Illinois Politics

Illinois politics are such fun to watch and if they weren’t real they wouldn’t be terrifying. But they are real and we will see how much spine the Senate has when it comes time to turn aside ANY appointment of the current Governor. Race has no place in this, especially now. We have a true African-American coming to the White House in just a few weeks. He will be heavily burdened with the economy, two unresolved wars and a very full plate of domestic policy expectations which he created during his campaign. He is further burdened with a HUGE national debt. You can blame the present administration or Congress or anyone you choose, it does not change the facts and he will be burdened in dealing with them.

The first 100 days has become the bench mark. I am sure he will try to make progress and will have a level of success IF there are no uncontrollable outside forces at work. Mr. Bush had an agenda that got sidetracked on 9-11-2001 by outside forces. I hope and pray (yes, pray) that Mr. Obama does not have a similar distraction.

What he doesn’t need is for the Senate to get its boxers in a bunch over the appointment by the Illinois Governor to get them off to a bad start, portending gridlock in the future.

If the Governor of Illinois really cared about his state and the nation rather than about his own political fortunes, he would step aside, let the process play out and run again for Governor at the next election if he is found innocent. Apparently he doesn’t see that as an acceptable alternative. Maybe Harry Reid can convince him that if he steps down and the reward for that is the approval of the appointment of Mr. Burris by the Illinois Secretary of State and the Senate. Then, after the process plays out, if he is cleared, what a great platform to run again. “I care about Illinois and its citizens so much that I put their well being ahead of my self interest. I want to resume serving you, the people of Illinois”. Of course, you have to have a high level of confidence in the system and in your innocence to take that approach. It worked for Martha Stewart in a similar way. She was found guilt, didn’t appeal, did time and got her life back. Similarly the former Governor of Connecticut was found guilty of accepting graft, did his time and is now the Business Development Director for his home city of Waterbury’s Chamber of Commerce. He is getting his life back. We all screw up from time to time. It is not what we did but how we handle it that affects the rest of our lives. Those who are religious might see the value in confession and repentance. It seems to have worked for the two examples above.

The Economy is bumbling along. The first time jobless claims have improved a little this week at the lowest level in the past 8 weeks. It is entirely possible that this is a signal that the economy has bottomed out but I suspect it is just a respite in a continuing slide.

Let us all wish for and those so inclined pray for a better year in 2009. I wish you all a Happy, Healthy and Prosperous New Year.

Unemployment rising

Today is Christmas Eve and for those of us who share the Christian faith it is a time for reflecting on a year gone by and looking forward to the future. It is a time for sharing gifts with each other to celebrate what some consider the second most important day in the Year.

The other evening I went out to a local restaurant and saw a woman wearing the quintessential sign of the times, It was a large "Pink Slip" that read "Merry Christmas, your terminated" pinned to her shirt. She was one of the many at the bar that night that had just worked their last day at the local Yatch builder. "Will it reopen if times get better", I asked. I doubt it she said, "they were moving the equipment out for the last couple of weeks". Where will this equipment go, I wonder?

Unemployment, or at least new claims, rose to the highest level since 1982, and up 86% from January 2008. That can’t bode well for corporate earnings during the first quarter and therefore stock prices likely will slump even more. To me, it is looking more and more like this market is going to remain soft to trending down over the next few months, maybe longer.

President-elect Obama, enjoying what may be his last opportunity to vacation with his family for quite a while, is going to take office in just under one month and will be facing a lot of problems from Iraq, Afghanistan, the economy, to the clamoring for delivery of expectations created during the campaign by his supporters. Each of those issues complicate and make enormously more difficult the other. On the plus side, he is getting unprecedented co-operation from the current administration in terms of the transition process. Unlike the last turnover when childish pranks like removing the “W” from the keyboards was the order of the day.

For the rest of us, hunkering down, spending only what is necessary to preserve capital until the market rebounds, will be the order of the day. This is a self preservation tactic that will ultimately bite us in the butt by making the recession more severe and longer lasting. We will be sharing the pain with our neighbors at home and abroad.

Auto Industry Bailout

In the waning days of the Bush administration perhaps the opportunity for historians to point to something he got right. Yes I, too , am opposed to a Bailout on many levels but playing Russian Roulette with the fragile economy may not be the wisest course of action. A measured bailout with lots of strings attached is a good alternative. The prearranged bankruptcy would have been a better option in my mind and the idea that no one will buy a car from a bankrupt company really underestimates the markets creativity. Insurers would write a contract to cover needed repairs on cars sold, funded up front by the auto industry. Just like we buy group health insurance, the insurers would calculate the annual losses in the recent past and charge a premium to cover that plus handling and profit. Secondly, the aftermarket parts makers would jump all over the opportunity presented to supply a large market with parts to repair these cars for the foreseeable future, thus boosting employment. It might even provide for independent mechanics who are properly certifed to perform warrantee work, expanding the consumers options and creating a larger opportunity for small businesses.

Beyond that we, the American car buyers, have stopped buying their cars anyway. That is why they are in trouble in the first place. We prefer Asian reliability and German performance to Detroit mediocrity. I have no idea how the bailout will effectively change that. Daimler Benz tried to "fix" Chrysler but couldn't overcome the "Cultural issues" that made the two companies effectively incompatable. Daimler walked away, selling Chrysler to Ceribus Capital for pennies on the dollar they paid for it, a sure sign of capitulation.

That said, we need to strengthen the economy and keeping people gainfully employed is a step in the right direction. In the long term, however I believe that it is money down a rat hole. Ford, doesn't need it and isn't planning to take it at this writing. They saw the problem and dealt with it early. They should reap the rewards of their wisdom while the other two continue struggling to stay afloat. Ford had electric hybrids available first (of the American Manufacturers) because the Moghty GM thought it could dictate the tune and didn't believe as strongly in hybrid technology as other alternative fuels which were further off in the future (or read that as we haven't finished milking the current technology). Hopefully the "bailout" will contain significant language to force GM and Chrysler to adopt these interim technologies.

