Saturday, May 23, 2009

OT: First Step to Problem Solving Is Identification of the Problem

And and stare it in the face. All thanks to Weird Al Yankovic.

For health care reform: Why is it necessary? Because we have doctors like this.

Transportation issues, particularly problems facing mass public transportation.

Obesity adds to skyrocketing health care cost.
This you have to go to Youtube to see it (opens a new window).

Ethnic tention? here you go (opens a new window).

Obama Admits "We're Out of Money"

(Update 4:38pm PST) Here's the link to c-span interview.

The president admits, but it doesn't seem to bother him much.

From the Drudge Report headline "We're Out of Money" (the link may disappear, as this is a news flash at the moment, but the following is an entire post on Drudge plus my grunting in bullet points):

"In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: "We are out of money." C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

  • "Probing"? Well let's see...
SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

  • Mr. Scully, if the government budget incurs debt year after year, and the country has $11 trillion deficit, that means we ran out of money a very long time ago. The last budget surplus was under Clinton (although this is disputed by many people). For paying off the national debt, you have to go back to President Andrew Jackson .

  • US 2008 GDP is $14 trillion. National Deficit is $11 trillion. (And that's excluding the private debt.) That's almost 80% of GDP. GDP is set to decrease this year, probably substantially. Do the math. No wonder traders were wondering "Will the US be the next (to be downgraded, after the UK)?" Or even worse: turning Japanese and have debt at 200% of GDP.
OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades."

  • Ummmm, health care? I'm sorry Mr. President, but increasing number of people are scrambling to come up with the money to pay for groceries, bills, mortgages. Health care reform doesn't come to mind as the most urgent thing we must do when the economy is tanking.

  • Your budget director also talks about "health care" whenever he opens his mouth on any subject. So if you repeat often enough it becomes important?

  • We are in deep deficits. And your proposal is to go even deeper. Only makes sense in this bizzarro world.

"So we've got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it's putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.

"So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don't reduce long-term health care inflation substantially, we can't get control of the deficit."

  • Short-term or long-term, as you say, WE DON'T HAVE MONEY. Why should we do any of that? So far, the funding method seems to be to PRINT money, and to come up with more and more ways to extort, oh sorry, collect tax money, whether the taxpayers like it or not.

So, one option is just to do nothing. We say, well, it's too expensive for us to make some short-term investments in health care. We can't afford it. We've got this big deficit. Let's just keep the health care system that we've got now. Along that trajectory, we will see health care cost as an overall share of our federal spending grow and grow and grow and grow until essentially it consumes everything... "

  • I am for doing nothing. It sure feels like a good time to hunker down and reduce debt, not incurring it. That's what businesses and individuals have been doing.

  • Money grows on trees. Probably it grows in the new White House organic garden.
SCULLY: When you see GM though as “Government Motors,” you're reaction?
OBAMA: Well, you know – look we are trying to help an auto industry that is going through a combination of bad decision making over many years and an unprecedented crisis or at least a crisis we haven't seen since the 1930's. And you know the economy is going to bounce back and we want to get out of the business of helping auto companies as quickly as we can. I have got more enough to do without that. In the same way that I want to get out of the business of helping banks, but we have to make some strategic decisions about strategic industries... "

  • So you want to get out of GM and Chrysler ASAP. Why did you get in to begin with? Was there some overwhelming support from the taxpayers? Your leaders at Auto Task Force are bankers and a hedge fund manager with no auto industry experience (other than having defaulted on the soon-to-be-ditched owner of Chrysler). How can they actually help? Oh I forgot; your auto czar was surely effective in "persuading" the "recalcitrant" hedge fund managers.

  • Strategic decisions about strategic industries? Who decides what's "strategic"?
SCULLY: States like California in desperate financial situation, will you be forced to bail out the states?
OBAMA: No. I think that what you're seeing in states is that anytime you got a severe recession like this, as I said before, their demands on services are higher. So, they are sending more money out. At the same time, they're bringing less tax revenue in. And that's a painful adjustment, what we're going end up seeing is lot of states making very difficult choices there... "

  • Sure the states will suffer. Your Treasury Secretary says he has to uphold the law so he is not going to give any TARP money to assist the states. The states may be better off that way after all, looking at what has happend to Chrysler and what is about to happen at GM.
SCULLY: William Howard Taft served on the court after his presidency, would you have any interest in being on the Supreme Court?
OBAMA: You know, I am not sure that I could get through Senate confirmation...

  • I suppose that would depend on who becomes the president after him.

Friday, May 22, 2009

Week 2 of Mercury Retrograde
Market Performance Report

It seems Mercury Retrograde is doing what it's supposed to be doing: Disrupting the information flow and exchange.

After a strong up-day on Monday, it was all slow downhill from there. Intraday from Tuesday onward was dotted with sudden, jerky sell-offs. Down-day volume seem to be increasing. Not a very good sign for the market bulls.

