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The Wall Street Greek blog is the sexy & syndicated financial securities markets publication of former Senior Equity Analyst Markos N. Kaminis. Our stock market blog reaches reputable publishers & private networks and is an unbiased, independent Wall Street research resource on the economy, stocks, gold & currency, energy & oil, real estate and more. Wall Street & Greece should be as honest, dependable and passionate as The Greek.

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Tuesday, September 30, 2008

Apology for the "Ignorant" Main Street Populist

main street has good reason
By Steven C. Ferguson - Econometrics and Programmatic Trade:

Most of us would acknowledge that the political divide in our Country is becoming increasingly caustic. Along with it, there is an ever-sharpening regional divide, in which those who reside in "Blue States" routinely point out demographics of "Red State" inhabitants, uniformly labeling them as ignorant, uneducated, religious fanatics. However, as time passes, a devastating economic divide will transcend both of these schisms and give rise to a powerful populist movement fashioned across political and geographical lines. At the moment, this movement is taking shape as "Main Street" lashes out in all directions, perhaps indiscriminately, at its present enemy on "Wall Street."


Any defense of the Main Street populist uprising must start with an acknowledgment that full scale assault on Wall Street as an institution leads to a lot of unfair collateral damage. This is especially true when Wall Street as an institution is personalized in the form of individuals like Mr. Kaminis, who are undoubtedly among the most intelligent, honest and kind people you could ever hope to meet. Obviously these people bear no personal blame for the current banking crisis. But the honest and capable people who comprise parts of the institution do not themselves absolve the institution as a whole from blame.

Main Street populists are also surprisingly quick to identify the many sources of blame behind the distressed debt that our government contemplates purchasing. The common name for the guilty parties is "Them." And the most conspicuous of "Them" all happen to live on Wall Street. What do "They" all seem to have in common? Greed. For those who bought the big house on next to nothing in income, greed was disguised in the form of "The American Dream." For the brokers and real estate agents, who helped propel prices into an unrealistic bubble, "Greed" was disguised as an "opportunity for unlimited income potential." For the blue suit investment bankers, "Greed" goes by the name of "good 'ole capitalism." But it turns out that all of "Them" are susceptible to greed, and yet all universally fail to acknowledge it. That is because "They" are all blind to their own greed. In fact, when is the last time someone confessed: "I have a problem with greed?" Never. But we all remember Gordon "Michael Douglas" Gecko telling us that "greed is good." The problem with that caricature is that it leaves us thinking it so absurd that we could never be guilty of the same belief. And yet even though every Main Street Populist has a little Gecko inside, we all want to make sure he pays for the mess he has created.

Thus, right or wrong, the populist is feeling that a certain amount of retribution is due. But you would have to know his perceived plight in order to understand him and his American Dream that turned into a nightmare. It all started when he and his family went to buy their first house. The realtor told him he had better offer as much as possible because someone else would surely snatch it up. His mortgage broker found an appraiser who told him not to worry about the price: the banker would lend him as much as he needed. Moreover, the house was undoubtedly worth even more than he would offer and would be worth a lot more soon. The inspector that the realtor picked out told him not to worry about all the annoying little defects since his objections might disrupt the deal with the seller. And yet all these people took what seemed to be an exorbitant payday so that he could enjoy his American Dream. The mortgage broker wanted about $4000 for a few hours of work. The realtors wanted their $12,000 for remarkably bad advice. Even the inspector and appraisers took several hundred for several minutes. Worst of all, the banker wants him to pay about $200,000 in interest before he will even own a few hundred square feet.

Three years later, through no fault of his own, the Populists' house is worth a lot less than he paid for it. Strange though: his taxes have not gone down one red cent. The food he buys, he can no longer afford. Keeping the utilities on is a struggle. His insurance premiums are on the rise for some inexplicable reason. And no one is talking to him about any pay raises. Then his interest rate, which he had hoped to lock down on a 30-year mortgage, has now adjusted up several percent. His payments, along with all his other unexpected bills, have become unaffordable. Sure he knew this adjustment was coming, but he thought he could refinance. Only he didn't expect mortgage rates to be going up, since the news had been telling him the government was lowering interest rates and using tax dollars to bail out mortgage lenders. Nor did he expect that his now negative equity makes it impossible to be approved. To top it off, his credit report is spattered with erroneous information from more banks, who then charge him time and money to clear it up.

Finally, out of desperation, he sees an advertisement for the government-sponsored mortgage relief touted by Senators, Treasury Officials and all sorts of public agencies. He sees his bank is on the highly publicized list of participating lenders. He calls the number and they don't offer any relief at all, but want to give him credit counseling. So he decides to call the bank directly to renegotiate his loan only to hear the rude representative tell him he has to be five months in default before they will speak with him. This same bank, which also holds his credit card, starts sending his bill out a few days before it comes due. For some reason, they are changing the due date each month. By mistake, he is one day late on his payment, and he finds they want a $39 late payment along with 17% interest for the entire balance. After a few more months of this, he feels angry and overwhelmed.

Then one day, he begins seeing and hearing everywhere in the main stream news that this bank who has lent him money is about to go under. He reads that Wall Street needs him to bail out all of these banks, as well as the many financial institutions he lumps together with them. He is at once outraged that the institutions who demand ever increasing payments suddenly want their debt problems to be solved... by him. Outrage turns into vengeance and there is a conviction born that no matter the consequences to him, justice can and must finally be served! He and many other populists like him will now have their revenge on the "money changers!"

For the populist, many of whom have already cashed in any 401Ks they were holding for retirement in order to pay bills, life goes on even after the Black Monday on Wall Street. There is no economic collapse. He still is not able to borrow money or refinance his house, so the credit freeze means little to him. Neither is his employer in desperate need of credit to continue his employment. And all these threats of catastrophe, which no one can actually predict or explain with any clarity whatsoever, are just another ploy to get his money. Life goes on for the ignorant populist on Main Street, the same as it did the day before.

Please see our disclosures at the Wall Street Greek website and author bio pages found there.

ahmadinejad mahmoud president of iran


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Zero Coupon Rentals


In this day and age of complex derivative instruments and acronyms to boot, I've created a financial security of my own, the "Zero Coupon Rental" (ZCR).


Zero coupon bonds are sold at deep discount and generate no cash flow. The interest earnings are compounded and embedded into the price of the bond. An investor can purchase the instrument with a one-time expenditure and allow the investment to grow over a long time frame: typically 10, 15, 20 or 25 years. The longer the time frame, the deeper the discount, and the higher the anticipated future return.

Zero coupon bonds are loved by planners, who use them when a known event will require funds. These events are generally many years in the future and require some planning. College educations and retirement are the typical uses, but any long-term goal fits, such as say a business start up for a college graduate or the wedding of dreams. Zero coupons work great for potential needs.

Every worker, whether employed or self-employed, needs to consider their retirement needs. The earlier provisions for retirement are started, or a fiscal strategy is begun, the more assets will be accumulated and the sooner financial independence will be achieved. One wealth strategy that I have employed with income rich investors, I like to call the "Zero Coupon Rental". The simple steps to employ the strategy are as follows:

