Thursday, August 27, 2009

Newsflash... Government makes a profit!

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August 27, 2009  

Newsflash… Government makes a profit!

"We're from the government, and we're here to help you." Hear that phrase and my advice is to hold on to your wallet and run in the opposite direction.

However, it appears the feds have done something right. "The TARP program is showing promising returns," IDE managing editor, Christian Hill told me yesterday.

"The government made almost 23% on its loan to Goldman Sachs. And it made 26% on the loan to American Express. Most of the profit came from warrants, which brought in $340 million for AMEX and $1.1 billion from Goldman Sachs."

"The government is sitting on a paper profit of $11 billion from Citigroup!" he added.

"What about all the other banks that haven't paid back the TARP funds?" I asked.

"18 banks have halted payments," he said. "But only 10 of these are on shaky ground. The other eight have halted payments due to state laws prohibiting payment until certain earnings benchmarks are met."

"Even if all 18 of these banks collapsed and the TARP money was a complete loss, it would only amount to $807 million. That's less than the profit the government made on Goldman."

Things have worked out well, so far. The original intent was to stabilize the banking system. And now it looks like the government might make a profit.

Despite the early profits the feds have made in financial stocks, there could be rough sledding ahead due to a new wave of mortgage defaults.

According to an excellent presentation by value investor Whitney Tilson and his associates at T2 Partners, 73% of Option ARM loans, 50% of subprime, 45% of Alt A and 25% of prime mortgages are currently underwater. In terms of sheer numbers, the Wall Street Journal states that 16 million mortgages are upside-down.

Already, nearly 10% of U.S. home mortgages are in some stage of delinquency or default. And with millions of upside-down borrowers facing job losses and a weak economy, you can expect these numbers to increase substantially.

Not to pile on, but rising defaults in commercial real estate loans and credit card debt could become black holes as well. More on that another day.

Meantime I hope Christian is right. What do you think? Is the government likely to come out ahead on the TARP program?

Send us your thoughts here:

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Are you buying Government Motors?

Some penny stocks may be worth taking a shot at, but GM isn't one of them. GM's stock is loaded with debt and non-performing assets. The chances of getting paid anything for these shares are less than 0.0000001 percent. But people are still buying it. The stock (MTLQQ.PK) is getting more volume than Procter & Gamble on some days!

Motors Liquidation (the "bad GM") has warned investors repeatedly that its stock is worthless.

Can GM Motors Company turn things around? Perhaps. And the new stock it issues under a new ticker symbol could rise with it. But the stock that people are buying now -- MTLQQ.PK -- is not that stock!

If you want to invest in bankrupt companies, there's only one way to do it. Invest in companies like Gladstone Capital Corporation (GLAD) or Icahn Enterprises (IDP). These companies specialize in buying distressed assets. Often they buy large blocks of shares or the debt of bankrupt companies at big discounts, via "negotiated" settlements.

As an individual investor, you can't buy negotiated settlements directly. But you can get the benefit by piggybacking on one of these investment companies. We'll tell you more about how to do so in future issues.

Is the S&P headed for a bobsled ride to hell?

That's a question we ask every time we meet in the IDE conference room. And though there are reasons to suppose that the rally could continue for some time, we all agree that investor optimism has run well ahead of economic reality.

And there are many indications the economy continues to crack at the seams.

  • More than two-thirds of U.S. economic activity relies on consumer spending. American's are just not spending like they once did for one big reason: Over 6.5 million Americans have lost their jobs since the Great Recession began.

  • The unemployment rate is at 9.4% and will likely head over 10% before the end of the year. The unemployed can't spend -- therefore consumer spending will drop even further.

  • Last quarter we saw a 1.2% decline in consumer spending and it will probably decline further into 2010.

From a technical perspective, it also looks like a pullback is imminent. The S&P 500 is well above its short-term moving averages and is approaching a down-trendline.

But we don't fret terribly about this. There are ways to protect the gains we've made – and make more – if the market drops, as it should.

In his Options Power Trader trading service, our own Ted Peroulakis is using a strategy that the professional options traders use to profit on stock market declines.

Ted recommends stock options as "insurance" against losses in your long positions. Click here for all the details.

Good Investing,

Bob Irish
Investment Director
Investor's Daily Edge

We want your feedback! Let us know your thoughts on this article. Email us at Email:

Market Window

Bob Irish - Investment Director
Andy Gordon - Editorial Contributor
Jon Herring - Editorial Director
Ted Peroulakis - Editorial Contributor
Christian Hill - Managing Editor
Dr. Russell McDougal - Editorial Contributor
Steve McDonald - Editorial Contributor
Michael Masterson - Consulting Editor


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