Stocks lower on Citi woes
Stocks are in freefall mode at midsession on concerns that Citi's negotiations with the U.S. government for extra aid may fall flat.
At noon, the Russell Russell 2000 (NYSE:IWM) was down 2.27% while the Dow was down 1.35% and the S&P 500 was down 1.71%.
According to The Wall Street Journal this morning, the U.S. government (which has already invested $25 billion in the ailing financial institution) was being asked to increase its aid to Citi by as much as 40%. The government would convert its preferred shares to common shares, which would leave Citi shareholders with a diluted stake, the Journal said. As the day progresses, though, investor fears have resurfaced as to how the Obama administration, which has done little to sooth ongoing market worries, will stabilize the overall banking system.
These banking fears, in turn, have hurt tech shares today because of a potential falloff in capital spending.
Rant of the Year, Part II
Americans are mad – mad at the banks, mad at their financial advisor, mad at the mortgage industry, mad at people who bought too much house. We’re mad at Paulson and Bernanke, Congress and Obama, too.
By now you’ve probably seen the rant from CNBC’s Rick Santelli I included in last Friday’s Daily Profit. It’s gotten a lot of attention the past few days, even getting airtime on Meet the Press this Sunday.
Santelli’s not the only one who’s mad. But he seemed to perfectly capture the mood in his spontaneous (or was it?) diatribe against bailing out homeowners who overextended themselves. And he makes some good points.
Why not let the government take over foreclosed homes and work to get them in the hands of worthy owners? That gets them off banks’ balance sheets, deals with the bad mortgages and may actually help people down the road. Simply trying to make homes more affordable for people who can’t afford them seems destined to fail. And we’ve already seen that a large percentage of modified loans have fallen back into delinquency.
*****Here’s a really informative interview on Barron’s with Nobel Prize winning economist Paul Krugman. One of the biggest mistakes investors can make right now is to make too many assumptions based on history. By that I mean, for instance, believing that because home prices were high a couple years ago, that they’ll return to those levels when the economy recovers.
Cisco (Nasdaq:CSCO) was a $70 stock back in 2000. Anybody think it’s headed back there anytime soon?
Krugman acknowledges Japanese economist Richard Koo as being the first to say the current economic crisis isn’t a housing crisis or a banking crisis but a balance sheet crisis. That’s a good term because it doesn’t seek to place blame or localize the effect. Rather, it tells us exactly what we need to know in terms of expectations.
Days of Steak
What happens when you have a balance sheet problem? How do you fix it?
A balance sheet problem means that you have too much debt and servicing that debt is impairing growth. Imagine a credit card bill that’s so big, it’s eating into your food budget. Vacation? New clothes? Not when you can’t afford basic necessities.
There’s no way to fix a balance sheet quickly. It takes time, and during that time, you won’t be eating many steak dinners. That’s where we are as a country. The days of steak are over for awhile. It’s beans and rice. And even when our collective balance sheets improve, we may decide we kind of like beans and rice.
Stock market news, commentary, and analysis from Chief Investment Strategist Ian Wyatt.