  1. Identify the universe of properties suited for the market segment that has been targeted for acquisition. This is usually a family home typically 3 or 4 bedrooms, 2 or more bathrooms, at least a 2 car garage, a fenced backyard, and in the 1500-1800 sq. ft range. However, there are other choices including college shared units, singles lofts, corporate and vacation furnished rentals, horse properties, farms, etc... The main ingredient is the need for the investor to familiarize themselves with the potential investment, and immerse themselves in the details of the neighborhood, such as schools, shopping, transportation, demographic make up, and historical growth of rents and appreciation. When researching the neighborhood, pricing of the properties will become apparent, and a short study will provide the knowledge necessary to recognize a market "anomaly." This anomaly usually comes in the form of a very good property at a discount to market. This discount would likely be caused by a pricing mistake or a distress-motivated seller. At the moment, the market is rich with the distress of REO Foreclosures.
  2. Purchase the property at a discount. Even a discount of as little as 5% will boost the total return. In today's, environment the REO's are being offered aggressively to the market, and non-foreclosed properties are forced to compete on price. The result is an opportunity that is available once every twenty or so years.
  3. Leverage the property to a level sufficient to generate break-even cash flow. In other words, use as little down payment as possible to equalize the rent and the debt service, taxes, insurance, repairs, leasing costs, vacancy factors, etc. Depending on the investment, this could be from 10-30% down payment; mortgage the balance with a 30-year fixed rate loan. Long-term rates are terrific in the 6-6.5% range as of today.
  4. Upon closing, you have created an investment with a guaranteed return. Anyone with children will attest to how quickly 10, 20, or 30 years can pass. The tenants who occupy the rental will pay the balance of the mortgage off in 30 years. The mortgage payment will remain reasonably constant over the life of the loan, varying by taxes and insurance, HOA fees, etc. However, the rent will not. Rent increases over time. The typical rent increase is 3-5%; some years are less, but rents have been depressed for years, and a10-15% increase is possible after the glut has been absorbed. Many individuals are not interested in additional cash flow during their high earning years, and so the rent increases should be used in a principal reduction strategy to reduce the mortgage balance to zero. Obviously, increasing the principal reduction of a fixed rate mortgage by an additional 3-5% each year will reduce the payoff time from 30 years to 18, 16, or even less.
  5. The rental income then pays the loan off in a prescribed time and may be accelerated at the investor's option. Only one cash investment is needed and the property becomes self-sufficient. Purchasing multiple properties and tailoring the loan payoffs to meet future needs, allows for incredible wealth generation and long range planning.
  6. A typical scenario involves accumulating 10 properties over a 10-year period. For the sake of simplicity, a non-appreciating environment is assumed. Assume also a $300,000 purchase price with a 20% down payment and an additional $5,000 in costs. A yearly investment of $65,000, excluding any capital gains or tax benefits would result in 10 free and clear properties within 20 years. $650,000 would grow to $3,000,000 if there was absolutely NO appreciation, and it would result in huge cash flow even if there was NO growth for 20 years. The demographics of the US are so compelling as to make that possibility near to impossible.

In conclusion, asset markets always offer opportunities. Sometimes it is the stock market, sometimes it is the bond market; recently it has been the commodity market. The global market is at an inflection point, and money is moving out of the richly priced oil and commodity sectors and into undervalued groups like financials and real estate. A shift is taking place, and in my view, in 18-24 months those that repositioned their portfolios to reflect the change should be richly rewarded.

Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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Monday, September 29, 2008

Blame Wall Street and Ruin Main Street

blame wall street main street
By The Greek:

Don't blame Wall Street, at least not completely...

Hear me! You are WRONG to blankly blame Wall Street today. In fact, you partly have Wall Street to thank for the American dream! Now, you know I'm not on Wall Street any longer, but you may not know that I sacrificed good standing there because I stood up for morals and ethics against the orders of the Wall Street types you seek to vilify today. I literally sacrificed my life for my values, so hear me now! You owe me that much.

You know that I represent an independent voice with a goal to lead you into understanding, and out from under the kind of corruption you are hunting now. Yes, bad people exist on Wall Street, the same as they do everywhere else. That said, I must correct an overwhelming ignorance that I see standing in opposition of a bill that offers the hope and potential to rescue our economy. Wherever blame may lie, I'm certain it is shared. Whoever is to blame, it's the whole of America we now seek to help.

The tax burden of $700 billion to $2 trillion is a good reason for concern, and an understandable source of frustration, but we must also understand that with government intervention, we seek to stabilize our financial institutions from California to Florida, from Washington State to Maine. In so doing, we are seeking to shelter each and every American from the very personal impact they would feel from broad reaching financial disaster, and I'm not exaggerating or sensationalizing in so saying.


My dear friends, Americans, we stand this day on the precipice of abyss, and while I never mince words, I neither exaggerate words in saying so. A horrible misconception is greatly disturbing me, and I feel it's fueling a good deal of argument against this bill.

You want to blame the rich blue suits of Wall Street, because you are sure they are to blame and you are comforted to hear others doing so as well. Also, you see Lehman Brothers and Bear Stearns now nonexistent and Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) fighting for survival. You note the stock market is nearing 30% collapse, and you see Wall Street on the front page of your daily paper. You hear about the excessive compensation of self-seeking CEOs, and you witness the witch hunt for their heads as human behavior drives counteraction.

Many people, many segments of American industry are to blame for the mess we are in, and even you and I are to blame. Just the same, it was Wall Street's contribution to this mess that is the same contribution which allows almost every American the opportunity to own a vehicle, and even a home. What separates the average American from the average third world suffering citizen is surely in part American creativity, invention and will. Why does a man in one nation have a job at Wal-Mart (NYSE: WMT), Target (NYSE: TGT), The Olive Garden (NYSE: DRI) or Disneyland (NYSE: DIS), and own a car and a home, while another across the world struggles to keep his family alive? You can partly thank Wall Street for that, because one man is not more intelligent than the other, nor embodies greater work ethic than the other.

Wall Street did nothing more than create financial securities, specifically secondary markets in asset backed securities, that allowed Americans to live the American dream. They created securities, they bought them and sold them, held them for investment and traded them for fee. That's all they did. Meanwhile, as a result, the every day Joe was able to own a home and a new car too.

I'm not saying that excess does not exist on Wall Street; that would be gravely naive. Certainly excesses generated from greed took a well-intended idea, however profitable, and led it to dangerous extreme. But Wall Street is not solely to blame for that, nor is Wall Street solely to blame for every stock market downturn or economic cycle trough. Wall Street bears the pain the most, and enjoys the fruit at the highest.

Let's Not Overlook Others Equally at Fault

Let's Start with the Credit Rating Agencies

How about the credit rating agencies, Standard & Poor's (NYSE: MHP) and Moody's (NYSE: MCO), that supposedly analyzed these securities and negligently labeled too many of them investment grade. That little mistake which made no difference as long as home values rose, made all the difference as the housing bubble busted. It was their job to decide how risky these investments were, so how hard was it to envision the scenario of home price decline and why didn't they? Is price decline so abnormal as to not be included in scenario analysis?

Each bank that now owns these securities, and falls into bankruptcy because of holding them, trusted these organizations to do their job correctly. They were supposedly a trustworthy voice to be believed in these matters. Nothing was sold that was not rated by these organizations. So don't blame Wall Street alone while ignoring Water Street!

These assets, whether backed by mortgage loans, commercial loans or consumer credits, embody the securities the Treasury Secretary plans to buy with your $700 billion. These are the illiquid assets that are clogging the financial system. These are the securities that prevent banks from lending to one another. These are the securities that marked-to-market are now worth well below the value they were suppose to have, the value that was supposedly appropriate for the risk born. These are the securities that cause your banks to take massive charges. These are the securities that lead to insolvency. These are the securities that have caused bankruptcy. These are the securities that our government now needs your tax money to purchase, $700 billion to $2 trillion in total, to remove from the balance sheets of our financial system. So, if you are looking to place blame, consider these firms equally to Wall Street's financial designers.

Mortgage Brokers

It was mortgage brokers who created liar loans. It was mortgage brokers who extended opportunity beyond its natural reach. It was mortgage brokers who propagated the excesses of housing price rise, partly at least. Most of these people are out of their jobs now, but many banked their profits and walked away. Sure, after the fact, many came to trial, but part of the blame belongs there as well. Also, some of the banks that originated these loans took on great risk for the sake of greed. These banks are not on Wall Street, but it's easier to blame the guys on the golden hill for all our woes. Greedy men in these other banks originated bad loans, and sought Wall Street's help to package them and sell them since they could be rated investment grade and dumped onto others. That greed is partly to blame as well.

Look No Farther than the Mirror

We neglected these errors. You and I, our elected officials, and the agencies we've established to watch over the activities of mortgage brokers, credit rating agencies, lending practices and securities creation, the collective group of us failed.

And please do not politicize this. This is not a Republican problem nor a Bush Administration issue. It's not the creation of the Democratic Party either. This is not John McCain's fault, nor Barak Obama's misunderstanding. This is a problem endemic to our society.