Here's this week's performance chart of the major indices. They are basically unchanged for the week, but it sure didn't feel that way, probably due to those jerky sell-offs that seemed to appear from nowhere.

Next week (holiday-shortened), it will be interesting to see how the stock market handles the bond market reaction to the Treasuries auctions (to sell $162 billion worth of debt).

Dollar Hits New Multimonth Low, Threatening Long-Term Support Level

"Dollar hits new multimonth low vs euro, pound, yen", from

"The dollar kept falling Friday, notching fresh multimonth lows against the euro, pound and yen as a warning that Britain's debt level may result in its credit rating being cut ricocheted into worries about the massive U.S. deficit.

"Because Britain is pursuing similar policies to the U.S.—with both the Bank of England and the Federal Reserve injecting billions of dollars in their economies by buying assets from banks—the move also weighed on U.S. assets and the dollar. Treasurys sold off Thursday, and continued to do so Friday.

"Earlier this month, the Obama administration hiked its forecast for this year's federal deficit to $1.84 trillion. The deficit is approaching $1 trillion for the budget year that began Oct. 1.

"Big deficits mean the government has to borrow more, which could put its credit rating at risk. They can also put upwards pressure on inflation, thus cutting the purchasing power of the dollar."

You can read the rest in the link I provided at the top of the post.

But here, to put things in perspective, I called up the long-term chart of the US Dollar Index (spot) and put in the key long-term economic events. It is a monthly chart from November 1985, with tiny dots indicating the pre-Nov 1985 index level (which I roughly connected).

US Dollar ended this week with five consecutive down days. Four out of the past 5 weeks saw US Dollar decline. So far, we've had five consecutive months decline, with the pace of decline accelerating. Right now, it is on the long-term support level at 80.

As you can also see in the chart, we may have the first case of "Economic Bust and US$ Bust" in this current recession. Not a very pleasant thought.

FYI, Plaza Accord was to devalue US Dollar against German Mark and Japanese Yen, in order to reduce the US deficit and make US exporters competitive. The move was to counter the effect of artificially strengthened US dollar under Paul Volcker.

Plaza Accord also led to the real estate bubble in Japan in the late 80's, as the Japanese government tried to stimulate the economy suffering the effect of strong yen with cheap credit.

Louvre Accord was to stop the decline of US Dollar. Plaza Accord worked too well, I suppose.

Curious Interpretation of Rising Treasury Yields

by the Treasury Secretary Tim Geithner, as the yields on long-dated Treasury notes and bonds continue to go up following the huge spike yesterday.

In the article at titled "Geithner Vows to Cut U.S. Deficit on Rating Concern (Update2) " [emphasis mine]:

"Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

"“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year."

Over the medium term - I wish he cared to clarify. That's actually a very subjective term. For stock daytraders, the medium term will probably mean several hours. For patient investors like Mr. Buffet, the medium term may mean two decades. Mr. Geithner's target of reducing the deficit from 12.9% this year to 3% sometime in "medium" future represents 77% decrease. It seems to me like a tough call, without changing some accounting rules (which they already did, by the way). Of course it depends on how "medium" is "medium term".

Mind you, he is talking about the budget deficit based on cash accounting, not accrued. It doesn't include future obligations to be incurred, such as Medicare and Social Security payouts.

Here's the kicker in the article:

"Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.” "

If I remember, Treasury and the Fed were hell-bent on keeping the Treasury yields, particularly on 10-year note and 30-year bond, LOW. That was the whole purpose of the Fed buying Treasuries. The scheme is backfiring, as bond traders and investors here and abroad use the opportunity to unload their holdings onto the Fed. They are losing control.

So what do they do? Spin it. If the rise in yields on Treasury is a sign that things are improving, then 70's should be known as "roaring 70's".

Yields are rising because there is much more supply than the market can absorb easily. There is much more supply not because risk appetite of the investors has returned and they are ditching the safe-haven Treasuries en masse (some of it maybe) but because the government is issuing so much more debt.

Mr. Geithner also mentions the use of TARP money for cash- and credit-strapped state and local governments:

"Also yesterday, Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.

"The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington. Among the hurdles: money from the Troubled Asset Relief Program was designed for financial companies, he said. "

Of course we expect them to abide by the law.

This Morning's News Headlines


This morning, Dow is up 58 points to 8,350, S&P500 up 6 to 894, Nasdaq up 7 points to 1703.

Thursday, May 21, 2009

Treasury Auction for the Week of May 26

Department of Treasury is selling the following Treasury bills and notes next week.

  • Tuesday May 26: 13-week bill, $31 billion
  • Tuesday May 26: 26-week bill, $30 billion
  • Tuesday May 26: 2-year note, $40 billion
  • Wednesday May 27: 5-year note, $35 billion
  • Thursday May 28: 7-year note, $26 billion

    Total for the week: $162 billion
The total amount is even bigger than the May 4 week, during which $155 billion worth of Treasuries were auctioned.

