Citigroup Acquires Wachovia Banking Operations

This morning the Federal Deposit Insurance Corporation (FDIC at www.fdic.gov) announced that Citigroup (Citigroup Charts) will acquire the banking operations of Charlotte, North Carolina's Wachovia Corporation (WB.) This transaction was facilitated by the FDIC and concurred with by the Board of Governors of the Federal Reserve and Hank Paulson, the Secretary of the Treasury, in consultation with the President, George Bush.

Wachovia did not fail. Instead it was acquired by Citigroup Inc with assistance from FDIC. Comments from FDIC Chairman Sheila C. Bair:

"For Wachovia customers, today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits."

"On the whole, the commercial banking system in the United States remains well capitalized. This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury."

"This action was necessary to maintain confidence in the banking industry given current financial market conditions."

Citi will pay Wachovia about $2.16B in Citigroup stock. Wachovia will continue to own AG Edwards and Evergreen which will add to this baseline valuation. The Citigroup shares give Wachovia a value of about $1.00 per share (Wachovia has 2.14B shares outstanding) plus whatever value the market assigns to the remaining assets.

Further terms of the agreement:

• Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans.
• The Federal Deposit Insurance Corp. will absorb losses beyond that in exchange for $12 billion in Citigroup preferred stock and warrants to compensate the FDIC for bearing this risk.

On the acquisition, Citi cut its quarterly dividend 50% to 16¢ a share . On an annual basis, the dividend was cut from $1.28 to $0.64 per share. At $20.00 a share, Citigroup yields 3.20%.

Citigroup also announced it will raise about $10B in new capital, further diluting stockholder equity.

Citigroup CEO Vikram Pandit said of the deal,

“Citi will have more than $600 billion in deposits in the United States, giving us about a 9.8 percent market share. Our total deposits will be $1.3 trillion globally, $350 billion more than our next largest U.S. competitor, making us one of the world’s largest core deposit-funded financial institutions.”

On this deal with government backing, Citigroup became one of the "anointed banks" that the government has deemed worthy of FDIC assistance or too large to fail.

Citigroup traded as low as $19.44 near the open then quickly recovered to $20.00, down 15¢ from Friday's closing price.

Disclaimer: I own in my personal portfolio and have recommended trading Citigroup around a core position in "Kirk's Investment Newsletter Explore portfolio" that is on "house money" from buying in 1998 and taking significant profits (more than twice what I put into the stock) in July and August 2000. Since then, I have done some minor trading around the remaining shares as a core position. I my buy back some of the shares I sold eight years ago when it looks like the dust settles as these huge financial panics are usually exceptional times to buy the very best of the best that survive. To learn what I recommend for newsletter portfolios, subscribe now!

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The Rise and Fall of Fannie Mae and Freddie Mac; Update 1

This article updates my original September 15, 2008 article, "The Rise and Fall of Fannie Mae and Freddie Mac with new information.

September 27, 2008 update:

A reader sent me this September 30, 1999 NY Times story called "Fannie Mae Eases Credit To Aid Mortgage Lending." Here are some key excerpts:

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

Of course stockholders didn't want the company to take on excessive risk where failure to repay loans would mean loss of profits. Yet the democrats now blame Wall Street fat cats for the troubles.

"Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

So we have he CEO of Fannie Mae, during the Clinton years, saying that subprime borrowers don't meet their lending standards.

"In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."

So even the liberal NY Times knew in 1999 that the risk Fannie Mae was taking could require a bailout by taxpayers!

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

So a government sponsored entity (GSE) pushed by President Clinton threw caution to the wind to make bad loans. It is no wonder the insiders cashed out their stock options as they knew ahead of time this was going to end badly! It is funny to hear government now wants to punish them for doing what they were told.

"From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."

We were warned and yet BOTH the Clinton and the Bush administrations took pride in how many unqualified lenders were getting loans to buy homes they could not afford at market rates. Now the punishment to us taxpayers for electing such incompetent presidents and members of congress is we are in a bear market, headed for a recession with very tight credit even for borrowers with good business ideas or the ability to repay the loans.

Washington Mutual - Largest Bank Failure in History

Yesterday the government seized the assets of Seattle's Washington Mutual (WM,) affectionately known as WaMu. At the same time, the government brokered an emergency sale of most of the assets to JP Morgan Chase (JPM.) The deal saves taxpayers and FDIC from another loss as JPM assumes the risk in exchange for the assets at a bargain basement price. WaMu customers should not be affected while shareholders and some bondholders will get nothing.

The failure of Seattle's Washington Mutual is the largest bank failure in History.

We knew Washington Mutual was in trouble because it has appeared high on the survey of "Best CD Rates" where it had the highest 5-year CD rate, currently at 5.0%, for some time. Troubled banks are paying high CD rates to attract capital at far better rates then they can get on Wall Street. For example, AIG is paying LIBOR plus 8% and 80% share dilution to the Government. The current LIBOR rate is 3.46% so AIG is paying more than double the rate WaMu pays for CDs. I suspect WaMu will continue to offer high rates to keep customers during the transition to JP Morgan Chase.