Our Society is to Blame - Our encouragement of easy living and good times

The cheating we overlook in our schools, the free pass we give to negligence there; the selfishness throughout our society and deficiencies of our family structure; these are to blame as well. The easy going mentality that we have sown into our society, the 9 to 5 work day we arrange so as to allow for the life we think we deserve, this is to blame. The little consideration we give to our day's work and to our life's passing, this is to blame.

More specifically, the priority we give to Thursday night bar outings, beginning in college and extending throughout our lives in many instances, this is to blame. The priority we give to sports over church, this is to blame. The speed with which we rush to fight, before we offer outreach, this is to blame. The "entitled-to mentality," the "me first" way of thinking, this is to blame. The circle within which we enclose our love ones, and at the same time use to keep out the rest of the world, this is to blame.

People just like you and me made these mistakes, and people like me and you allowed it to happen by not staying informed with the goings on of our society and by not seeking to improve upon it. But, we looked the other way didn't we. After all, we were happy while driving our new cars, which we surely could not afford without credit nor deserved due to equal value work completed. Same goes for that first home we purchased. It made it easy to look the other way, to completely miss the "too good to be true" rule.

So don't go blaming some fictional enemy you've created on Wall Street. I've been to Wall Street. I worked on Wall Street. I know Wall Street, and it's no different than Main Street.

Of all the fools I've seen speak today in the House of Representatives, there were a few clear-minded voices I now admire. Maxine Waters, for one, is neither from my neighborhood nor from my party, but she made perfect sense today and her voice deserves credit.

Not Bailing Out Wall Street

The most important point I can make is that we are not bailing out Wall Street. Wall Street is bankrupt already. The Wall Street machine is broken. We're not bailing out Wall Street, but if we were, they would deserve as much as the Main Street banks we really are saving. Washington Mutual (NYSE: WM) is not located on Wall Street. Wachovia (NYSE: WB) is neither on Wall Street. National City (NYSE: NCC) is no where near Wall Street. Corruption is not isolated to any one place, no matter what you think. Also, wealthy individuals are NOT always corrupt, whether they own a car lot in Pennsylvania or a brokerage firm on Wall Street. You know as well as I do, corruption is not a rarity in our society. Selfishness is not uncommon. So, please do not draw a black circle around a place somewhere far away where people just like you and me live and work. Some of the worst men I'll ever know work on Wall Street, but some of the best men I'll ever know also do.

Our financial system needs fixing. This is the problem. These assets and their faults are not the sole responsibility of Wall Street, though Wall Street is feeling the pain more than anyone so far. You know, sometimes the sick are shunned just because they are ill. Lepers were sent to far away places long ago, just because they had a problem. All throughout history, men have been blamed for their own problems. People have been killed because of the problems of smaller societies they dwelled within. Wall Street is reliant on trade, and so when liquidity dried up, Wall Street got sick first. But, this problem is not the sole responsibility of Wall Street.

Sometimes people are to blame for the problems of many innocent, but these assets have existed for a long time my dear friends, and our economy thrived partly because of them. The average Joe in America has lived a far better life than the average Joe in the third world, partly because of these securities that allowed for it. So, while I will not absolve Wall Street of all blame, I will not attribute all the blame to those folks either. But, most importantly, the other financial institutions now sick with the cancer of these securities need radical surgery. Otherwise, make no mistake, you will get sick as well. These are your banks, and they fund your life.

The Emergency Economic Stabilization Act of 2008 just failed in the House of Representatives. I am reviewing the bill in detail. I suspect I will also find faults with it. However, we must support some form of government intervention, which I believe should be based upon the Paulson plan; because otherwise I believe we very well could see the support of the failings of Ron Paul and Dennis Kucinich led bull-headed, self-righteousness (and ignorance) help to destroy American life as we know it.

Please see our disclosures at the Wall Street Greek website and author bio pages found there.


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Bailout Bill Fails in House of Representatives


The Emergency Economic Stabilization Act of 2008 failed to pass in the House of Representatives, largely beaten by House Republicans. The vote was about 205 for vs. 228 against. Because the Congressmen believe in essence that some form of action is needed, efforts persist. At this hour, the Dow Jones Industrial Index (AMEX: DIA) is down 5%, while the growth heavy Nasdaq (Nasdaq: QQQQ) and S&P 500 (AMEX: SPY) are down over 6% each. There is a raw video for review at the website - WALL STREET GREEK.

(Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK). Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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Week Ahead: Bailout or Bust!

bailout or bust
By The Greek:

While many of you just don't want to hear it, if we do not get this bailout passed, we have stock market ruin and economic depression to look forward to. Even so, this action may have come too late in the game anyway, as fear is now loose on Main Street and bank runs are growing in popularity, Wachovia (NYSE: WB) being the latest. In that regard, let's not forget why we are taking this action, which is to reassure American depositors in the reliability of their banks and the financial system. We are cutting the cancer out of these organizations, so that they might live another day. Because, if they do not survive, we will mourn with great pain and for very long.


Last Week

Lost in the mayhem of bailout mania was the fact that last week's economic data was decidedly disappointing. From start to finish, data points offered nothing but poor result. While Lehman Brothers (NYSE: LEH), AIG (NYSE: AIG), Washington Mutual (NYSE: WM, NYSE: JPM) and Ben Bernanke, Hank Paulson and elected officials dominated the news wires, home sales, durable goods orders, retail sales and weekly jobless claims quietly provided equally concerning information, albeit in stealth.

On Tuesday, the ICSC Weekly Same-Store Sales Report showed growth moderated again, as sales sank 1.0% from the prior week, while rising just 1.3% over the prior year result. Weekly sales growth has been decelerating since the end of "back to school" season, on the year-to-year comparison, and we expect things to get significantly worse before we reach Thanksgiving. As a result, we expect to see consolidation in the restaurant/retail space, and resulting commercial real estate deterioration. This is a facet of the economic cycle we've been calling attention to for more than a year now, but we see further deterioration ahead. So, for all you happy tots who have gleefully owned The Gap (NYSE: GPS) and other anomalies in retail, there's a saying about not counting your chickens before their hatched, you might look into...

Last Wednesday and Thursday, both Existing and New Home Sales Reports provided worse than expected data, with New Home Sales offering the most surprising miss. The annual rate of new homestead sales fell to 460K, versus economist expectations for a reading of 510K. We authored an article in response entitled, "Housing Recovery on Hold." Check it out.

Then on Thursday, the worst news of all came in the form of Weekly Initial Jobless Claims, which tallied 493K. I think it's only been a week or two since your favorite Hellene wrote, "It's only a matter of time before we break 500K," or something along those lines. Odds are now down to 1:1 on this one. You could make more money betting on the Mets. Oh no he didn't!

Also on Thursday, Durable Goods Orders came in as bitter as Mets fans in September. August orders fell 4.5%, versus expectations for a more modest decline of 1.6%. Orders had been flat to up since April. Slower order flow means decreasing factory/office capacity utilization and productivity, which means either tighter future profit margins or layoffs. Either card kills this hand.

So with a horrible week now behind us, and a government bailout progressing toward enactment, investors are thirsty for some good news. So, let's explore what refreshment, or poison, the week ahead might hold in store.

The Week Ahead


With the post-midnight publishing of the final composition of the "Emergency Economic Stabilization Act of 2008," you can expect all media focus to be on the report, on expert-reaction to it and global market reaction. Also, we expect the Treasury Secretary and Federal Reserve Chief might engage in a press conference, possibly alongside the President and Congressional Leaders on Monday. The President already addressed the nation, and the presidential candidates will also be expected to respond.

Wachovia failed this morning, as feared, but depositors will find statements arriving from Citigroup (NYSE: C) shortly. Finally, one slipped through the hands of that wily J.P. Morgan Chase (NYSE: JPM).

On the scheduled slate, Personal Income and Outlays for August are set for 8:30 AM ET release. Bloomberg's consensus of economists forecasts 0.2% increases for both income and consumption. This compares to a 0.7% decrease in income in July, coming on the conclusion of stimulus distribution. Outlays rose 0.2% in July, and as we know, August data has seasonal benefit to look forward to. After that though, we would not expect good news from this report. Kansas City Fed President Thomas Hoenig is scheduled to speak on Monday, and nice scheduling at that.

