Turmoil on the Wall Street
You've seen it yesterday: Lehman Brothers filed for bankruptcy protection after failing to reach a deal with potential buyers (Barclay and Citi were rumored to be the interested parties) over the weekend. Meanwhile, Merrill Lynch, one of the marquis investment banks on the Street, agreed to be bought by Bank of America in a deal valued at $50B. This deal was viewed as BoA bailing out Merrill. Furthermore, rumors about impending bankruptcy of AIG caused people to believe more bad news is yet to come. Stock sold off around the world, with Europe down more than 4% and Asia down close to 5% before US stock market opened. As you would expect, the Monday trading on Wall Street was bloody. Dow declined more than 500 points, or 4.4%, worst single day decline since the burst of dot com bubble seven to eight years ago. It was indeed a "black Monday".
To make things worse, pundits were all sounding doom and gloom. A NYU economist, Nouriel Roubini, even warned that American's deposits in the banks are at risk (I think he should shut up, or be locked up for inciting run on banks). Our old pal Allan Greenspan said this is the worst crisis in last hundred years. That means the 1929 depression was even better than current financial and economic crisis. I think all these pundits have their ulterior motives (not very noble often time) to try to scare people, and further weaken people's confidence.
I think the current crisis in a large part is a crisis in confidence: people don't know how to evaluate the risky assets after having burned by subprime mortgages. So they start to sell all the assets for cash. So if you take a look, ALL asset classes are under selling pressure, even the darlings just a few months ago (oil and commodities). It will take a long time to restore confidence.
I have been a critic of the Fed and US government for creating such crisis in the first place. But the action, or lack of action of the Fed and the Treasury department over the weekend, was a wise decision. I think history will prove that not bailing out Lehman was the right move. Collapse of Lehman is no big deal. The Fed should not even have bailed out Bear Stearns earlier this year. But Fannie and Freddie were entirely a different matter. Taking out Fannie and Freddie was necessary and a right move, in my opinion. Today, the Fed maintain the Fed Funds rate at 2%, which is a big sigh of relief. I was really worried about that Fed would cave in to the pressure from the Wall Street and lower the interest rate. At this point lowering interest has no positive effect at all. It in fact would be counter productive, causing further panic in the financial markets. Lowering interest rate would do nothing to reduce investors' risk premium, which is very high right now.
So what is my assessment of the situation? Should we sell stock and stay in cash, or this is a great opportunity to buy? Before I tell you my opinion, let me show you my thought process:
If one looks at the entire US economy in three segments: household sector, government sector and corporate sector, and then analyzes the health of each sector, he or she should be able to see more clearly where problems lie and what are the solutions.
1) US household is under stress, there is no doubt about that. Consumer spending has been outpacing consumption for a long time, financed by cheap credit provided by foreign investors. Since 2000, medium household income actually shrunk in real term by $1000, according to some reports. Wealth gap has widened significantly. The ultra rich have seen their wealth grow fastest in decades, while middle to lower class people are suffering. When the US consumer cannot borrow against their future income, they started to borrow against their assets, their houses. Due to the artificial low interest rate engineered by Allan Greenspan and the Fed, Americans were able to extract tremendous amount of cash from home equities, and spend the cash as on home remodeling, vacation, or buying bigger nicer cars. Then the house prices start to decline, that is when many people begin to see equities in their houses evaporated. Mortgage default rate start to rise rapidly, creating a chain reaction in the world financial institutions who willing lent to these overstretched homeowners.
Now US household is deleveraging, trying to repair the balance sheet. That is a good thing. But expect consumer spending to decline in the next few years, and financial service industry will have to de-leverage, too, to shrink their balance sheets as well. So the demise of a few financial institutions is just the normal course of the consumer adjustment we are witnessing now. That is good in long run, painful in near term.
2) The government sector is also under stress. Tax revenue has not grown, due to the big tax cut Bush enacted back in 2002. In the meanwhile spending has rocketed, largely due to twin wars we are fighting in Iraq and Afghanistan. The government cannot continue to rely on printing money to finance the deficit spending. So we either have to raise the tax or cut spending, or both. You can't raise tax on middle class in this economic environment. I support Obama's tax plan to raise taxes on the wealthy, who have disproportionally benefited under the Bush tax plan. In the meanwhile, we have to cut spending. That is difficult: you cannot cut social security or medicare. Healthcare for the uninsured will be extra money the government has to spend. And the national infrastructure is also in dire need of repair (bridge collapse in Minneapolis was an indication). We also have to invest in alternative energy (wind mills) to wean our dependence on fossil fuel. So where the cut can come from? The only place is Iraq and Afghanistan war spending. The whole war on terror is a self inflicted pain. As you know, the US government had all the tools to prevent 9/11 from happening. If you don't believe they made 9/11 happen, you should at least believe they LET 9/11 happen. So the whole war-on-terror spending is just waste of money and resources. We can save that for more productive use, such as building the national energy and transportation infrastructure and investing in healthcare. That is why it is so important to elect Obama as President coming November.
