What is wrong with the US economy? Part 2

[LowlyPion]

I wonder if that's after hours - or it was delayed?

Probably delayed as it is technically after the close that it changed to that, but is no longer moving.

 

[turbo]

The markets will rebound. After a drop like this, there are bargains, and they will be traded heavily enough to offset some of today's losses. Realists in the market know that the bailout proposal was a potential windfall for the well-connected, and now that it is dead, they will stop factoring it into their buy-sell evaluations and buy into the bargains.

 

[Astronuc]

Marketwatch reported - Dow tumbled 777.60 points, or 7%, to end at 10,365 points, its biggest ever point loss.

If Congress doesn't come up with a bill, I don't see much of a recovery, if any. Look at the overseas markets and futures in the morning.


So much for strong fundamentals.

 

[LowlyPion]

Marketwatch reported - Dow tumbled 777.60 points, or 7%, to end at 10,365 points, its biggest ever point loss.

If Congress doesn't come up with a bill, I don't see much of a recovery, if any. Look at the overseas markets and futures in the morning.


So much for strong fundamentals.

You will be able to look this evening when the Asian Markets start - 9:00 PM Eastern.

 

[Topher925]

So exactly how screwed are we?

http://biz.yahoo.com/ap/080929/wall_street.html

The majority of my investments are in the stock market. I was really counting on that money to help me get through my PhD. But now I have lost about 40% (as of today) of it due to my bad decision making. Does anyone think the market will rebound within a couple years?

 

[LowlyPion]

Rosh Hashanah starts at sunset.

No Congressional action apparently until Wednesday

 

[Astronuc]

So exactly how screwed are we?

http://biz.yahoo.com/ap/080929/wall_street.html

The majority of my investments are in the stock market. I was really counting on that money to help me get through my PhD. But now I have lost about 40% (as of today) of it due to my bad decision making. Does anyone think the market will rebound within a couple years?

That's hard to say at the moment because it depends on what happens the next few days, and with the foreign markets, and ultimately with the stabilization bill that Congress is considering.

It also ultimately depends on how much bad debt there is in relation to the income. The US government is looking at a $400 billion deficit this FY and a similar one next year. How much of the economy strongly dependent on that is hard to say.

The housing problem is supposed to continue through the next quarter and maybe into next year. Also watch the unemployment trends the next 3-6 months.

If the sovereign funds pull their capital out of the US market - watch out.

Also - those derivatives and unknown financial instruments are unkown.

Now the equity markets have recovered after a fall like this, but that was before the current financial crisis when there was not so much uncertainty and the economy was not so over-leveraged. Keep in mind that the market stabilized all morning after it fell in the opening minutes.

 

[Art]

The only thing supporting the markets at this time is investors still believe a deal will be struck. If it becomes apparent none will be I would expect the indexes to drop like a rock spurred on by more bank collapses.

 

[LowlyPion]

The only thing supporting the markets at this time is investors still believe a deal will be struck. If it becomes apparent none will be I would expect the indexes to drop like a rock spurred on by more bank collapses.

I think that's already happened.

Tomorrow nothing will get done.
Wednesday either.

Thursday things will be going swell again.

 

[nuby]

Oil down a lot today.. and the dollar up. What are the chances we're headed for a "Great Deflation" .. If no bailout happens will the value of goods/services drop, and increase the value of currency worldwide?

 

[CaptainQuasar]

I wish I was a leprechaun.

I wish I was a leprechaun. That's what I was thinking last St. Patty's day, that I ought to get into the leprechaunin' business. If only I'd listened to myself.

 

[Astronuc]

Oil down a lot today.. and the dollar up. What are the chances we're headed for a "Great Deflation" .. If no bailout happens will the value of goods/services drop, and increase the value of currency worldwide?

Lower energy prices would cushion the downturn in the US economy - for consumers and energy users. For energy developers, e.g. oil and gas producers, it's not so good.