Internationally, Chinese markets are closed all week, while the Australian market is closed Monday only. At the hour of the authoring of this piece, U.K. Bank, Bradford & Bingley (OTC: BDBYF.PK) was taken into conservatorship by the United Kingdom, with some of its business sold to Santander's (NYSE: STD) Abbey National (London: ABO6.L).

A new authorized biography about Warren Buffet is set for release on Monday. In corporate events, W.R. Grace (NYSE: GRA) argues its case with bondholders before a U.S. Bankruptcy Court in Delaware. FedEx (NYSE: FDX) is scheduled to host its annual meeting, and the earnings report schedule includes a couple companies facing headwinds in Steelcase (NYSE: SCS) and Circuit City (NYSE: CC). The remainder of the schedule includes Cal-Maine (Nasdaq: CALM), CMGI, Inc. (Nasdaq: CMGI), Dynatronics (Nasdaq: DYNT), Fonar (Nasdaq: FONR), Hi-Shear Technology (AMEX: HSR), Napco Security Systems (Nasdaq: NSSC), TRC Companies (NYSE: TRR) and Walgreen (NYSE: WAG).


In the pre-market on Tuesday, look for the ICSC-UBS Weekly Same-Store Sales data at Market Moving News (stock market news aggregator). The Redbook Survey is also published each Tuesday morning, and reported on this website. We expect a continuation of recent deterioration. Also in the early going, the S&P Case Shiller Home Price Indices are due for July. We so no reason to expect anything but further price decline, given economic circumstances and recent housing data.

The National Association of Purchasing Managers - Chicago notes its Business Barometer Index at 9:45 on Tuesday. The Midwestern measure of manufacturing activity is seen reaching 53.0 in September. While a reading above 50.0 indicates economic expansion (read good thing), the forecast for this month represents a decrease from August's measure of 57.9. At 10:00 AM, the Conference Board is scheduled to post Consumer Confidence data for September. The economists' consensus forecasts a reading of 55.0, which compares to 56.9 in August. In other words, the overriding theme of economic deterioration continues.

Atlanta Fed President Dennis Lockhart is scheduled to address a group on the topic of the economy. On the corporate scene, Reliance Communications is holding its annual meeting. The very light earnings schedule highlights Pepsi Bottling Group (NYSE: PBG), and includes Landec (Nasdaq: LNDC), Marshall Edwards (Nasdaq: MSHL), Palatin Technologies (AMEX: PTN) and Xyratex (Nasdaq: XRTX).


As sure as the sun rises in the east, The Bank of Japan will start the day's news flow on Wednesday with its release of the tankan survey for September. Barron's reports that Japanese manufacturers should display pessimism for the first time since 2003. Keeping with the international theme, markets will be closed in Hong Kong, Indonesia, Malaysia and Singapore. China will take over the lead role of the United Nations Security Council, but as the UN fails to push Iran as aggressively as we would like, John McCain has proposed a League of Democracies to get the job done.

Monthly employment reports begin on Wednesday, with the Challenger Job-Cut Report and ADP Private Employment Report released in the pre-market. Last month, Challenger noted announced layoffs of 88,736 and ADP reported a loss of 33K jobs. We have no expectation for anything better this time around.

August Construction Spending is seen decreasing 0.5% on a monthly basis, compared to a 0.6% drop in July. The Institute for Supply Management is scheduled to measure the state of manufacturing at 10:00 AM. The September reading is expected to rate at 49.5, versus 49.9 in August, and economic contraction should be surprise to nobody at this point.

Detroit will report light motor vehicle sales (perhaps we should say "lighter"), with consensus forecasts set at 10.08 M, down from 10.3 M last month. Last week, several automakers announced expanded hybrid vehicle plans, but not many are seen reaching market soon. Meanwhile, the Southeast hopes to see the end of the gasoline shortages experienced last week. The shortages were not due to waning global supplies of crude or OPEC production constraint, but rather, the impact of two hurricanes on refinery operations.

The SEC has an open meeting scheduled, and in light of recent political pressure, you can expect the SEC to turn up the heat a bit on investors and public companies alike. I view this unfortunate, because we needed the oversight years ago, not after the fact.

The two regular Wednesday reports, Mortgage Activity and Petroleum Status, are due at their usual times. The more I think about all the events that have occurred, the more I think the interest rate outlook is less certain than most believe.

On the corporate front, the Air Force is taking one more stab at it, accepting bids again for refueling tankers from Boeing (NYSE: BA) and Northrop Grumman (NYSE: NOC). Recall, after the first time around, there were allegations by Boeing, later confirmed true, of improper process. The earnings schedule includes Actuant (NYSE: ATU), Immucor (Nasdaq: BLUD), Micron Technology (NYSE: MU), Standard Microsystems (Nasdaq: SMSC), The Mosaic Co. (NYSE: MOS) and Wolverine World Wide (NYSE: WWW).


Overseas, markets in India and Pakistan will be closed. In Europe, the ECB makes an important rate decision for the euro zone. Expectations are that the ECB will hold rates steady as the threat against the global economy is now clearly more important than its recent inflation concern. In the States, three regional Fed Presidents are scheduled to speak.

The employment data parade enters day two on Thursday, as the Monster Worldwide (Nasdaq: MNST) Employment Index is released in the early going. Last month, the August reading showed two point improvement from July, rising to a level of 159. Weekly Initial Jobless Claims jumped last week to 493K, and so the economists' forecast has edged higher from recent prediction level, standing at 475K for this week. We'll be over 500K before you can cay Hank Paulson.

August Factory Orders are due at 10:00 AM ET, with the economists' consensus looking for a 2.5% decrease month-to-month. July marked a 1.3% rise. As recession sets in, orders are near certain to decrease, especially as export demand wanes. At 10:30, look for the regular Natural Gas Report to again post increase to inventory storage.

At 9:00 PM, you'll want to tune into the Vice Presidential debate. Sarah Palin has been on a crash course to boost her foreign policy expertise, so I would not be surprised to see a much more seasoned Joe Biden make her look foolish on a series of issues across topics. The deeper we get into real issues, the more this decision looks like a flawed one for McCain. The fruit of Palin's tree, i.e. her answers to questions, have revealed her inexperience and raised my own concerns about her ability to run our country if the aged McCain were to need a baton exchange. I'm growing uncomfortable with Obama's ability to run the country as well, due to his initial reactions to events. Even though the best presidents are good decision makers surrounded by well-seasoned and schooled advisors, I fear he's in need of more seasoning just the same. If I could put McCain and Biden together, I think I would have the ticket I would be most comfortable with. What are the odds of that happening!

On the corporate front, Lehman Brothers Holdings is making Bankruptcy Court request to borrow as much as $450 million from Barclays (NYSE: BCS), the purchaser of its brokerage assets. Reporting earnings, look for news from AngioDynamics (Nasdaq: ANGO), Constellation Brands (NYSE: STZ), DemandTec (Nasdaq: DMAN), Global Payments (NYSE: GPN), Lawson Software (Nasdaq: LWSN), Marriott Int'l (NYSE: MAR), MSCI, Inc. (NYSE: MXB) and Resources Global Professionals (Nasdaq: RECN).


The clear focal point on Friday will be the Employment Situation Report. Economists expect the economy shed another 100,000 jobs in September, after losing 84K in August. Unemployment is expected at 6.1%, equal to last month's measure. You must be wondering how unemployment could stick at the same level despite heavy weekly job losses and an estimated 100K net reduction for the month. It's because of population growth, and rounding benefit due to the three-tenths of a point rise last month. However, we still believe deterioration should be ongoing, whether this month or next... it seems clearly possible now too. Remember also, unemployment was 4.9% just a few months ago, in January; the pace of this change has been more disturbing than anything.

ISM reports its nonmanufacturing data at 10:00 AM ET. Bloomberg's experts see a reading of 50.0, as the broad service sector rides the fence of economic expansion/contraction. Nada, look for a reported result lower than 50.0 as the months progress, without a doubt. After all, who are we going to serve if money, lending and spending dwindle. Perhaps debt collection activity will increase, but that's about it.

Markets in South Korea and Pakistan are scheduled to close on Friday. In the U.S., AIG (NYSE: AIG) holds an investor call at 8:30, if there are any left to listen. The earnings schedule includes Family Dollar (NYSE: FDO), which is appropriate since America's families may be left with about that sum by Friday.

Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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Emergency Economic Stabilization Act of 2008

Congress published the big bailout bill on the Internet in the interest of transparency. That's like telling someone you lied to them after they caught you. Nevertheless, please find the information linked below, but you may have trouble reaching it due to high demand.

  1. Summary of the "Emergency Economic Stabilization Act of 2008"
  2. Section by section of the Emergency Economic Stabilization Act
  3. The full 100 page copy of the "Emergency Economic Stabilization Act of 2008"

The link to the full copy of the act is not working at last check. Once it is repaired, we will also repair this link for you. The House of Representatives is expected to vote on the bill, at earliest, Monday. The Senate would then vote on Wednesday. As the Act is put to use, all transactions will be made public for all Americans to see within 48 hours.

(Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK). Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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Sunday, September 28, 2008

Weekly Videos: Blockbuster Bailout

We stand on the cusp of disaster, and as a result, the emotions of those involved in the work of nation preservation are intense. We think you'll enjoy this week's video collage, if you don't have a heart attack while watching. So, we've tried to ease the pain of this most dramatic period with some lighthearted parodies. You may not be able to view the videos from your viewing location, in which case we urge you to visit the website via this link: WALL STREET GREEK.

(Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK. The opinions expressed within the videos may not agree with the view of Wall Street Greek. Please see our disclosures at the Wall Street Greek website.

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Saturday, September 27, 2008

Heaven Help Us Without a Bank Bailout

heaven help us no bailout

By Markos N. Kaminis - Economy and Markets:

"Heaven help us" were the words spoken by Warren Buffet on Friday regarding the divine intervention required if Congress failed to pass the bailout proposal.


Indeed, "The Greek" agrees with history's greatest investor. In fact, I will go so far as to say that if Congress develops and passes into law a politically perverted version of the bailout, we could still see the stock market crash this coming week, and certainly more bank failures.

Fortunately, House Finance Committee Chief Barney Frank predicted Congress would have a plan worked out by Sunday, and that this bill would be based on the Paulson plan. Congress stayed in session for this all-important effort, and remained cloistered in Washington over the weekend, working diligently to save the economy and stock market, or to seal its demise, depending on what exactly the bumbling group works out.

Please take my sound advice, and if you have more than $100,000 in an individual bank or financial institution of some sort, split it up among institutions so that no one institution holds more than $100K of your money. Your dear government only insures your deposits up to $100,000, and banks are failing before our eyes.

In short time, we've now witnessed the failures of Lehman Brothers (NYSE: LEH), AIG (NYSE: AIG) and Washington Mutual (NYSE: WM). Fear is spreading, and now has depositors making a run on Wachovia (NYSE: WB), which could be nonexistent by Monday morning depending on how far panic spreads. When depositors withdraw their money en masse, a.k.a. a "run on the bank," the institution can quickly fall below capital requirements and as a result find itself forced under. But, your deposits are safe as long as they're short of $100K. Your shares in these institutions, however, aren't worth the paper they’re printed on.

What Could Go Wrong

Because of the Administration's early denials and harmonious cheerleading of positive economic claims, Congress has lost confidence in the group. More recently, though, the feds have been forced to come clean, as they have dealt with one financial emergency after another. Treasury Secretary Paulson now presents himself like the boy who cried wolf, which is appropriate considering that he might be fed to the wolves soon.

I openly criticized Paulson and Bernanke around this time last year for not acting with the intensity I thought the coming predicament called for. In fact, I advised Wall Street Greek readers to sell and sell short the shares of IndyMac, Washington Mutual (NYSE: WM, NYSE: JPM) and Wachovia (NYSE: WB) when their shares traded in multiples of ten. Two are now bankrupt and one is close to it. I offered my feelings on these three failures several times, one of which can be seen here: "Sometimes Bad Gets Worse." I suspect you'll also find this interesting reading: "The Most Important Article You’ll Ever Read."

Congress is rightfully frustrated, after faithfully signing off on previously failed efforts. However, now that they have least reason to believe, they need to listen more than ever; and if they do not, they risk sending our economy into depression and the stock market into ruin. Senator Schumer's suggestion that Paulson take increments of $150 billion at a time to buy the illiquid assets of institutions would be ill-received by the market, as at least $700 billion is needed in my view to show an earnest effort. More importantly, it would instill a note of uncertainty into the message, and the market hates uncertainty. Congressional attempts to alter the proposal to include funds for the direct aid of distressed homeowners, while noble on the face of things, could restrict funding for financial institutions, the primary focus of need.

At this time more than ever, we need to restore confidence in our financial institutions. The President softened things up until now to prevent national panic, but now that we stand on the brink of catastrophe, he expresses extreme concern at the urging of Congress in order to get the bill passed. I am disgusted by the politics we see at play in Congress, but I appreciate the President's obvious advising of the Presidential Candidates to tone down their political pretense on this subject during their debate. The last thing we needed Friday night was Obama and McCain stirring the nation into panic.

However, if Monday comes to pass without the arrival of a bill powerful enough to quell concerns about the banks, you really should head for the hills; because, otherwise, over the weekend, word will spread via the media, and panic will consume America. In that case, truly, heaven help us!

Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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Friday, September 26, 2008

Asian Banks Weigh Lehman Exposure

asian banks exposure lehman brothers

Lehman Brothers is now history, but its shock wave reverberates as a number of banks in Asia continue to announce their exposure to the failed investment bank.

(Article interests: Nasdaq: ASIA, Nasdaq: PRASX, AMEX: PUA, AMEX: NWD, Nasdaq: MEAFX, Nasdaq: EBASX, Nasdaq: EVASX, Nasdaq: MACSX, Nasdaq: MATFX, AMEX: CZJ, AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK)

Japan's subprime exposure amounts to $9 billion

As per the Financial Services Agency (FSA), Japanese banks hold ¥958 billion ($9 billion) of subprime-related products, and the aggregate of their realized and valuation losses amounts to ¥896 billion ($8.5 billion). Lehman Brothers related exposure in terms of bonds and loans is approximately ¥310 billion ($3 billion), of which about ¥140 billion (44%) is unsecured. However, S&P has stated that the exposure is "manageable" and will not affect credit rating. Sumitomo Mitsui Financial Group (OTC: SMFJY), Japan's third largest bank by assets, is the worst hit with ¥103.4 billion ($990 million) in exposure. Aozora Bank, Ltd (TYO: 8304) has exposure of $463 million and expects losses of $25 million. Shinsei Bank Ltd (TYO: 8303) sees exposure of no more than 38 billion yen ($364 million). Mitsubishi UFJ Financial Group (NYSE: MTU) has about $235 million in exposure. Mizuho Financial Group (NYSE:MFG) has announced total exposure of ¥20 billion ($190 million).

China's Exposure Uncertain

While the full extent of Chinese bank exposure to the U.S. financial crisis remains uncertain, the financial regulators (China Banking Regulatory Commission, China Insurance Regulatory Commission and the China Securities Regulatory Commission) have asked for detailed records of their investments in the U. S. and European financial assets.

China Construction Bank Corporation (SHA: 601939) and Industrial and Commercial Bank of China (SHA: 601398), China's largest bank by assets leads the pack with its announced exposure of $191.4 million and $151.8 million, respectively in Lehman. China Construction Bank has $141.4 million in senior bonds and $50 million in subordinated bonds; the amount accounted for a miniscule 0.019% of its total assets and 0.29% of its net assets through June. Industrial and Commercial Bank of China's exposure to Lehman constitutes 0.01% of its total assets and 0.03% of the total investment in debt securities of the Group as of 30 June 2008.

Other Chinese banks with exposure to Lehman include Bank of China Limited (SHA: 601988), China Merchants Bank (SHA: 600036) and Industrial Bank (SHA: 601166), with each reporting exposure of $129 million, $70 million and $34 million, respectively. These exposures are in the form of loans and bonds and constitute between 1-2% of their profits.

