Education

Five Economic Storms Raging NOW! Part 2

Storm #3
Auto Sales Down 44 Percent!

At their peak in February 2007, U.S. and foreign-owned companies sold automobiles in America at an annual pace of 16.6 million units.

Last month, their sales pace plunged to 9.3 million, a decline of
44 percent (including the best performers like Toyota and Honda).

Again, as with housing, we saw a tiny uptick in the prior month, hailed by high officials as a “sign” of improvement. Yet, as with housing, it was weaker than all prior “signs of a turn” over the past 26 months – each of which was followed by a sharper plunge.

Any lights at the end to Detroit’s dark tunnel? Only those of three speeding freight trains:

• The Chrysler bankruptcy, despite all the talk of a “quick and easy” procedure, is not only frightening U.S. car buyers away from the Chrysler brand, it’s also scaring them from other U.S. and foreign makers. And it’s not only hurting auto dealers and parts suppliers, but also smacking auto lenders. Meanwhile …
  
  
• GMAC, the nation’s largest auto lender, is already in its death throes, with the government now estimating it could suffer additional losses of a whopping $9.2 billion over the next two years. Will the Obama administration bail it out? Perhaps. But it would still have to downsize its operations, throwing another monkey wrench into General Motors’ sales. Meanwhile …
  
  
• General Motors is now sinking even more rapidly toward bankruptcy than it was just a few months ago. According to last week’s New York Times column, G.M., Leaking Cash, Faces Bigger Chance of Bankruptcy …

“Even after receiving $15.4 billion in federal loans, General Motors is once again on the brink of financial collapse.

“The automaker’s first-quarter earnings released Thursday showed that G.M. was losing more money and sales than it was in late December, when the government began its bailout.

“With its cash reserves down to the bare minimum and its revenue plunging, G.M. seems more certain each day to be heading toward a bankruptcy filing. …

“The company’s chief financial officer, Ray Young, called the drop … ‘a staggering number,’ and said consumers were showing increasing concern about G.M. products because of the potential for bankruptcy.”

General Motors’ CFO added: “Once you start losing revenues, you get yourself into a vicious cycle from which you cannot recover.”

Sound familiar? It should. It’s the same vicious cycle I’ve been warning about for many moons – falling revenues prompting mass layoffs, and mass layoffs driving down revenues.

Storm #4
Biggest Decline in Consumer
Credit Ever Recorded!

Any economist counting on the consumer to get things going again had better go back for some more Rorschach tests …

… because you don’t need a therapist to interpret the image depicted in my chart below. It shows very clearly how the nation’s lenders are dumping consumers and making a mad dash for the exits:

In the third quarter of 2007, banks dished out $44 billion in net new loans on credit cards, autos, and other consumer credit (excluding mortgages).

Then, just 12 months later, in the third quarter of 2008, that giant credit machine collapsed to a meager $8.7 billion, a decline of 80 percent!

But the collapse didn’t end there. In last year’s fourth quarter, not only did new credit disappear, but lenders actually pulled out of the consumer credit market to the tune of $19.5 billion.

And they did it AGAIN in the first quarter of this year, pulling out another $12.2 billion.

It is the biggest collapse in consumer credit ever recorded.

Now do you see why I’m recommending a shrink for any economist fixated on a recovery?

They know how important credit is. They know that few Americans have the savings to splurge on consumer goods. And they’re tired of knowing that a recovery is virtually impossible without credit.

And yet here we are, with the biggest-ever collapse in consumer credit – and they’re still searching for the “signs”!

Storm #5
Big Banks!

Whether the government lets big banks fail or not, the impact on the economy is similar: A massive contraction of bank loans and credit, sabotaging attempts to revive credit flows and stimulate the economy.

Reason: These banks must build capital quickly, and the only realistic way to do so is by cutting back on their lending.

The official stress test results released Thursday on 19 U.S. bank holding companies were supposed to help determine exactly how much capital they’ll need, and the total came to $75 billion.

That’s no small amount. But the stress tests will go down in history as the world’s most elaborate effort to paint lipstick on a pig.

