Thursday, August 28, 2008

More Media Outrage

From the Desk of Joe Rollins

I saw some outrageous headlines on the Internet last night that forced me into writing another rant. One particular headline – practically jumping off the screen with its boldfaced type – exclaimed that the “FDIC says U.S. Problem Banks rise 30% to 117.”

I have written extensively on this blog about the media’s dramatization of our current economy. It seems that journalists are on a mission to make the daily financial news seem more and more spectacular, and after reading the headline noted above, I decided it was time for me to give you the facts on this subject.

It’s true that the FDIC reported that the number of troubled banks increased from 90 in the first quarter to 117 in the second quarter of 2008. But it’s important to realize that this really isn’t all that significant. How, you may ask, can that be true?

There are actually 8,500 banks in the United States, and 117 of those banks, or 1.4%, are in a problematic state. Let me emphasize to you that these banks have not failed; they are simply on the FDIC’s "watchlist" of problem banks. So far in 2008, a total of nine banks in the United States have failed.

The FDIC reports that the total assets of these 117 troubled banks are $78 billion. At the end of the first quarter, when there were 90 banks on the agency’s watchlist, the combined assets were $26 billion. This is a $52 billion increase from the first to the second quarter, but it should be put into perspective that $32 billion of that increase was from one bank being put on the watchlist – IndyMac Bank Corp. – which ultimately failed in July.

Without question, $78 billion is an enormous amount of money. However, as banks go, this amount is practically insignificant. I see so many self-purported “experts” on the Internet giving their opinions on how many banks they think will fail in the United States, and numerous articles refer to "BIG BANK" failures.

Bank of America alone has $1.2 trillion in loan receivables. Comparatively, the $78 billion in combined assets of the U.S.’s problem banks is only a small percentage of the total of only one bank’s assets.

The reason bank failures draw the media’s interest is because it’s a relatively rare occurrence. In fact, there have been very few bank failures in the United States since 1934. For the media to assert that nine bank failures and 117 problematic banks represent a financial crisis belies the statistics issued by the FDIC itself.

There have only been two years since 1934 – in 2005 and 2006 – when there hasn’t been a single bank failure. The fact that not even one bank failed in 2005 and 2006 is even more amazing when you consider the fallout from September 11, 2001. In 2007, only three U.S. banks failed, and so far in 2008, nine banks have failed.
While hardly any U.S. banks have failed since the year 2000, compare that with the years 1988 and 1989 when there were over 1,000 U.S. bank failures: The rate at which banks were failing during those two consecutive years was two every single business day. Interestingly, the U.S. was still able to absorb those massive bank failures without falling into a recession.

Unfortunately, a big part of the problem banks are facing today stems from mandates set by those in my profession – accountancy. Accountants are requiring banks to reserve and write-down assets well beyond their reasonable valuations. For example, for the most recent quarter, U.S. banks set aside $50.2 billion in loan loss provisions, which is more than four times what they set aside as potential losses in the second quarter of 2007. Again, these are potential loan losses, not actual loan losses.

With the Federal Reserve’s current low interest rate extended to banks, and with the relatively high interest rate these banks subsequently charge their customers, banks are earning potentially mind-boggling profits. Once we get through all the write-downs and adjustments of loan losses, I think we’ll see bank earnings rebound to a staggering level in 2009.

In spite of my positive forecast on bank earnings above, the financial media continues to report concern regarding what they are touting as poor financial circumstances in the U.S. banking industry. The FDIC, by its very nature, is conservative beyond definition. If U.S. banking in America was as bad as the financial media would like for you to believe, you can bet that there’d be significantly more problem banks on the FDIC’s watchlist than the 117 of the 8,500 banks on it today.

In a recent blog, I wrote that this past July 15th would be the bottom of the bank stocks. After that time, banks rallied – in some cases over 50% – but have subsequently fallen back in price nearly to the lows of July 15th. In the elapsing time, however, banks have become more profitable and more stable than ever.