 

[LowlyPion]

Tokyo Stock Exchange

http://www.tse.or.jp/english/

currently off 4%-5%.

That might suggest another 400 500 points tomorrow on the Dow.

But Bush will speak in the morning at 7:45 AM.

That's got to make the sphincter tighten if he's going to talk before the markets open.

 

[Astronuc]

Bush gave a pep talk this morning before the markets opened.

Ummmm - it didn't help.

 

[Astronuc]

According to MarketWatch - S&P 500 futures rose 31.9 points to 1,150.70 and Nasdaq 100 futures added 34.25 points to 1,546.25. Dow industrial futures added 211 points.

Overseas markets also were performing relatively well after Monday's bruising. The Nikkei 225 tumbled 4.1% in Tokyo, but the Hang Seng closed higher and the FTSE 100 edged up 0.3% in London.

Overnight and this morning (0600 US EDT) -

Royal Bank of Scotland shares drop 7.5%, Barclays down 4.3% after US Congress rejects economic intervention.

Tesco's revenue reported up 13%.

Hang Seng and Indian Sensex markets up.

German DAX 30 index down 1.3% at 5,730.00
French CAC 40 index down 2% at 3,874.80

Volvo to cut 1400 jobs in Sweden and Belgium

 

[nuby]

For energy developers, e.g. oil and gas producers, it's not so good.

and don't forget the government, and our military/energy investment in middle east.

I'm not surprised the people (and congress) are doing the opposite of what GW Bush asks/wishes. Is anyone? The biggest joke of his presidency would be if "no bailout" somehow turned out to be the best option.

 

[Astronuc]

A rally this morning.


Meanwhile - Gas(oline) shortage plagues the Southeast
http://news.yahoo.com/s/ap_travel/20080930/ap_tr_ge/travel_brief_gas_shortage

My brother was apparently having trouble finding gasoline the past few days.

ATLANTA - Motorists are rising before dawn so they can be at the filling station when the delivery truck arrives. Some are skipping work or telecommuting. Others are taking the extreme step — for Atlanta — of switching to public transportation.

Across a section of the South, a hurricane-induced gasoline shortage that was expected to last only a few days is dragging into its third week, and experts say it could persist into mid-October. The Atlanta area has been hit particularly hard, along with Nashville and western North Carolina.

Those lucky enough to find gas are paying more than drivers elsewhere around the country.

"I've used up gas just looking for gas," said Larry Jenkins, a construction worker who pulled his red pickup truck into a Citgo station in Charlotte, N.C., on Monday. The sign said $3.99 a gallon, but the pumps were closed. Many filling stations in the area have not had gas for days.
. . .
The shortage started with the one-two punch of Hurricanes Gustav and Ike, which shut down refineries along the Gulf Coast. Now, more than two weeks after Ike, many refineries are still making fuel at reduced levels.

While other parts of the country get gasoline from a variety of domestic and overseas sources, the Southeast relies heavily on two pipelines that carry fuel from the Gulf of Mexico. Because the gasoline moves at just 3 to 5 mph, it can take up to 10 days to reach Atlanta.

And companies don't want to store it because that would cost profits.

 

[phoenixy]

As of Monday, Sep 29, DOW and NASDAQ are both lower than when Bush took office 8 years ago. But let's ignore stocks for a moment and look at some other economic indicators.

Are You Better Off Now Than You Were Eight Years Ago?

http://www.cepr.net/index.php/publications/reports/2000-2008:-are-you-better-off/

 

[Astronuc]

Yesterday the Dow Wilshire 5000 stocks lost about $1.2 trillion of value, but hey it's only money and if one waits long enough, the value of equities may recover.

Meanwhile - if one had good inside information:

Google jumped 4.4% in early trading.

Sovereign Bankcorp - jumped 91%. (could have made some good buckage there!)

Huntsman and National City both increased 54%.

Genworth was up 28%

and JPM and Citgroup rallied more than 10%.