At the end of the day the financial crisis is about trust (or the lack thereof) and it is still about housing and that problem isn't going away anytime soon. This recession, from which we are trying to protect the auto makers in this latest round of chicken little, is going to continue until housing rebounds. With the second wave of mortgage defaults still coming (some say larger than the first) housing prices will remain depressed. For those with substantial equity left and a solid credit rating, refinancing at favorable rates is possible and they can use the extra cash to capitalize on the falling prices of almost everything.

The Economy

So you think the worst is over? I’m suspicious that there is yet at least another shoe to drop. There are more mortgages that haven’t yet hit their reset date that will be a wave of much larger homes, bought by people with good incomes that just over reached and/or are losing those good jobs they had.

Earnings for the first quarter are very questionable in my eyes, and I think this recession will deepen and last through most, if not all of 2009. Interest rates will remain low, bad news for those who are savers and those who are living off the interest income of savings. It would be good news for those who need to borrow except for the credit problems that are restricting credit to the most credit worthy borrowers but at unusually high rates. We have gone from a nominal risk premium to a severe risk premium. Together these will create a bad year ahead for most everyone. It will take Congress a while to act on health care and even longer to get any broad based coverage into place, meanwhile as people get pink slips they will be losing their health care so even Doctors (MD’s, Optometrists/Ophthalmologists, Chiropractors, Dentists) and other health care professionals will see a decline in income and/or a rise in uncollectable receivables.

Auto sales will remain soft if the credit crunch stays with us. Those 3 million jobs that were so central to the need for a governmental bailout are not very secure bailout or no. Plant closings, temporary and relatively short term, will likely be prevalent over the next year. If the Gov’t. has any money on the table and the work bank is abolished, then those workers affected will be spending less prolonging and deepening the recession.

New housing construction is already at the lowest level since 1959. The future will surely see this grow but not in the near term. The second wave of mortgage foreclosures is still in the wings and that will increase housing inventory. Housing permits are down, so even when permits go up, houses will take 6 to 9 months to be completed and sales closed, assuming the builders can get money to fund construction costs until closing. The amount of funding available will have a major impact on the speed of the housing recovery when it comes. Don’t look for any major recovery in the housing market for at least another year.

A rate drop by the FED. (anticipated at this writing) will do little to loosen the credit markets. It may improve the profitability of the banks a bit, but their lending levels are such that even more margin on the deal will not make up for the smaller number of deals they are doing and their earnings will likely remain weak.

All of that said, I believe there are opportunities out there for the patient investor. There are always solid well managed companies mixed in with the others in each market category. Finding them and buying them slowly over time even while there maybe a continuing slide will be, I judge, amply rewarding over the next five years.

Gasoline???

Has anyone noticed the price of gasoline lately? It has been quite reasonable hasn't it. Just when you thought the world had finally returned to "normal" watch out. The wholesale price of gasoline at the New York NYMEX RBOB Gasoline futures market has been creeping up every day to now $1.08 per gallon. Typically you can add $.75 to$1.00 to that price to get the 'usual' price at the pump. How much you add depends on where you live and the state tax. Where I am, in Brunswick County, NC it typically ranges in the $.90 range. This covers the state tax, transportation to the local station and retailers profit and any other incidental expenses I may have left out.

By the first of the year, assuming the price creep continues we could be looking at $2.00 gasoline at the pump. Still a long ways from $4.00+ of last summer but then January isn't driving season. By spring we could be back in the $3.00 range unless consumption drop a lot.

So enjoy it while it lasts friends, the party is almost over. Gas prices will increase just as you start to get those Christmas charge bills. Ho,Ho, Ho.

june 30

Well Congress has again displayed why it is not ALL George Bush's fault. They can't agree on anything and maybe they should all resign. Lets start over.

The money they did pass was passed for the Financial Industry to buy up toxic paper. That would restore confidence of lenders in each other, one knowing that if the other had crap on their balance sheet it could be underwritten by the Gov. and they wouldn't suffer a liquidity driven failure. Paulsen has not been able to get that done and the housing crisis still looms.

What do we know?
1. Housing is the backbone of wealth for the average American.
2. They have been abusing the golden goose by using their home as a personal ATM machine.
3. It is pay back time. The check for the sumptuous meal has arrived. We may all be doing dishes for a long time.
4. Until the housing problem is resolved, we can't spend freely.
5. The US economy is between 60 -70% driven by the consumer.
6. Consumer restrained, an awful lot of jobs go away.
7. Loss of jobs=higher unemployment (not a tough one to grasp).
8. Higher unemployment =less consumer spending (see where this is going?)
9. Auto industry can't sell cars, running out of money to pay people to sit around doing nothing.
10. Government asked to give them money so they can pay people to sit around doing nothing (isn't that what unemployment does?)
11. Money spent to help automakers isn't available to help the housing issue. It doesn't solve the problem. It is like taking Ibuprofen when you've a broken arm. It helps the pain but does nothing to set the arm and promote healing.
12. Congress couldn't agree on wording. They want to assure that the car companies are going to do the right things for the future. But they can't agree amongst themselves what the right things are.

Results: The market will continue to wind its way down until the temptation is too great for investors to ignore and they begin to buy up companies at what are surely bargain prices in anticipation of the recovery that will come eventually. The point of temptation is different for every investor and every company. Overall I think the market could go as low as 5800 (the approximate book value of the 30 companies in the DOW). I don't think the investment community is patient enough to wait that long, but 7200 is a real possibility in my mind.