I hope that my rants help you realize how important it is for you to think objectively when you hear reports of gloom and doom in the media. If you simply accept the financial news reports without analyzing exactly what the facts represent, you’re likely missing a lot of important details that would undoubtedly provide a more balanced, positive picture.

Lastly, and on a different subject, I’ve come to a fundamental disagreement with both candidates running for President over the last few days. They both speak of higher taxes and higher governmental spending, and I see projections of deficits running in the half trillion dollar range for 2009 and $5 trillion for the first four-year Presidential term.

It is especially distressing to me that neither of these candidates is talking about cutting governmental spending. Each wants to spend more, give more credits, and provide more governmental resources, but neither wants to cut government and reduce spending to accommodate whatever revenues they currently receive. I hope that at some point, one of them takes on fiscal responsibility and recognizes that our government is big enough. The focus should be on balancing the Federal budget – not with increased taxes, but with decreased expenditures.

Of course, all of this is just my opinion – and I could certainly be wrong…

Source: Federal Deposit Insurance Corporation (FDIC)

Friday, August 22, 2008

The Manhattan Energy Project, Part II

From the Desk of Joe Rollins

I always appreciate feedback – both positive and negative – regarding my blog posts. It helps me see what people are really interested in hearing about, and what’s on my readers’ minds regarding the economy and the financial world.

I received a lot of feedback to my “Energy Crisis Resolved!” post on August 15th – most of which was complimentary – but I did receive one particularly critical email that grabbed my attention. The writer said that after reading my blogs, she was left with a feeling of despair, and she accused me of being exactly like the politicians I so often criticize – someone who criticizes everything but who offers no solutions.

Essentially, this particular reader thought that the content of my “Energy” blog characterized the problems we’re facing, but failed to provide a solution or course of action that would lead to a solution of the energy crisis. And thus, the purpose of this post is to provide you with my solutions for the issue.

Some people wonder why Speaker of the House Nancy Pelosi is taking all of the heat for not allowing an energy vote in Congress. Simply put, it seems to me that she’s going against the public’s wishes regarding energy reform. Nearly every poll I’ve reviewed on the subject indicates that 70% of the U.S. public prefers for the United States to immediately become more energy-independent from foreign sources.

The first step in that happening would be to immediately begin domestic offshore drilling and other energy-saving activities. However, prior to Congress taking a five-week summer recess, Nancy Pelosi (and to a lesser extent, U.S. Senate Majority Leader Harry Reid), firmly ruled out a vote on new offshore drilling. Considering the recent results of a Gallup Poll indicating that Americans, by two to one, would be more likely to support a candidate who back expanded offshore drilling, I imagine this is becoming frustrating to many Americans.

The reason for the stonewalling regarding the offshore drilling subject is relatively clear – there is potential political fallout for the Democratic Presidential candidate, Senator Barack Obama. But I don’t think they can hide much longer by their delaying tactics.

When Congress is back in session after Labor Day and Senator Obama actually has to vote on energy issues, it will be incredibly uncomfortable for him – he’ll be in the crosshairs of both the public and with his important campaign contributors. While the public clearly wants more energy independence from foreign sources, the significant financial backers of the Obama campaign want absolutely none, and they seem to be adamant on the subject. Therefore, Senator Obama will be in a no-win situation of either voting for what the public wants or for what his campaign contributors want. It’s absolutely clear to me that Nancy Pelosi and Harry Reid are taking the fall for the Democratic Party by not allowing any type of vote on the subject.

In recent news articles, both Senator Obama and Speaker Pelosi have indicated that they’d be willing to consider limited offshore drilling as a part of a comprehensive energy plan. Offering to put a bill before Congress that will be so bogged down with stipulations that it’s made unworkable for either party is full of political lingo. It will only further delay any action on an energy vote until well after the elections. I fully expect to see a bill introduced by both the House and the Senate that will be completely unworkable and will fail when they come to a vote. This stalling tactic is only for political reasons and will reflect a failure on the parts of our elected officials to follow-through on what the American public wants.