Week of May 4 was the last week before the Mercury Retrograde fully hit, and the market gained significantly. Not sure at all about the next week.

The stock market has been shaky all week, and today's pooper was S&P downgrade of the United Kingdom's outlook to "negative", threatening the downgrade of the UK's credit rating. Not so much of the UK itself, but clearly the market reaction was "Will the US be next?" Long-dated Treasury yields spiked up, and the market went down. Now it's almost back to the beginning of the week.

Increasing uneasiness, that something is getting unhinged yet again, is in the air. As you can see in the headlines of SKF bloggers (right column), they seems to be feeling it too.

Golf Courses Would Like Some Federal Aid

from Los Angeles Times May 13 article, "Golf courses hit a rough patch":

"In today's economy, golf is in the rough. And with a bad lie. Once-haughty country clubs are offering specials. Courses have closed or cut back on maintenance. The world's top golf ball manufacturer has seen demand for souvenir balls stamped with company logos drop off.

"And so officials in the golf industry have joined the nation's bankers, auto makers and insurance companies in marching to Washington in search of understanding. They're not asking for a bailout, but they do want greater appreciation of their industry's importance."

"..... Singerling and others will be in Washington today to make sure Congress does not lump the golf industry in with massage parlors, suntan facilities and liquor stores as businesses undeserving of federal help.

""We're in an unprecedented era of government involvement in business, so we have to be in D.C. to be able to make sure that people, when they're writing law or making comments about our industry, realize all of the positive impact that golf has," said Joe Steranka, chief executive of the PGA of America."

""Even in a recession, people are pursuing their passion, but they're moving down the value chain, sort of the Wal-Martization of golf," explained Mike Hughes, chief executive of the National Golf Course Owners Assn. "Where they were paying a $60 green fee, they might go to the lower end and pay $20 to $30 for a round.""

Remember Mr. Larry Flynt asking for $5 billion bailout for porn industry, citing the importance of the industry in difficult times? Well, Hollywood got bailout money. Motorsports racetrack facility owners got bailout money. Why not golf courses?

New Link Added:

to the "Market / Economic News, Analysis, Commentary" section of the blog (left column).

You can track how the $700 billion stimulus is being spent. It even provides the link to the government version of the tracking.

Unintended (and Predictable) Consequences

Credit card reform bill

  • Intention: To protect consumers from "unfair and abusive" practices by credit card companies.
  • What many consumers are already getting: Notice from credit card companies for increased rates and fees, reduction of borrowing limit, or outright cancellation.
  • What all consumers will eventually get: higher rates across the board, regardless of their spending and paying habits.

Federal Reserve's decision to buy longer-term Treasuries

  • Intention: To keep the interest rates on longer-term loans low.
  • What's happened: Fed becoming the buyer of last resort. 10-year and 30-year Treasury yields have gone up.

Bank "Stress Test"

  • Intention: To restore public confidence
  • What's happened:
    - The test itself, and the test results are perceived as joke or worse.
    - Has helped banks to raise capital at a much higher level, which has made investors more suspicious of the test's intention.

The White House and Congressional outrage over AIG bonuses

Chrysler's bankruptcy/restructuring

  • Intention: To restructure Chrysler into a viable, competitive business; to protect US workers [=UAW workers] and keep the jobs in the US.
  • What's happened so far:
    - Fiat is getting a free lunch with no money down.
    - 1st-lien secured bond holders got half of unsecured claim holders (totally ditching the bankruptcy law).
    - Investors will be wary of investing in any troubled US company receiving any form of US government aid.
    - It looks more and more like Chapter 7, not 11. Chrysler and soon-to-be bankrupt GM are shutting down their dealerships which will result in job loss and bankruptcies.
    - GM says it will import cars made in China.

I hope they were at least "unintended".

Goldman Sachs Upgrades Banking Sector to Neutral

Following the upgrades of Bank of America (BAC) and J.P. Morgan Chase (JPM) to their "Conviction Buy" list, Goldman Sachs (GS) upgraded the entire banking sector to neutral.

Goldman Sachs Upgrades Large US Banks to 'Neutral' (
Goldman Upgrades Large Bank Sector, Sees Write-Downs Ending (

Conviction Buy:

  • Bank of America (BAC)
  • J.P. Morgan Chase (JPM)
  • Morgan Stanley (MS)


  • Bank of New York Mellon (BK)
  • Northern Trust (NTRS)
  • State Street (STT)


  • PNC (PNC)
  • U.S. Bancorp (USB)
  • Wells Fargo (WFC)
  • Capital One (COF)
  • Discover Financial Services (DFS)
  • American Express (AXP)

Regional banks are still under "Cautious" rating:

  • Fifth Third Bancorp (FITB)
  • KeyCorp. (KEY)
  • Regions Financial (RF)

Citigroup (C) is not rated.