To show you why, first, let me provide our analysis based on data from TheStreet.com Ratings, the Comptroller of the Currency (OCC), and the banks’ first-quarter financial statements. Then I’ll show you why I believe the official results grossly underestimate how much capital the banks will need and how much pressure they’ll be under to slash lending.

We find that …

• Seven institutions – JPMorgan Chase & Co., Citigroup, Wells Fargo & Co., Goldman Sachs Group, GMAC LLC, SunTrust Banks, Inc., and Fifth Third Bancorp – are at risk of failure and may have to cut back lending dramatically to stay alive.
  
  
• Eight institutions – Bank of America, Morgan Stanley, PNC Financial Services Group, US Bancorp, BB&T Corp., Regions Financial Corp., American Express Co., and Keycorp – are borderline, meaning they could be at risk of failure with worsening economic or financial conditions and will also have to cut back on lending.
  
  
• Only four institutions – MetLife, Bank of NY Mellon Corp., Capital One Financial Corp., and State Street Corp. – appear to have adequate capital to withstand worsening conditions. But even they may voluntarily cut back their lending in an attempt to maintain their current financial health.

Moreover, of the $11.6 trillion in assets held by the 19 institutions, those likely to cut back dramatically represent $6.56 trillion, or 56.5 percent, of the assets; while borderline institutions hold $4 trillion, or 34.7 percent.

Only $1 trillion – just 8.8 percent – of the assets are held by institutions with adequate capital, based on our analysis.

In contrast, the government is trying to persuade us that most have plenty of capital … the rest can easily raise it … and none will have to slash lending in a way that would sabotage the prospects for an economic recovery.

So what explains this vast discrepancy between the official conclusions and ours?

The simple answer: Three unmistakable deceptions in the government’s stress tests …

First deception: The assumptions.

To come up with estimates of future losses, the government assumed what they call “a more adverse” scenario. But their more adverse scenario is actually less adverse than the current reality!

Hard to believe? Then just look at their own numbers in the chart the Fed published recently:

• Their “more adverse” scenario is predicated on the presumption that the GDP will contract no more than 3.3 percent this year. But in actuality, the GDP is already contracting at an annual pace of 6.1 percent!
  
  
• Their “more adverse” scenario also assumes that unemployment will average 8.9 percent this year. But unemployment has already reached 8.9 percent in April, and no one – not even economists fixated on recovery signs – is anticipating anything but a further rise.

Either they’re delusional. Or they’re cheating at solitaire.

Second deception: No mention of systemic risk!

The banking regulators have published two major white papers on the stress tests – “Design and Implementation” plus “Overview of Results.” However, in these papers, they have failed to even mention the greatest risk of all: systemic risk.

This is the risk that …

• A few key players in highly leveraged instruments like derivatives could default on their trades.
  
  
• These defaults could set off a series of failures, with the most severe impacts felt by banks that hold the largest share of the derivatives in the country.

This is the giant risk that the Government Accountability Office (GAO) wrote about in its landmark 1994 study, “Financial Derivatives: Actions Needed to Protect the Financial System,” warning of “a chain reaction of market withdrawals, possible firm failures, and a systemic crisis.”

This is the giant risk that triggered the collapse of Bear Sterns, the failure of Lehman Brothers, and the $180 billion bailout of America’s largest insurer, AIG.

It’s the giant risk that AIG executives themselves wrote about in their recent memorandum, “AIG: Is The Risk Systemic?,” warning of a “cascading impact on a number of life insurers already weakened by credit losses” … and “a chain reaction of enormous proportion.”

It’s the giant risk that the International Monetary Fund is most concerned about when it warns of another $3 trillion in global losses due to the banking crisis.

It’s the giant risk that prompted former Treasury Secretary Henry Paulson to literally drop to his knees last September, begging Congress for $700 billion in bailout funds for the banking industry.

Since that day, the U.S. economy has suffered the worst back-to-back GDP declines in over 50 years, burning the nation’s fuse even closer to a blow-up.

And yet, suddenly, in a massive undertaking that was supposed to accurately evaluate the banks’ exposure to these dangers, it’s also the giant risk that has been scrupulously scrubbed from 59 pages of official white papers, a half dozen press releases, plus multiple public pronouncements – all about the stress tests, all without a single mention of systemic risk.

