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Archive for February, 2009

Fourth Quarter GDP Revised Much Lower

Friday, February 27th, 2009

Today the Commerce Department brought some very negative news on the economy. The Commerce Department released a revised fourth quarter Gross Domestic Products number that shows a loss of a stunning 6.2%. Just a few weeks ago the initial estimate was for a loss of 3.8%, and the most shocking part of this revision is the sheer magnitude of the revision. Historically GDP figures aren’t revised by any more than .5% or 1% at the most, but this time it was completely different. The news gets even worse though, this wasn’t even the final reading for the GDP, that will come later on in March.

What caused the large revision downward in the number? Consumer spending dropped 4.3% in the fourth quarter, which is typically a strong quarter because of all the holiday shopping. Also pushing the number lower was a major adjustment lower in exports and inventory investments. To put things in perspective the 6.2% estimate that is currently being shown for the fourth quarter is the worst single quarter since 1982.

The scariest part of the whole thing is that the first quarter is looking much worse than the fourth quarter did. Companies are slashing jobs at a much quicker rate, consumers are slowing down their spending even quicker than they did in the fourth quarter, and the overall sentiment of the market and the economy as a whole has gotten much worse. In order to see a slowdown in the dramatic drops in the GDP of this economy we may need to see slowing of the harsh drop in the housing sector. As of yet, there have been no signs of any kind of improvement in the housing market that could aid the economy.

The truth is we are in a period of great unknowns. The uncertainty is terrible for the stock market and for every individual who wants to have that coveted job security. For the foreseeable future, uncertainty will reign and wise use of savings will be absolutely vital.

Nine More Years Before Dow Hits 2007 Peak

Thursday, February 26th, 2009

Dow closed at 7182 today. How long it would take before it reaches 2007 peak of 14,000? Prof. Elroy Dimson of London Business School estimates that we’ll have to wait nine more years before the Dow average, including dividends, has a 50% chance of hitting its 2007 highs.

I am sure many investors will be damn happy if they ever get their money back from the market.

You can read the complete story in Wall Street Journal.

BofA CEO Ken Lewis Doesn’t Want to Talk about Merill Bonuses

Thursday, February 26th, 2009

I think Ken Lewis is arrogant and overconfident. Hours ago, he refused to reveal the names of Merill employees, that received multi-million dollars bonuses in 2008, to New York Attorney General. Those guys received the hefty bonuses few weeks after Bank of America received $20 billion bailout from Government.

The New York attorney general’s office has subpoenaed Bank of America Corp. seeking the names of Merrill Lynch executives who received $3.6 billion in year-end bonuses, after Chief Executive Ken Lewis didn’t want to give out the names. If this guy is genuine, as he claims, why is he hiding the names? Whom he is trying to protect? Himself?

Related Link: Ken Lewis Keeps Lips Sealed

$80,000 Collectible Teddy Bear

Thursday, February 26th, 2009

We all heard about $6,000 spent by Dennis Kozlowski, former CEO of Tyco, for bathroom curtain. Now, there is another guy that allegedly spent $80,000 for collectible teddy bear — using the money looted from investors.

Federal prosecutors allege that since 1996, Paul Greenwood and Stephen Walsh ran a fraudulent investment-advisory scheme, involving several companies, in which they promised to invest funds in a program called “enhanced stock indexing.” It was represented as a conservative trading strategy that had outperformed the Standard & Poor’s 500 Index for more than 10 years. Prosecutors allege the men raised more than $668 million from institutional clients, and misappropriated most of the money.

Recently we heard about Bernard Madoff. Then, there was news about Allen Stanford. Now, this news is coming out. I wonder how many more crooks are going to be discovered.

Alleged victims (of Greenwood’s fraud) include Carnegie Mellon University, which had invested more than $49 million, and the University of Pittsburgh, which put in more than $65 million, court records show. These universities charge exorbitant fees from students and then they lose all the money to some crooks. What a world!

Related Link: Pair Lived Large on Fraud

Every Little Bit Counts

Thursday, February 26th, 2009

Every little bit that you can save is vitally important. It has always been the case and will always be the case, but it is even more magnified now in the economic downturn that America and the rest of the world are in. With so much uncertainty surrounding the future of the employment picture, the stock market, and the economy as a whole it is clearly up to the consumer to make every bit of their savings go a long ways. Many are finding it hard to pay the bills each month and hard to stay in their home, and in the coming months only more people will find this same problem.

It is so frustrating for me when I hear someone say, “Well it’s only a few dollars.” The truth is it may only be a few dollars this time, but if you save $8 or $10 consistently it will add up much quicker than you would have ever thought. The current economic picture is not one in which anyone should turn their back to any kind of savings that is available to them.

Maybe you have always been the type that thinks every little bit counts and saves every little penny that you can save. If you have been then that is great, keep up the good work! If you have been one that thinks that taking some extra time to save a little money isn’t worth it and you’ll just simply go with convenience over saving money, then you need to think twice about how you view things. In a perfect world savings and convenience go hand in hand, but this quite obviously isn’t always a perfect world. If you haven’t done it before now is the time to start putting into practice the theory that every little bit counts, because it truly does.

Can the American economy recover? Of course!