See "Washington Mutual Bank Best CD Rates with FDIC" for current rates as of 9/23/08

WaMu was also #14 on "Dick Bove's List of Banks In Danger of Failing" under the category of "non performing assets as a percentage of equity" so we had plenty of warning in advance. Someone close to me cashed in their WaMu CDs last week, paid the penalty, reinvested $99,000 at WaMu for total FDIC protection of principal and interst until the dust settled then invested the remainder of the money in a new bank for to get full FDIC protection. The government acted before more people pulled their money out and created another run on a bank.

Jamie Dimon, Chairman and CEO of JP Morgan Chase said, "We think this builds a great franchise for us....We are building this franchise for the long term, not next year or the next five years but the next one hundred years."

Merrill Lynch: "The strategic fit is good and exactly what the company has long articulated it wanted, at a knock-down price which manages the risks. "

Deutsch Bank: "Earnings accretion (to JPM ) is mostly offset by P/E dilution and a higher risk profile. Maintain Hold."

Disclaimer. I own and trade XLF, the financial sector ETF, around a core position that is well in the money for both my personal portfolio and "Kirk's Investment Newsletter Explore portfolio." JPM is the number two holding of XLF according to ETFConnect.com:

Holding As of 04/30/2008	% of XLF
Bank Of America Corporation	8.05
Jp Morgan Chase & Co	7.82
Citigroup Inc	6.08
American Intl Group Inc	5.02
Wells Fargo & Co New	4.78
Goldman Sachs Group Inc	3.67
Wachovia Corp New	2.91
Us Bancorp Del	2.87
American Express Co	2.8
Morgan Stanley	2.51

The best news is for taxpayers who won't have any loss from this deal.

Financial Meltdown; Who To Blame?

The last two days I have listened to Federal Reserve chairman Ben Bernanke and US Treasury Secretary Hank Paulson testify before congress in favor of a $700 Billion package to "bailout" the financial markets and the US economy.

There is an old cliche that applies. It says when a person with money meets a person with experience, the person with the experience leaves with the money and the person with the money ends up with an experience. Usually Wall Street has the experience while tax payers and greedy investors start out having the money.

To me, blaming Wall Street it is similar to blaming the great white sharks off our California coast for eating the occasional surfer.

Earlier today Warren Buffett said this is an "economic Pearl Harbor" we are going through. When asked what would happen if the package proposed by Paulson and Bernanke fails to get quick approval, Buffett said

It will get worse. Last week will look like Nirvana if they don't go through with a plan to get the country back on the right track. Huge institutions in the World all want to deleverage at the same time. We need someone large, like the US government, to step up and provide liquidity. If they do it right, and I think they will, then the US Government will make a lot of money.
[See Warren Buffett on Goldman Sachs and Financial Bailout Package.]

When asked about punishing those responsible, Buffet said

I think the CEOs and directors should be punished for what they did, but I would not write this into the legislation.

Am I the only one who finds it odd that nobody is blaming:

• The people who took out loans they could not pay back?
• The schools for not teaching people enough to understand compound interest or that what goes up in price often crashes faster than it went up?
• The people who bought homes as "investments" that went down in price? I know many here in California who were speculating on being able to sell for a quick gain before their teaser loan rates turned into very expensive loans. They gambled and lost just like some of us lost buying troubled stocks that went out of business.
  

If all the "sub prime" borrowers were smart enough to know

• that their house would not keep going up forever
  
• that they could not afford to pay their mortgages when the intro rates ended
• that their house could plummet in value if they were the last one to buy before the housing bubble collapsed
  

then we would not be in this problem because the sharks on Wall Street could not take advantage of them.

The fault seems to be in regulations that didn't step up and notice many were getting toxic loans they didn't understand. At the peak of the bubble, my housekeeper was thinking of buying a house in the area of San Jose that is now off 40%. I took a few minutes to explain to her how dangerous the loans were that she would "qualify" for and the only one who PROBABLY will come out ahead in a few years is the person who gets a fee to get her to sign the papers. I explained to her what was happening and told her to not sign ANY papers until she let me look them over to see if she was getting screwed and could afford the payments should the economy sour where people decided to clean their own houses or her husband lost his job building new homes.... She didn't buy and they are doing fine as renters... and her husband cleans carpets now so they can pay their bills, drive nice cars and care for their kids.

If you really want to fault people

• Fault the schools for keeping people stupid about math and compound interest.
  
• Fault a society that pushed huge homes and expensive SUVs on people who could be happy with half the lifestyle and far less debt.
  
• Finally, fault the greedy people who closed their eyes to the risks just like they do when they buy lotto tickets or trips to Las Vegas. One multimillionaire friend (at least he was two and a half years ago) asked for my advice about an $800,000 condo in Vegas he paid $4000 for the right to bid on (got a refund when his bid was accepted). I told him I would look to sell immediately as that was the classic sign of a top when they find people who will pay a finders fees to buy stuff that has not been built yet. He was so mad he did not set up the planned lunch to balance my buying him his lunch nor would he return my emails! Now I bet he wishes he listened to me.
  

Sure the people at the top knew their were selling loans to people that could not pay them back. Just as I have no problems killing great white sharks that eat humans, I believe the CEOs and directors at these failed companies should be punished. They had a duty to shareholders to manage their companies for the future. They should be held accountable in civil court by shareholders to disgorge every penny they made but lets not forget that the reason the sharks got so rich is the waters were filled with clueless swimmers.