This omission is both deliberate and unforgivable.

It means the stress tests have failed to fairly evaluate the credit exposure of each bank to defaults by their trading partners. And it means the tests are creating a false sense of security for investors and the public that can only lead to greater mistrust, more loss of confidence, even panic.

The omission is especially misleading for large banks that dominate the derivatives market … would be at ground zero in any meltdown … and would therefore be among the first to suffer massive losses.

The prime example: The OCC reports that, at year-end 2008, JPMorgan Chase (JPM) held $87.4 trillion in notional value derivatives, including $8.4 trillion in credit default swaps.

(To see for yourself, click here to download the OCC’s latest report; scroll down to page 22; and check out the top line “JPMorgan Chase Bank NA.” Note: The next to the last column “Total Credit Derivatives” is 99 percent made up of credit default swaps, according to the OCC.)

Why is this such a big problem? For several reasons:

• Although it’s cut back a bit, JPM still has 43.6 percent of all the derivatives held by all U.S. commercial banks, or $17 trillion more than Bank of America and Citibank combined. Among the 19 bank holding companies in the stress tests, that puts JPM closer to ground zero than any other bank.
  
  
• It’s well known that credit default swaps are the highest-risk sector of the derivatives market. And yet, in this sector, JPM has 52.8 percent of the total held by all U.S. commercial banks, or nearly double the total held by BofA and Citi. This puts JPM even closer to ground zero.

• JPM execs insist they’re smart and know how to handle their risks very neatly. But if that were the case, why did they suffer a whopping $2.5 billion loss in their credit default swaps in the fourth quarter? (OCC, page 27, Table 7, line 1, last column.)
  
  
• The OCC also reports that, for each dollar of capital, JPM still has $3.82 in total credit exposure. Mind you, that’s JPM’s exposure to just one kind of risk (defaults by trading partners) in just one kind of instrument (derivatives). In addition, JPM is also assuming market risks in derivatives plus a series of risks in its other investing and lending operations. (OCC, page 13, table at bottom of page, line 1, last column.)
  
  
• Despite all this, in their “more adverse” scenario, the banking regulators estimate JPMorgan Chase’s total “counterparty and trading losses” will not exceed $16.7 billion, a fraction of the true potential losses in a financial crisis.

With the fatal omission of systemic risk from their analysis, the government concludes that JPMorgan Chase is in good shape and does not need any additional capital.

The same omission leads to a similar conclusion for Goldman Sachs, despite the fact that Goldman has over $10 in total credit exposure per dollar of capital, or nearly triple the credit risk of JPMorgan Chase.

The only realistic conclusion: Both these institutions will need huge amounts of capital, driving them to cut back massively on new lending.

Systemic risk is the elephant in the room. Everyone knows it’s there. Everyone understands the dangers. But they’re afraid of the answers. So they dare not ask the questions.

The fundamental answer, though, is clear: Systemic risk is what drove the financial markets into a deep freeze seven months ago; and it was that storm which helped drive the economy into a tailspin.

Today, systemic risk is not gone. If anything, it’s far worse.

Third Deception: Improper influence.

In its white paper, the Federal Reserve admits that the stress tests were based, to a large extent, on each bank’s self-evaluation – not only for loan loss estimates that can be derived from past data, but also for the future performance of trading accounts, which can be far more subjective.

Moreover, each institution was allowed to appeal the final results, and several banks strenuously negotiated for more favorable grades. They even got regulators to accept their projections of future revenues, treating those future revenues almost as if they were cash in the kitty.

In contrast, we never permit the companies we evaluate to influence our evaluation process or our results. To do so would defeat the entire purpose of the exercise. But much like conflicted Wall Street rating agencies, that’s essentially what the bank regulators have done – from start to finish.

Put simply, the stress tests were too easy; the banks took the exams home with cheat sheets; and if they didn’t like their final grade, they could get the examiners to give them a better one.

Yet despite all these fudge factors, the government still estimates these institutions could suffer $600 billion in additional losses over the next two years.