3) US corporate sector, apart from the financial institutions or auto industry, is very healthy. Profit margins are at all time high. Earnings have been strong. Corporations are awash with cash, balance sheet is pristine. US companies are very competitive compared with companies of other nations. So the US corporate sector is very strong. We have to encourage corporations to invest in the US to create jobs and grow household income. I think Obama has detailed plan for that.
So what is my opinion?
If Obama wins, I will buy stocks with all the money I have. If McCain wins, and he continues the Bush policy, then I will have to cash out to invest in gold and swiss franc.
We got to elect Obama!
To make things worse, pundits were all sounding doom and gloom. A NYU economist, Nouriel Roubini, even warned that American's deposits in the banks are at risk (I think he should shut up, or be locked up for inciting run on banks). Our old pal Allan Greenspan said this is the worst crisis in last hundred years. That means the 1929 depression was even better than current financial and economic crisis. I think all these pundits have their ulterior motives (not very noble often time) to try to scare people, and further weaken people's confidence.
I think the current crisis in a large part is a crisis in confidence: people don't know how to evaluate the risky assets after having burned by subprime mortgages. So they start to sell all the assets for cash. So if you take a look, ALL asset classes are under selling pressure, even the darlings just a few months ago (oil and commodities). It will take a long time to restore confidence.
I have been a critic of the Fed and US government for creating such crisis in the first place. But the action, or lack of action of the Fed and the Treasury department over the weekend, was a wise decision. I think history will prove that not bailing out Lehman was the right move. Collapse of Lehman is no big deal. The Fed should not even have bailed out Bear Stearns earlier this year. But Fannie and Freddie were entirely a different matter. Taking out Fannie and Freddie was necessary and a right move, in my opinion. Today, the Fed maintain the Fed Funds rate at 2%, which is a big sigh of relief. I was really worried about that Fed would cave in to the pressure from the Wall Street and lower the interest rate. At this point lowering interest has no positive effect at all. It in fact would be counter productive, causing further panic in the financial markets. Lowering interest rate would do nothing to reduce investors' risk premium, which is very high right now.
So what is my assessment of the situation? Should we sell stock and stay in cash, or this is a great opportunity to buy? Before I tell you my opinion, let me show you my thought process:
If one looks at the entire US economy in three segments: household sector, government sector and corporate sector, and then analyzes the health of each sector, he or she should be able to see more clearly where problems lie and what are the solutions.
1) US household is under stress, there is no doubt about that. Consumer spending has been outpacing consumption for a long time, financed by cheap credit provided by foreign investors. Since 2000, medium household income actually shrunk in real term by $1000, according to some reports. Wealth gap has widened significantly. The ultra rich have seen their wealth grow fastest in decades, while middle to lower class people are suffering. When the US consumer cannot borrow against their future income, they started to borrow against their assets, their houses. Due to the artificial low interest rate engineered by Allan Greenspan and the Fed, Americans were able to extract tremendous amount of cash from home equities, and spend the cash as on home remodeling, vacation, or buying bigger nicer cars. Then the house prices start to decline, that is when many people begin to see equities in their houses evaporated. Mortgage default rate start to rise rapidly, creating a chain reaction in the world financial institutions who willing lent to these overstretched homeowners.
Now US household is deleveraging, trying to repair the balance sheet. That is a good thing. But expect consumer spending to decline in the next few years, and financial service industry will have to de-leverage, too, to shrink their balance sheets as well. So the demise of a few financial institutions is just the normal course of the consumer adjustment we are witnessing now. That is good in long run, painful in near term.
