That was one of the best Super Bowl games we’ve seen in a long time. There were some costly penalties on both sides of the ball, but in the end, both teams made some phenomenal plays. Congratulations go to the Steelers for their sixth championship ring. And equal congratulations go to the Arizona Cardinals for turning their first ever Super Bowl appearance into a great game.
*****There are rumblings that Senate Republicans may not pass Obama’s massive stimulus bill. This may be politicking, as the GOP clearly wants to show that it has some teeth. But there’s a lot of pretty ridiculous spending included, too. $300 million for sexually transmitted diseases jumps to mind. I hope the GOP is successful in stripping out the fat.
For now, though, it’s important to remember what happened the last time a stimulus bill was voted down…
I want to stress that I’m not advocating accepting the bill as a means of self-preservation. Just that you should be ready to sell some stocks and move to cash as the vote approaches. It appears that the Senate vote will happen sometime this week.
*****Dave is stuck in Bank of America: Ian, I understand how you feel about financials as a new investment. What would be your position if you already owned BAC at average cost of $29.00?
That’s not an enviable position. And as a general comment for all investors, I recommend having some sort of exit strategy to prevent getting in such a bad position to begin with. A stop loss, even at 30%, would have prevented a lot of pain.
Now, I know that doesn’t help here. And I’m not trying to pour salt on the wound. You could start working off the loss by selling covered calls on your stock.
*****HS writes: according to the "buy up toxic assets with tax payer monies" theory. we should also buy my bad stock picks. I made a wrong guess and now the stocks are under water so reward me for poor picks. When we make a mistake, no matter how well or not well intentioned, we pay for it.
This is a fairly common sentiment. Especially since the bailouts are funded with public money, why shouldn’t we have access to it? The difference is that our bad stock picks don’t have the power to send the U.S., and possibly the world, into a depression.
*****Jim F. sees the irony of asset pricing dilemma: I love your newsletters (editor’s note: I had to leave that in there.) Comment on Bad Bank idea–in order to carry this out it will be necessary to price the bad assets. When that is done it will become likely that other banks will have to price their bad assets (mark to market) like the Feds priced them for the creation and buy of the bad bank.
If Feds pay too high it’ll cost the govt. (us) more than it should. If it prices the toxics too low (as they will probably have to mark to market their bad assets) it’ll further erode the capital of banks not necessarily involved in the good/bad bank process. Seems like a "Catch 22" to me.
Right you are, Jim. It’s a sticky situation. And without a liquid market for these assets, it’s near impossible to know what a fair price is. Personally, I’m not so concerned about being "fair." It’s still hard not to want to exact a measure of revenge. And that’s why I lean toward the nationalization idea.
*****Doug writes: Greed was the key. Maybe we should look at how CEO’s in this country are paid. Seems that it is a bad incentive to let a company go down the tube while the CEO is paid millions in compensation. Board of Directors have been very lacking in oversight at most of these companies. The good old boy system needs to be looked at very closely or this will happen again and again.
Yes, greed is perhaps the key player in the entire debacle. And there’s clearly room for reform. Compensation often appears to be out of whack. Though I have to say, if a CEO is responsible for growing profits by a billion dollars, he should expect a sizable payday.
The problem for these banks is how profits are counted. For the last 5 years or so, Wall Street investment banks were making record profits. Employees were making bonuses and everyone was happy.
We now know that all those profits weren’t real. They were a lie. And the bonuses have been paid.
Thankfully, President Obama has made it known that he is in favor of changing the compensation culture on Wall Street. That’s a good start to restoring investor confidence, which is extremely important.
*****Rob B:. You’re leaning toward bank nationalization? My assumption is that the way the government would do this is through the acquisition of preferred shares so that they are first in line for dividends. Meaning that the common shares, like you and I would normally buy, would probably not pay any dividends, and their price would steadily decline. Who would buy their common stock? All incentive in the market would disappear for financial common stocks, wouldn’t it? Oh, and by the way. You criticized the management of these banks, in some cases, rightfully so. But, as I recall, weren’t they directed by our government to start lending to the very people that couldn’t afford the loans in the first place? And you want these same idiots and incompetents who wrote the regulations, and were supposed to be overseeing the same financial institutions to now be in an even more intrusive position? Reagan warned of "creeping socialism". This is no longer creeping. Most of the proposed "Stimulus" plan seems to be designed to create more reliance on the governments doles and increasing central planning. How often do we have to be taught the same lessons? Do we really want to go down this path? Our country has not gotten to a position of world leadership through socialistic ideals and centralized planning. Quite the contrary! The "Stimulus" plan is a transparent power grab, which will lead to a restructuring of our economy to that of socialism, and we shouldn’t fall for it. And, oh yes, what happened to the spirit of bipartisanship? Seems to me to be the same old Washington. Only a little worse.
