Tuesday, September 1, 2009

Taipan Daily: Catching Up With the Carnage - AIG, Banks and the Fed

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Tuesday, September 1, 2009
Taipan Daily: Catching Up With the Carnage - AIG, Banks and the Fed
by Justice Litle, Editorial Director, Taipan Publishing Group

Sounds like to me I can hear this mornin’ people
Death bells ringin’ all in my ear...
 – R.L. Burnside, “Death Bell Blues”

On Monday my colleague Adam noted (tongue firmly in cheek) that “it’s a throwdown... a feud at Taipan Daily... Lass is long and Litle is short...”

True as far as it goes, but not exactly black and white. Within that basic framework, there are many subtle variations. One must take into account the many moods, the many shades, the many sides of JL. (Hat tip George Costanza.)

For instance... On a historical basis, September is far and away the worst month for stocks. But it is also the best month of the year for gold stocks. U.S. Global Investors recently posted a nifty chart showing returns for the NYSE Arca Gold Miners Index going back to 1993.

View the Gold Miners Stock Index Chart

As Frank Holmes, CEO of U.S. Global Investors writes, “After the typically soft months of June and July, the gold miners start to bounce back with a 2 percent bump in August before shooting up another 8 percent in September. Since 1993, when it was created, the GDM has been up 11 times in September and down just five times.”

The best September ever for gold stocks came in 1998, when the Arca Gold Miners Index picked up a stunning 54.3%.

So THAT’s Who’s Buying AIG...

In another amusing example of art imitating life – or is it the other way around? – Adam spoke yesterday of doomed stocks (like AIG) and gambling in Babylon (or rather Sodom).

To quote my colleague, “[Staying bullish on this market is] kind of like hanging out just an hour or two longer in Sodom, because your poker game is going so well... what brings all this to mind today is the recent behavior of shares of the insurance giant, American International Group (AIG:NYSE).”

Oh, the irony...

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Over the weekend, your humble editor dropped by his local poker room (a far from unusual Saturday night occurrence) for a little Texas Hold ‘Em. He found himself in a respectably deep $3-$5 blind No Limit game – roughly seven or eight thousand in chips and bills on the table.

Lo and behold, the talk of the table turned to markets as sometimes happens. (Other highly popular cash game topics are sports, politics and real estate. It is good to have headphones as a backup in these games.)

To make a long story short, the player directly to my left – a nice enough fellow well on his way to getting toasted – couldn’t resist bragging about his recent scores to the rancher directly on my right. As the conversation flowed, your humble editor sat bemusedly in the crossfire, mouth firmly shut.

“So yeah man,” Almost Toasted says, the barest hint of a slur in his voice. “You know AIG, Fannie Mae and Freddie Mac? I’m loaded up on all of those.”

(JL’s ears perk up.)

“Really?” Rancher says. “How you doin’ on those?”

“Oh man – I’m doin’ good, real good. My friends gave me [trouble] when I bought ‘cause they went down at first, but now I’m up big. I knew the government wouldn’t let those guys go out of business. Now if this other solar stock I’m nursing just comes back around, I’ll be a happy boy.”

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Rancher: “But aren’t those guys basically bankrupt?”

Toasted: “Oh no way. The government will never let ‘em go under. It’s a lock.”

Again, true as far as it goes. But our toasted friend has overlooked a rather important detail. AIG will probably stick around for the duration... but as for actually turning a profit? That’s another story. As Barry Ritholtz points out, these guys are permanently in hock [underscore emphasis mine].

Let’s not mince words: AIG is on the hook for $182.5 billion dollars to the taxpayers. And it [is] high-grade, enzyme-free manure to pretend this is going to be repaid anytime soon...

Consider that if the company comes up with an extra $2 billion dollars per year — $1.83 billion [to] be precise — it would take a full century to repay the taxpayers the $182.5 billion.

