Signs of a bottom: lots of bad news today!
This morning, Congressman Barney Frank said he expects the SEC will restore the uptick rule in about a month. The uptick rule says you're not allowed to sell a stock short unless the last transaction happened at a higher price than the previous one. It was repealed in 2007. Barney also said mark-to-market accounting – reporting assets according to what you could sell them for at current market prices – should be "substantially" revised and made more flexible...
And lo and behold – as if the uptick rule and accounting tricks can fix the banking system – the S&P 500 went up 6%, the biggest one-day gain since November 24, 2008.
Analyst Meredith Whitney expects outstanding U.S. credit-card lines – which now total about $5 trillion – to shrink by $2 trillion in 2009 and another $700 billion in 2010. She points out most credit cards were issued when unemployment was below 6%.
Whitney also dispelled the popular myth that America's credit cards are maxed out. They aren't. Just 17% of total credit-card lines were drawn on at the end of 2008. But that percentage will ramp up sharply when credit-card issuers start pulling credit lines from borrowers who lose jobs and fall behind on payments.
In an act of atonement, Moody's – whose lax credit ratings are partly responsible for the current crisis – today released a list of the 283 companies most likely to default. The quarterly report, called the "Bottom Rung," is much meatier than in past years.
You can view the entire list at Zero Hedge. The list is mostly media, retail, automotive, and consumer-products stocks. Of those companies that have public equities, most have already been hammered into oblivion. Would it surprise you one bit if a Moody's death report signaled a substantial bottom?
The FDIC shut down the Freedom Bank of Georgia on Friday. That's the 17th bank failure of the year. The bank had $173 million in assets. The failure will cost the dwindling FDIC Deposit Insurance Fund $36.2 million.
The contraction of credit-card lines... the rapid rises in home foreclosures and corporate defaults... the bank failures... These all have the effect of shrinking the money supply.
Most of our money is not created by the Federal Reserve. Most of our money is lent into existence by our banking system. That's why the Fed doubling its balance sheet in world-record time last fall didn't have inflationary consequences.
The Fed's fiat money merely provides the fuel for inflation. The real engine, where $1 is multiplied many times over, is the banking system... and it's broken. The Fed's balance sheet has expanded dramatically since September, but the banks' balance sheets are still contracting as mortgages and other loans continue to go bad. That reduces lending capacity – money-creation capacity.
More capacity will evaporate later this year and next year. Option-ARM loans will hit reset levels, causing more mortgage delinquencies and defaults. Insurance companies will get hit by corporate-bond defaults. (Insurance companies, especially life insurance companies, have been the largest buyers of corporate debt going back to the Great Depression. They're also huge commercial real estate lenders.)
Perhaps the hardest thing for you to believe is that all this credit destruction is good... but it is. Less borrowing means more saving. Economic growth requires saving, not borrowing and spending. Savings is the horse. Borrowing, spending, and higher tax revenues are all in the cart. If you put the cart before the horse, you won't get very far. If you put the horse in front, you can go anywhere you want.
Everybody's got excuses about why they're doing poorly, and James Tisch, CEO of Loews, is no exception. Tisch co-hosted CNBC Squawk Box this morning and explained why his stock has fallen from $51 to $18...
Loews is a conglomerate involved in hotels, natural gas exploration and production, and insurance – three industries that have been destroyed. The natural gas business is struggling because gas prices have fallen from $14.50 per mcf to under $4. Its insurance business is struggling because "investors don't like companies with big balance sheets." CNA Financial – Loews' insurance subsidiary – has around $40 billion of investment assets. Tisch added, "Congress has done a very good job of telling people, Don't go to hotels."
But ultimately, Tisch laid the blame on Obama. He said the Obama administration hasn't instilled confidence in investors and has been anti-business. It's going after bank executives, raising energy prices, and raising taxes. In particular, Tisch was upset about the plan to tax both domestic and international profits, which will force companies like "General Electric to reincorporate in Switzerland."
Tisch does admit the main reason for the crisis was an explosion of debt. Sixty years ago, total borrowing as a percentage of GDP was 120%. Last year, it was 360%. Most folks don't understand the government was behind that one, too. Without the Federal Reserve Act of 1913, we might have a real banking system, instead of... what we have.
Tisch is certainly right about one thing: The more government interferes in the economy, the worse it is for anyone who owns stocks and bonds. The belief that government has any special powers outside theft and counterfeiting is one of the pervasive myths of the ages. I've met very few people who understand that it is impossible for government to be creative, like business.
Financial assets worldwide have fallen in value by more than $50 trillion, according to the Financial Times. That's a big hole to fill. Maybe Ben Bernanke and his staff can paper the landscape with dollars from the opened doors of the 28 Marine One helicopters Obama's buying for $11.2 billion and climbing.
More layoffs... United Technologies (UTX), maker of Otis elevators and Pratt & Whitney jet engines, announced 11,600 layoffs. Most of those layoffs will be in the administrative and sales departments, but UTX will cut hourly jobs if necessary. The company announced 2009 revenue will fall $2.7 billion short of its December projections. (Makes you wonder what has changed since December, a little over two months ago.)
And what's the next industry to face massive layoffs? Hedge funds cut about 6.5% of jobs, about 10,000, last year. And they may cut an additional 20,000 positions this year as assets under management continue falling and management fees shrink.
As Bloomberg reports, "About 920 hedge funds, or 12 percent, closed last year, according to data compiled by Chicago-based Hedge Fund Research Inc. Of the 6,800 single-manager funds that remain, 70 percent lost money in 2008, meaning they can't resume collecting performance fees until the losses are recouped. Those fees, generally 20 percent of investment profits, are the primary source of cash used to pay bonuses."
In today's Crux, learn about Jim Rogers' No. 1 investment idea right now. He calls it "one of the great shorts of our time." Click here for more.
New highs: none.
If you're dumb enough to think our government's on the right track, write in and tell us how we should stick to financial topics and shut up about politics: feedback@stansberryresearch.com.
"I enjoy your comments and advice – I read your columns as often as time allows – I don't usually comment... but from personal experience, I felt the need. Your article on 'storing physical gold' had some very good points and information. My only concern is for the part on storing in your lock deposit box at a bank. Having been self-employed and a contractor for going on 60 years... I have had several experiences with government agencies, both local and federal. My personal experience has proven to me that the last place you want to keep survival type items i.e. gold or silver, is in a lock box. If the problem a person is having, has anything to do with any government agencies, the first place they go and seal is your bank accounts... including safe deposit boxes. They don't necessary take the funds or the items... they just seal them so you can't get to them. After this happens, needless to say, the items are no longer secret and a lot of time and paperwork are required to ever have them released. Just my thoughts/experience." – Paid-up subscriber Larry
Ferris comment: I agree. The last place I would ever suggest you keep gold is in a bank. Too bad we couldn't start a deposit box company staffed 24 hours by armed guards. If the government came and tried to seize any of the contents, the guards could be under strict orders to shoot first and ask questions never.
Good investing,
Dan Ferris
Medford, Oregon
March 10, 2009