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Archives for December 2009

December 2009 - Money Morning - Only the News You Can Profit From

Don't Be Fooled by the Housing Market's False Bottom

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Existing home sales surprised the markets by rising 7.4% to an annual rate of 6.54 million units in November, the highest since February 2007, according to the National Association of Realtors (NAR). That's only 10% below the all-time peak in 2005.

What's more is that house prices, as measured by the S&P/Case-Shiller 20-city Home Price Index, rose for the fourth consecutive month in September before stabilizing in October when prices were flat.

The NAR is inevitably convinced that the worst is over and that housing is due for a rapid recovery, and that home prices will take out 2006's peaks some time in 2011 or 2012.

Not so fast, guys!

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Only the Strongest Retailers Will Survive in 2010 as U.S. Consumers Continue to Battle Back

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The early returns on the 2009 holiday shopping season show a minor gain over last year's abysmal retail sales, and next year will affirm that retailers are successfully adapting to a consumer environment that's very different from years past.

However, 2010 will be difficult for retailers as they contend with high unemployment, tight credit, and aggressive competition.

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Retail sales gained 3.6% year-on-year from Nov. 1 through Dec. 24, SpendingPulse, a unit of MasterCard Advisors (NYSE: MA) said earlier this week. But an extra day between Thanksgiving and Christmas this year may have skewed the data anywhere from 2% to 4%, SpendingPulse said. Sales in the same period last year declined 2.3% as consumers reeled from the financial meltdown that occurred in the fall.

"The latest holiday shopping season wasn't a rip-roaring success, but at least it met or slightly exceeded expectations," John Lonski, chief economist of Moody's Capital Markets Research Group (NYSE: MCO) told The Associated Press. "Consumer spending is indeed in a recovery mode, which brightens prospects for 2010."

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GMAC to Receive Additional $3.5 Billion TARP Bailout

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The U.S. government is negotiating to provide GMAC Financial Services with approximately $3.5 billion in bailout funds in addition to the $12.5 billion the company has already received, according to multiple reports.

The U.S. Treasury told the company to raise additional capital as part of government-led stress tests of large banks conducted earlier this year. The tests were designed to identify banking firms that would need more capital to continue lending if the economy faltered in 2009 and 2010.

While the government views GMAC's survival as critically important to the revival of the auto industry, the company's financial troubles are actually linked to its mortgage lending unit Residential Capital LLC, or ResCap.

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"Financial Reform" Just Camouflage for Wall Street's Latest Power Play

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Anti-Wall Street sentiment makes for a good cover, but behind the scenes and rhetoric, legislators are working with the country's largest financial firms to fashion a new system that concentrates even more risk and reward at fewer banks.

And what's more, the underlying socialization of the system will guarantee the success of excess with the full faith and credit of taxpayers.

On Dec. 11, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009, which among other things, creates a consumer protection agency, strips the U.S. Federal Reserve of certain powers and subjects it to politicization, calls for big banks to finance a $150 billion bailout fund and gives the government power to break up or coddle financial firms as they see fit.

The Senate will try and reconcile the House bill with an earlier version of its own bill. Legislators are hoping to have a final bill ready sometime in early 2010.

But, in a testament to the power of Wall Street, what's on the table is what works for bankers and the Street. The resulting de-facto socialization of American banking is nothing more than Wall Street's secret agenda to eliminate competition, grow bigger profit engines and rely on the perception of a socialized system to support cheap funding.

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Coming Soon: The Bill for the Massive U.S. Debt

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Americans could be in for a rude awakening in coming months when they discover the true scope of the massive national debt racked up by the U.S. government.

In fact, the $1.6 trillion deficit expected for 2010, which is above 10% of gross domestic product (GDP), is only the beginning.

Since the current economic crisis began in late 2007, the U.S. Federal Reserve has tripled the size of its balance sheet, creating enormous amounts of new money by lending to hundreds of ailing banks and buying up more than $1 trillion of questionable asset-backed securities.

But that's only a small part of the story. Since the beginning of the crisis, the Fed has lent, spent, or guaranteed $11.6 trillion, including underwriting the entire system of mortgage finance in the United States, a system that currently shows a nearly $1 trillion loss.

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Investment News Briefs

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With our investment news briefs, Money Morning provides investors with a quick overview of the most important investing news stories from all around the world.

Top AIG Lawyer Quits Over Pay Restrictions, Gets Millions in Severance; Biggs & Faber: S&P 500 Has Room to Run, Dollar Will Rebound; Consumer Confidence Rises for Second Month in a Row; U.S. Home Prices Unchanged in October; China Audit Finds $35 Billion in Fraud by Officials; GM Holds Fire Sale on Remaining Pontiacs and Saturns; Oil Moves Closer to $79

Outgoing American International Group Inc. (NYSE: AIG) General Counsel Anastasia Kelly will get "several million dollars" in severance after she quit over federal pay curbs, people familiar with the matter told The Wall Street Journal . Kelly was entitled to the money under AIG's severance plan, which says certain executives can resign and collect severance if their pay is significantly reduced, the people said. Kelly's pay stood to take a large hit after the Obama administration "pay czar" Ken Feinberg capped annual salaries at $500,000 for executives at companies that received billions in bailout money. The exact amount of severance was not specified.

