News Flow Remains Poor, so Why Shouldn't Stocks Soar?

Chrysler is going under, almost 30 years after the Feds bailed the company out with a now modest loan guarantee.  Its impending bankruptcy is a testament to two major factors:

dysfunctional management-labor relations that pervaded the Big Three; and the over-financialization of auto purchasing, wherein auto companies became finance companies with unprofitable manufacturing facades.

In other negative news, the Commerce Department reported today that private wage and salary disbursements dropped $33 B in March on top of $29 B in February; these are seasonally adjusted annual rates.  This $62 B (annualized) two-month drop in wages and salary is a 1% drop.

There is massive human and physical overcapacity in the United States and in many other places.

With secure income on financial assets hard to find, riskier assets such as stocks and high-yield bonds have attracted positive cash flows.  

In the meantime, the $5.2 million salary hedge fund genius ($26 million annualized salary given his reported 1 day of "work" per week) Larry Summers continues to advise President Obama that a further massive wealth transfer from taxpayers to large financial institutions is necessary via PPIP, the $750 billion "placeholder" in the first Obama budget, direct Fed purchase of Treasury debt, etc.

The Federal Open Market Committee reported yesterday a downbeat assessment of the economy.  

We know in retrospect that the jobless recovery from the mild 2001 U. S. recession was spurred by a lunatic housing and commercial real estate boom.  That boom that at some point entered bubble territory was a continuation of a bull market in real estate that began in the mid-1990s and that initially was simply a recovery from the bear market in real estate that tied into the S&L mess.  Similarly, the tech bubble in the late 1990s was an excess that grew out of a real boom and real innovation.

Where is the ongoing positive industry trend, even one without innovation, which will underpin and provide a theme for and employment/investment options, a true economic growth cycle?

The answer is obviously none, which is why Econblog Review is skeptical of the prospects for a strong economic recovery.  Printing money only goes so far and then fails.

Currently, the major leadership in the stock market is the financial sector due to your money going straight to the banksters' pockets.  The canary in this coal mine, beyond all the obvious matters, may be Northern Trust (NTRS).  NTRS is perhaps the best-regarded TARP recipient, yet it needed to raise equity at a significant discount to its stock trading range.  Its stock chart had begun looking very promising, and in a typical bull market, you want to buy the leader of the damaged sector that would be poised for a bull market recovery.

If NTRS needed to sell below-market price equity rather than debt, bad news on JPM could follow.  This has been a scripted recovery in the financials created solely by the continuing alliance between Big Finance and Big Government, an unholy alliance which continues to drain America of its money and its spirit.

Copyright (C) Long Lake LLC 2009 

The Administration Says: Please Buy a New Car But Leave Home Without It

The Administration is all over the auto industry these days. On the one hand, there is immense effort to deal with the miserable condition of GM and Chrysler. The government is in charge and will have its way, one way or another, with all the other parties trying to game the system as best as they can.

On another related front, one of the centerpieces of the stimulus program was an enhanced roads program. We recall VP Biden proudly standing in Michigan touting the alacrity with which a 4-lane roadway was being transformed into one with 6 lanes.

And many of us remember Dr. Christina Romer on Meet the Press 6 weeks ago saying the following:

I think we know that consumers have lost a lot of wealth and that normally what you'd say is they should be saving more. I think the truth is consumers have also not done a lot of spending for the last 14 months. So what I would predict and I think would be a perfectly reasonable thing is you go out and you buy that car that you've been thinking about for 14 months and you do some of the spending.

So Barack Obama is strongly in favor of keeping lots of people busy building autos, making driving hassle-free, and of course busy adding another vehicle to the roads.

There is however a great big green BUT . . .

Barack Obama personally has informed us that we must reduce our carbon emissions. Being green means to the administration that every human exhalation is contributing to the rising of the seas. Therefore, every time anyone drives a vehicle anywhere, some grains of sand on a beach are being murdered as the oceans rise in response.

The U. S. contains about 9 motorized vehicles for every ten Americans. The green solution is to reduce that ratio substantially. The politically expedient solution is for taxpayers to keep subsidizing all of the following: auto manufacturers, the pensions of the UAW, the providers of financing to purchasers or lessees of the vehicles, and the maintenance and expansion of the roadways. Not to forget that taxpayers are going to subsidize improvements on the internal combusion engine.

Houston, we have a contradiction. An important part of Federal policy is to support the auto industry as we know it. Please don't use the end product, though, because when you do, you are an environmental villain.

We have other contradictions. Since this is a President who is emphasizing personal responsibility, what about him ending his addiction to cigarettes? Every time he lights up, he is adding to the global burden of carbon in the air. In addition, he is supporting some of the worst of the worst corporate offenders. He is adding a health care burden on society. He is setting a horrible example for American teenagers. Etc.

Cumulatively, if 60 million Americans smoke an average of 20 cigarettes a day, is that not as meaningful from an environmental + health point of view than the recent Administration goal of taking $100 M out of Federal expenditures is to a $3+ trillion budget?

Mr. President, put out that butt! (Please)

Copyright (C) Long Lake LLC 2009

Auto Makers, Banks, and Bailouts

30 years ago, the Federal Government "bailed out" Chrysler with a loan. Taxpayers eventually made some money on that loan.
Thus began the age of bailouts, with bondholders of the poorly-run bank Continental Illinois being made whole due to years of hard work by the Feds after the bank collapsed, then the bailout of Mexico's bondholders in 1995 in and end-run around Congress, the bailout of Wall Street in the 1998 LTCM collapse, etc.

Now we read this about Chrysler (WSJ):

The government said it would provide Chrysler with capital for 30 days to cut a workable arrangement with Fiat SpA, the Italian auto maker that has a tentative alliance with Chrysler.
...
If the two reach a definitive alliance agreement, the government would consider investing up to $6 billion more in Chrysler. If the talks fail, the company would be allowed to collapse.

Just as with Citigroup and its ilk today, one wonders if it would not have been better if Chrysler had been left to die in 1979. Think of how many investors have lost how many dollars propping this corpse up for the last three decades.

(EBR might praise the administration for making a tough decision on the automakers, except that at least these companies actually make products people use, employ skilled labor, and are victims of the worst economic banana since the Great Depression; whereas those who caused this banana are receiving trillions of dollars in aid. While in the bailout mode, why not give a little less to Big Finance and more so the automakers can ride out this downturn, Mr. President?)

It is past time for a people-centric financial policy built on equity rather than debt. Policies in that direction will in and of themselves render "banking" what it was in the 1950s, a small utility-like part of the economy without the swagger and pretense of all the "Masters of the Universe" bull----.


Copyright (C) Long Lake LLC 2009