Warren Buffett on Goldman Sachs and Financial Bailout Package

Yesterday Warren Buffett invested in Goldman Sachs (GS Charts). His Berkshire Hathaway holding company (BRKA Charts) bought five billion dollars of preferred stock plus warrants to buy another five billion dollars in common stock. Buffett got a very sweet deal that I wish was available to small investors like myself. Of course, you could buy stock in BRKA where you would benefit from this deal.

Chart of GS and BRKA courtesy of stockcharts.com

Details:

• Goldman Sachs plans to offer 40.65 million common shares at $123 per share to raise $5 billion.
• Goldman said Tuesday it will sell $5 billion of perpetual preferred stock to Buffett's Berkshire in a private offering.
• The preferred stock has a dividend of 10% and is callable at any time at a 10% premium.
• Berkshire will also receive warrants to buy $5 billion of common stock with a strike price of $115 a share, exercisable at any time for five years.

Click for BRKA Graphs
Warren Buffett is effectively making about 10% above what others can make in exchange for endorsing this deal and Goldman Sachs as a good, long term investment. It worked as he was on CNBC this AM speaking highly of Goldman.

CNBC Interview

These are edited comments from Warren Buffett interview by Joe Kernen, Becky Quick and Carl Quintanilla on today's CNBC TV's Squawk Box.

Becky Quick: Why is this the right deal at the right time?

Warren Buffett: I don't try to time things but I do try to price things. I got a formula that says bet on brains when it is the the right type of deal. The price was right. The terms were right. The people were right. I decided to write a check.

Becky Quick: Does the government bailout plan have anything to do with this deal?

Warren Buffett: If I didn't think the government was going to act, then I would not be doing anything this week. I might be trying to undo things this week. It would be a mistake to buy ANYTHING now if the government were going to walk away from the Paulson proposal.

Becky Quick: Why?

Warren Buffett: There is no telling what would happen. Last week we were at the brink to going over the precipice into something that would take the economy many years to recover from.

Carl Quintanilla: Was this the most frightening experience in your financial career at evaluating where this economy stands?

Warren Buffett: Yes. The economy and Wall Street are joined at the hip. The market could not have taken another week like was developing last week.

Becky Quick: What does this mean to the tax payer at who who asks "why is this my problem?"

Warren Buffett: It is everyone's problem. Unfortunately, the economy is like a bath tub where you can't have cold water in the front and hot water in the back. Wall Street was going to immerse the tub very quickly. A collapse of the firms in trouble last week would have caused industry and retail to grind close to a halt. It is still very, very dangerous but thank heavens Paulson had the imagination to step up with ideas that I like. I did not think of backing money funds but once I heard it I knew it was a great plan to keep them from tumbling.

Joe Kernen: When many in Congress started to question Paulson and gave hints they might not approve the plan yesterday. As a result, the short term treasury yield tumbled as people again pulled money out of money funds to buy treasuries with tiny yields. Can the market get in trouble again if they don't go through with this plan?

Warren Buffett: It will get worse. Last week will look like Nirvana if they don't go through with a plan to get the country back on the right track. Huge institutions in the World all want to deleverage at the same time. We need someone large, like the US government, to step up and provide liquidity. If they do it right, and I think they will, then the US Government will make a lot of money. People who are buying these instruments in the market expect to make 15 to 20% a year. I would like to buy these if I had the liquidity. It should be a lead pipe cinch to make 10% minimum after fees at the prices today.

I think the CEOs and directors should be punished for what they did, but I would not write this into the legislation.

Becky Quick: Would you administer the plan or offer any suggestions?

Warren Buffett: Laughing "I'd love to administer it for nothing." One thing you might do. If someone wants to sell $100 billion of these instruments to the treasury, let them first sell $2 or $3 billion first in the open market and then let the Treasury match that price for the remainder. With Hank Paulson on top of it, you couldn't have a better guy.

Carl Quintanilla: Separate from the Bailout. People are pointing to you as the canary in the coal mine with the Goldman deal. Is this OK?

Warren Buffett: Laughing, as long as the canary lives, it is fine. We've got a lot of cash and we are seeing ways to use the cash sensibly. This is one of them and we plan to buy another $5 billion.

Joe Kernen: How much do you know about AIG?

Warren Buffett: I think I know a fair amount, but I don't think anybody knew what they needed to know including the management. The hole was so deep they were not able to work it out. We would be interested in a couple of assets when they sell them.

Becky Quick: You haven't put any money into an investment bank since Soloman in 1987. I am shocked to see you do it now since you had to run the company in 1991. Why do it?

Warren Buffett: That was a very unfortunate experience caused by a few people (rogue traders that nearly brought Solomon down.) I don't expect this to happen with Goldman which is extremely well run.

Joe Kernen: Could you tell by the way the assets were priced that Lehman was not facing reality?

Warren Buffett: Yes. I feel good about the way Goldman is marking to market which is one reason for the deal. I really think the Treasury will make a considerable amount of money if they price the assets by having the firms sell 5% into the open market to see what people think they are worth so they get a fair price that would net a positive return.

Carl Quintanilla: Is the current stock market price based in reality?