2) The government sector is also under stress. Tax revenue has not grown, due to the big tax cut Bush enacted back in 2002. In the meanwhile spending has rocketed, largely due to twin wars we are fighting in Iraq and Afghanistan. The government cannot continue to rely on printing money to finance the deficit spending. So we either have to raise the tax or cut spending, or both. You can't raise tax on middle class in this economic environment. I support Obama's tax plan to raise taxes on the wealthy, who have disproportionally benefited under the Bush tax plan. In the meanwhile, we have to cut spending. That is difficult: you cannot cut social security or medicare. Healthcare for the uninsured will be extra money the government has to spend. And the national infrastructure is also in dire need of repair (bridge collapse in Minneapolis was an indication). We also have to invest in alternative energy (wind mills) to wean our dependence on fossil fuel. So where the cut can come from? The only place is Iraq and Afghanistan war spending. The whole war on terror is a self inflicted pain. As you know, the US government had all the tools to prevent 9/11 from happening. If you don't believe they made 9/11 happen, you should at least believe they LET 9/11 happen. So the whole war-on-terror spending is just waste of money and resources. We can save that for more productive use, such as building the national energy and transportation infrastructure and investing in healthcare. That is why it is so important to elect Obama as President coming November.
3) US corporate sector, apart from the financial institutions or auto industry, is very healthy. Profit margins are at all time high. Earnings have been strong. Corporations are awash with cash, balance sheet is pristine. US companies are very competitive compared with companies of other nations. So the US corporate sector is very strong. We have to encourage corporations to invest in the US to create jobs and grow household income. I think Obama has detailed plan for that.
So what is my opinion?
If Obama wins, I will buy stocks with all the money I have. If McCain wins, and he continues the Bush policy, then I will have to cash out to invest in gold and swiss franc.
We got to elect Obama!
Friday, August 29, 2008
I am voting for Barack Obama
Wow, what a great acceptance speech by Barack Obama at the Democratic National Convention (DNC)! Before the speech, I had doubt. Now I am completely on board. No more cynicism. Let's get Obama elected the President of United States of America!
It was fitting that yesterday marks the 45-year anniversary of MLK's famous "I have a dream" speech. The very fact that a black man is nominated to be the presidential candidate of a major political party is a testimony to how far this country has progressed. There is no turning back. For those who are still hanging on to the old way of politics, your days are coming to an end!
In his speech, Obama talked about his humble beginnings, and the values he was taught with by his mother and grandparents. He admitted that his father did not have much influence on him. He was more shaped by "his (father's ) absence".
He also laid out his policies, item-by-item, in a way that ordinary people can understand. For example, to counter McCain's accusation that he is going to raise taxes on the middle-class, he said he is going to cut taxes on 95% of the families.
But most importantly, at least to me, he addressed some of the issues that democrats have been commonly criticized for. The republicans have long criticized that democrats don't have a set of clear principles, and they follow the polls to please people in order to get elected. Yesterday, Barack Obama answered those criticisms very eloquently.
He contrasted the republican principles vs. his democratic principles. The republicans talk about "Ownership Society". But in reality it means "you are on your own". But democrats believe we have "mutual responsibilities" to each other. As Obama puts it: "We are our brothers' keepers, and our sisters' keepers."
I thought this is a great comparison, and is exactly what I had hoped the democrats would say for a long time. The republicans often claim moral superiority over the democrats. But where is the morality to favor big businesses and refuse to raise the minimum wage for the low-income workers? (I believe in America, if you choose to work, you ought to be able to earn a living wage! That is the moral responsibility of the entire society to the less fortunate segment of our community). Where is the morality to oppose abortion while turn a blind eye to the deaths and destruction in some inner city America? The republican principles have so many contradictions to bordering hypocrisy.
Obama also talked about his belief in what the appropriate government's roles in our lives. Here again, republican believes are full of contradictions. It has become a cliche to the republicans that government does not work, and the less government regulation the better. Yet they want you all to vote for them so they can occupy the government positions to prove that government indeed does not work. The Bush Administration really proved that its government does not work: from the mis-management of the Iraq War, to No-Child-Left-Behind, to Hurricane Katrina fiasco.
If the republicans want the government out of our lives, why do they insist on regulating people's morality? I am a Christian, and I have a set of values that I believe will benefit everyone. But I can't impose my values to others, and let alone having the government to impose my values to everyone in the country. Yes, we disagree on many issues, but we should always seek common ground, not to be bogged down by our disagreements. That was what Obama preached last night. He touched on a few very controversial issues (abortion, gay marriage, and gun control) and illustrated where we may find common grounds.