Hedge fund manager Barton Biggs and contrarian investor Marc Faber both said in an interview with Bloomberg Television that the dollar and the U.S. equity market may gain up to 10% in the next two years. "History would suggest that after such a severe economic shock like we've just had that the odds are that we're going to have a pretty good burst of growth in 2010, 2011," Biggs said. "I don't see any reason why we can't have a further rally in the dollar and a further rally in stocks. And my guess is that the next move in both could be on the order of 10%." Both Biggs and Faber recommended investors buy U.S. stocks on March 9, 2009 when the Standard & Poor's 500 Index was at its lowest point in 12 years.

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U.S. Stocks Will Reward Optimistic Investors in 2010

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I have been surprised to see the air thick with pessimism in recent weeks. Not so much the stock market, where the sentiment indexes show the bulls dominating the bears by slightly more than 52%. But among the general public.

An NBC/Wall Street Journal poll last week found that 55% of all Americans feel the nation is heading the wrong direction. This is the highest level since January of this year – when the financial crisis was red hot and U.S. President Barack Obama was just entering the White House! That's amazing.

A recent CNBC "Wealth in America" report found more negativity. Negative sentiments were expressed about the economy, stocks, home values, and wage growth. Faith in institutions like the U.S. Federal Reserve, the U.S. Treasury, and the financial sector were very low. President Obama's approval rating has fallen below 50% for the first time.

However, Merrill Lynch & Co. Inc. researchers picked up on this theme, and said in a recent note to clients that 2010 would be the year we exit the "pessimism bubble."

And I couldn't agree more. In fact, there might not be a better time to buy stocks.

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Investment News Briefs

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With our investment news briefs, Money Morning provides investors with a quick overview of the most important investing news stories from all around the world.

Fannie, Freddie Get Blank Checks; Holiday Retail Sales Rise 3.6%; Fed to Banks: Set Up CDs with Us; Health Care Bill Likely to Resemble Senate Version; JPMorgan Sues Former Bank Exec; Oil Tops $79 for First Time in Four Weeks

  • In what's been called a "perplexing" move by one analyst, the U.S. Treasury lifted a $200 billion cap on the amount of taxpayer dollars that can be injected into ailing mortgage firms Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) , providing unlimited support to them. The Treasury put into $60 billion into Fannie and $51 billion into Freddie, and were unlikely to need more than the $200 billion cap, wrote Keefe, Bruyette & Woods Inc. analyst Bose George in a note to investors yesterday (Monday). George views the Treasury's move as a way to more aggressively prop the U.S. housing market, and said the government could step up efforts of its Home Affordable Modification Program (HAMP), a mortgage-modification program designed for homeowners who can no longer afford them. But so far, HAMP and other government props have failed to stop a continuing wave of foreclosures, as Money Morning reported last fall. Shares of the firms, both government-sponsored enterprises (GSE) skyrocketed in trading yesterday. Fannie was up 20.95% to close at $1.27, while Freddie gained 26.98% to close at $1.60.

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The "January Effect" Could Offer Quick Gains for Small-Cap Investors

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If your investing tastes run more to small-cap issues than the giants of the Dow Jones Industrial Average and other major indexes, you could find 2010's best buying opportunities before the new year even starts – today (Tuesday) and tomorrow to be precise. That's the promise of the so-called "January Effect," historically one of the most reliable of the recognized stock market anomalies.

Although there are some minor variations, the primary thrust of the January Effect states that stocks do better in January than in any other month – and small stocks do better than large stocks, with the bulk of the gain realized from the final trading day of December through the middle of the following month.

While the first portion of that hypothesis isn't strictly true – historically, April has held a slight edge over January in general stock market performance – the small-stock portion has a strong record. In fact, in some years, small-stock gains in the first trading days of January have accounted for the sector's total advance for the entire year.

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China's Exports to Return to Growth Next Year, but How Much Will It Matter?

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Shipments from the Red Dragon were hit hard in the first 11 months this year, falling 18.8% compared to a year earlier, but are expected to bounce back and grow 6% in 2010, China's State Information Center said today (Tuesday).

However, exports from China, which is largely considered to be the world's manufacturing floor, are becoming less and less relevant as the Red Dragon moves toward a more balanced economy.

For instance, imports are expected to grow 11% next year, reflecting a shift toward more domestic consumption. And while the country is known for its massive spending on infrastructure, its service sector is growing twice as fast as its construction and infrastructure sectors, according to Money Morning Chief Investment Strategist Keith Fitz-Gerald, who says exports account for only 20% of China's gross domestic product (GDP).

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