Northern Trust, Bank of America, J.P. Morgan Chase, Wells Fargo, State Street (up 4%), Bank of New York Mellon (and Goldman Sachs) are currently trading up from yesterday. Citigroup is unchanged. Dow Jones Industrial is down 140 points, at 8,281.

Wednesday, May 20, 2009

Warrants under TARP May Be Problematic For Banks

From "Geithner Says Treasury May Move ‘Quickly’ to Sell TARP Warrants"

"Treasury Secretary Timothy Geithner said he’s inclined to “quickly” sell warrants the government got when injecting capital into banks, offering prospects of a speedy exit to lenders seeking to retire government stakes.

"The Treasury received warrants with nearly every capital injection it made with its $700 billion bank-rescue fund, called the Troubled Asset Relief Program. As big banks begin to pay back the assistance years earlier than expected, the Treasury may use market bidding to break a logjam over how to value a key component of the government’s equity stakes.

“We’ve got a carefully designed program in place to make sure we’re getting the best price for those warrants as possible,” Geithner said in answering questions at today’s hearing."

Carefully designed, Mr. Geithner? Now we know how the October 13, 2008 meeting came about.

"The total value of the government’s bank warrants is roughly $5 billion, according to Treasury calculations.

"Big banks may value their warrants at an amount that is hundreds of millions of dollars below the prices that other models might generate, the Treasury official said. That range makes it hard for the government to find a price that protects taxpayer funds without penalizing the banks."

No kidding. If the example of a bank who already returned the TARP money, the difference may be enormous.

One extreme case is Centra Financial of Morgantown, W.Va., a privately-held bank who repaid the TARP money of $15 million. Centra sold the warrant to Treasury for $750 -- $1 for 750 preferred shares. But when it came time to repurchase the warrants, Treasury demanded $750,000.

Bloomberg article continues:

"The Treasury says banks can choose whether to negotiate over the warrants or not. The department plans to examine the warrants from four different perspectives, two provided by the Treasury and two by outside financial advisers, the official said.

"If the bank refuses or can’t agree on a price, then the government will sell the warrants to a third party, as outlined in the original contracts."

Treasury's calculation may be out of the line, now that the market volatility has declined so much. Maybe their calculation is based on VIX in the sheer panic days of last October (with VIX between 50 and 90).

Maybe this was the news that pressured financials today, which started to weaken during his testimony (Q&A section). Further uncertainty.

Japanese GDP Crashes

See it a picture. It's from (His site is really worth bookmarking, I think. The site is on the list of my links in the left column under "Market/Economic News, Analysis, Commentary").

My first reaction was "What the hell are they importing?" Then I realized that it's a percentage contribution, not the absolute amount. Phew.

Then I went to read the Japanese reaction to their own numbers.

"Kaoru Yosano, Japan's Finance Minister who is also in charge of Economic and Fiscal Policy, told the reporters on May 20 that the worst may be over for the Japanese economy. [Green shoot everywhere...] He cautioned "For the Japanese economy to get back on the growth track, it will need a lot of effort, time, and [better economic] performance from other nations", indicating the recovery may be limited." [translation by me from May 20 article]

California Ballot Measures: Resounding NO

Except for 1F, a resounding YES.

Here's from the official California Statewide Special Election Result website (click the table for clearer picture):

For more details of the ballot measures, here's my post.

A Letter from A Dodge Dealer Who Lost His Franchise

From Gary North's Specific Answers (paid site, but he posted it as a free article). The letter was written by Mr. George C. Joseph, President & Owner of Sunshine Dodge-Isuzu in Melbourne, Florida.

Dr. North says:

"As you read it, think: "Where is our legal protection? If this can happen to him, what has happened to corporate loyalty and trust?"

"This has happened to almost 800 Chrysler dealers. GM has sent out notices to over 1,100 GM dealers that their franchises will not be renewed in 2010. GM plans to shut down 2,600 dealerships.

"You invest a lifetime in your business and then, through no fault of your own, this happens. This may be legal. It is surely unjust."

The legal protection clearly went out of the door in the bankruptcy court, where the 1st-lien senior debt holders got far less than junior, unsecured claim holders. Chrysler hasn't been a thriving, successful business of late, and as a business person he should have thought about the scenario, "What if Chrysler goes bankrupt? What will happen to my business?" But hindsight (if it comes) is always 20/20, and it's easy for an outsider to criticize. Mr. Joseph has my sympathy, and I share his outrage.

Government Considers Stripping SEC of Powers reports that "U.S. Considers Stripping SEC of Powers in Regulatory Overhaul".

"The Obama administration may call for stripping the Securities and Exchange Commission of some of its powers under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said.

"The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail."

So far, I don't like this at all. Whatever the shortcomings, whatever the past and present mistakes, SEC is UNDER THE US GOVERNMENT'S JURISDICTION. Whereas the Federal Reserve, it is an INDEPENDENT entity owned by its member banks. The US government does not have formal authority over it. Remember, we can't even audit its books!