Most importantly, unlike the republicans who cynically claim that government simply does not work (so they should outsource critical government functions to the private businesses run by their cronies), we democrats believe government plays a critical role in some of the functions of the society, as clearly laid out in the US constitution, such as providing common defense (not only defending foreign threats, but also environmental threats). Obama also gave other examples of where the government can make a difference: education, promoting scientific advancements and technological innovations. Unlike the cynical republicans, we democrats believe "yes we can". Yes, we can, under the right leadership! It was not the government that failed us. It was the lack of leadership in the past eight years that has failed us!
Obama also showed that he is a new breed of democrats, not exactly in the mold of traditional so called "liberals". He talked about "personal responsibilities", in the same breath of "mutual responsibilities". He wants to "cut wasteful government spending", not exactly the kind of "big government liberal" the republicans make out of him. I call this new brand of democrats "progressive". And I am so happy to see them becoming more prominent in the democratic leadership.
Go Obama!
It was fitting that yesterday marks the 45-year anniversary of MLK's famous "I have a dream" speech. The very fact that a black man is nominated to be the presidential candidate of a major political party is a testimony to how far this country has progressed. There is no turning back. For those who are still hanging on to the old way of politics, your days are coming to an end!
In his speech, Obama talked about his humble beginnings, and the values he was taught with by his mother and grandparents. He admitted that his father did not have much influence on him. He was more shaped by "his (father's ) absence".
He also laid out his policies, item-by-item, in a way that ordinary people can understand. For example, to counter McCain's accusation that he is going to raise taxes on the middle-class, he said he is going to cut taxes on 95% of the families.
But most importantly, at least to me, he addressed some of the issues that democrats have been commonly criticized for. The republicans have long criticized that democrats don't have a set of clear principles, and they follow the polls to please people in order to get elected. Yesterday, Barack Obama answered those criticisms very eloquently.
He contrasted the republican principles vs. his democratic principles. The republicans talk about "Ownership Society". But in reality it means "you are on your own". But democrats believe we have "mutual responsibilities" to each other. As Obama puts it: "We are our brothers' keepers, and our sisters' keepers."
I thought this is a great comparison, and is exactly what I had hoped the democrats would say for a long time. The republicans often claim moral superiority over the democrats. But where is the morality to favor big businesses and refuse to raise the minimum wage for the low-income workers? (I believe in America, if you choose to work, you ought to be able to earn a living wage! That is the moral responsibility of the entire society to the less fortunate segment of our community). Where is the morality to oppose abortion while turn a blind eye to the deaths and destruction in some inner city America? The republican principles have so many contradictions to bordering hypocrisy.
Obama also talked about his belief in what the appropriate government's roles in our lives. Here again, republican believes are full of contradictions. It has become a cliche to the republicans that government does not work, and the less government regulation the better. Yet they want you all to vote for them so they can occupy the government positions to prove that government indeed does not work. The Bush Administration really proved that its government does not work: from the mis-management of the Iraq War, to No-Child-Left-Behind, to Hurricane Katrina fiasco.
If the republicans want the government out of our lives, why do they insist on regulating people's morality? I am a Christian, and I have a set of values that I believe will benefit everyone. But I can't impose my values to others, and let alone having the government to impose my values to everyone in the country. Yes, we disagree on many issues, but we should always seek common ground, not to be bogged down by our disagreements. That was what Obama preached last night. He touched on a few very controversial issues (abortion, gay marriage, and gun control) and illustrated where we may find common grounds.
Most importantly, unlike the republicans who cynically claim that government simply does not work (so they should outsource critical government functions to the private businesses run by their cronies), we democrats believe government plays a critical role in some of the functions of the society, as clearly laid out in the US constitution, such as providing common defense (not only defending foreign threats, but also environmental threats). Obama also gave other examples of where the government can make a difference: education, promoting scientific advancements and technological innovations. Unlike the cynical republicans, we democrats believe "yes we can". Yes, we can, under the right leadership! It was not the government that failed us. It was the lack of leadership in the past eight years that has failed us!
Obama also showed that he is a new breed of democrats, not exactly in the mold of traditional so called "liberals". He talked about "personal responsibilities", in the same breath of "mutual responsibilities". He wants to "cut wasteful government spending", not exactly the kind of "big government liberal" the republicans make out of him. I call this new brand of democrats "progressive". And I am so happy to see them becoming more prominent in the democratic leadership.
Go Obama!
Saturday, August 23, 2008
Have the Beijing Games changed the West's view about China?
As the Beijing Olympic Games are approaching to the end, a lot of Chinese are wondering: has hosting the Games succeeded in changing the West's stereotypes about China?