Warren Buffett: Long term, this is going to look like a very good time to buy but people should not use leverage. Leverage lets other people dictate to you and lower prices can take you out of a good position.

Becky Quick: Did Charlie Munger like the deal?

Warren Buffett: I didn't tell him about it until after it was done since his wife had a fall and he was away. Charlie is all for it.

Becky Quick: You've spent about $24 billion in the last 9 months.

Warren Buffett: We had a lot of money but at some point you have to use it. Otherwise, it is like saving up sex for your old age.

Becky Quick: How much cash do you have left?

Warren Buffett: We have enough.

Joe Kernan: How are we going to deal with the other $50 trillion in credit default swaps?

Warren Buffett: Getting regulation around the entire derivative market is important. AIG would be doing fine now if they never heard the word derivative.

Becky Quick: Is your purchase of Goldman a vote of confidence in banking institutions across the globe?

Warren Buffett: It is a vote of confidence in Goldman and a vote of confidence that congress will do the right thing.

Carl Quintanilla: Are you doing this as a philanthropist to help get this package passed?

Warren Buffett: No, I am doing it to make money and betting on congress doing the right thing.

Carl Quintanilla: What is the absolute deadline that this package needs to happen?

Warren Buffett: Anything that ads doubt that they will pass a package will be detrimental to the markets.

Joe Kernen: Do they get it?

Warren Buffett: Yes. This is an "economic Pearl Harbor" we are going through. I believe they will do what is right for the country after they vent their spleen against those who got us into this mess.

Becky Quick: How long were you talking to Goldman Sachs

Warren Buffett: Almost every financial institution has been talking to me. Yesterday they came to us with serious terms we liked and we got the deal done.

Joe Kernen: Did our prodding about when will you step in have anything to do with it?

Warren Buffett: Laughing, "This was a cheap way to get you off my back."

• He would ask Hank Paulson to stay on.
• He would be happy to help with the financial deal but he has too many conflicts of interest to take a significant position in the new administration. [If this is Pearl Harbor, then he could let Charlie run BRKA while he helped for a few years like Bill and Dave Packard did in WWII when one went into government to help while the other ran HP.]
• I think a "market price" will allow people to deleverage and get cash which will really help them.
  
  
  Jim Cramer Rant Video

Erin Burnett in Giraffe Dress with Jim Cramer on Dec. 11, 2007

Joe Kernen: This is important to get it out that the government could make money on this deal. Most think it is a bailout that will raise their taxes long term.

Warren Buffett: I would do this myself if I could get the terms the government is probably going to get and had the liquidity.

Becky Quick: Michael Bloomberg is against giving the government a blank check.

Warren Buffett: I admire him but sometimes if it makes sense you need to act and not attach unnecessary conditions. It would be nice to have 3 months or 3 weeks to think about it but we don't have that luxury.

Since January 1, 1999 through 9/23/08 Warren Buffett's BRKA is up 83% while "Kirk Lindstrom's Newsletter Explore Portfolio" is up 160%. For more information and a free sample or subscribe today and get the September 2008 issue for free.

Update 7/29/13:

• Jim Cramer's "Action Alerts Plus" Charitable Trust Performance

VIX: CBOE Volatility Index Signals Fear is High

This VIX chart shows that buying equities when the the Chicago Board Options Exchange (CBOE) Volatility Index has been above 35 has worked out very well for short term gains even during the March 2000 to October 2002 bear market.

"Buy when there is blood in the streets"

Nathan Rothschild, the British member of the Rothschild banking family in the early 19th Century commenting on the best time to buy. He is reputed to have made a fortune from the Battle of Waterloo stock market panic. His full quote is believed to be "Buy when there is blood in the streets, even if the blood is your own."

Click chart courtesy of stockcharts.com for full size image

Currently the VIX is at 33.80 but it spiked to 42.5 last week. I was a buyer for my own accounts last Wednesday, Thursday and Friday. To learn what I bought for my newsletter explore portfolio last week and what I recommend now, subscribe Today!!

One could give in to the fear, cash in your stocks and buy CDs, (CD rates,) money funds, US Treasuries (US Treasury Rates) or even gold, but over the long term, stocks have out performed. What better way to boost your returns than to buy when the markets are 25% or so off their peaks? [See Market Update for September 21, 2008.]

Using periods of major market weakness to rebalance is not market timing either. Why wait for January 1, 2009 to do your "annual rebalancing?" The markets could recover significantly by then. See the article "Using Asset Allocation to make money in a Flat Market" to see how that works.

Definition: The VIX is the Chicago Board Options Exchange (CBOE) Volatility Index. The VIX shows the market's expectation of 30-day volatility. It is calculated from both calls and puts that are near the money. The VIX is a popular measure of market risk thus making it another great contrarian “fear indicator” useful for short-term market timing.

Market Timing Disclaimer: No sentiment indicator, or any indicator for that matter, is 100% reliable. I look at sentiment as head winds and tail winds. When sentiment is terrible, then it acts like a tail wind for your returns where you could see further declines, but long term, it is best to be buying when most others are selling. Likewise, if we see sentiment get too bullish, then I would consider lowering my portfolio asset allocation. It seldom pays to be buying stocks when EVERYONE is talking about stocks and how much money they are making at cocktail parties.