Oh wait, at least I was not alone in thinking it would be a mistake:

"“It would be a terrible mistake,” said Stanley Sporkin, a former federal judge and enforcement chief at the SEC. “Whatever the SEC has done or didn’t do, it is still the premier investor protection agency around.” "

It was the then-Treasury Secretary Paulson who wanted to expand the Fed's role in regulating the financial industry in March 2008. Now we are moving very fast in that direction:

"Geithner was set to discuss the proposals at a dinner last night with Summers, former Fed Chairman Paul Volcker, ex-SEC Chairman Arthur Levitt and Elizabeth Warren, the Harvard University law professor who heads the congressional watchdog group for the $700 billion Troubled Asset Relief Program."

There are people who argue against it on conflict of interest:

"Opponents of giving the Fed more authority, such as former SEC chief Levitt, have said the central bank’s focus on keeping the financial system solvent may trump efforts to punish companies for violating securities laws."

As the article points out, it doesn't help SEC when two of their attorneys are being investigated for possible (looks like probable) insider trading.

Don't waste a good crisis, the White House Chief of Staff says. Indeed.

Tuesday, May 19, 2009

17 Billion Budget Cut in Context

Someone made an extremely low-budget, clever video on the proposed budget cut by the Obama administration.

Two Opposing Views on VIX

VIX, Chicago Board of Option Exchange Volatility Index, has broken below 30 today (ended at 28.80), despite the last half-hour dive of the major indices (DJI and S&P500) into red. The last time VIX was below 30 was September 15, 2008, when Lehman Brothers went bankrupt.

Today I ran into two different interpretation of lower VIX, one bearish, one bullish (if I may be so stereotypically speaking).

The first one is from titled "Is lack of fear such a good thing?"

The answer to this rhetorical question is no.

""The rally is losing momentum, which is not terribly surprising," said Ken Tower, chief market strategist at Quantitative Analysis Service. "Is the VIX dangerously low? I would say it's close."

"For contrarian investors, the fear gauge, when it reaches extreme levels, is seen as likely to pull back the other way much like an over-extended elastic. And it is therefore all the more fuel for a rally when it does.

"But now that the VIX has fallen back sharply, some analysts believe the pulse of the market is at risk of being too tepid and stocks might be facing another leg down. "

VIX is indeed often used as a contrarian indicator, along with put/call ratio and short interest (the higher the more bullish). Right now, put/call ratio is middle of nowhere, not high but not low either.

Here's the other view from Market bulls would love this...

In "Op-Ed: Investors Embrace Risk?", James Kostohryz, former head of international investment at a major Brazilian bank, says:

"The dramatic collapse of the VIX, first below 40 and now below 30, is a very strong indicator of sharply declining risk aversion. Based on this collapse of the VIX, and my interpretation of the historical data series, I believe that we will very soon see a collapse in another key indicator of risk aversion: cash allocations.

"Furthermore, history has shown that once the aforementioned risk preference indicators start trending, they exhibit strong persistence characteristics. This indicates that these indicators have a great deal more to run, and there's very limited risk that we're at the tail end of the trend in declining risk aversion. To the contrary, analysis of all of the indicators reveals that the decline in risk aversion is likely to persist and progress much further.

"In the face of the strong reversal of these risk-preference indicators, and the fact that the markets have likely only completed the first phase of a longer medium term trend, it's my contention that current cash allocation levels are unsustainable. "

Mr. Kostohryz thinks "Improving fundamentals + collapsing risk aversion + extremely high cash allocations = massive marginal cash inflows into equities".

I disagree with the very first component in the equation, though. I don't see any real improvement in fundamentals, and with the government spending like there's no tomorrow and standing ready to tax every single thing that exists, from cigarette butt onward, I don't see improvement coming any time soon. But if I modify it to say "Perception of improving fundamentals" (i.e. more smoke and mirror), then I tend to agree.

It happens to be my technical position also that the so-called "sucker's rally" hasn't suckered in enough investors yet. But I am nervous everyday that a sudden reversal of the market could happen out of the blue. Long or short the market, everyday is still a survival.

Credit Card Bill Passed the Senate

Senate votes to limit credit card rate changes (AP via Yahoo Finance):

"The Senate voted on Tuesday to prohibit credit card companies from arbitrarily raising a person's interest rate and charging many of the exorbitant fees that have become customary -- and crippling -- to cash-strapped consumers.

"The overwhelming bipartisan vote of 90-5 was lawmakers' way of telling Americans that they haven't been forgotten ..."

We haven't been forgotten. That's comforting to know, I suppose.

"If enacted into law as expected, the credit card industry would have nine months to change the way it does business: Lenders would have to post their credit card agreements on the Internet and let customers pay their bills online or by phone for free. They'd also have to give consumers a chance to spare themselves from over-the-limit fees and provide 45 days notice and an explanation before interest rates are increased."

?? What kind of credit cards are people using?? I can see the card agreements on the net, I pay all my card bills online, for free, for several years now.