Indian banks not directly vulnerable to the global credit crisis

India's biggest private sector bank and second largest lender ICICI Bank (NYSE: IBN) was the subject of malicious rumors. The word was that top management was selling shares, leading to a price decline of 15% in the last 10 days ended September 19. ICICI Bank has until now been identified as the only Indian bank to have exposure to Lehman Brothers bonds. The bank's UK subsidiary - ICICI Bank PLC has an investment of $80 million in senior bonds of Lehman Brothers. These bonds constitute less than 1% of ICICI Bank PLC's total assets and less than 0.1% of the consolidated total assets of the ICICI Group. ICICI Bank PLC already holds a provision of about $12 million against investment in these bonds. Considering a 50% recovery estimate, the additional provision required would be about $28 million. ICICI Bank's market cap was wiped down by $1.2 billion since 15th September but regained its lost ground after surging 9% last Friday.

India's first and third largest banks SBI (BOM: 500112) and Punjab National Bank (BOM: 532461) are also rumored to have exposure to Lehman bonds, but this could not be verified. Indian Finance Minister P. Chidambaram says that India's banks are not vulnerable to the global credit crisis. Although the full extent of their exposure is not known, most Asian banks are believed to be well positioned in terms of capital to assets and deposits to loans, and expected to weather the global contraction in liquidity.

Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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An Ancient Bailout Proposal

year of release sabbath forgive debt

"Everyone knows that a policy of bailouts will increase their number." William Poole, St. Louis Federal Reserve, 2006

This article sequentially follows Ferguson's piece, "Slapstick Economics."


The consensus among more than 150 prominent economists seems to be that the Paulson Proposal is decidedly Bush League. In a letter to Congressional leaders, the group rightfully urged lawmakers not to act in haste to pass flawed legislation simply to "subsidize" businesses in the troubled financial sector. Democrats apparently took this advice to heart and are acting with more prudence and fiscal conservatism than self-proclaimed political conservatives.

So for the moment it seems that Trickle-Down Economics, at least in the form proposed by the three stooges, are officially out. Paulson's Whacky Wall Street Special would have been an unmitigated disaster for our country. But in this topsy-turvy world of populist political thinking, it is no surprise to see that a new and unexpected solution to this problem is and has been emerging from normally conservative sources for some time.

Namely, as long as $700 billion dollars will be created out of thin air, perhaps its time to employ the Trickle-UP approach instead. Not a few hundred dollar per capita stimulus package, but an amount per homeowner that would allow taxpayers to repay most or all of this troublesome debt. This frees both bankers AND homeowners of the distress. Tax payments would go up about $3000-$5000 per year per household. And we can then resume doing what we do best in America: spend, spend, spend! Of course, bailout payments should be accompanied by financial planning and oversight to avoid a repeat mistake on the part of either the lender or the borrower. Brokers, appraisers, inspectors and real estate agents should probably listen in while we're at it.

This is not a novel idea. Others, including Dr. Robert McHugh of Main Line Investors, Inc. have been outlining a legitimate trickle-up proposal for nearly a year, as the depression in housing has unfolded. Dr. McHugh offers compelling reasons why this more radical approach would work, where the bank bailout is doomed to repeat the failure of its predecessor actions.

However, the same basic trickle-up idea predates even these proposals. As we approach Rosh Hashanah, perhaps it is time to consider a more ancient and equitable proposal from Mosaic Law. Maybe we should observe the "Year of the Sabbath," which (subject to certain counts) may actually coincide with the year 2008. These ideas are not mentioned here out of any religious pre-disposition. No, this Ancient Bailout Proposal might actually work!

Every Seventh Year, the Sabbath Year is also Called "Year of Release"

Under Mosaic Law, the seventh year is called the year of release, and all debts are to be forgiven. The reason for this law is to relieve the poor.

The Law is to be read at the end of the seventh year, at the Feast of Tabernacles. This would ensure that former debtors and servants were properly taught God's Law so they might not have to become poor again.

If these laws seem so radical and onerous, perhaps we should challenge our own thinking. Why can't we forgive debt? Haven't we forgiven the debt of entire nations? Aren't these bankers in effect asking for their debt to be forgiven? Do these CEOs and hedge fund managers, brokers and deal-makers, who make hundreds of thousands of dollars per year really need to be bailed out at the hands of taxpayers who average less than five per cent of a typical Wall Street pay check?

Search for honest answers to these questions. Gauge the response of the American people. Understand the hypocrisy of the Wall Street bailout request. Then, if and when the legislation passes despite these legitimate concerns and amid a loud public outcry, watch it fail.

Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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Thursday, September 25, 2008

Slapstick Economics

slapstick economic fiscal policy


How many times will Ben, Hank and now Christopher Cox confound us with their slapstick solutions for ongoing market turmoil? Bear Stearns (NYSE: JPM) wasn't enough? Freddie? Fannie? AIG (NYSE: AIG)? And now the grand finale, the bailout to end all bailouts? And since it won't, what will they do for an encore?

Somehow we should trust Henry Paulson with this effort? The same Hank Paulson who told us that housing bottomed long ago and that sub-prime mortgages constituted a small problem that was largely contained? The same Paulson who proposes no oversight and unlimited pay for the greed-ridden geniuses who got us into this mess? Maybe he thinks he still works for Goldman Sachs (NYSE: GS)? Maybe he has already forgotten the need for regulation?

Or maybe we should trust Helicopter Ben? Ben Bernanke? The mad scientist run amok who is encouraging tax-payers to offer "hold-to-maturity" prices for distressed debt when we might actually benefit from the "fire-sale?" If these assets are truly worth the price of holding to maturity, shouldn't the banks simply "hold to maturity?" (mental note: hire Ben Bernanke to sell my home with that sales pitch!) Ben, the same manic maniac who one day warns of runaway inflation and the next day holds the gun of deflation to our collective head?

Or perhaps Chairman Cox can save the day? Banning short sales sure seems to have helped Ambac Financial (NYSE: ABK) and Farmer Mac (NYSE: AGM) fritter away half of their market capital in the last four days. Chris, have you noticed that short covering can no longer fuel the mega-rallies which have characterized this volatile market over the last many months? Any more brilliant ideas?

With the answers to all of these questions so seemingly obvious, it should come as no surprise that the American Public is overwhelmingly and vocally opposed to the "Bush Blockbuster Bailout" (that's not even Bbb- debt) proposal. And though some of us must ruefully admit that Democratic Congressmen have authored more common sense provisions than their Republican counterparts, none of the options seem the least bit palatable.

No, it is time to put an end to the "trickle-down economics" playbook. While this worked what seems a lifetime ago, when Presidents were presidential, when Fed Chairmen had a modicum of common sense, when America was still an Empire with a real live manufacturing economy, and when bankers were actually about the business of propagating wealth formation, it no longer works today. It does not work for many reasons, all of them summed up in a word: Greed. And it certainly won't work in the hands of the stooges who have failed thrice before.

See Part II to this piece: "An Ancient Bailout Proposal"...

Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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Econometrics and Programmatic Trade, By Steven Ferguson

econometrics programmatic trade Steven C Ferguson

Senior Technical Analyst

Econometrics and Programmatic Trade

Steven C. Ferguson is presently a business owner and entrepreneur in the field of embedded electronic control systems. His corporation is engaged in the development and integration of mobile hydraulic control solutions including those oriented towards hybrid energy regeneration and management.

During his earlier career in the automotive industry, Steven helped develop drive-by-wire controls technology, notably for fuel cell vehicle application; electronic stability control systems; anti-lock braking and traction control systems; and electronic all-wheel drive systems. Steven holds multiple patents and product development awards in those fields of invention.

A student of the world economy and capital markets, Steven has also applied dynamic system modeling principles to the burgeoning field of econometrics as well as to programmatic trading in equities and options. As an active trader, Steven has achieved a success rate of over 92% in positional equity trades.

Steven aspires to the creation of a humanitarian relief fund which would allow donors to multiply their giving through investment.

Wall Street Greek welcomes Steven to the team. We are very pleased to add such an independent and intelligent thinker, and one with such an important message to convey.

Steven's Email: sferguson@wallstreetgreek. com
The Greek's Email: greek@wallstreetgreek. com

Ferguson's Article Portfolio:

Full Disclosure: Mr. Ferguson has agreed to Wall Street Greek policy to not author articles about securities he personally owns. In the event of a special case, Steven will make full disclosure of ownership interest. The work of contributors to Wall Street Greek is their own, and may not necessarily agree with the opinion of the site or its founder, and does not constitute financial advice. Please see our full disclosure at the site (Wall Street Greek).