Note that AIG’s profit last quarter was $1.82 billion. Thus, they could accelerate the repayment dramatically if they decided to turn over every last cent of profit to Uncle Sam for every quarter for the next 25 years. That assumes they can continue to maintain profitability, and not have a losing quarter.

I don’t know about you, but I am not holding my breath.

Fannie and Freddie are no better off. Analyst Bose George with Keefe, Bruyette & Woods opines that “People have done well by trading them (in the short term), but when it gets to the end of the road, these stocks are going to be worth zero... There could be a lot of improvement in the economy, and these companies would still be worth zero.”

Sometimes it’s better to be lucky than good... and sometimes it’s better to be drunk than sober, especially when gutshot draws start paying off. AIG recently hit 10-month highs as toasted gamblers, buying in the conviction that “the government won’t let these guys go under,” squeezed the stuffing out of the incredulous shorts.

So what’s a little mania among friends, you ask. That can’t be the main driver for the market, can it? Surely it’s just a side show, with “green shoots” and genuine recovery providing the true animus?

Well, try this little bit of market trivia on for size. Last Thursday, according to Bob Pisani of CNBC, the trading volume in just four stocks – AIG, Freddie Mac, Fannie Mae and Citigroup – accounted for an eye-popping 29% of volume (1.9 billion shares) on the New York Stock Exchange.

Nearly one-third of market activity on the most venerable stock exchange on the planet, devoted to flat-out gambling. Poker in Sodom indeed... the trouble with holding aces against a lucky drunk, as many a seasoned poker player will tell you, is the tendency for that Jack-Four offsuit to hit a miracle turn or river.

A Sobering Chart

What’s the best way to sober up a drunk? One potential option is dunking his head in a bucket of ice cold water. Or you could show him the following chart (courtesy of John Mauldin and Crestmont Research).

View Secular Bear Market Example Chart

As Mauldin writes, “The last secular bear market was 1966-82... It was as volatile then as it is now... There were some breathtaking ups and downs. With every rise, pundits declared the end of the bear market, only to have the market fall dramatically again...”

Why are bear market swings so violent? In part because financial markets are structurally naïve. It’s very easy to take a handful of short-term data points and fashion them into a trend without considering the realities of the bigger picture. Investors have shown a remarkable tendency to do this over and over again without fail.

As a number of men have observed in one form or another, “What we learn from history is that we don’t learn from history.”

All Aboard the Fail Train

A few days ago we asked, “Is the Next Banking Crisis Unfolding as You Read This?

In that piece, we noted how the S&L crisis peaked out with 534 bank failures in the year 1989. By that standard, the 81 bank failures in 2009 (bumped up to 84 as of this writing) are merely a warm-up.

The U.S. “problem” bank list is at a 15-year high, the Financial Times reports. The WSJ notes that “Banks on Sick List Top 400.”

And now John Kanas, a former bank CEO and private equity investor in the business of snapping up banks, predicts that 1,000 more will fail in the next two years. “Many of these institutions nobody’s ever heard of,” Kanas says. “They’re smaller companies... there’s really very little lifeline for the small institutions that are suffering.”

Optimistic pundits like to portray bank failures as a lagging, rather than leading, indicator. “These banks are failing because of problems in the rearview mirror,” the optimists like to say. “Their problems are behind us now.”

This is similar to the view that unemployment is a lagging indicator – more indicative of past pain than future trouble. But, as Taipan Daily has noted before, a downturn fueled by financial crisis is a very different beast than the more “normal” run-of-the mill downturns prognosticators have grown used to.

In a financial crisis, bank and consumer woes become leading indicators... because the lack of available credit leads to more pain ahead.

On the consumer side, rising unemployment translates to future pain by way of reduced spending and higher credit default rates. As more consumers struggle to make ends meet, corporate profits decline and top line revenues shrink. This puts more pressure on the banks (as larger loan-loss provisions eat into profits) and makes it hard for companies to grow.