 

[Art]

Here's a video highlighting the differences between what McCain said before and what he said after his epiphany moment in relation to the economy and de-regulation.

 

[LowlyPion]

Oil. We'd better not be at war over this? Doh! Because we could drill, drill, drill in Alaska instead? DOH!

https://www.youtube.com/watch?v=gVDCXpSD6Fk

 

[LowlyPion]

Here's a video highlighting the differences between what McCain said before and what he said after his epiphany moment in relation to the economy and de-regulation.

Thanks for the link. Brave New is apparently an attack arm PAC supporting Obama. They recently did the one asking about his medical records and the progress of his skin cancer that he is withholding.

 

[mheslep]

...His real opinion is that the Republicans couldn't deliver the votes that they said they could and are now painting it as a partisan issue. True that.

Crap that.

 

[Astronuc]

Stock futures are down ahead of the Senate vote.

So the markets may drop, then they'll probably rally if the Senate passes the bill. But then there is the House vote on Th or Fri.

October will be volatile like Sept.


Interestingly, since the markets recovered so easily, that might suggest that the government shouldn't intervene - but that could cause further instability.

Also - the big question nobody wants to ask - by intervention, is the government simply postponing the inevitable. This however means poking through the myth that economy appears stronger than it is. It's a bit like knowing a hurricane is approaching, but not preparing for, and then suffering because of the lack of everyday routine support.

Perhaps the biggest concerns are the actual debt and the fact that the US energy supply is largely outside the US, which is not good for an energy intensive economy.

 

[turbo]

Congress is STILL looking at a bailout, and they are STILL shooting for $700 billion, even though nobody can say how that figure was arrived at. I'm getting sick of this. The longer Congress dithers around, the more paralyzed the market will be. If they flatly reject any bailout, the market will stabilize, investors will buy up perceived bargains, and life will go on. Right now we've got a market full of hogs waiting to see which trough the bailout is directed to, and any rapid infusion of cash is going to cause a lot of instability, and possibly make matters worse as investors drop investments that are poorly positioned to suck up bailout money.

http://news.yahoo.com/s/ap/20081001/ap_on_bi_ge/financial_meltdown;_ylt=AhR3DeZP.c46xoCInh5xXNas0NUE

 

[Astronuc]

Dow 30 - Prev. Close: 10,850.66
High: 10,847.79 as of ~10 am, 10/01/08)
Low: 10,648.68

52-Wk High: 10/11/07 14,279.96
52-Wk Low: 09/29/08 10,266.76
Down nearly 4000 points (~28%)

Dividend: 80.83
Yield: 3.04

The volatility is a bit ridiculous given that it is now driven solely on emotion (fear bordering on panic). That much uncertainty does not make for a healthy environment.

 

[OmCheeto]

The volatility is a bit ridiculous given that it is now driven solely on emotion (fear bordering on panic). That much uncertainty does not make for a healthy environment.

I asked a broker acquaintance of mine last night(do they have any friends left?), who was driving the market right now. I thought it might be the big wigs trying to scare the little people and get them all to call their congressmen to force the passage of the $700b bill. He said that it appeared that everyone was trading. Big and small investors.

He told me last week that this is usually how wall street profits. The market goes down, the little people sell, the big investors buy, the market goes back up, the little people lose, the big investors win.

He also said that only young people should have their money in risky investments. Old people like me should not gamble with their investments 3 years before retiring in the hopes that they'll "win big".

Old people!

I bought the kid a drink for his advice.

 

[Astronuc]

Buffett dives into GE amid "economic Pearl Harbor"
http://news.yahoo.com/s/nm/20081001/tc_nm/us_ge_buffett

NEW YORK (Reuters) - Warren Buffett's $3 billion commitment to General Electric Co is the latest attempt by perhaps the world's most revered investor to dive into a beaten-down company he believes has staying power, despite a global credit crisis he calls an "economic Pearl Harbor."