There’s a lot to this question. While it’s true that some regulations were relaxed to increase homeownership, nobody told Lehman and Goldman Sachs to over-leverage their balance sheets to the point they were.
Wall Street saw a way to game the mortgage system. As you probably know by now, the investment banks were buying mortgages, both good and questionable, dividing them into pieces, then re-packaging the pieces (good mixed with bad) and selling them as A-rated debt. How the rating agencies gave these financial Frankensteins A ratings is an important question.
So no, the investment banks weren’t charged with relaxing lending standards. Sub-prime mortgage companies went off the reservation precisely because Wall Street provided a ready market for "disposing" questionable loans.
It’s worth noting that Fannie Mae and Freddie Mac had a disproportionately small percentage of the non-performing loans that sent the whole thing crumbling down.
I came across a relevant observation from one of my favorite economists, Morgan Stanley’s Stephen Roach. At the Economic Summit in Davos, he told the AP:
"Wall Street made mistakes. Regulators made mistakes. Rating agencies made mistakes. Central banks made mistakes. Politicians made mistakes — we all did it…"
You can also throw in the people who got mortgages they couldn’t afford.
I have no doubt that regulations will change to prevent this from happening again. But there will always be loopholes. And when there’s big money at stake, you can bet people will find them.
*****Cathi writes: I have recently signed up for several free online publications, only to find that I am now being billed for them after a trial period. I did not read the fine print well enough-are you going to be charging me and if so, what is the cost for this online publication? Please advise and thank you in advance.
It’s been my experience that "bait and switch" is not a sustainable business model. So let me say, you will NEVER be charged for Daily Profit. This is, and will remain, a free e-letter. I offset the costs through advertising. You’ll see ads for investment services that I’ve created. And you’ll see ads for the services of others.
Many of these services have great track records and satisfied subscribers. If you’re interested in any of these ads, please investigate. If not, simply ignore them. But rest assured, you will never be charged for Daily Profit.
*****Danny asks: When have you ever seen the government take over anything and it turn outbetter than it was before the take over?
That’s a good point. The Federal government has never been known as efficient. Whether it’s $200 hammers or some other boondoggle, the government doesn’t do much to encourage our trust.
The best model for the "bank nationalization" plan is the Resolution Trust Corporation (RTC) that was set up to deal with the S&L Crisis in 1989. It was funded with $50 billion and charged with taking over insolvent banks and disposing of the assets.
The RTC wasn’t perfect. There were times when it may have jumped the gun in declaring a bank insolvent. And there were questions as to whether the RTC always got a fair price for the assets it was selling. And the final cost was closer to $100 billion. But in the end, it worked.
*****Stephen writes: OK, you wanted our opinion – – here is mine.
It is not a matter of deciding whether to let them fail or not – – many of the major banks have already failed, they just haven’t been shut down. Thus, Citi (who never sleeps) is a zombie bank. Their capital position is such that they are not able to lend – – even with taxpayer cash infusion.
So, the bad bank — good bank concept is valid. The Feds should effectively nationalize Citi (and other like them) spin of the toxic assets into a bad bank which the taxpayers own (because we are responsible for them already). Then, sell the good bank to investors who want to run a good bank. The Feds keep the proceeds (i.e. like the FDIC keeps the money for selling off IndyBank, etc.) That wipes out the current stockholders of Citi – – which is only fitting. Poor Sandy, his $900 Million is now worthless. But that”s what they deserve. The renewed bank is fully capaitalized and can only be successful by lending and running a bank.
For what it’s worth, former Citi CEO Sandy Weill recently gave up a lucrative compensation package from Citi. And obviously, his Citi stock holdings are in the tank. And yes, that’s pretty much what he deserves.
Stephen is also correct that stockholders bear some responsibility. That’s why I’m advising Daily Profit readers to avoid financial stocks.