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In addition, I am not market timing but for a small portion of my explore portfolio. I use market-timing indicators to tell me it is a good time to buy so I can add to positions when the market is down and thus help me overcome my fear to rebalance back to my target asset allocation. Likewise, when the market-timing indicators are saying to sell, they usually come when the markets are high where I want to be taking profits. The market timing indicators at market highs help me get over my greed and take profits. Now and then, I may make an asset allocation adjustment based on the Fed Model saying the market is over or under valued. Some call that market timing, but I do not. Also, I have stayed pretty close to 70:30 equities-fixed for many years despite the Fed model which has its own set of flaws.

Details of Financial Bailout Package

In an effort to end the worst financial disaster since The Great Depression, on Saturday the Bush Administration sent congress a $700 billion plan to purchase toxic debt from troubled financial institutions.

The Democrats, who control both the House and Senate, questioned whether there were sufficient protections for taxpayers and homeowners, but they acknowledged the need to act quickly. Some Democrats said they might use the opportunity to add some limits on what corporate executives are paid and look for ways to reduce home foreclosures.

Some details of the plan:

• Raises the public debt limit to $11.3 trillion.
  
  
• Earlier this year, Congress voted to increase the debt limit to $10.6 trillion as part of omnibus housing legislation that included broader federal authority over Fannie Mae and Freddie Mac. Fannie and Fannie have since fallen under government control. See The Rise and Fall of Fannie Mae and Freddie Mac
  
  
• The proposal would give the US Treasury secretary Paulson significant leeway in buying, selling and holding residential or commercial mortgages, as well as "any securities, obligations or other instruments that are based on or related to such mortgages."
  
  
• Total purchases can not exceed $700 billion outstanding at any one time.
  
  
• Treasury could hire asset managers to handle the debt purchases, which could include residential or commercial mortgages and related instruments that were originated or issued on or before Sept. 17, 2008.
  
  
• Hedge Funds would not be eligible under the plan to offload troubled assets.
  

House Speaker Nancy Pelosi (D., Calif.) said, "We will strengthen the proposal by ensuring that the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms, and establishing fast-track authority for the Congress to act on responsible regulatory reform."

Senate Majority Leader Harry Reid (D., Nev.) was more critical saying, "while the Bush proposal raises some serious issues, we need to resolve them quickly."

Financial Services Chairman Barney Frank (D., Mass.) would like to see limits put on executive compensation.

The Republicans praised the plan and called for swift action to enact the required legislation.

Treasury secretary Hank Paulson said "I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial-institution failures and frozen credit markets unable to fund economic expansion."

The stock markets liked the news and rallied Thursday and Friday, but they remain in bear market territory. See Market Update for September 21, 2008

I was a buyer Wednesday, Thursday and Friday. To learn what I bought for my newsletter explore portfolio, subscribe now!

Click chart courtesy of stockcharts.com for full size image

More:

• US Congress examines $700 bln market bailout plan
  Forbes - The Bush administration Saturday sent Congress a $700 billion plan to purchase bad mortgage debt.
• Treasury Seeks Authority to Buy $700 Billion Assets
  (Bloomberg) -- The Bush administration asked Congress for unchecked power to buy $700 billion in bad mortgage investments from US financial companies in ...
  
• But Struggle Looms Over Details:
  Wall Street Journal - USA: The two mortgage firms have since fallen under government control. Democrats will work with the Bush administration on enacting legislation swiftly
• $700B rescue plan may not save some troubled banks
  The Associated Press: While the reverse auctions could help banks set a clearing price for mortgage-related assets, Reinhart said, that "price doesn't mean that every financial
  

==> Very Best CD Rates with FDIC <==

and

Stable-Value Fund Worries for 401(k) and 529 Plan Investors

Market Update for September 21, 2008

The stock markets liked the news (see Financial Bailout - A Day To Remember) and rallied Thursday and Friday, but they remain in bear market territory.

S&P500 Chart

Last Market High 10/11/07 at 1,576.09
Last Market low 09/18/08 at 1,133.50
Current S&P500 Price 1,255.08
Decline in Points = 321.01
Decline in percent = 20.4%
Max Decline = 28.1%

=>This means the decline from intraday high to intraday low is 28.1% and we are currently 20.4% off the peak.
=>The decline in the S&P500 from the closing high to the closing low was 26.1%

Click chart courtesy of stockcharts.com for full size image

DJIA Charts

Last Market High 10/11/07 at 14,279.96
Last Market Low 09/18/08 at 10,403.75
Current DJIA Price 11,388.44
Decline in Points = 2,891.52
Decline in percent = 20.2%
Max Decline = 27.1%

=>This means the decline from high to low has been 27.1% and we are currently 20.2% off the peak.
=>The decline in the DOW off the closing high to the closing low was 25.1%

NASDAQ Charts

Last Market High 10/31/07 at 2,861.51
Last Market Low 09/18/08 at 2,070.22
Current NASDAQ Price 2,273.90
Decline in Points = 587.61
Decline in percent = 20.5%
Max Decline = 27.7%

=>This means the decline from intraday high to intraday low is 27.7% and we are currently 0.205349623 20.5% off the peak.
=>The decline in the NASDAQ off the closing high to the closing low was 26.6%

I was a buyer Wednesday, Thursday and Friday. To learn what I bought for my newsletter explore portfolio, subscribe now!