But take a look at the post below, about San Francisco wanting to add cigarette butt tax to discourage people from bad behavior - smoking. Isn't irresponsible use of credit card a very, very bad behavior? Don't they need to punish that behavior by stiff fees and higher interests?

Oh never mind. I correct myself. If the private industry does that, it is predatory and profitting from card holders' economic plight.

Coupled with the news that the government is going to put more restriction on TARP repayment, the bank stocks are not doing too well today. Not too bad, but struggling to remain unchanged for the day. As of 11:28 am PST, among credit card issuers, only Citigroup is up:

  • Citigroup (C) up 18 cents (4.9%)
  • JP Morgan Chase (JPM) down 61 cents (1.64%)
  • Bank of America (BAC) down 5 cents (0.43%)
  • Wells Fargo (WFC) down 94 cents (3.45%)
  • Capital One (COF) down 91 cents (3.5%)
  • Discover Card (DFS) down 31 cents (3.36%)
  • American Express (AXP) down 80 cents (3%)
And card transaction processors:
  • Mastercard (MA) down $3.88 (2.2%)
  • Visa (V) down $1.40 (2.1%)

San Francisco To Tax Smokers For Littering

Targeting the bad habit to tax is a favorite game of politicians. According to New York Times article, San Francisco Mayor Gavin Newson wants to impose a fee on cigarette butt which often end up on the city's streets, sidewalks and gutters.

"The proposal, to be introduced next month to the San Francisco Board of Supervisors, would add 33 cents to the cost of a pack of cigarettes, to offset the estimated $10.7 million the city spends annually removing discarded butts from gutters, drainpipes and sidewalks.

"Mr. Newsom said cigarette butts became a target after San Francisco’s annual “litter audit” found that cigarette detritus made up a quarter of all the trash in the city’s public spaces. With the city spending some $44 million a year on litter cleanup — and facing a $500 million deficit for the coming fiscal year — a fee was born." [San Francisco has $6.6 billion annual budget.]

There's some strange logic here. So a quarter of all the trash in the city's public spaces were cigarette butts. It costs $44 million a year to clean ALL litter. So let's charge quarter of $44 million on packs of cigarettes.

As if the street sweepers separate out litter and leave cigarette butts to a dedicated cigarette butts cleaners. Money is fungible, but so is litter. What about the remaining three-quarters of litter? Are they going to levy extra tax on candy bars, bottled water, soda cans?

"The added cost, Mr. Newsom hopes, will also dampen smokers’ urge to light up."

The true reason for the tax is to punish people who smoke financially so they quit. It will be for their own good, to be free of addiction.

And that, seems to be how things are going: to punish your "bad habit" by taxing. Across the country, there are already numerous proposals for new taxes for money-starved local governments: sodas high in fructose, potato chips and other junk foods, video game download, etc. But who decides what's "bad" for you? Politicians? Special interest groups, as long as their "interest" is good for you?

I have a feeling that smokers in San Francisco will make sure they throw the cigarette butts on to the city's streets and gutters, because they will be paying for the cleaning cost anyway.

Monday, May 18, 2009

Auto Companies News Collage

It's about time to go back to the favorite topic, the auto industry. Things are moving fast, although I'm not sure which direction. So I've collected some headlines for you, so you can judge which way we're going.

Obama to tap consumers for emission, mpg standards (AP, via Yahoo News):

" President Barack Obama plans to propose the first-ever national emission limits for cars and trucks as well as average mileage requirements of 35.5 miles per gallon by 2016 — all costing consumers an extra $1,300 per vehicle.

"The auto industry will be required to ramp up production of more fuel efficient vehicles on a much tighter timeline than originally envisioned. It will be costly; the Transportation Department last year estimated that requiring the industry to meet 31.6 mpg by 2015 would cost nearly $47 billion."

And the auto industry, which includes soon-to-be-government-owned Chrysler and GM, are grateful:

"But industry officials — many of whom are running companies on emergency taxpayer dollars — said Obama's plan would help them because they would not face multiple emissions requirements and would have more certainty as they develop their vehicles for the next decade."

They don't care, because the government (taxpayers) will pay for it anyway.

I can't afford a new car anyway, so regulate away. But if they think this will produce an attractive fuel-efficient car, think again, because....

Honda Insight 1.3 IMA SE Hybrid Review (Times London) is horrendous:

"Much has been written about the Insight, Honda’s new low-priced hybrid. We’ve been told how much carbon dioxide it produces, how its dashboard encourages frugal driving by glowing green when you’re easy on the throttle and how it is the dawn of all things. The beginning of days. "

But as a car,

"It’s terrible. Biblically terrible. Possibly the worst new car money can buy. It’s the first car I’ve ever considered crashing into a tree, on purpose, so I didn’t have to drive it any more."

Oh boy.

"Hondas feel as though they have been screwed together by eye surgeons. This one, however, feels as if it’s been made from steel so thin, you could read through it."