And this is being portrayed as another “sign” of recovery?!

My view: We will have a recovery someday. But only AFTER we honestly recognize the grave mistakes of the past and own up to the hard sacrifices still ahead.

Until that happens, I’m staying the course, investing my own money in a way that protects me from the dangers and gives me an opportunity to profit from the next decline … which, by the way, promises to be the biggest of all.

If you want to follow along with me, check your inbox for an alert that I’ll soon be sending you personally – with the sender name “Martin D. Weiss, Ph.D.”

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Interview with Wade W. Slomea, author of “How I Managed $20,000,000,000.00 by Age 32″

With all that’s happening in the current market and so many conflicting opinions in the news everyday, how do you recommend people approach investing today?

The most important thing is to NOT invest emotionally, but rather objectively. The average investor is panicking now and piling into low yielding investments like CDs, savings and money market accounts – the equivalent of socking cash under the mattress. For some wealthy individuals, late in retirement, this may be prudent. However, for most investors, significant future damage may be occurring from this seemingly comfortable, short-term, benign strategy. The problem is that life expectancies are stretching; boomers/retirees are more active, and inflation (i.e. healthcare, food, vacation, etc.) will eat away at these so-called safe investments. The fact of the matter is there are a lot of opportunities now – especially as fear levels have risen so dramatically. And the opportunities do not only lie in the stock market. There are a lot of excellent investment prospects in the fixed income market as well.

Is it true that people haven’t actually lost their money if they don’t sell their stocks for a lower price?

Stocks in some respect are no different than other asset classes. You can think about stocks in the same way you think about the value of your house. If you are in the process of selling your home and the house price craters, you will experience a loss in home value. The prospective buyer will encounter a simultaneous gain, in the form of a lower price (the buyer gets to keep more money in his/her pocket). It is true that lower stock prices on unsold positions are only “paper losses,” and if prices rebound above the prices purchased then there will be “paper gains.” True gains or losses will not occur until the stock positions are sold.

The media buzz is that this is a great time for people to make a lot of money; can you explain that?

The old adage of “buy low, sell high” rings true during volatile periods like now. Most domestic equity indexes corrected by more than -40% from the peak levels experienced in late 2007. Historically these terrifying periods have been the best times to buy. For example, take the 1974 bear market, which experienced a price correction of about 50%. During that period we were in a deep recession with 9% unemployment, we had just come out of the Vietnam War, and President Nixon resigned after impeachment hearings. At the time, the S&P 500 index bottomed out at a level of approximately 61. Last Friday (2/6/09), the same index closed around 868, a 1,300%+ increase over that period (excluding dividends). Not too shabby.

The economic environment wasn’t pretty either if we fast forward to the 1990-91 period when we were knee-deep in the first Iraqi war, going through a recession (8% unemployment), and digging our way out of the S&L Crisis (Savings & Loan). Yet again, this was a great opportunity to invest as the markets have about tripled over that period, excluding the benefit of dividends (S&P 500 bottomed at around 295 in late 1990).

After the 2008 mark downturn, many people are afraid to invest. What do you suggest for them?

Unfortunately, there is no silver bullet. Everybody’s situation is different. My suggestion for a 29 year old in the wealth accumulation phase of his career would be dramatically different from a 79 year old retiree that is in the distribution phase of her investing cycle.

The best thing people can do is to educate themselves about investments. There are a lot of aggressive sharks out in the investment waters and to survive in the long run investors need to equip themselves with relevant questions to ask financial advisors and institutions in order to protect their investments. There are some great low cost tax efficient products (e.g. index funds and exchange traded funds) and strategies that I discuss in more detail in my book.

In light of current events, how can investors improve investment performance over the long run?

The low hanging fruit for investors is to drive down excessive fees and transaction costs charged by brokers and financial institutions. John Bogle, the very successful founder of The Vanguard Group, did an eighteen year study (1984-2002) showing that individual investors underperformed the “do-nothing” index strategy by more than 10%…PER YEAR. The cause, a standard fee structure of approximately 2.5% (1% load, 1% management fee, .5% transaction costs) that many investors pay, which doesn’t even account for additional tax expenses. The annual -10% underperformance is not only due to fat fees, but also from poor emotional decisions tied to the “herd” trading mentality. A sensible, unemotional approach to investing should also incorporate a “dollar-cost-averaging” strategy that purchases additional shares for each dollar invested as prices decline.