==> Very Best CD Rates with FDIC <==

and

Stable-Value Fund Worries for 401(k) and 529 Plan Investors

Financial Bailout - A Day To Remember

The rescue or bailout by the US Treasury and the Federal Reserve is the biggest in history. The details are being hammered out with a joint session of congress, the Fed and Treasury Secretary Henry Paulson Jr. representing the executive branch. So far:

• The US Government will insure $2 TRILLION of money market funds. The Fed came in to assist by loaning money to troubled funds to help them not "break the buck."
  
  
• Federal Reserve will take on about half a trillion ($500 BILLION) of bad debt
  
  
• Government made it illegal to short financial stocks on a list.
  
  
• President Bush, Congress (Senate and House of Reps) and the Federal Reserve are united in saying a tax payer sponsored bailout is better than a financial collapse.

Keep checking back as I update this blog with new information.

From Wikipedia:

Crowd at New York's American Union Bank during a bank run early in the Great Depression. The Bank opened in 1917 and went out of business on June 30, 1931.

Stable-Value Fund Worries for 401(k) and 529 Plan Investors

The Wall Street Journal reported that stable-value funds are under scrutiny by worried investors with 401(k) and 529 plans that offer this option.

Fidelity defines a Stable-Value Fund as:

A stable value fund generally invests in investment contracts, certain types of fixed income securities (e.g., U.S. treasury bonds, corporate bonds, mortgage-backed securities, bond funds), and money market investments.

While the stable value fund tries to maintain a stable $1 unit price, the fund cannot guarantee that this unit price will be maintained and its yield may fluctuate. The goal of the stable value fund is to preserve the participant's principal investment while earning interest income.

Mortgage backed securities are behind the melt-down on Wall Street!

Article excerpts:

It's not just money-market funds that are being scrutinized. Many 401(k) plan participants and employers are fretting about stable-value funds. These products, which are generally available only in defined contribution and 529 plans, typically invest in high-quality bonds and bank or insurance-company contracts that guarantee the value of the principal and offer relatively high interest rates compared with money-market funds.

The troubled insurance giant AIG is a major player in stable-value funds. The company is a provider of "wrap" contracts that protect the funds against loss of principal. AIG wraps roughly 10% of the stable-value fund assets tracked by Hueler Analytics, a stable value research firm. And that has many investors on edge.

But investors shouldn't lose much sleep over the developments at AIG, stable-value experts say. In stable-value wrap contracts, the fund assets are not held in the insurance company's general account. They're owned and controlled by the plan. And in stable-value funds that hold AIG wraps, AIG would typically be just one of many wrap providers. "If something were to happen to one of those wrap providers, it doesn't really change anything in the stable-value portfolio other than the manager has to decide to reallocate those dollars to a different wrap provider," says Kelli Hueler, CEO of Hueler Analytics.

Could these stable-value experts be related to the experts who missed the housing bubble and the effect its bursting would have on Wall Street financial firms such as AIG? I hope not.

I don't own any stable-value funds because I have never wanted to "trust an insurance company" to stay in business for me to have a good retirement. I use CDs, TIPS, GNMAs, Treasuries and a total bond fund for my core and explore portfolios. Why take excessive risk in the fixed income part of your investment portfolio when your rewards are only a few extra points of return above the safe investments I prefer? I take the risk in the stock market where the upside is unlimited!

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Beware of Annuities

The Rise and Fall of Fannie Mae and Freddie Mac

As the American financial system is shaking from major companies going under or being bought for dimes on the dollar, the public deserves to know "what went wrong?"

Fannie Mae and Freddie Mac were hedge funds that privatized profits and socialized risk, something I thought was only possible with corrupt regulators and third-world countries.

Fannie Mae and Freddie Mac had the closest thing to a license to print money. They legally borrowed money at below-market interest rates based on the perception that the government guaranteed repayment, and then they used the money to buy mortgages that paid market interest rates.

Way back in 1996, the Congressional Budget Office reported that Fannie and Freddie were using government support to increase their profits, rather than reducing mortgage rates to make homes more affordable, the reason for their existence. The budget office study found that these "profits" were worth $3.9 billion in 1995. By 2004, these profits jumped to $20 billion. These were profits meant to make housing more affordable, not make Freddie and Fannie insiders rich while paying to get their supporters reelected.

This article from the Washington Post details it well.

How Washington Failed to Rein In Fannie, Freddie
Excerpts from the Washingtonpost.com article:

Gary Gensler, an undersecretary of the Treasury, went to Capitol Hill in March 2000 to testify in favor of a bill everyone knew would fail.

Fannie Mae and Freddie Mac were ascendant, giants of the mortgage finance business and key players in the Clinton administration's drive to expand homeownership. But Gensler and other Treasury officials feared the companies had grown so large that, if they stumbled, the damage to the U.S. economy could be staggering. Few officials had ever publicly criticized Fannie Mae and Freddie Mac, but Gensler concluded it was time to urge Congress to rein them in.

"We thought this was a hand-on-the Bible moment," he recalled.

The bill failed.

Blessed with the advantages of a government agency and a private company at the same time, Fannie Mae and Freddie Mac used their windfall profits to co-opt the politicians who were supposed to control them. The companies fought successfully against increased regulation by cultivating their friends and hounding their enemies.