"But what about the eco-cost of building the car in the first place?...I cannot see how making a car with two motors costs the same in terms of resources as making a car with one... The nickel for the battery has to come from somewhere. It has to be shipped to Japan, not on a sailing boat... And then the finished car has to be shipped, not by Thor Heyerdahl, to Britain, where it can be transported, not by wind, to the home of a man with a beard who thinks he’s doing the world a favour.

"Why doesn’t he just buy a Range Rover, which is made from local components, just down the road?"

His conclusion:
"...hybrid cars are designed solely to milk the guilt genes of the smug and the foolish."

Volkswagen Cancels Porsche Merger Talks for Indefinite Time (Bloomberg):

After causing the short squeeze of historical proportion, Volkswagen cancelled talks of merger with Porsche. A bone of contention seems to be Porsche's increasing indebtedness:

"Volkswagen Supervisory Board Chairman Ferdinand Piech said last week that Porsche must trim debt before it can complete a merger with Volkswagen. Volkswagen “won’t solve” Porsche’s net debt, which tripled in six months to 9 billion euros ($12.2 billion) as of Jan. 31, Piech said. Porsche owns about 51 percent of Wolfsburg, Germany-based Volkswagen. "

In the meantime, GM and Chrysler dealers are fighting back.

Local Car Dealer to Fight Back (one of 1100 GM dealers who got letters of termination)
Dealers could toss wrench in automakers’ plans: Thousands could lose franchises as bankruptcy court trumps state laws

Report: GM to import Chinese cars; trickle in 2011 will turn to flood in 2014

Uggghhh... Haven't we had more than enough Chinese stuff in the past decade or two? And I thought this auto bailout stuff is about saving jobs, or keeping jobs in the US. (At least it has been sold as such, and also cited as the reason why the senior bond holders of Chrysler and GM had to be squeezed.) The exact opposite is happening. I must be dreaming. If only I wake up....

...while Fiat is laughing all the way to the bank...

Fiat's New Prospects Dazzle Italy: Formerly Struggling Automaker Aims to Be World's Third-Largest

"Under a chief executive with no prior experience in the car business, Fiat has stabilized its finances and is pursuing an ambition that most Italians would have laughed at only a few months ago: to become the third-largest manufacturer of automobiles in the world, behind only Toyota and Volkswagen and ahead of a fading GM."

OT: Change Gets Marching Order

From Blog.

The Government May Enter Muni Bond Insuring Business

I knew it! I knew it was coming. According to Bloomberg,

"The National League of Cities says it will ask the U.S. Treasury today for a $5 billion interest-free loan to capitalize a new municipal bond insurer it plans to create."

So we, taxpayers, get to fund a muni bond insurer who will insure muni bonds which are the obligations that we, taxpayers will eventually have to pay.

"The Issuers Mutual Bond Assurance Co. would be the first publicly owned U.S. financial guarantor. The $5 billion capitalization would make it the biggest in the industry, eclipsing MBIA Inc.’s capital base of $3.8 billion and the $1.1 billion of current market leader Assured Guaranty Inc. "

This is the "business plan", as presented by the National League of Cities. (I don't think it would pass the scrutiny at any venture capital, but then they have Treasury Department.) The largest business risk that they foresee is that the federal government may enter the forey:

"... the federal government could create a competing company that charges premiums so low that the Issuers Mutual could not possibly compete. This will be most unlikely if the U.S. Treasury invests $5.0 billion in Issuers Mutual, as planned. But it is possible that the Congress might enact legislation creating such a company, notwithstanding the investment by the Treasury. In such case, the Company would cease operations..."

They seem to be aware of the risk of premiums collapsing, but they dismiss it as unlikely. Again back to Bloomberg,

"IMBAC, as the new insurer would be known, is asking Treasury for $3 billion in cash upfront. It said it would seek to insure only general obligation and essential-purpose revenue bonds. In its cash-flow projections, the firm said it would charge premiums equal to about 70 basis points on a 25-year bond."

That seems like an overly optimistic business projection to me. Bloomberg again,

"In a December report, the League observed that in 2006, premiums for bond insurance had dwindled to as low as 15 basis points. Last week, Richard E. Kolman, the executive vice- chairman of MIAC, the Macquarie-Citadel venture, said he thought insurers might charge 30 basis points to 75 basis points to back A rated general-obligation debt. "

Sign of times.

First it was mortgage companies (FNM, FRE), then an insurer (AIG), then major national and regional banks, then car companies (Chrysler, GM), and now a municipal bond insurer. Healthcare is fast joining them. If the government add a large homebuilder or two, a major oil company (in order to kill it), a large media outlet (some say the media is already "owned"), a large consumer staples company or two, we will be solidly on our way to ___________. (Fill in the blank, any way you see fit.)

Disclosure: I own the shares of one of the "failed, shareholder-owned" bond insurers (ABK).

