Wednesday, March 18, 2009

I am not buying….



"If it doesn't make sense, it's not true" - Judge Judy

The stock market is up for the fifth day in a row, but I am not buying. In a bear market, there will always be bear market rallies. For years investors have been advised to diversify and to buy and hold in bear markets and in bull markets because this way investors purchase stocks at varying prices. In the long run, the investor should come out ahead so goes the conventional wisdom. This is advice that is not so easy to follow. Since July 2007, the market has lost 50% of its value, and every market class has fallen, (ie: stocks, bonds, real estate) except for cash. As companies continue to layoff, the economy continues to deteriorate, and the market continues to decline I suppose the advice would be don't worry, hold on, you can't time the market. In my opinion, that is just plain stupid advice.

Before the Dot-com crash, I was 80% in the market, and two months before the dot-com crash I was 80% out of the market. In other words, I missed most of the crash. I knew valuations were way too high, and I patted myself on the back for avoiding what could have been a train wreck. I have to admit I was lucky in timing it so perfectly. Then comes 2007, and although not as obvious as the Dot-com crash, there were still warning signs. When Bear-Sterns was purchased by JP Morgan, I should have completely exited the market. It was a harbinger of things to come. I also understood as we approached the election, if it appeared that Obama would win the election, the markets would react negatively. There was indeed an Obama effect. These events did come true, and the markets continued to tank. Instead of instilling confidence in the markets, Obama fomented panic. I did not exit the market at the right time, and like many I was hit by the downturn. I held on in the hopes of selling on market strength, but the market continued to plummet. I sold a considerable portion of my portfolio even though the market was falling, because I had no confidence in the current state of affairs and the incoming administration. By doing this I avoided continued deterioration of my portfolio.

I am now struck with a form of paralysis as to what to do now. This has never happened to me before because I could always anticipate that sooner or later the market would rebound. I see the market go up now, but there remains an uneasy feeling about the current state of affairs in which we find ourselves. We have a president whose radical left agenda includes totally reshaping America into a socialistic utopia. Obama's call for cap and trade, taxes on the rich, socialized health care, and the list goes on do not bode well for an economic recovery. And, if an economic recovery does take place, hyperinflation will set in from the massive spending and borrowing undertaken by our government. In the last five months, the money supply has almost tripled, 271%. The Fed is buying up another trillion dollars of treasury bonds to further expand the money supply. This will move the money supply up an additional 60%. Banks are not lending right now, but when banks do begin to circulate this money, the result will be double digit inflation. Inevitably this will halt any recovery and we will begin to see phase two of Jimmy Carter only worse – stagflation déjà vu.

Even Democrats are beginning to have reservations about Obama's big spending plan as reported by Politico:

There is rising doubt among Democrats — particularly moderates already concerned about the big costs and deficits called for in Obama's budget — that either Obama or Washington have enough bandwidth this year to stimulate the economy, overhaul the failed financial sector and move on to a far-reaching domestic agenda.

AIG

The latest illustration of the incompetence of this administration is the dog and pony show we are witnessing with the bonuses of AIG. We hear how outraged Obama and his cronies are with the paying of AIG's retention bonuses. The bonuses represent 1/10th of 1% of the total 170 billion dollar bailout. The only reason the administration is outraged is because there was an outcry from the public over the weekend. Where was the outrage in the 9,000 earmarks in the omnibus bill? Or where is the outrage with the Fannie Mae and Freddie Mac bonuses? The one problem with all of this hoopla is the congress and the administration knew all about it. Senator Chris Dodd inserted the following amendment into the TARP bill:

The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary

The adminstration knew bonus payments were going to be paid, and so they allowed them to be paid. if the administration were so concerned, why now? why didn't they question it at the time of the bailout? They knew about it. The payments of these bonuses were in the filings of AIG a year ago.

There are two things of note here 1) these are contractual obligations – since AIG did not claim bankruptcy, these contracts are still enforceable. AIG cannot just abrogate enforceable contracts without massive lawsuits and 2) these are retention bonuses. Retention bonuses are paid to keep employees from leaving in order to prevent work stoppage or retraining new personnel. The administration is feigning outrage to try and assuage the public fear and divert attention elsewhere.

In Actuality, there are 400 million dollars in bonuses that AIG intends to payout. In defense of the retention bonuses, CEO Edward Liddy said the following,

We have to sell 70% of our company." But to make those businesses saleable, "you have to keep the people in place.... If you don't use retention bonuses -- those people are some of the best in the insurance industry, they will go elsewhere and we won't have anything to sell ... and we can't pay back the federal government. We want to pay back the federal government.

I have been paid retention bonuses in the past, and retention bonuses are for the exact purpose stated by Liddy.

Obama has noted that his approval rating is dropping and his disapproval rating is rising as Rasmussen reports, so he intends once again (like he did last week) to appear on primetime to try and justify his actions. He seems to be doing a lot of that lately.
To do this, he intends to usurp American Idol angering many of Idol's fans including me. Tonight, he plans to be on Jay Leno. He sounds worried. Senator Chuck Grassley (R-Iowa) wants the recepients of these bonuses to commit Hare Kare and Congress wants to impose a 90% tax on said bonuses. But, this outrage is to cover up an even bigger sin by AIG.

The beneficiaries of the government bailout include according to the Wall Street Journal two dozen foreign and U.S. financial institutions. These institutions received $50 billion dollars. Foreign banks include Germany's Deutsche Bank AG and French bank Société Generale SA and Scotland Group. AIG has become a clearing house for these foreign institutions. Where is the outrage here?

The question should not be why did AIG pay retention bonuses? but the questions should be why did we bailout AIG to the tune of 170 billion dollars in the first place? and why are we bailing out foreign banks with the bailout of AIG? And why didn't tax cheat and treasury secretary Tim Geitner bring this up when he drafted the AIG bailout bill?

This AIG bailout and bonus outrage do not pass the smell test.

This could have been an opportunity for Republicans, but I am wondering if they have any "cojones" left. Many of the Republicans were complicit in this bailout and I do not hear the outrage from them. Have they learned anything?

The Republicans have an opportunity to return to their conservative principles, but I do not see anything as of yet. Barack Obama's approval rating may be declining, but if there is no viable alternative, will he be around for a second term? Why would I or anyone want to invest in this environment?

Where is the change?

4 comments:

Anonymous said...

Do you believe Barack Obama has declared war on Capitalism?

- If I answer yes or no, it means that I am giving my opinion one way or another, so the question should be reworded to include my answer:
Do you know that Barack Obama has declared war on Capitalism? My answer then would be, "Yes".

muckdog said...

The bulk of the stock market losses are probably behind us, even if we retest the lows. The consumer and economy may already be recovering. The stock market discounts the future.

Mark said...

muckdog,

Thanks for stopping by. I hope you are right that the bulk of the market losses are behind us, but I still have my doubts. When inflation sets in because of all the printing of money, that will cause the market to drop. The market does discount the future - that is the problem. I am sure I will be dabbling in it, but I am not going to risk my money in this market. Good luck

Mark

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