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On the business side, a lack of bank of credit makes it that much harder for a sick economy to heal. As more banks struggle, crushed by the weight of construction loans and consumer credit exposure gone bad, their ability to lend is hampered. This, in turn, makes it harder for the “have nots” – smaller businesses without the clout to get credit – to return to previous form. Reuters captured this dynamic in a recent piece, “‘Zombie suppliers’ haunt manufacturing sector.”

Call them zombie suppliers. Analysts say the speed with which major manufacturers cut output in this recession put unprecedented strain on thousands of small manufacturers that supply the industry with critical parts.

That has left the supply chain with an unknown number of suppliers who are dead but do not know it – companies so undercapitalized and overleveraged they will never raise the money they need to get their idle plants running again.

"Their lenders are going to say, 'Sorry, we're not going to increase our exposure with you because we don't know if you're going to make it or not," says Bill Diehl, the chief executive of BBK, an advisory firm that does supply chain risk analysis.

If countless small lenders are on the edge of failure themselves – struggling to push back from the precipice – it will make life that much harder for the “little guy” suppliers and myriad small businesses who make up the backbone of America’s economy to get back on their feet.

Some Choice Opinions on the Fed

Last but not least, there was a huge outpouring of feedback to Friday’s piece, “Whom Does Ben Bernanke Work For?

Of course it goes without saying that, as duty-bound patriotic Americans, you expressed joy and gratitude and heartfelt thanks for Mr. Bernanke – who indeed “saved the world” after all – and heartily endorsed the wonderful job the Fed is doing.

Kidding people, I’m kidding. (If you spit out your coffee, I apologize. Couldn’t resist a little sarcasm there.) And to the reader who called me “the Johnny Carson of Finance” – much obliged. Your humble editor got quite the kick out of that.

Here are a few representative excerpts, to make of what you will.

Great piece. For those with internet access and even a shred of intellectual curiosity, a few minutes of research into the Federal Reserve leads to only one possible conclusion: the Federal Reserve is a cabal, of mostly foreign bankers, whose sole purpose is to profit (obscenely) at everyone else's expense. No other conclusion is possible or believable. That so few Americans have any concept of the harm done to them and to our once great nation, by the Federal Reserve, leaves us with but a few, very scary, explanations: 1) very few Americans have any measurable intellectual curiosity; 2) most Americans are too lazy to think for themselves and would rather rely upon others to do their thinking; or, sadly 3) even when presented with concrete facts, most Americans are just too stupid and gullible to form any useful opinions on their own.
TD Reader Paul B.

The Federal Reserve System exists to protect and perpetuate the titan financial institutions. Bernanke merely adheres to this mandate. The fourth branch of government accurately describes it... I enjoy and appreciate the insights provided by Taipan Daily. When the revamped version of the Cybersecurity Act of 2009 becomes law, how long do you think your emails will be tolerated?
TD Reader R.Y.

I live in China and people here have more power because the government actually fears them... If these bankers who got bonuses and screwed us were here in China they would get bullets instead of bonuses. You tell me what is better.
 – TD Reader Barry

Ben works for the same people that:

1) Created the FED by deceit and subterfuge in 1913.

2) Own 51% or more of the stock of the same major 4 banks on Wall Street, through inheritance from the originators.

3) Have created 2 major depressions and financed at least two World Wars

4) Have worked to create a world financial system which makes the Madoff scheme look like the proverbial ant screwing the elephant.

5) Plan to control the entire world through "global governance", and are well on the way, with their latest creation, after 96 years of screwing the public daily through inflation of the currency and booms and busts, to crashing the system in order to institute a massive world wide thievery by institution of another world wide fiat currency, so they can continue the con as before. (At the expense of the sovereignty of every nation through the UN, BIS, IMF World Bank, etc. system.)

6) Want to control the world for their ability to control commerce and the currency creation world wide.

7) Arranged for the election of Obama so that this takeover will be arranged smoothly, they hope.
TD Reader Patricia R.

Thanks for reading as always... until the goons in dark glasses come to take us away, we’ll keep chucking banana peels under the heels of the powers that be.

Warm Regards,


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