The billionaire's insurance and investment company Berkshire Hathaway Inc announced the preferred stock investment as GE, whose shares have slid about one-third this year amid concern over its financial services operations, set plans to sell $12 billion of common stock.

It came just eight days after Berkshire invested $5 billion in Goldman Sachs Group Inc in a similarly structured transaction.

Buffett admitted that both investments could backfire if the U.S. Congress fails to pass a proposed $700 billion plan to help the nation's banking industry reduce its stockpile of bad mortgages and other debt. Unlike much of corporate America right now, Berkshire does not need to borrow to do big deals.

"What Buffett has been waiting for years is finally happening: a period of sufficient market distress where he can negotiate terrific financial terms for Berkshire," said James Armstrong, president of Henry H. Armstrong & Associates in Pittsburgh. "He has been waiting for this for 10 years."

Omaha, Nebraska-based Berkshire agreed to buy $3 billion of GE perpetual preferred shares with a 10 percent dividend, generating $300 million of income a year.

Berkshire also gets warrants to buy $3 billion of GE common stock within five years at $22.25 per share, below its current level, and near the 5-1/2 year low it set on Sept 18.

"General Electric is the backbone of American industry," Buffett said on CNBC television. "They've become tainted as every company is that has to borrow a lot of money all the time. They're going to be around in five or 10 or 100 years from now and, if you buy at the right time, you'll probably make some money."

The Goldman investment included $5 billion of preferred shares with a 10 percent dividend and warrants to buy $5 billion of common stock at a discount.

GE shares closed down $1 at $24.50 on Wednesday, giving Berkshire a roughly $330 million paper profit on the warrants. The Class A shares of Berkshire rose $6,400 to $137,000.

Well some people are going to do very well in the current crisis, and others are not. Those already holding GE common stock will see a dilution of wealth.

Note that the Goldman preferred stock offers a 10% dividend yield. Compare that to the dividends of the common stock (Div & Yield: 1.40 (1.10%)) - what's wrong with this picture. And that is why the common stocks are overvalued.

 

[Jimmy Snyder]

Note that the Goldman preferred stock offers a 10% dividend yield. Compare that to the dividends of the common stock (Div & Yield: 1.40 (1.10%)) - what's wrong with this picture.

Preferred stock and common stock are very different things. For preferred stock, the amount of the dividend is a fixed dollar amount, as with a bond. When preferred shares are traded, the buyer and seller agree to what the dividend is worth based on the expectation that it will be paid and the price of other similar investments. A high dividend yield on a preferred stock is an indication that the market thinks the dividend payment is iffy. Compare this to the yields on junk bonds which also tend to be high. In general, there is a drawback to preferred stock in that since the dividend is a fixed amount, it can never rise even if the company does well. The expectation of profiting if the company does well is what keeps up the price of common stock. If the market expects a company will do well, then the price will rise and the yield fall.

Keep in mind that the market is relatively efficient. If one investment is better than another, money will flow rapidly in the expected direction until they balance, like heat in a closed system flows toward temperature equilibrium.

 

[Astronuc]

Deleveraging Society by David Paul
http://www.huffingtonpost.com/david-paul/deleveraging-society_b_130628.html

As illustrated below, our indebtedness--not just as a government but as a society--took off. As a percent of our national income, our cumulative debt burgeoned from a stable level of around 150% of GDP to 350% and counting.

That's a big problem that is not going to get fixed with the bailout. In addition to the $700 billion in funds to the financial sector, the bailout bill includes ~$100 billion in tax breaks and other obligations that will contribute to a greater federal deficit in FY2009. If McCain tries add another set of tax cuts, FY2009 will have an even great deficit.

The Senate's new economic rescue package is now worth over $800 billion.
http://marketplace.publicradio.org/display/web/2008/10/02/new_senate_package/

Interesting commentary!
Recession will inspire a new frugality
http://marketplace.publicradio.org/display/web/2008/10/02/farrell_new_frugality/

 

[kronon]

"Recession will inspire a new frugality"

Wouldnt that be nice.
But looking back at the economic expansions and contractions and expansions and contractions over the last 200 years would show otherwsie.