I have been wondering the same question. what I found out seems to be very disappointing: the Beijing Olympics only served to reinforce the stereotypes about China.
Leading up to the Games, all Western media focused on one talking point: how China was preparing the Games as a propaganda tool to project a better image to the world. But what we Chinese are saying? We want the world to see the REAL China first hand. There have been too much distortion in the Western media about China. We were hoping the Olympic Games can help change that.
The opening ceremony was a big bang. Everyone I met told me it was spectacular, unprecedented, incredible, (add your own adjectives here). Initially I was very happy. I was proud. But after carefully examining, I sense these praises are not exactly what we are looking for. Yes, many people were awe-stricken by the 2008 drummers counting down to the opening of the Games. But I sense that awe was a little bit condescending. It is not the kind of awe when people watch the first man landed on the Moon. Nor the kind of awe that people have when they watch Usain Bolt dashing to the finishing line, leaving others in the dust. It is rather the kind of awe when people see thousands of ants transporting food, seemingly without any supervision, or when people see the bees dancing in front the bee hive, signaling where the flowers are. It is that kind of condescending awe most of the Westerners felt when they were watching those spectacular performances of the Opening Ceremony.
In their view, the Chinese are like machines, displaying absolute conformity and non-individuality. The group synchronized performances at the Opening Ceremony only help reinforce that view. To them, we are just like the ants, or the bees.
Then you may ask, what about all those gold silver and bronze medals. As of now, China has won 89 medals, second only to the US. Fifty of those medals are gold, far surpassing the US. Shouldn't we be proud? Shouldn't that change people's view about Chinese?
To westerners, Chinese are typically nerds who are good at math and sciences. Sports are the fun thing that the Chinese does not know much about. Even though Chinese athletes have won so many medals, that fact still does not change their view. They think Chinese athletes are just manufactured goods. They are not even human. They are the products of a nationally organized sports machine or factory. They believe: we western athletes play sports for fun, and the Chinese train for sports only to get gold medals. Chinese sports programs are just like factories that churn out athletes.
Back in 1996 when the Olympics were held in Atlanta Georgia, NBC ran a program that provided stories about the real life of the athletes. When it was about the American athletes, NBC showed how these men and women loved the sports and were having fun playing in the Olympics. But when it came to the Chinese athletes, the stories were often very sad. The Chinese athletes were picked by the government to be trained in sports camps. They left their families at very young age, and spent their childhood training for sports. To them, sports were not for fun. They were for winning gold medals to glorify the Chinese nation. So all the Chinese athletes were shown to be under tremendous pressure. What NBC implied in the program was obvious, the Chinese don't like sports. They just use sports to serve propaganda purposes.
So with this view, no matter how many medals the Chinese athletes win, it does not change a bit the stereotypes about China and Chinese.
So for those Chinese who pin too much hope that Olympics would help the world see the real China, wake up. It ain't gonna happen!
So stop worrying about what other people would think about you. Don't give a damn about their opinions. Let them say whatever they want to say. Let us just have some fun!
Let the Games continue!
I have been wondering the same question. what I found out seems to be very disappointing: the Beijing Olympics only served to reinforce the stereotypes about China.
Leading up to the Games, all Western media focused on one talking point: how China was preparing the Games as a propaganda tool to project a better image to the world. But what we Chinese are saying? We want the world to see the REAL China first hand. There have been too much distortion in the Western media about China. We were hoping the Olympic Games can help change that.
The opening ceremony was a big bang. Everyone I met told me it was spectacular, unprecedented, incredible, (add your own adjectives here). Initially I was very happy. I was proud. But after carefully examining, I sense these praises are not exactly what we are looking for. Yes, many people were awe-stricken by the 2008 drummers counting down to the opening of the Games. But I sense that awe was a little bit condescending. It is not the kind of awe when people watch the first man landed on the Moon. Nor the kind of awe that people have when they watch Usain Bolt dashing to the finishing line, leaving others in the dust. It is rather the kind of awe when people see thousands of ants transporting food, seemingly without any supervision, or when people see the bees dancing in front the bee hive, signaling where the flowers are. It is that kind of condescending awe most of the Westerners felt when they were watching those spectacular performances of the Opening Ceremony.
In their view, the Chinese are like machines, displaying absolute conformity and non-individuality. The group synchronized performances at the Opening Ceremony only help reinforce that view. To them, we are just like the ants, or the bees.
