Man, I try to get bullish and then this happens.
The European Commission warns of a full-blown debt crisis for the eurozone, with half of the 16 nations at high risk of unsustainable public finances.
"Governments will spend the next year and beyond balancing the urgent need to fix public-sector debt and deficits — without imperiling what appears to be a feeble economic recovery. Fitch warns in a December report that particularly the U.K. (which isn’t in the euro zone) and Spain and France (which are) risk being downgraded if they don’t articulate more-credible fiscal-consolidation programs during the coming year given the pace of fiscal deterioration."
Even optimists expect a rocky road full of downgrades and bond-market punishment.
It’s not like we didn’t know this was happening, it’s just that investors obviously don’t want to know and, as Jim Cramer often reminds us - ignorance is bullish bliss. Of course government debt doesn’t seem to bother US investors so maybe we shouldn’t worry about other global debt either. The Trillions of dollars in stimulus spending bought the EU a 0.7% increase in their Leading Economic Indicators for November, now down less than 10% from its 2007 peak after dropping close to 20% last fall. Wow, stimulate a $14Tn GDP with $3Tn and get a 10% boost - why didn’t we think of this sooner?
Similar logic is being used today as GMAC will be getting another $3.5Bn injection of funds, adding to the $12.5Bn the Fed has already given to them. The new capital will likely allow GMAC to avoid placing its ailing mortgage unit, Residential Capital LLC, or ResCap, into bankruptcy. GMAC had set the end of the year as a deadline for deciding ResCap’s fate after losses from loans made to borrowers with shaky credit dragged down GMAC’s results in 2009. The mortgage unit lost $2.7 billion through the first three quarters of 2009 following $9.96 billion of losses in 2008 and 2007.
It’s not GMAC per se that bothers me but the fact that clearly investors are betting on other mortgage financers as if GMAC is the only company losing money in 2009. We know what’s up with GMAC because we already own 34.5% of the company and they are coming to us for more. The rest of the $11Tn mortgage industry that isn’t FRE or FNM (who we’ve already pledged unlimited bailout funds to this week) are losing their money behind closed doors and sweeping those losses under virtual rugs, aided and abetted by FASB rule changes that were put into effect this year which allow lenders to mark their loans to whatever they want as we all go whistling past the graveyard that is the US mortgage market.
Of course, the GMAC bailout is simply an example of our government in action as one of GMAC’s expenses in 2008 was $4.6M spent on lobbying while parent company GM spent another $14M and got themselves a $10Bn bailout. You can see a chart here showing what the ROI for lobbying was this year, which also shows campaign contributions. GM paid $916K while GMAC only paid $72K but BAC paid $5.7M to elect their friends in ‘08 and another $8.8M on lobbying them. Was it worth it? Absolutely! BAC got $45Bn in TARP funds, a 309,335% return on their
Kind of makes the people in this country seem foolish doesn’t it? They contribute hundreds of millions of dollars to various candidates but get nothing for it. Imagine if somehow they were to get organized and were to contribute through an organization that looked after the interests of the working man. Why if they did something like that they could even possibly get together and collectively bargain for better wages and benefits on their jobs with representatives that would be directly elected by the workers to represent their interests and coordinate their substantial group influence so people in Washington would have to pay attention to them, the way they pay attention to banks and corporations. Just a thought…
All right, before they bury me in the end zone of the new Giants stadium, let’s get back to the capitalistic pursuit of making money! Thanks to all those tens of millions of dollars spent on lobbying, the 1,279-page “Wall Street Reform and Consumer Protection Act” clearly protects only one thing - Wall Street! The bill authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around.
The bill also allows the government, in a crisis, to back financial firms’ debts. Bondholders can sleep easy — there are more bailouts to come. The bill contains a provision that, in the event of another government request for emergency aid to prop up the financial system, debate in Congress be limited to just 10 hours - that’s right, Lloyd Blankfein put his foot down and will not wait more than 10 hours for his money next time, so kudos to Congress for insuring themselves another $150M in
bribes contributions from their pals in the financial industry and those of you who are lucky enough to still have jobs better get back to them and earn that $4Tn of our money that our elected representatives just pledged to our bankers.
$4 Trillion is nothing in the grand scheme of things of course. Japan is looking to grow their economy by ¥150T by 2020 but it wasn’t enough to pull the Nikkei out of a power dive that dropped them 150 points from what started as a huge gap up at the open as the dollar made new highs against the Yen. The Nikkei fell on news of JAL possibly going into liquidation as that airline fell 23.9% in the session. "It was not surprising to see substantial concerns about debt default at Japan Airlines, and this is actually not an isolated situation," said Richard Hastings, a consumer strategist at Global Hunter Securities. "Credit quality is still an issue even if debt markets are more liquid now than they were nine months ago."
The Shanghai Composite managed to shake off the JAL news with a 1.5% gain led by the banking sector on expectations that the government has allowed over 300Bn Yuan ($43.9Bn) in new loans for December. Insurers also gained ground after a state-run newspaper report cited officials at the Ministry of Finance and the insurance regulator as saying a change in accounting rules will boost insurers’ 2009 net profit. See, toss in a little cash, rewrite a few rules and it’s rally time - who says making money is hard?
Don’t be fooled though, the MSCI World Material Index is now at 234 which, according to Bloomberg, is 81 times earnings for that sector. This is why we like SMN as a short play as well as EDZ - just in case people aren’t willing to pay 100x for commodities in 2010…
Europe has pulled back a bit this morning as have the US futures. We’ll see if we can hold our levels this morning after yesterday’s exciting finish.