Bankers - 1; Taxpayers – 0

by Anthony Cherniawski, The Practical Investor, LLC | May 22, 2009

Banks negotiating to reclaim stock warrants they granted in return for Troubled Asset Relief Program money may shortchange taxpayers by almost $10 billion if Treasury Secretary Timothy Geithner’s first sale sets the pace, data compiled by Bloomberg show.

While 17 financial institutions have repaid TARP funds, only one has come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. That was Old National Bancorp in Evansville, Indiana, which gave the Treasury Department $1.2 million for warrants that may have been worth $5.81 million, according to the data. If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of profits taxpayers might have claimed.

Credit card “Bill of Rights” may have an unintended effect on the economy.

The credit card user’s “bill of rights” that U.S. President Barack Obama is scheduled to sign today is intended to protect cardholders from excessive fees and last-minute contract changes. It also may prompt banks to slash available credit by as much as $90 billion to avoid risk.
That reduction could choke off a consumer-led recovery and hurt retailers struggling amid the longest recession since the 1930s, said Andrew Caplin, an economics professor at New York University. Consumer spending accounts for 70 percent of the U.S. economy. A reduction in credit available to consumers may have the effect of slowing the economy even more. One of the side effects is that shopping malls are turning into ghost towns.
The market is faltering…

-- U.S. stocks were little changed on Friday after sinking Thursday, and there was no recovery in sight for the dollar, which continued to drop. Trading could be sparse and therefore volatile on Friday ahead of the Memorial Day holiday weekend. All U.S. markets will be closed on Monday. Stocks ended lower Thursday as investors grappled with S&P's warning that it may downgrade the U.K.'s AAA credit rating and the disappointing results of the latest phase of the Federal Reserve's Treasury-purchase program. The Dow Jones Industrial Average retreated 129 points.

Treasury bonds react to new sales of government debt.

-- Treasuries fell, pushing 10-year notes to their biggest weekly loss since January, as investors prepared for the resumption of U.S. government debt sales after a two-week hiatus. The slump pushed yields above 3.4 percent for the first time since November as investors also raised concern about the possibility that record supply of Treasuries to pay for a mounting budget deficit may jeopardize the U.S.’s AAA credit rating.

Have gains in gold gone giddy?

Gold rose to a two-month high in New York and London, heading for a third weekly gain as a weaker dollar boosted the metal’s appeal as an alternative investment. “Investors are flocking to gold as an ultimate safe haven against the sliding dollar,” Pradeep Unni, an analyst at Richcomm Global Services DMCC in Dubai, wrote today in a note. “There is an extreme fear that the U.S. economy may lose its AAA credit rating in due course, and this has been feeding the gold bulls pretty well.”
Japanese stocks slumped on U.S. retail sales.

-- Japanese stocks fell as concern the U.S. will eventually lose its top credit rating boosted the yen, hurting earnings prospects for exporters and overshadowing the Bank of Japan’s upgrade of its economic assessment. Shares fell even after the Bank of Japan raised its assessment of the economy for the first time since July 2006. “Economic conditions have been deteriorating, but exports and production are beginning to level out,” the bank said in a statement. Previously it said the world’s second-largest economy had “deteriorated significantly.”

China’s recovery may be “premature”.

-- The Shanghai Composite Index fell, capping its first weekly decline in a month, as commodity producers dropped on concern that this year’s rally overvalued prospects for the nation’s economic recovery. The comments add to a number of voices casting doubt on the pace of China’s economic recovery. Credit Suisse said this week the country’s growth stalled in the second half of last month, while the World Bank cautioned enthusiasm about a recovery may be “premature.”

US Dollar.png Will the “green shoot rally” prevail?
-- The dollar continues to give us a bearish picture, while stocks and gold are advancing. Today will be the fifth consecutive down day, if it continues its current decline. What might change the direction of the US Dollar? Fundamentally, a reversal in stocks would drive investors back to the safe haven of the dollar. GOLD and the US dollar have moved back to their traditional inverse relationship lately, although some analysts say it remains to be seen how long this will last and how strong it will be.

Buying foreclosed homes reduces overhang.
An increasing percentage of Americans are willing to consider the purchase of a foreclosure home, even knowing that there are some negatives to acquiring distressed properties, according to results of a survey released on Wednesday. The interest in foreclosures is good news for the reduction of home inventory on the market. In addition, for-sale homes that are not foreclosures are being priced to sell and homeowners are slashing listing prices as needed -- an effort to compete with bank-owned prices. Twenty-four percent of existing homes for sale on the market have had at least one price reduction this year.

Crude oil driving gasoline prices higher.

Energy Information Administration Weekly Report suggests that, “More recently, gasoline price increases have been driven by the more traditional spring transition leading up to the Memorial Day weekend, the traditional start of the peak summer driving season. The average U.S. price for regular gasoline rose another 23 cents over the past two weeks, reaching $2.31 per gallon on May 18. Crude oil prices have contributed in some measure to this increase as well: from May 1 through May 15, crude prices increased $7 per barrel, or 18 cents per gallon.”

Economic downturn reflected in natural gas prices.

Natural Gas.png The Energy Information Agency’s Natural Gas Weekly Update reports, “Natural gas spot prices fell by large amounts at all trading locations in the Lower 48 States, reversing the increasing trend that began in the beginning of May. The average decline in spot prices between May 13 and May 20 was 62 cents, and declines ranged between 8 percent and 22 percent. Prices fell this week as a result of mild weather across the country, resulting in weak natural gas demand for heating and for power generation for cooling.”

Thomas Sowell on how government policies made the housing crisis possible
reason: What is the most dangerous sign you’ve seen so far in terms of policy reaction to the housing bust?
Sowell: The presumption that Obama knows how all these industries ought to be operating better than people who have spent lives in those industries, and a general cockiness going back till before he was president, and the fact that he has no experience whatever in managing anything. Only someone who has never had the responsibility for managing anything could believe he could manage just about everything.

General Motors moving to China?
For decades, General Motors Corp. (NYSE: GM) was an icon of American industry. But over the past decade its sales in China have steadily increased, while dwindling sales at home have turned the company into a relic.

Now facing bankruptcy, GM has an opportunity to shift its operations to China, its fastest growing and most profitable market. The company is already attempting to move its manufacturing operations to the Asian powerhouse, and that has given rise to speculation that it will move its headquarters as well.

Contact Information

Anthony Cherniawski | President and CIO, The Practical Investor, LLC.
State Registered Investment Advisor | Mason, MI USA | Email | Website