The rest of the article gives a great history of the rise and fall of Fannie and Freddie.

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My blood pressure boils and I feel like spitting at my TV whenever I see Barnie Frank speaking. Long before I learned of his support of the GSEs, I felt he evaded direct answers to questions with a Libertarian slant that questioned his Socialist leaning beliefs.

In October 1992, a brief debate unfolded on the floor of the House of Representatives over a bill to create a new regulator for Fannie Mae and Freddie Mac. On one side stood Jim Leach, an Iowa Republican concerned that Congress was "hamstringing" this new regulator at the behest of the companies.

He warned that the two companies were changing "from being agencies of the public at large to money machines for the stockholding few."

On the other side stood Barney Frank, a Massachusetts Democrat who said the companies served a public purpose. They were in the business of lowering the price of mortgage loans.

Barney Frank should get a ride to a federal prisoin in tar and feathers on a rail.

In the fall of 1999, Treasury Secretary Lawrence Summers issued a warning, saying, "Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly."

It was a signal moment. An administration official had said in public that Fannie Mae and Freddie Mac could be a hazard.

We were warned but those we elect to protect us with regulations appear to have been bought and paid for to look the other way.

People talk about how good the economy was during the Clinton presidency, but it now seems the good times were from building BOTH the internet/telecom bubble that collapsed in 2000 and the housing bubble that started its collapse in 2006.

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Beware of Annuities

September 18, 2008 update:

It will be VERY tough to Blame President Bush according to this New York Times article that shows the president tried to do something five years ago.

September 11, 2003
New Agency Proposed to Oversee Freddie Mac and Fannie Mae
By STEPHEN LABATON

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

It looks like president Bush is far smarter than his critics give him credit for. His lack of skill is in getting the good stuff accomplished.

REIT Real Estate Investment Trust Update

Real Estate Investment Trusts (REITS) have had a nice, 20% gain off their 2008 lows, but they remain 30% below their 2007 highs, set at the beginning of the REIT bear market.

Click charts courtesy of stockcharts.com to see full size images

For long-term REIT investors, REITs have been great relative to stocks. The graph above clearly shows that despite being 30% off their peak, REITs are still up about 200% from early 2000 when the S&P500 was about 20% higher than it is today. (More S&P500 charts)

Disclaimer: In 2001 I added REITs to my "Kirk's Investment Newsletter" core portfolios to diversify into what I thought was an under valued asset class relative to stocks and bonds. Click for more information and a free sample.

Perfect Market Timing:

A perfect market timer, something that does not exist, or even a very good market timer would have sold equities in late 1999 or early 2000 and bought REITs, gold, oil (Crude Oil Charts) or a general commodities fund. All have been great investments relative to stocks.


The best most of us can hope for is to recognize under valued asset classes before they take off so we can add them to our diversified portfolios.

Are REITs a good buy now? It is hard to say. They are still up 200% from early 2000 so they are by no means cheap. The chart below shows two possible very bullish developments are in the works.

Click chart to see full size image

1. Breaking above the 200-day-moving-average (DMA) is one key sign a new bull market is possible. If this 200 DMA, currently at 886, becomes support, rather than resistance, then that is bullish.
   
   
2. The inverse-head-and-shoulder pattern developing is very bullish if the dashed red resistance line is broken with volume.

Until either happens, the REIT index remains in a bear market the trend down.

Summary:

Hard assets like land, real estate and gold have been great investments. Have they run their course? Are stocks so out of favor now with investors that they are great values? I am interested in what do you think.

Disclaimer: I personally own REITs and SPY (SPY is the ETF for the S&P500.) I also follow both in "Kirk's Investment Newsletter" . Click for more information and a free sample.

Charts of US Dollar, Oil Prices, Gasoline Prices and S&P500

This graph shows the US dollar has rallied to a 1-year high (vs. the Euro), oil prices (WTIC) currently $100.87 per barrel, are down 31% since peaking at $145.66 earlier this year while the S&P500 trading at $1225 (more charts of S&P500) remains at bear market levels.

Click chart courtesy of stockcharts.com to see full size image

Consumer sentiment should improve now that gasoline prices are down significantly as this chart of gasoline prices, oil prices and the S&P500 shows.

With oil prices off 31% and companies like Federal Express (FDX) announcing higher earnings expectations largely due to lower fuel costs, can a rally in the S&P500 be far away?

==> More Oil Price Charts <==

For more information, see "Stock Market Returns After Oil Prices Double in a Year or less"

To find out how I've profited greatly from these difficult market conditions, subscribe to "Kirk Lindstrom's Investment Newsletter" today!

• Since 1/1/1999 through 6/30/08 my "explore" portfolio is up 175% while the S&P500 is only up 20% and Warren Buffett's Berkshire Hathaway is only up 71%
  
  
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• Newsletter (pdf) Story about my success

Don't delay!

US Treasury Bailout of GSEs

A Treasury-led bailout of the GSEs (government sponsored enterprises Fannie Mae and Freddie Mac) was announced after the markets closed on Friday by the Wall Street Journal.