Russian Perspective on American Capitalism

The Russian president Dmitriy Medvedev called the current US president his "new comrade" during the April summit in London. I found that curious at that time.

And here's more Russian perspective. "American Capitalism Gone With a Whimper" by Stanislav Mishin, as appeared in The original article appeared in Pravda, the official organ of the Communist Party during the Soviet era.

Mr. Mishin writes,

"It must be said, that like the breaking of a great dam, the American descent into Marxism is happening with breathtaking speed, against the backdrop of a passive, hapless sheeple, excuse me dear reader, I meant people....

"True, the situation has been well prepared on and off for the past century, especially the past twenty years..."


"The final collapse has come with the election of Barack Obama. His speed in the past three months has been truly impressive. His spending and money printing has been record setting, not just in America's short history but in the world. If this keeps up for more then another year, and there is no sign that it will not, America at best will resemble the Weimar Republic and at worst Zimbabwe."

He then mentions the administration's "restructuring" of the auto industry:

"Then came Barack Obama's command that GM's (General Motors) president step down from leadership of his company. That is correct, dear reader, in the land of "pure" free markets, the American president now has the power, the self-given power, to fire CEOs and we can assume other employees of private companies, at will."


"...Prime Minister Putin, less then two months ago, warned Obama and UK's Blair [I think he meant Brown], not to follow the path to Marxism, it only leads to disaster. Apparently, even though we suffered 70 years of this Western-sponsored horror show, we know nothing, as foolish, drunken Russians, so let our "wise" Anglo-Saxon fools find out the folly of their own pride.

"Again, the American public has taken this with barely a whimper...but a "freeman" whimper."

As you can see, Mr. Mishin is understandably bitter. But he is also appalled at ease with which Americans seem to have accepted the new (for him it's old and tired and failed) way of their political, financial, and economic life.

He then suggests Russian companies to flee the land of the Red (USA):

"The Russian owners of American companies and industries should look thoughtfully at this and the option of closing their facilities down and fleeing the land of the Red as fast as possible. In other words, divest while there is still value left.

"The proud American will go down into his slavery with out a fight, beating his chest and proclaiming to the world, how free he really is. The world will only snicker."

Accounting Rule Change for the Administration

So it's not just those bad, greedy bankers who wanted to change certain accounting rule. Monthly Treasury Statement of Receipts and Outlays of the United States Government for April released on May 12 states on its front page [emphasis mine]:

"The administration has reclassified prior month expenditures related to the
Emergency Economic Stabilization Act (EESA- also known as TARP). Consistent with
statutory requirements of the Federal Credit Reform Act and EESA, TARP purchases
are now being accounted for on a net present value basis, taking into account market
risk. Accordingly, budget outlays have been reduced and direct loan financing
activity correspondingly increased by $175 billion

And accordingly, "Monthly Receipts, Outlays, and Budget Deficit/Surplus" chart on the page 3 shows a sharp decrease in budget deficit for the month of April; without the accounting change, the deficit would have been just as deep as February and March, if not deeper. It is a cosmetic change to give the appearance of reduced deficit level.

Sunday, May 17, 2009

The Real Stress Test, SNL version

We could use a good laugh in this uncertain market. Here's from Saturday Night Live, on the stress test results of the nation's 19 banks.

Who, Me? Yes You, Mr. Greenspan

Peter Schiff writes in the article that appeared in [emphasis mine]:

"... in a speech this Tuesday before the National Association of Realtors, Sir Alan “the-bubble-blower” claimed that his low interest rate policies in the early and middle years of this decade had no effect on mortgage rates or real estate prices. As a result, he claims no responsibility for the subprime mortgage crisis.

"His primary defense is that mortgage rates were a function of long-term interest rates which were simply not responding to the movement in short-term rates, which he did control. While it is true that the flow of capital from foreign creditors with excess dollars did keep long rates low despite rising short rates, this “conundrum” was not the leading factor in the housing bubble. Although rates on thirty-year fixed rate mortgages are based on long-term bonds, by 2005 such loans had become an endangered species. The housing bubble was all about adjustable-rate mortgages with 1–7 year teaser rates primarily based on the Fed funds rate.

"Greenspan expresses exasperation now, as he did then, that his careful nudging of interest rates higher by quarter-point increments did not translate into corresponding increases in long-term rates... If the “measured pace” of his quarter-point hikes were too slow to produce the desired effect, why didn’t Greenspan jack up the pressure?

"The bottom line is that Greenspan fathered the housing bubble and now he refuses to acknowledge kinship of his wayward child. His denial of responsibility is an act of stunning bravado, and is a testament to his ability to turn even the simplest of situations into an impenetrable tangle of theories and statistics. The private sector jokers who now hold top dishonors in our pack of economic villains are easily trumped by the Maestro. The fact that Greenspan still has any credibility shows just how little understanding the general public, including Wall Street and the media, actually have about this crisis."

Well said. I have nothing to add.