Finally here’s a great article from Forbes. The writer has a great acronym for the bad bank/nationalization plan. Worth the read: http://www.forbes.com/2009/01/29/tarp-treasury-department-business-wall-street-0129_barf.html
*****Greg takes us back to economics 101: Why even try to prop up inflated house values when the single most crucial need in this sector is for house prices to return to parity with incomes so the shrinking pool of ordinary people still employed can begin to think about buying one?
Well, it might be tough to say that home prices are still over-inflated. But your point is valid nonetheless. Ultimately, prices have to be at a point where buyers actually buy. That’s the basic principal of a free market.
Unfortunately, the housing market isn’t free right now. For one, lending has dried up. Even if you want to buy a house, it may difficult to get the cash. So prices fall.
Then there’s people who accepted ARMs thinking they could refinance down the line. In the current environment, refis are not easy to get. And I imagine the increase in monthly payments has taken some homeowners from paying to not being able to. In those cases, some assistance may be warranted to keep them in their homes and keep their homes off the market.
Ultimately, though, the housing market is too big to subsidize. Prices will fall to a point where they are in line with incomes.
***** R. Klene: How can we agree that it’s okay to bail out people who borrowed money they should not have borrowed, and then agree that it’s okay to dilute if not destroy the investment of those Americans who are risking their money to buy bank equities that so desperately need the capital?
Investing is all about risk. When an investor sees Citi down 75% and thinks he can triple his investment in a few years, that’s greed talking. Investors should always consider the risks as well. I know that sounds like a platitude, but if there’s one thing that the financial meltdown should teach us, it is that we need to be more conscious of risk in the stock market.
*****Rosalyn tells a familiar tale: I have been reading about this subject intently for several weeks now. You asked for your readers’ opinions so here goes:
As a nice, novice investor, I took my financial adviser’s advice back in May, 2008 to buy preferred stocks of Citigroup and Bank of America. Despite my protests that I absolutely needed that money to be safe, he assured me that he was so sure of the safety of those companies that he even sold those stocks to members of his own family and bought them himself. This man, an honest veteran of the investment industry who works for a respected firm, has lost us all a lot of money, as we know. He was operating on good faith, decades of experience and was obviously wrong.
Here is my reaction to the notion of nationalization of the banks, and losing my money, which I have shared with my Senators:
First, I don’t appreciate the implication that as a shareholder I have anything at all in common with the high rollers on Wall Street who created and were excessively rewarded for this mess. I haven’t profited at all; in fact, I have seen my inheritance cut in half, money that was painstakingly saved by my frugal mother over her lifetime. I, too, am a frugal woman who is used to living a low income lifestyle, and yet suddenly I am being lumped into the same group as the Boards and CEO’s of multi-billion dollar corporations.
Surely there are many millions of other shareholders of these stocks and shareholders of funds which are invested in these stocks, who are more like me than the titans on Wall Street and their Boards of Directors.
Second, and more importantly, who in their right minds would ever buy the stocks of these so-called cleaned up banks? The people who just lost all their money or maybe somebody who has great faith in government bureaucrats to run businesses? Would anybody ever believe the claims that these businesses are going to be profitable at this point? Really?
I fully understand the anger of Joe Public against bailing out the fat cats of Wall Street and I agree that we should do everything we can to prevent those greedy, creepy, stupid, selfish, immature, narcissistic jerks from simply taking advantage of tax payer money. But I do not appreciate journalists fanning the flames of this anger and setting up shareholders as people different than Joe Public. Most shareholders are Joe Public. The government failed to properly regulate and protect the shareholders who are also taxpaying Joe Public.
So your investment advisor recommended Bank of America after Bear Stearns went bankrupt. Industry vet or not, that’s irresponsible advice, in my opinion. But it does go to show that nobody really knew how big the problems were. And in fact, we still don’t know how big the problem is.
As for who will buy the banks after they are cleaned up, don’t worry, that won’t be a problem. After they’ve been scrubbed they’ll be virtually debt-free and profitable. That’s a great time to buy. Don’t let anger keep you from seeing the opportunity when, and if, it arises.
Also, it’s important to note that the government won’t run them for long. Just long enough to clean up the toxic assets. And they will probably use industry veterans as advisors. Think Paul Volcker, not Henry Paulson.
*****O. Moore is apparently unsubscribing to Daily Profit: I have been reading your newsletters and have decided you are no longer credible. Nationalizing banks is a crazy idea, have you visited the DMV or social security offices run by the government. Let the banks who are badly managed fail and support the ones who have been responsible.