The Treasury announced the terms of the GSE bailout. Read the full text of Paulson's statement at the following link:

http://www.ustreas.gov/press/releases/hp1129.htm

With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

Key: The Treasury position will be "senior" to the current preferred and common stockholder positions. We'll have to wait and see what this means after the markets open tomorrow. Hopefully, this means they are "buying low" and can sell in the future at a nice profit for taxpayers.

This may put a fork in the bear market in BOTH equities and housing as it should allow people to get reasonably priced mortgages and home equity loans again.

The shareholders may be wiped out or at least severely diluted since the government will be first in line. Already, the GSE shares trade more like options than stocks. (Stocks that trade under $5 are very risky. I consider them "options that don't expire" since you can buy cheap stocks in companies you like for a potential recovery and hold for years if needed.)

Charts of Fannie Mae and Freddie Mac


Feel free to discuss this and your thoughts in the comments section below:

Charlie Maxwell Says $300 Oil Inevitable

Charles (Charlie) Maxwell, Senior Energy Analyst at Weeden & Co., told Barrons he thinks $300 oil is "inevitable." With three or four new Saudi oil fields coming on line soon, Charlie thinks supply and demand are roughly in balance for the next two years. Charlie predicts oil prices between $75 and $115 for awhile. After that, he sees prices soaring again.

Chart courtesy of stockcharts.com

More charts of Crude Oil Prices

Other key comments from the Barrons interview:

Natural Gas:

• "Its supply should last another 40 or 50 years before it runs into the same problems of peaking that we have in oil. "
• "Natural gas has a very low carbon footprint, meaning it's a cleaner type of energy, and it has wonderful petrochemical adaptability. "

On Hubbert's Peak:

• "(He) said that we would reach the limit of domestic production of oil in the continental United States in the early 1970s.... and he was correct"
• "He thought the American public would never be stupid enough to fall for the concept of foreigners continuing to give us all the oil that we wanted."

More on $300 Oil:

• "We will see $300 a barrel -- or roughly $250 in today's dollars -- because oil supply will be so short. "
• "That ($300 oil) will be in 2015."
• "But even earlier, around 2010, more than 50% of the non-OPEC world will have peaked in its production of oil so the dependence on OPEC will become extreme. That will give OPEC a chance, I'm afraid, to lift prices rather more quickly on us than they are doing today."

==> More Oil Price Charts <==

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The above summarizes an article in the Monday September 8, 2008 Barrons (available today, Saturday September 6) titled "What $300-a-Barrel Oil Will Mean for You" By Lawrence C. Strauss.
Article Subtitle: "AN INTERVIEW WITH CHARLES MAXWELL: He correctly predicted the recent price spike -- and he sees an eventual move to around $300 a barrel."

$80 Oil? Inflation Adjusted Gasoline and Oil Charts Suggest Odds are Good

The graphs of inflation-adjusted gasoline prices and the price of oil (more oil charts) below are good news for the global economy. Prices for both gasoline and oil could continue to fall as the global economy slows. The best news is technical analysis indicates the prices of oil could fall a lot more, perhaps into the $70s if the "Head-and-Shoulders Top" reversal pattern now in play resolves to its price target.

Chart courtesy of www.chartoftheday.com

The chart below of oil prices vs the S&P500 shows the price of oil has completed a "Head-and-shoulders reversal," very important reversal pattern for those who practice technical analysis.

If you look closely at the above chart of oil prices, you can see two head-and-shoulder (H&S) patterns have formed what I've coined a "compound head-and-shoulders pattern." A compound H&S patterns in one H&S pattern inside another. I show the neckline for H&S#1 at $121. You can see this neckline breakdown was tested from below while forming the right shoulder of a second H&S pattern with a neckline at $111.

A reason to be bearish on the price of oil (expect declines to continue) is three key support levels have been broken. These are:

1. H&S #1 at $121
2. H&S #2 at $111
3. The 18 month uptrend support (dashed blue) line also at about $111.
   

The H&S patterns project oil will drop into the $70s and $80s while the point-and-figure chart projects $96, a good 10% lower than were oil was yesterday at the close.

More on "Head-and-Shoulders" chart patterns


The Bible for technical analysis, Technical Analysis of Stock Trends, by Robert Edwards and John Magee, covers the "Head-and-Shoulders" chart pattern in Chapter six (starting on pg 59)

Note, "Edwards and Magee" states the neckline has to be broken for the reversal pattern to be in play with the target price. They say about 20% of patterns break the neckline with the proper volume attributes, flounder about for a bit, then return to higher levels to negate the reversal pattern.

As with all Technical Analysis, it would be a science rather than an art if the patterns were 100% reliable.

Conclusion:

Today the economy is suffering from inflation from high oil prices plus an economic slowdown in large part due to higher energy costs sucking spending power from consumers and business owners. This has thrown the market averages into bear markets.
If oil prices continue lower to to $70s, $80s or $90s, then consumers and business owners will have more to spend. If the credit markets can work out their issues, then consumers and business owners will have access to low cost money again too. More money to spend should help the markets recover in the long term. Thus, I've been using these major sell-offs as time to add to equities in my "newsletter explore portfolio" and my personal portfolio too. While writing this article, I added to one of the stocks covered in my newsletter. I bought just minutes after I got word from a program that monitors the SEC that two insider buys were made on a stock I wanted more of.