What should people do that have stocks that took a nose dive?

It really depends on the particular investment. Each stock should be thoroughly reviewed on a case by case basis. If fundamental investing is the driving force behind your investments, then I believe individuals need a systematic strategy to buy securities and sell securities. As part of this disciplined approach, I urge investors to have a thesis (basis) for ownership and if that thesis changes you can use that dynamic as a foundation for your sell signal. There will be winners and losers as we work our way through this financial crisis and recession, but with each recession and bear market there is a renewal of leadership that builds for the ensuing bull market. Tax loss considerations can play a role in the sale decision of underperforming stocks, but should not be the key determinant.

Lastly, do you have any tips for someone who may be considering investing for the first time in the current economic climate?

Now is a great time to start investing relative to a year ago. Don’t get discouraged by the market volatility. First time investors have extremely long investment horizons, therefore heightened volatility can be viewed in a beneficial light. Diversification through fund investing is another important principle that new investors should embrace. As experience levels expand for newbie investors, expanding exposure to individual stocks can become a larger priority. Until then, my advice to first-timers is to take a more conservative stance.

NOTE:

Wade is also offering a free ebook which shares excerpts from his book, for a limited time. Be sure to stop by his website to get a copy www.Sidoxia.com. This is your chance to take a look inside the book and to learn additional information about Wade Slome and his business.

For more information about Wade Slome and his virtual tour, check the schedule at http://virtualblogtour.blogspot.com/2008/12/how-i-managed-20000000000-by-age-32-by.html

Millions of Monkeys, Drumming on Drums !

Jim Cramer: Get out of the stock market if you need your assets in the next five years

That’s essentially what Jim Cramer is saying.



“I thought about this all weekend. Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.”



“I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market. I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market.”



But what if you can wait longer than 5 years… ?



“I think what you have to do, if you can withstand it, is just ride it out,”



“I think the previous quarter, the one we’re now hearing from, was a terrible quarter – but it will look good versus the coming quarter.”

6 Tips on How to Safely Give Loans to Friends and Family

Nothing can come between close friends and loved ones as quickly or cause more hard feeling than money issues. Any one of us have or could find ourselves in a position where we fall short on money and may need a quick loan. When looking for help, oftentimes friends or family are the first people we turn to in a pinch. Is it a good idea to borrow money from them? More so, is it a good idea to lend the money if you are the person being approached to help someone out of a sticky situation? Since money tends to be an emotional issue for all parties involved, it is best if you are borrowing or loaning money in this situation to have a few ground rules to avoid a misunderstanding that can ruin the relationship. In addition to protecting your relationship with each other, you want to protect your relationship with the IRS by learning how the loan is viewed by the IRS.

Documentation
To avoid paying income taxes on money you never received and gift taxes on money you haven’t given away, be sure to document that the money is given as a loan. You will want to include interest rates if applicable, payment terms and collateral (if any) is used to secure the loan. This documentation can easily be done without a lawyer using a document-creation software program.

Establish Interest Rate
While you may not be interested in charging interest, it is recommended you do so. Otherwise it is likely the IRS will do it for you. It might serve you well to learn how this loan may effect your for tax purposes and how the IRS relegates loans or gifts of money between family. This is one situation where interest free does not equal hassle free.

Establish Solvency
To prove that this is a loan and not a gift, document in some way that the borrower was solvent at the time of the loan, which gives you a reasonable expectation for repayment.

Keep Records
Before and during the term of the loan, stay organized and keep records indicating you are loaning the money and not gifting it. Also track all payments made. If at some point the worse happens and you find yourself unable to collect payments, make a written request asking for repayment. If this fails to produce results, you will then be required to claim a “nonbusiness bad-debt deduction”. This is the worst case scenario because if it gets to this point, not only may you be out money, but the relationship might be ruined as well.

