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Charles A. Smith
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Charlie Smith – Principal and Chief Investment Officer of Fort Pitt Capital Group. Charlie is a graduate of Penn State University and lives in Marshall Township, PA.
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  • Loose Items from a Tight-Leaf Notebook
    Bruce Keidan, the former sports editor of the Pittsburgh Post-Gazette, would occasionally produce a column consisting entirely of snippets of future story ideas, rather than a fully-formed essay.  These compilations became quite popular with his readership. When asked about their popularity, he said he didn’t know whether to credit the failing attention spans of his readers, or his own laziness. In honor of the (now deceased) Mr. Keidan, we present “Loose Items from a Tight-Leaf Notebook”:
    The Kids are NOT Alright  In 2010 the typical U.S. college graduate left school $24,000 in debt, and student loans surpassed credit cards on the great American liability tote-board.  Delinquency rates are rising, and student loans remain the only category of indebtedness not discharged by bankruptcy. How are these kids going to move out of Mom and Dad’s basement when they already have a mortgage? Moral:  There’s a serious storm coming to the world of academia.
    Neither a Borrower or a Lender Be  Bank stock investors may be getting ahead of themselves in their zeal for renewed dividends. Many of the nation’s largest banks cut their dividends to the bone after the financial crisis in late 2008. Now that the process of balance sheet repair is moving along, most have requested and received permission from the Federal Reserve to begin raising them again. This has many analysts waxing enthusiastic about bank shares. We say think again. By our calculations, the nation’s top five banks will take an average of 9 years to bring their dividends back to pre-crash levels.
    The 4% Solution   Dan Henninger summarized the Federal deficit problem quite succinctly in a recent Wall Street Journal column. He said the goal of the Republican budget plan is a simple one:  pare Federal spending as a percentage of Gross Domestic Product (NYSE:GDP) to 20%. President Obama, on the other hand, wishes to keep spending at 24% of GDP. Henninger says the nation’s future lies within those four points of GDP, and he’s right. History shows that no matter the tax rate, the IRS manages to pull about 18% of annual GDP into Federal coffers each year. If spending falls back to 20%, the deficit is manageable over the long term. If it stays at 24%, fiscal ruin lies ahead. End of story.
    What’s Wrong with This Picture?  The popular press, the Fed and the Obama administration would have you believe that the U.S. economy is steadily recovering from the economic mess of 2008-2009, sort of like Lance Armstrong valiantly powering his way up a mountain in the Pyrenees. We have another image for you, however. Imagine a 5-year-old child on her bicycle for the first time, hands frozen to the handlebars as her kindly grandfather gives her one swift push after another. Training wheels scrape along the ground as she alternates between budding confidence and sheer terror.  Now, substitute free money (courtesy of the Fed) for the training wheels and Ben Bernanke and steady bouts of Quantitative Easing for the old man. Any questions?
    Gasland   Oil prices recently crept back over the $100 mark. One obvious solution to the problems of high prices and crippling imports is domestic natural gas. U.S. gas reserves have increased 50% in the past decade, and new drilling and fracking techniques continue to drive this number upward. Large energy firms like Exxon-Mobil and Chevron recognize the opportunity, and have spent billions acquiring proven reserves right here in Pennsylvania. Thorny environmental and regulatory issues need to be resolved before production can move ahead full bore, however. The state of Pennsylvania in particular needs to create a tax regime which is fair to all parties involved, including local municipalities bearing the brunt of drilling-related disruptions. Prediction: If newly-elected Governor Tom Corbett does not enact some sort of natural gas extraction tax during his first term, he will not be reelected.
    One Potato-Two Potato   We’ve said for 3 years that the Great Recession of 2008 – 20?? would be known as the Couch Potato Recession. Now we have the numbers to prove it. USA Today reports that only 45.4% of Americans had jobs in 2010, the lowest rate since 1983, and down from a peak of 49.3% in 2000. Last year just 66.8% of men had jobs, the lowest fraction on record. Labor force participation is scraping along at all-time lows as well. These facts beg the question:  Is it a problem if half the population is not working and depending on those who are? What is the purpose of a job? Most people would say the purpose of a job is to provide an income, but this is backwards. The purpose of a job is to add value as part of a manufacturing or service process. One can work for one’s self or for another, but if labor adds no value, the job cannot last. Value added is determined by the employer, and, ultimately, by the customer. Politicians can take resources from the productive economy to employ people in jobs which politicians deem socially worthy. There is a limit, however, to the resources productive individuals will provide to politicians before refusing to produce or hire others.
    Great Gig if You Can Get It   A recent issue of Rolling Stone magazine featured a report on emergency lending by the Federal Reserve during the financial crisis. It turns out the very well-to-do wives of two Morgan Stanley executives received $220 million from the Fed to invest in packages of student loans and commercial mortgages. These “non-recourse” loans were structured such that the borrowers had very little to lose and much to gain, and vice-versa for the Fed.  What was the public policy rationale for this? One could argue that the economic inequality bemoaned in the popular press is a direct result of this sort of behavior. Inequality is actually very easy to fix; all you have to do is let rich people fail.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Apr 15 12:46 PM | Link | Comment!
  • Can You Spell Perpetual Motion?
    The following (italics) is excerpted from today's release by the Fed concerning it’s "financial results" for calendar 2010 (my editorial notes in bold):