Banks will find borrowers for all the paper it considers safe to issue.

 

[Astronuc]

Stocks decline on unemployment, factory reports
http://news.yahoo.com/s/ap/20081002/ap_on_bi_st_ma_re/wall_street

NEW YORK - Stocks tumbled and credit markets remained tight Thursday after plunging factory orders and a seven-year high in jobless claims stoked fears that the government's financial rescue plan might not be enough to ward off a recession. The Dow Jones industrials fell nearly 300 points.

Investors appeared to be pulling more money out of the market and settling in for a prolonged economic winter. The main concern is that the $700 billion bailout plan won't be enough to stimulate growth, and the latest economic reports delivered on Tuesday demonstrate that the economy continues to struggle.

The government said the number of people seeking unemployment benefits rose last week and that demand at the nation's factories has fallen by the largest amount in nearly two years. The market is interpreting the Commerce Department report on factories as a sign that tight credit conditions are hitting manufacturers.

"The economy is what's driving this weakness," said Subodh Kumar, global investment strategist at Toronto-based Subodh Kumar & Associates. "I think now what's going on is a focus on the economic weakness in a whole bunch of areas."
. . . .

Tight credit and/or reduced demand - reduced revenue.

 

[Astronuc]

GE Announces Pricing of Common Stock Offering
http://biz.yahoo.com/bw/081002/20081002005635.html?.v=1
Thursday October 2, 9:22 am ET

FAIRFIELD, Conn.--(BUSINESS WIRE)--GE today announced that it priced an offering of 547,825,000 shares of its common stock at $22.25 per share. To the extent that the underwriters sell more than 547,825,000 shares of common stock, the underwriters have the option to purchase from GE up to an additional 82,173,750 shares.

http://www.clusterstock.com/2008/10/ge-we-had-to-slash-price-to-get-stock-deal-done

Well, GE raised the additional $12 billion it planned to raise after Warren Buffett injected $3 billion yesterday. But it had to price the stock at a gut-wrenching 9% discount to the current price, at $22.25. Demand was so weak, in fact, that the deal was priced below Warren Buffett's option on an additional $3 billion, which has a strike price of $22.50.

Not a good sign. Presumably things will turn up a little once the House votes on the bailout bill (assuming it passes). Yet if the economic picture doesn't improve dramatically, the markets will remain weak.

 

[turbo]

A $700 billion bailout will not stimulate growth because it is not targeted at people who spend their disposable income on consumer goods. 2/3 of our economy is driven by consumer spending, and with the rising costs of fuel and food, there is simply less disposable income to spend on consumer goods. Wait until heating season kicks in and people have to pay nosebleed prices for heating oil, propane, natural gas, etc. Retailers are going to be singing the blues this holiday season.

On a local note, a snowmobile club in the region is having a hard time drumming up members this year. Even though we had LOTS of snow and lots of riders last year, the high price of fuel piled on top of dues, registration fees, and insurance has forced lots of people to reconsider whether they can afford to run their sleds this year. There are a LOT of them out on front lawns for sale in this area.

 

[mheslep]

GE Announces Pricing of Common Stock Offering
http://biz.yahoo.com/bw/081002/20081002005635.html?.v=1
Thursday October 2, 9:22 am ET

http://www.clusterstock.com/2008/10/ge-we-had-to-slash-price-to-get-stock-deal-done
Not a good sign. Presumably things will turn up a little once the House votes on the bailout bill (assuming it passes). Yet if the economic picture doesn't improve dramatically, the markets will remain weak.

Again I don't know. Certainly not a good thing for shareholders but a big chunk of that is the hits being taken by GE Capital. The jobs, manufacturing, etc are elsewhere in GE. They seemed poised to gobble up a big share of the coming US wind market, already sold T Boone his wind turbines for Texas.