First of all, I’m pretty sure DMV is a state office, not federal. And no, I’ve never been to a Social Security office. But that’s not really the point.
Think of how many banks would have already failed. Citigroup would be gone. The US economy wouldn’t recover for years. Remember how the market reacted to Lehman? That failure took down banks across the globe.
No, simply letting them fail is what’s not credible.
***** Harry writes: I like your two reasons except for one thing: oversight does not equal well run. Has there ever been a government agency in the last 50 years that you could call well run? If government buys the bad assets it has the time to wait out the time needed to get value on those assets? Let a good bank run the good assets. The profit motive is a good thing. You’re right about the greed that got us into this thing but if the housing market (because of Fannie Mae/Freddie Mack loose rules) it wouldn’t have sparked the over leverage stuff because there would still have appeared to be some risk. All that profit blinded people to good sense.
Profit motive is good, but it can also blind. I don’t think you can blame relaxed rules for over-leveraging. Over-leveraging was caused by greed pure and simple. And a complete disregard for the interests of shareholders.
Again, for a model of the government agency that would run insolvent banks, see the RTC.
*****Tom R.’s been doing his homework: Nationalizing, and later re privatizing the banks is probably the cleanest and clearest solution. How else do we get control over the greed that got us here.
And is it fair to stockholders? It’s every bit as fair as the free market approach of letting them go belly up if they have been loading up on too many toxic assets. In both scenarios the shareholders get flushed.
In the nationalization approach the system can be held together to avoid systemic collapse, lending can resume at a reasonable rate, and when things have been stabilized the banks can be reprivatized with the Gov’t getting paid back for a big chunk of the losses they have absorbed.
***** Peter hits an old theme – Lehman’s failure: In you article about Foxes in the Henhouse, you debate about whether the biggies should be allowed to fall, if they cant keep themselve afloat. What has baffled me is why did the Fed let Lehman fall? Am I just too stupid or is there more to that?
This was a frequent topic in Daily Profit in the fall. I’ll never forget Fuld’s Congressional testimony when he said, and I paraphrase "To my dying day, I’ll never understand why Lehman was allowed to fail."
The short answer is that the Treasury and Fed were trying to send a message. But Paulson has essentially said that if he knew now what he didn’t know then, he wouldn’t have let Lehman fail.
When Lehman failed, it rippled across the globe. Clearly, nobody knew at the time how deep the problems went.
I still suspect that Paulson was "playing favorites." As the former CEO at Goldman-Sachs, he was used to seeing Lehman as a rival. And I think he let that cloud his judgment.
*****Diane Can’t someone create some overseeing of these fat cats? Their arrogance is beyond imagination. Year end bonuses, planes, junkets!!
I have yet to hear any positive places the money already received has been spent. Could you enlighten on this?
Well, it’s simply not possible to point out where any of the TARP money has been used in a positive way by the banks. And I think there will be repercussions. New York Attorney General Cuomo is on the case. And even president Obama has spoken out, which, incidentally, is extremely rare.
I believe we will see prosecution at some point.
*****John writes: As an interested potential subscriber, I listened to the 30 minute discussion of Recovery Portfolio, and the recommendation to buy (??) the etf, TLT as a means to short treasuries. I must have misunderstood, because it seems TLT is an investment in treasuries, is it not? Maybe someone can explain this to me as already I am confused, and this is supposed to be not a confusing strategy.
In my Recovery Portfolio webinar, I discussed my intention to take a short position in TLT. Unfortunately, I was unable to find any TLT stocks to short. So I initiated a position in short treasury ETF, called UltraShort Lehman 7-10 Yr Treasury ProShares. The ticker symbol is PST.
I’ve taken a few other positions, too. For more information click HERE
*****Our resident poet John asks: I’m curious to know whether there is a place in the core portfolio for an ETF like QLD.
John is talking about the Ultra QQQ ProShares, symbol QLD. This ETF seeks to double the performance of the Nasdaq 100. The 52-week range on this ETF has been $19.72-$92.55. The current price is $25 and change.
I see no reason why this can’t be included as a core holding in a portfolio. It will be volatile, though, because it’s leveraged. Sill, it’s a good way to play a potential market recovery. Plus, you can trade covered calls on it to generate extra income and help smooth the volatility.
That’s it for today…