Wednesday, February 25th, 2009

I wanted to take a look at the more positive side of things today, which is certainly tough to do in the current economic environment, but it is important to keep some perspective. The fact is our economy is in terrible shape and there is no real end in sight, but that does not mean that this economy cannot recover. In fact the chances of a strong recovery by the American economy at some point are very high.

I think as the economy and the overall market goes lower and lower it is easy to go along with the naysayers and those who believe that the American economy has been forever tainted and it will never again see its glory days. The fact of the matter is, this isn’t just an American problem it is a worldwide problem. The other thing that people need to remember is that recessions do happen, and it had been quite some time since the American economy had a severe recession. Even if the recession turns into something that goes on for quite some time, it doesn’t mean that America has lost all of its competitive advantages.

There are quite a few analysts who are hinting that this could be the beginning of the end of America’s reign as a global power from an economic standpoint. I think to believe such things is quite premature and rather short-sighted. Clearly right now America’s position is weakened, but this has happened before and it will happen again. America can still be an engine of growth and a market leader around the world. The American economy can once again start humming along and helping many individuals live a very comfortable lifestyle. While I wouldn’t want to bet on the economy turning around anytime soon, I also wouldn’t want to be on the side who thinks this economy is on a one way street and will never turn things around.

Consumers need a reason to spend

Tuesday, February 24th, 2009

If you watch much financial television you’ll see numerous debates as to exactly what is going on in the economy and exactly what could turn around the ailing economy. There are so many different ways of trying to stimulate the economy that it could make your head spin, but the truth is they all boil down to one simple thing; making the consumer want to spend their money once again.

The United States economy is extremely dependent on the consumer. In fact over 70% of the overall United States economy comes from consumer spending. That is quite a stunning number, and it is one that is very concerning at this time. Why is it so concerning? Look at consumer confidence numbers and retailers earnings reports. The Consumer Confidence Index plummeted to an unheard of level of 25 in February. Consumers outlook of the next six months dropped even more precipitously, which is certainly an ominous sign for those wanting a rebound by the end of this year. The average consumer isn’t stupid and they definitely hear the national news every night which tells just how bad things are right now.

The fact of the matter is the American economy needs the consumer to want to spend their hard earned money and get it cycling through the entire economy. The other simple fact right now though is that the average American simply can’t be doing much spending at all right now, especially discretionary spending. Americans are concerned about their jobs and the entire financial system of our country. Why exactly should Americans be spending that hard earned money? From a broad economic based thought, spending must occur to promote a rebound, but from the point of view of an average consumer, I see no reason to be spending right now. Until things get settled out and consumers have a reason to spend, expect the American economy to have serious issues finding any real footing.

Banking Stocks

Tuesday, February 24th, 2009

I warned about banking stocks one month ago.  At that time Citibank was trading at $3 and Bank of America was trading at $5+. I warned that the price could go lower. Bank of America went down to $2.53 before recovering to current $4 level. Citibank went down to $1.61 before coming back to $2+ level. I have never seen banking stocks this volatile in my career.

I don’t really worry about nationalization of these two banks – Citibank and Bank of America. Contrary to public fear, nationalizing these banks for short period of time will do good for the economy. You can also get rid of people that put the country and its economy in great danger. Nationalization is no longer about economy. It’s politics now. Anything can happen in the next few weeks.

If you are a hard core trader, you may want to play bank stocks to use the volatility to your advantage. If you are not, then better stay away fom bank stocks such as Citibank and Bank of America. Things can change suddenly and quickly. If you are not careful, it can wipeout your entire savings.

Disclaimer: I do not own any stock mentioned in this blog post.

Is nationalization of banks really the answer?

Monday, February 23rd, 2009

It’s been swirling around both Main Street and Wall Street for several weeks now, but as each day passes the rumors of the nationalization of some of the largest financial institutions grows even stronger. Continually we have rumors breaking out of the nationalization of banks and then White House spokesman Robert Gibbs continually tells reporters that the Obama administration strongly believes a “privately held banking system is the correct way to go.”

The fact that we are even having to have a discussion about whether nationalization of our nation’s largest banks is healthy or not is a case in point as to how terrible things have gotten for the economy over the past year. These once seemingly unbreakable banks are falling apart in front of our eyes. The financial health of the entire industry is at stake here, but there truly are no easy answers to how we fix the problem.

Nationalization of the banks is a very touchy subject and for good reason. If the banks would be nationalized the fear is that politicians and anyone in the government would have access to allocate bank capital in any way that they wish. As most Americans know, politicians in all parties tend to worry first and foremost about getting elected, which could be highly detrimental to the capital position of the bank as it is controlled by the government. Nationalization of the banks may sound like a great way to avoid bankruptcy, but in reality it is a very scary threat.

The true definition of what a nationalization of a bank would be like is not known, hence more uncertainty in the overall economy and the markets. This vicious cycle of uncertainty and economic recessions or depressions is a difficult one to get stopped. One thing is for sure: the nationalization of the banking system as we know would be a major move and one that could threaten the system for many years to come.

No Bottom in Sight

Saturday, February 21st, 2009

Brilliant investors like George Soros are pessimistic even after trillion dollars bailout from U.S. government. George Soros said yesterday that the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis. Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.

“We witnessed the collapse of the financial system,” Soros said at a conference in Columbia University. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.”

“I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world,” Paul Volcker, former Federal Reserve Chairman, said in the same conference. Quotes like these, from the people like Soros and Volcker, can make anyone nervous.

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