• 262 days Will The ECB Continue To Hike Rates?
  • 262 days Forbes: Aramco Remains Largest Company In The Middle East
  • 264 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 663 days Could Crypto Overtake Traditional Investment?
  • 668 days Americans Still Quitting Jobs At Record Pace
  • 670 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 673 days Is The Dollar Too Strong?
  • 674 days Big Tech Disappoints Investors on Earnings Calls
  • 674 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 676 days China Is Quietly Trying To Distance Itself From Russia
  • 676 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 680 days Crypto Investors Won Big In 2021
  • 681 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 681 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 684 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 684 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 687 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 688 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 688 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 690 days Are NFTs About To Take Over Gaming?
Market Sentiment At Its Lowest In 10 Months

Market Sentiment At Its Lowest In 10 Months

Stocks sold off last week…

Strong U.S. Dollar Weighs On Blue Chip Earnings

Strong U.S. Dollar Weighs On Blue Chip Earnings

Earnings season is well underway,…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

  1. Home
  2. Markets
  3. Other

Obama: Change to Come?

This is an excerpt from an RSG Newsletter dated January 17, 2009.

Friday, the last trading day with the Bush Administration in command, was marked by new lows in the terribly ill banking sector. The Troubled Assets Relief Program (TARP) became law on October 3, 2008. Since then, the Philadelphia Bank Index ($BKX) has declined by an astonishing 55%.

In fact, the financial sector as a whole is now trading near its 1995 levels when the problems from the 1980s banking crisis were still being digested.

The primary reasons for this fiasco are: continuous rule changes and lack of any policy follow-through, absence of any transparency of how the funds are being spent and finally an understanding by investors that even $700 billion will be insufficient to patch the gigantic and growing hole in the banks' balance sheets.

With the 2009 S&P 500 earnings per share expected to decline to $40, even an 800 level in the index produces a P/E of 20, a fair value at best. Of course, the key is how fast the earnings will recover in 2010 or 2011. Right now the market is clearly saying that it does not like the Paulson approach to stopping the bursting of the financial bubble and that the earnings recovery is still far away.

We agree with those experts' predictions which state that the financial system needs about $1.5 trillion more to patch up this deflating bubble. But every week, it seems that there are new problems. For 2008, bank losses related to credit cards were $28 billion. In 2009, as more people lose their jobs and run out of savings, the number is expected to grow to $100 billion.

A bigger problem yet is the coming mortgage rate reset for hundreds of thousands of homeowners. While the Subprime tidal wave is largely over, the majority Alt-A and the Option Adjustables resets are still to come in 2009 through 2011. And the effect on the economy can be just as large if not larger and more painful than the subprime crisis.

With enormous job losses experienced over the past few months, homeowners are now in a much worse shape to be able to absorb an increase in mortgage interest rates. Many of these same homeowners cannot take advantage of today's low mortgage rates since the value of their homes is now less than their mortgage. Seemingly, it is a trap with no way out. If the government does not intervene directly, the only answer for many is foreclosure.

With so much change promised, what does President Obama have in store for us?

The $825B spending package unveiled by the House last week was a disappointment to us. It offers little in tax cuts, but a lot in social giveaways to states. The much promised infrastructure spending on highways, transit and energy is just $148 billion.

Instead, most of the spending is for immediate social needs such as unemployment benefits, insurance and health care. While this money will be spent quickly, we doubt there is much of a sustainable stimulative effect to the US economy (perhaps it will help the Chinese economy?!).

We doubt that the plan will create 3-4 million jobs, 90% of which are supposed to come from the private sector. If such a promise is to be fulfilled, much more money will be needed for direct infrastructure, technology, transportation, industry investments or in form of tax cuts or investment credits for businesses.

In addition to this proposed emergency spending, the second $350 billion installment of the TARP has been released to the new president. As Bernanke first suggested a few months ago, the money is most likely to be spent in setting up a $1 Trillion Bad Asset Bank (AGGREGATED). This appears to be a measure of desperation since the financial sector recapitalization efforts to date have failed to work.

Similar to the Resolution Trust Corporation (RTC), this government bank would swap good assets (such as cash and treasuries) for toxic assets that appear on the banks' balance sheets. Banks get cash; taxpayers get toxic assets with questionable value.

So far, that is the recap of the change that is coming with the new Administration.

By improving the balance sheets in the financial sector, they hope that confidence in the financial system will recover and that bank recapitalization will succeed. Is this going to work? We believe eventually it will, although it will take a lot more than $350 billion and much more time than most people hope for.

The reaction of the broad market to the Obama Administration "innovations" remains muted. Yet gold and other precious metals stocks began to demonstrate remarkable outperformance compared the rest of equities at a moment when it became clear that Obama won.

This is convincing evidence that inflationary policies of the new Administration are, as expected, bullish for gold.

 

Back to homepage

Leave a comment

Leave a comment