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Congressional Testimony Answers Critical Questions

congressional testimony

We addressed the meat of the bailout on Tuesday, but a few of our lingering and critical questions were answered during Wednesday's testimony of Paulson and Bernanke.


Bernanke's Testimony to House Committee

Federal Reserve Chairman Bernanke offered insight on Wednesday morning beyond that shared in Tuesday's testimony to the Senate Banking Committee. For starters, he offered some important economic forecasts, noting that he sees GDP in the second half of the year "falling well off its potential." Now, he stopped short of predicting recession, and left himself quite a cushion at that. Between the economic forecasts and his notation that he is neither part of the executive nor legislative branch of government, and therefore has no legal authority to negotiate law, specifically the bailout, Bernanke showed an impressive political prowess. Regarding GDP, he especially made note of global economic softness and the recently strengthening dollar, and how exports should therefore lose some of their recent robustness.

While giving most acclaim to Paulson on the big bailout, Bernanke offered strong support for it, noting that any lending constraints should be removed to allow banks to promote economic activity and normal business fluidity.

Greek Not On Board with Schumer

As questioning began, we again found ourselves disagreeing with NY Senator Chuck Schumer. The Senator offered a variation of the bill that I found myself pounding the desk against. He asked Bernanke why the $700 billion could not be broken up into installments. Then, as he detailed his own research on the subject, he pretty much answered his own question. He noted that some experts he had queried indicated that this could offer a noisy message to the market, disturbing the psychological impact that the original $700 billion clearance would provide. However, he offset this critical statement by focusing on the likelihood that the Treasury would not need more than $150 billion for starters, to which he noted experts agreed.

Schumer made case for installments by stating that in this manner Congress might have more assured oversight, since they would be required to again approve further capital. However, what this really does my friends is install uncertainty into the picture, and the market hates uncertainty. The market wants to know that Paulson has his bazooka, and the bullets as well. Of course oversight is a necessity and will be a part of the final deal, as Senator Dodd made clear.

I also disagreed with Schumer on the subject of funding the bailout. With a noble goal to reduce the burden on taxpayers, since we decide if he has a job or not, Schumer offered the idea of having the banks help fund this bailout themselves. I agree that it would be nice if the those costing us the money could pay for it. But, we again shoot ourselves in the foot and damage market psychology if we require capital constrained banks to pay up for their own bailout. The idea Bernanke responded with, and we were thinking of as well, was that you might extend the funding burden to the banks, but on different time frame. We might create a special tax for banks that would begin perhaps a year or two from now, and in that way not offset the goal of the bailout, which is freeing financial intermediaries of constraints.

While Bernanke was a bit soft on the possibility of plan alteration, noting that this was a topic for psychologists, he did strongly address another important question. Regarding "fire sale pricing," Bernanke indicated that fire sale pricing is what exists now, and that this is why the government needs to step in. He also stated that it was of course the goal of the Treasury to purchase these assets at best competitive price, and this would occur by allowing broad participation in the reverse auction. He also smartly noted that he thought there was a decent chance the federal government could make money before things were all said and done.

Bernanke also addressed Congress' concerns regarding some of the plan changes that have developed. Congress is troubled that foreign based institutions are now eligible, and that the Treasury also wants authority to purchase other impaired assets if necessary, beyond subprime loan securities. Bernanke's spot on answer here along with our own opinion mixed in was that, allowing foreign based institutions to participate would broaden the scope of bidders and allow for true price discovery, thus better pricing for the feds, and it would simply be fair to our trading partners, since these assets are American originated after all. He and Paulson noted later that they had been encouraging foreign governments to take similar steps as well. There clearly is rightful concern that taxpayer money might help foreign institutions. We still need to find some solution here, or better justification. One might be that these foreign institutions also promote American economic activity, as evident by their ownership of illiquid assets, and so by freeing them up as well, we further drive the wheels of economic growth.

Regarding non-subprime loans, Bernanke believes that other loans that are not as difficult to market as subprime MBS, are increasingly running into trouble as well. This goes for consumer credits, commercial real estate, etc., so he believed it would be wise to not limit these government purchases. Also, this further broadens the bidders in auction, and these assets are already causing problems with some institutions and look to be tomorrow's issue. The goal is to free financial intermediaries to go about their business, which is greasing the wheels of the American economy.

Inflation Fear Resolved

The biggest news came when Senator Dole (I believe) asked about inflation, specifically whether Bernanke foresaw these proposed steps as driver of inflation. Bernanke's response was critical in my view. It was doubly satisfying since he had just fielded some tough questions from Representative Paul, and rather well I might add. He corrected Paul on a couple things regarding the Great Depression. Most importantly, Chairman Bernanke went on record saying that he foresaw no impact to inflation.

Increasing money supply would be an inflation driver, but we suspect Bernanke's point is that the Treasury will be purchasing an asset, and one that he expects to return value potentially equal to cost. We're buying assets, not issuing capital blankly. Happy happy! Joy joy!, all the Congressmen cheered! Actually, they demanded the President address the nation so that they could blame this whole thing on him if it goes awry. It seems Congressmen are fielding significantly more calls opposed to this deal than for it. I'll have something to say about this later this week, and why I believe the consensus of popular opinion is wrong this time regarding the terms "bailout" and "Wall Street" when describing this action. I believe we should pass this proposal into law, and move past this period of economic troubled waters.

Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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Wednesday, September 24, 2008

Housing Recovery On Hold

unfinished homes delayed housing recovery

It's becoming increasingly clear that long anticipated housing recovery is on hold for now. Recent data out of the Mortgage Bankers Association and National Association of Realtors only reinforces common sense expectations. That is: with the economy slipping into recession, natural demand cannot resume just yet. That said, housing stock recovery might renew as soon as this bailout is approved, if approved without significant legislative damage.


Recent housing starts and existing and new home sales data have offered evidence of a real estate market bottoming out, but with the economy slipping into general recession now, we cannot see demand renewing just yet. Today, the National Association of Realtors (NAR) published the Existing Home Sales Report for August.

Existing Home Sales

The NAR noted the annual pace of sales declined to 4.91 million, down from 5.0 million in July. While the decline was foreseen by the consensus, as indicated by a Bloomberg survey figure of 4.92 million, it seems clear that recovery is also yet far off. The economic environment is just not going to be conducive to the traction of new home demand any time soon, and so, despite recent price decline, I see nothing stopping further drops in home values. Investors have been making their way back in to real estate in a selective manner, especially in distressed situations; but the general marketplace simply has no support, if not failing supports in the near term, in my view.

While banks could see some friction removed from the lending process (read ordeal) as a result of the bailout, a renewed inflation threat seems possible as well. However, our nation's greatest expert on the topic, Ben Bernanke, sees no inflation threat tied to this bailout. If this proves true, because others argue the dollar should weaken on money production, then housing should benefit. Even so, I'm hopeful for spring '09 for the beginning of such trend. Still, there are a lot of factors that could mess that up, and so no economist in his right mind would try to pinpoint housing recovery just yet. In between now and then, we could see anyone or more of these factors play a role in economic disruption: messy war with Iran and unforeseen repercussions; energy restriction by Russia over the winter (afflicting Europe directly, the U.S. indirectly); failure to pass the bailout or to reduce its impact through legislative process; global market failure due to unforeseen mistakes by foreign leaders or central banks; the presidential election. Clearly, these do not represent all the risks.

Mortgage Bankers Association Report

The Weekly Mortgage Activity Report from the Mortgage Bankers Association showed a double digit weekly decline, just one week removed from a spike in activity. It seems that nascent mortgage rate easing didn't last long, and possibly quickly absorbed a good piece of shelved demand last week anyway. That rate dip disappeared initially after the Treasury bailout plan was announced. Also, the flight to capital moved money rapidly into short-term money vehicles and out of long-term ones, dropping short yields to near Great Depression lows. People were basically paying the government to watch their money for them, on real terms. So, we blame this week's drop on these two factors and also storm disruption in the South, Southeast U.S.