Take the time to think through all the possible repercussions, financially and emotionally before lending a friend or family member money. You might in fact be doing them a great favor, with good results on both sides. As long as both parties are aware of how the loan will be viewed by the IRS, and take the steps to protect themselves, loans between family members and friends can be completed safely.

USDA loan Basics

If you live in a rural area and are thinking of buying property, there is a lending source that is often overlooked. Have you considered looking at a USDA loan? The United States Department of Agriculture will actually lend you the money directly if you qualify. What is the purpose of a USDA loan and who can get them?

The purpose of USDA loans is to level the playing field a bit. People who live in rural areas are often too far away from economic growth. When you don’t live in a big city, it might be hard to find a high paying job. To prevent people from all moving into the city, the USDA created their loan program. This way, there will still be someone out on the farms to produce agriculture. If you live in a rural area and want to buy a farm, you have a good chance of qualifying for a loan.

These loans are actually quite flexible and they come straight from the government. There’s no middle man like another bank. You’ll be working directly with the USDA. They will allow you to buy preexisting houses that are for sale in rural areas. You don’t have to start a farm from scratch. But if you want to build a house or a farm, you can do that as well. This option requires you to have a contract for the land before you can get the loan. You also have to have a plan in place with a builder to build your house in a timely manner. The government wants to make sure that you’re actually going to build a house with the money they loan you.

One of the great benefits of a USDA loan is that you don’t have to have a down payment. This enables people from low income areas the option of buying a house without any money upfront. Offering 100% financing gives many more people an opportunity to buy. If people in rural areas are just getting by with their rent payment, they probably wouldn’t be able to buy a house otherwise. With a traditional lender, they would have to come up with a 20% down payment. This enables them to get the house they want without having to save up for a down payment.

The USDA actually bases your loan payments on your household income. They won’t typically allow the payment to be more than 26% of your family’s income. This prevents you from getting in over your head with a big mortgage payment. In addition to these flexible payment terms, they also offer longer mortgages than you can normally find. They offer mortgages with 38 year terms in order to get the payments down to where you can afford them. These types of deals make it possible for a lot of people in rural areas to own their own home or farm.

There is much more information available on USDA loans and rural home loans. If you’d like to find out more about USDA loans, go to USDA loans. If you want to know about rural home loans, go to rural home loans.

It’s 3AM. Is your web site backed up ?

I’m buying website backup software called SiteVault. I tested it a few times. I’m convinced SiteVault will protect me from future mess ups by backing up website files and MySQL data files.

Why am I buying this?

One my favorite webhosts has been losing entire websites. To protect the guilty party, I won’t provide names yet. Shockingly they keep no backup. Maybe they don’t want to keep me, but I’ll deal with that later. They did offer to give me 1 month of free hosting. Fortunately, only my nonsignificant websites were harmed.

Anyway… I should have established a better backup system. With SiteVault, backups will happen daily, and I’ll receive emails confirmations to prove it.

Tip

If you decide to buy SiteVault, make sure you are clearly identify the directories that should be grabbed. Appartently SiteVault won’t download all folders in a directory unless you say which ones you want.

Buy SiteVault

Download a 30 day evaluation copy of SiteVault

Summary:

I purchased SiteVault backup software. SiteVault is a website Backup FTP & MySQL backup tool. It backs up your entire ftp directory and the mysql databases you specify. And do I really have to explain how backing up your website is related to financial success ?

Need another reason to backup and upgrade your software ?

Our friends at Build and Succeed got hacked. That small screenshot is what Build and Succeed looked like when it got hacked. I am not gloryfing the crackers ( evil hackers) and I am not linking to the hacked website. Consider yourself warned… Make sure you have backup.
Read more…

Should I become a Certified Financial Planner ?

Blame it on this blog but owning Financial Dominance has turned my attention toward a career in Financial planning. Should I become a Certified Financial Planner ?

I am a Web developer with a Bachelor degree in Computer Information Systems. I am deeply interested personal finance/money management and obviously want to broaden my career.

What do you guys think ? The salary is a nice upgrade.

The school is at ROYTEC. The education program is in association with Advocis of Canada.

Videos about Certified Financial Planners