Then you may ask, what about all those gold silver and bronze medals. As of now, China has won 89 medals, second only to the US. Fifty of those medals are gold, far surpassing the US. Shouldn't we be proud? Shouldn't that change people's view about Chinese?
To westerners, Chinese are typically nerds who are good at math and sciences. Sports are the fun thing that the Chinese does not know much about. Even though Chinese athletes have won so many medals, that fact still does not change their view. They think Chinese athletes are just manufactured goods. They are not even human. They are the products of a nationally organized sports machine or factory. They believe: we western athletes play sports for fun, and the Chinese train for sports only to get gold medals. Chinese sports programs are just like factories that churn out athletes.
Back in 1996 when the Olympics were held in Atlanta Georgia, NBC ran a program that provided stories about the real life of the athletes. When it was about the American athletes, NBC showed how these men and women loved the sports and were having fun playing in the Olympics. But when it came to the Chinese athletes, the stories were often very sad. The Chinese athletes were picked by the government to be trained in sports camps. They left their families at very young age, and spent their childhood training for sports. To them, sports were not for fun. They were for winning gold medals to glorify the Chinese nation. So all the Chinese athletes were shown to be under tremendous pressure. What NBC implied in the program was obvious, the Chinese don't like sports. They just use sports to serve propaganda purposes.
So with this view, no matter how many medals the Chinese athletes win, it does not change a bit the stereotypes about China and Chinese.
So for those Chinese who pin too much hope that Olympics would help the world see the real China, wake up. It ain't gonna happen!
So stop worrying about what other people would think about you. Don't give a damn about their opinions. Let them say whatever they want to say. Let us just have some fun!
Let the Games continue!
Tuesday, August 05, 2008
Was Bruce Ivins a scapegoat for the FBI
If you still recall, back in 2001, there was an anthrax in the mail incidence that killed several people and hospitalized several others. In the past SEVEN years, the FBI was trying to find out who did it. First the FBI found a wrong person, Steven Hatfill, and ended up having to pay $5.8M to Hatfill to settle a lawsuit against the FBI by Hatfill.
Last week, only after the death of Bruce Ivins, a government bioterrorist research scientist, ruled as suicide, the FBI leaked to the media that Ivins was FBI's prime suspect for the 2001 anthrax case. I stress that the FBI leaked the information, because officially, the FBI did not say anything. Under intense public pressure, FBI started to provide more information about their investigation of Ivins. They claim that Ivins was a homocide maniac, according to Ivins' "psychotherapist".
But friends of Ivins vehemently defended Ivins as a smart, outgoing, and caring person. To the friends, it is utterly unbelievable that Ivins could be the person who sent out anthrax laced letters.
Now more and more evidence has emerged that the FBI may be just looking for another scapegoat to blame on. They have deliberately put pressure on the objects of their investigation, in an attempt to destroy them psychologically. Steven Hatfill was tough enough to endure the pressure and prevailed. But Bruce Ivins was less lucky.
This makes me wonder: is the FBI interested in finding the real criminal, or just looking for a scapegoat to cover the whole thing up? My suspicion is the latter. Then that begs the question: what does the FBI want to cover up? why the FBI may not want to find out the truth about the 2001 anthrax incidence?
Read more about this story by clicking here:
Last week, only after the death of Bruce Ivins, a government bioterrorist research scientist, ruled as suicide, the FBI leaked to the media that Ivins was FBI's prime suspect for the 2001 anthrax case. I stress that the FBI leaked the information, because officially, the FBI did not say anything. Under intense public pressure, FBI started to provide more information about their investigation of Ivins. They claim that Ivins was a homocide maniac, according to Ivins' "psychotherapist".
But friends of Ivins vehemently defended Ivins as a smart, outgoing, and caring person. To the friends, it is utterly unbelievable that Ivins could be the person who sent out anthrax laced letters.
Now more and more evidence has emerged that the FBI may be just looking for another scapegoat to blame on. They have deliberately put pressure on the objects of their investigation, in an attempt to destroy them psychologically. Steven Hatfill was tough enough to endure the pressure and prevailed. But Bruce Ivins was less lucky.
This makes me wonder: is the FBI interested in finding the real criminal, or just looking for a scapegoat to cover the whole thing up? My suspicion is the latter. Then that begs the question: what does the FBI want to cover up? why the FBI may not want to find out the truth about the 2001 anthrax incidence?
Read more about this story by clicking here:
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