In conclusion, housing market recovery looks a ways off. However, I believe that if Bernanke is right and inflation does not result from the bail out (and if the market believes him as I expect they will), then you should see housing stocks rise again shortly and before tangible housing demand recovery. Our personal favorite play remains Toll Brothers (NYSE: TOL). Lennar (NYSE: LEN) reported results yesterday and is up 12% at this hour. In fact, shares of Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI) and Centex (NYSE: CTX) are all higher this morning.

Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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Tuesday, September 23, 2008

Senate Banking Committee Testimony Addressing Economic Crisis

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Just when it seemed a Congressional committee might for once offer oxymoron, or the voice of reason, Hank Paulson stepped up and showed us why he is the Treasury Chief. Boy did he stand up!

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Oxymoron of oxymorons, Congress sounded like the voice of reason coming into today and through the introductory remarks of the Senators. Can you believe it, even Senator Johnson made some sense this morning in the prelude to the testimonies of Treasury Secretary Paulson, Federal Reserve Chief Bernanke and SEC Chairman Cox. Outside of Senator Schumer's dangerous sharing of Bernanke's worst economic fears, which should have stayed in the back room (to protect America from falling into greater panic), Congress actually offered a voice of reason today. And, the market agreed with Congress in the early going, as the Dow Jones Industrial Index was up modestly this morning; this after it had a distressing weekend of contemplation and fell on Monday.

Friday's announcement offered hope more than anything else, and that's probably why the market moved so favorably initially in response. We saw confidence in America's financial institutions falling, and America's institutions failing as a result. We needed some sort of support, and the Treasury acted quickly to provide it. Sure, the details need to be refined, but this looks plausible to me, especially if the feds can devise some means of containing any inflationary impact.

It was clear that the shotgun meeting that brought forth the Treasury and Federal Reserve's plan on Friday, left it needing some seasoning and perhaps substance and clarity. It was after all quickly assembled, though well-intended and thought out. However, after listening to the Senators, we recalled our own commentary from months past. We use to preach here about addressing the core problem, and that meant supporting home owners and mortgages, or the collateral assets that support the entire house of cards. However, the current root cause of financial market seizure is the illiquidity of these assets; we cannot prop up housing values, so this seems the best way to address the root problem.

Along a sensible line of reasoning, Senator Shelby said it best this morning, that before signing off on any huge burden for American taxpayers, and one prepared over an intensely pressured weekend and which calls for swift action by the end of the week, that some hashing out needs to occur.

Paulson's Comments

Promptly and powerfully, taking from his tough Wall Street training at Goldman Sachs (NYSE: GS), Paulson defended himself quite well right from the start. Before even getting going really, he noted that he was fixing a problem that began many years ago, before he got to Washington. Then he noted something that we pointed out in our articles over recent days, that the bazooka and expansion of powers at the Fed and Treasury came to be because he and Ben stepped up and took charge of a situation that frankly nobody else in Washington, and certainly not the Senate Banking Committee, was prepared to tackle. I would go as far to say that without these agencies and these men, our economy would be on its way to depression rivaling the Great one. Fred Mishkin confers, judging by his comments to CNBC this morning. The only problem I have with it is that they took a little long in foreseeing how things would develop. Foresight, we generally need more foresight!

Paulson pointed to the trouble with the American financial system, the seizing and ceasing of American finance in progress. And then Paulson showed exactly who is inside that kind frame he projects 99% of the time. It was quite a strong response from Paulson, noting that (and I'm paraphrasing) thank God for Fed and Treasury actions, for otherwise, our economy would be in far worse condition.

Bernanke, the Refined Voice of Reason

Then, Bernanke stepped up to the plate for his turn at the microphone. He very well explained why and how this intervention would help. He urged Congress to act in order to avoid major consequences from ongoing financial market constraint. In English, we need banks to be capable of lending, and we need investors or capital sources to have confidence in financial institutions. This action, in his view, would do that.

Bernanke also addressed some of the criticism about the plan, and this should not be missed by Main Street. Bernanke noted that he is not from Wall Street. He said that he is a professor, with no inclination now or ever to work on Wall Street, and that he also has no personal contacts of interest there (well he probably does now, but we get what he meant). In other words, this is not a save Wall Street screw Main Street solution.

What This Really Is Folks

If financial institutions are not functioning properly, every employer, every employee, every borrower and every depositor bears great risk of very personal future impact. We are not saving "Wall Street" here, but saving the American economy and the banks that lend to it, and that means you too. Just because you have a job today and feel separated from the goings on of this economy, does not mean tomorrow will not have you bankrupt, panicked and suffering; it very much might! These are not fear tactics, as one ill-advised naive-minded House Representative stated on the House floor this morning; that kind of statement is akin to calling Americans whiners entangled in psychological recession.

The Plan

Lenders have tightened lending significantly because of concern of coming under solvency stresses. Institutions have witnessed peers fail, and at rapid rates in some instances when the market sharks caught whiff of blood. Under such conditions, and even more so than under normal recessionary instance, lenders have incentive to batten down the hatches and wait out the storm, and in some instances, pray for survival. What that means for America is decreased opportunity for growth for many of America's businesses, especially its broad reaching small business sector. It seems that a way to get banks feeling like doing business again in this specific instance, is by taking illiquid assets off their hands once and for all, thereby freeing them up to raise capital more easily and to lend and do their business. More importantly, it may keep a lot of businesses from failing, thereby increasing unemployment and sending us into extremely tough times. So we help out the banks so they lend to your boss, they lend to you for your home equity project, they lend to your brother for his auto purchase, and they lend to your sister for her new UPS store she's starting up (NYSE: UPS). There's clearly some hope here that banks are not shell-shocked.

The Treasury will offer to purchase, via reverse auction through the newly created federal purchaser, the sick assets of financial institutions. Institutions will offer these assets through auction reaching across a vast group of firms. This mechanism should allow for competitive price setting, offering a price discovery tool that could further aid the market by providing better mark-to-market values. In other words, the most desperate sellers among our financial institutions will sell their worst assets. This should help free them up, or to "unclog the arteries" as the Fed Chief puts it. This will allow for free blood flow, encouraging a healthy body of U.S. economy.

Problems Addressed and Unaddressed

One problem that was addressed through the questioning was the risk of downgrade of the United States as a sovereign issuer of debt. Even though Bernanke sort of sidestepped the issue, by doing so, he also answered it. There is much concern that the United States could be downgraded, but let's be serious. Can you imagine Standard & Poor's (NYSE: MHP) or Moody's (NYSE: MCO) doing that? And, if they did, how long would it take for the general populous to burn down 55 Water Street, where S&P is housed? Not gonna happen... Even struggling, the U.S. economy and United States government remains one of the world's most reliable creditors on a relative basis.

The oversight question was addressed, as Paulson stated he welcomed it. This guy is from Wall Street; are you kidding me that he wouldn't want oversight? The last thing he wants is to bear personal legal risk here, and lack of oversight would place him at great personal risk. He plainly stated that the oversight question was not addressed in his own press release, because he viewed it presumptuous for him to do Congress' job for it. In other words, it's up to Congress to figure out how it will keep an eye on things, which makes perfect sense.

Nobody, not one Senator, addressed the inflation threat, unfortunately. I would have directed that question to the Fed boss, and he would have answered it very well I suspect. I think he might have said that there is risk, but that the risk of inaction here is far greater. Unfortunately the question remains overhanging, and a serious concern of financial markets. This is because, by seeking to help lenders, we may also drive offsets to capital flows, that being higher long-rates, a weaker dollar and again climbing commodity prices, including oil. It's truly unfortunate that among a stronger than usual line of questioning from the Congressmen, they missed this one.

In conclusion, we support this strategy, even so. Friction from lending restraint should be released, and inflation may lead to higher long rates, but we'll hopefully keep more lenders in operation, limit lost tax income and increased unemployment and more importantly hopefully avoid total financial market collapse (and the second depression). We'll maybe free up institutions to merge and to grow their businesses. We'll take a weight off the shoulders of the financial system. Our only problem with the plan is that it took this long to figure out that addressing the illness would be more effective than treating the symptoms. The Dow is down fractionally at hour of publishing, reflecting market uncertainty.

Please see our disclosures at the Wall Street Greek website and author bio pages found there.

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