Thoughts on the Rescue Plan...Outside View
Sunday Links: The Splurge
http://abnormalreturns.com/2008/09/21/sunday-links-the-splurge/
Capitalism will survive, but not for lack of trying to commit suicide.
http://www.becker-posner-blog.com/archives/2008/09/the_financial_c.html
Links shared by Daniel Carroll, FSX Team on FSX Fantasy Stock Exchange.
Saturday, September 20, 2008
What Credit Crisis?
Business reports around the world are reporting last week's trading activity was net neutral. For example, the Toronto Stock Exchange was up 1% for the week. The Bush Administration is creating another bailout package that will cost US $700 Billion. This is a massive amount. Worse is that this is on top of the cost of saving AIG ($80B) and Fannie And Freddie Mac ($200B combined). The total deficit excluding these items will be $482 Billion.
It has taken me months to really comprehend why the credit market is seizing. Mortgages were given out to many homeowners who should not have qualified in the first place. Why? There were "workarounds" against the checks and balances associated with calculating the risk these homeowners would default. The repackaged debts, CDOs, and other instruments that were created still actually have value, but there is no market for them. What do you assign investments that have no buyers? Zero. Yet these debt obligations have property backing them, so its book value should not be zero.
The government is effectively buying all of the above illiquid debt obligations and creating a market for them. This should solve the problem of the credit market seizing up. In fact, this was so severe that several money market funds had a redemption value of $0.99 for every $1.00 deposited. Investors were even buying US 30 day T-bills were paying almost 0% interest.
The action taken by the Government was necessary. Now, as stock investors, we must review the consequences of this drastic bailout, and make a few assumptions.
Let's start with the logical assumptions:
Consequences to stabilizing the Financial Sector:
...and On Toronto Real Estate?
The renewed bank sector stability in the US will have a positive impact on Ontario's economy. Home buyers will be less fearful that the weakness in housing in the U.S. will spread here. As always, I would recommend home buyers monitor the health of the commodities market and the job market. These two factors are good indicators for the health of home buyers.
I recommended TLT on September 4th. It is now a SELL.
Business reports around the world are reporting last week's trading activity was net neutral. For example, the Toronto Stock Exchange was up 1% for the week. The Bush Administration is creating another bailout package that will cost US $700 Billion. This is a massive amount. Worse is that this is on top of the cost of saving AIG ($80B) and Fannie And Freddie Mac ($200B combined). The total deficit excluding these items will be $482 Billion.
It has taken me months to really comprehend why the credit market is seizing. Mortgages were given out to many homeowners who should not have qualified in the first place. Why? There were "workarounds" against the checks and balances associated with calculating the risk these homeowners would default. The repackaged debts, CDOs, and other instruments that were created still actually have value, but there is no market for them. What do you assign investments that have no buyers? Zero. Yet these debt obligations have property backing them, so its book value should not be zero.
The government is effectively buying all of the above illiquid debt obligations and creating a market for them. This should solve the problem of the credit market seizing up. In fact, this was so severe that several money market funds had a redemption value of $0.99 for every $1.00 deposited. Investors were even buying US 30 day T-bills were paying almost 0% interest.
The action taken by the Government was necessary. Now, as stock investors, we must review the consequences of this drastic bailout, and make a few assumptions.
Let's start with the logical assumptions:
- Credit markets open up again, making it easy for consumers to borrow again
- Consumers re-gain confidence and boost spending
- Companies boost revenue because consumers are happy again and buying their things
- Companies do not lay off employees because their sales are steady
- Companies import raw materials, developed products thus aiding in economic growth for China, India and Europe
- US Consumers take out mortgages and buy homes, and assume that housing prices will not fall the next month
- US Consumers take on more credit card debt, and don't mind paying the high credit borrowing rates
Consequences to stabilizing the Financial Sector:
- The US will buy debt and increase Money supply, fueling inflation
- Higher consumption = Higher supply of products = Greater demand for oil, metals, and other commodities
- Interest rates will need to increase, creating higher borrowing costs
- The US dollar will weaken
- The US is spending $400B a year just to pay for the interest on the debt. This will severely limit the ability for the next President to fulfill spending promises.
- Buy gold (trades inversely to the price of the US Dollar)
- Buy commodities, especially oil
- Sell US Government Bonds (I can no longer recommend TLT)
- Begin to take a position on the consumer discretionary sector and semiconductor sector
...and On Toronto Real Estate?
The renewed bank sector stability in the US will have a positive impact on Ontario's economy. Home buyers will be less fearful that the weakness in housing in the U.S. will spread here. As always, I would recommend home buyers monitor the health of the commodities market and the job market. These two factors are good indicators for the health of home buyers.
I recommended TLT on September 4th. It is now a SELL.
Thursday, September 18, 2008
Eyes on the US Dollar. Buy Gold
AIG is the most recent bailout that will cost the U.S. 85 Billion. It's a big number, but in the grand scheme of things, the cost is not unreasonable. In fact, the government might even be able to make a profit from this "investment" a few years down the road. The reward of bailing out AIG is far higher than the risk of global-wide credit market liquidity.
In the short-term, the global reaction to the costs incurred by the U.S. Government need to be monitored. How? Monitor the U.S. dollar. As I had remarked in a previous entry, the USD rallied gallantly, but a sell-signal was recently triggered. My initial short-term price support target for the USD is 77.07.
To profit from this short-term trend, buy gold. It rallied 9% yesterday.
AIG is the most recent bailout that will cost the U.S. 85 Billion. It's a big number, but in the grand scheme of things, the cost is not unreasonable. In fact, the government might even be able to make a profit from this "investment" a few years down the road. The reward of bailing out AIG is far higher than the risk of global-wide credit market liquidity.
In the short-term, the global reaction to the costs incurred by the U.S. Government need to be monitored. How? Monitor the U.S. dollar. As I had remarked in a previous entry, the USD rallied gallantly, but a sell-signal was recently triggered. My initial short-term price support target for the USD is 77.07.
To profit from this short-term trend, buy gold. It rallied 9% yesterday.
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