    The Reserve Banks' comprehensive income increased $28 billion over the previous year to $82 billion (+52%!!!) for the year ended December 31, 2010. The increase was primarily attributable to an increase of $24 billion in interest earnings on the federal agency and GSE MBS holdings.
    The Reserve Banks transferred $79 billion of their $82 billion in comprehensive income to the U.S. Treasury in 2010, a $32 billion increase (+68%!!!) from the amount transferred in 2009.
    So, let's get this straight. The Treasury borrows from, and pays interest to, the Fed, and then the Fed simply skims some (in 2010 it was 3.65%) of the interest paid by the Treasury for itself, and then gives the rest back to the Treasury!

    What then is the effective cost of such borrowings? It is certainly FAR LOWER than the cost of funds borrowed elsewhere. Why wouldn’t Treasury therefore want to borrow EVERY LAST DIME IT CAN from the Fed? Wouldn’t this be in the best interest of taxpayers? Inquiring minds want to know…

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Mar 22 12:56 PM | Link | Comment!
  • Pay No Attention to the Man Behind the Curtain
    The year is 2030. On a cold January morning the head of the United States Nuclear Regulatory Commission calls a national press conference and says the following:

    "Good morning. As you know, after dumping 75 million tons of nuclear waste beneath the Nevada desert at the Yucca Mountain facility, Commission directors yesterday issued a press release clarifying the true nature of that facility. Regrettably, this release generated far more public scrutiny, attention and skepticism than the Commission desired, so I am here this morning to reiterate the facts, which are as follows: The materials stored at the facility do not, and never at any time, presented any risk whatsoever to public health. Furthermore, our technicians have developed a tool for permanently neutralizing all potential future negative public health effects from these materials. And I happen to have the very latest version of that tool right here in my shirt pocket."

    He pulls out a pen and holds it up for the cameras.

    "Thanks for your attention, and have a good day."

    On January 6, 2011 the U.S. Federal Reserve issued a little-noticed press release as an addendum to its weekly balance sheet update. The release announced an accounting change which essentially allows the Fed to denote losses by the various regional reserve banks as a liability to the Treasury, rather than a deduction to its own capital. The reason for the change? If the Federal Reserve were forced to properly account for the losses which it has suffered on $1.2 trillion in mortgage securities purchased in 2009 as part of an effort to prop up the housing market, it would be insolvent. The math here is pretty simple: a 5% mark on a $1.2 trillion portfolio (home prices are down more than 5% since the Fed stopped buying) creates a loss of $60 billion. The Fed has only $53 billion in capital.

    The Fed is insolvent, and needed accounting legerdemain to hide that fact, so it simply passed the losses along to the U.S. Treasury in the form of an IOU to taxpayers. But wait...isn't the Treasury already issuing gigantic amounts of IOUs which the Fed is buying? Isn't that what we call QE2? How does one cash-strapped and nearly insolvent entity (the U.S. government) get propped up by another, already insolvent, entity (the Fed)? It doesn't. What you've just witnessed (and the Fed has tried to obfuscate) is the "closing of the loop" on the largest financial shell game in history.

    You would think an announcement of this sort would've generated headlines. So far, it has not. This is because the average American has no understanding of the minutiae of financial accounting, and neither does the average financial reporter. Ever since the Fed starting buying mortgages in early 2009, I've wondered how the Great Paper Hanger, the Ben Bernanke, would cover his tracks. Now we know. A few mirrors here, a puff of smoke there, and tens of billions in losses continuously fold in on themselves and disappear!

    I have a suggestion for Mr. Ron Paul, the new Chair of the House Financial Services Subcommittee on Monetary Policy. The first item on your 2011 agenda should be a clear and simple explanation of this chicanery on the part of the Fed. Hiding an entire mountain of bad debt is no mean feat, and the American people have a right to know exactly how it was done.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 22 8:36 AM | Link | Comment!
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