But I digress…. To satisfy the reader who criticized me for not offering a solution in my last blog, I will do so herein. First, as Americans and taxpayers, we need to demand that Congress holds a serious vote on this subject. The proposed bill should not be one with massive stipulations and meaningless provisions – it just needs to be a clean vote on all of the energy issues we’re facing today. Each member of Congress would vote “yea” or “nay” on each provision, and there would be no confusion as to who voted for what. Personally, I’d like to see a vote on the following issues, and I think many Americans probably agree:

  • Offshore oil drilling off the Continental United States with reasonable environmental controls
  • Expanded drilling in the Arctic National Wildlife Refuge (ANWR) in Northeast Alaska
  • An immediate expansion of nuclear power facilities to provide energy to the United States
  • Reasonable governmental funding for wind and solar energy alternatives
  • Governmental initiatives to expand and develop alternative-fuel vehicles beyond ethanol
I’m not suggesting that it’s possible to have one bill that will encompass all of these provisions. A single bill set up in such a way will surely fail, and that would only provide our elected officials with an out for voting against it. This, of course, would leave us in our present situation, where nothing gets accomplished.

So, my solution is for everyone to contact their elected representatives and demand that they work hard to immediately resolve the energy crisis. Heck, you can even forward this post to your representatives and demand that they vote clearly and concisely on each of the energy issues mentioned above. The American public deserves for Congress to start taking this challenging issue more seriously and get a plan in place once and for all. For them to continue delaying a vote on this important situation and only ignore the energy crisis only reflects our government’s failure at doing the job for which they were elected.

It is hard for me to imagine why any U.S. citizen would disagree with a straight up or down vote on these issues. That’s the reason our democratic system works while systems in other countries fail. Quite simply, the direct voting process is less cumbersome and easier to explain, and I think we would finally see that many members of Congress would vote for independent energy of foreign sources if given the chance. The fact that U.S. Senate Majority Leader Reid and Speaker Pelosi have refused to allow a vote on energy issues up to this point is outrageous and detrimental to our economy and national security.

When I was preparing to write this post, I researched what the environmentalists’ objections are to nuclear energy exploration. To be frank, the information I found on the Internet was somewhat lacking in specifics and only focused on the disposal of nuclear waste. I wasn’t able to find any particularly compelling arguments that gave definitive reasons for why nuclear energy is an environmental concern. In fact, my research revealed that nuclear energy is the most environmentally sensitive form of energy that we have available to us today.

I noticed several references in my research regarding the Chernobyl disaster and the Three Mile Island accident. It’s relevant to this argument to note that there wasn’t a single loss of life from the Three Mile Island accident and that no one was exposed to excess radiation. I think most people probably confuse the facts surrounding that incident with the movie that was released only 12 days before the accident, “The China Syndrome,” which concerned a nuclear reactor disaster.

The Chernobyl disaster did, however, result in 56 direct deaths, with approximately 9,000 cases of cancer potentially attributable to the accident. This incident, however, is not indicative of the dangers arising from nuclear energy.

The Chernobyl Nuclear Power Plan was built in the Soviet Union in a butler building with absolutely no failsafe designs. If you read the history on the construction of the plant, you will see that due to crime and corruption in the construction process, the nuclear reactor was improperly constructed and under-supervised. Furthermore, the type of facilities we would be building today have little to no resemblance of the the Chernobyl plant.

Other than the Three Mile Island accident and the Chernobyl disaster, I was unable to find any serious environmental objections to building nuclear power facilities. It would seem to me that nuclear energy is the answer to many of our issues and is one that we should be aggressively proposed.

As for domestic offshore oil drilling, I have only a few short comments: Those who are pushing the most for ANWR drilling in Alaska are the Alaskans themselves. They are the ones who’d be most dramatically impacted by those drilling efforts and they are the biggest advocates of taking that measure.

Even though Speaker Pelosi absolutely refuses to have a vote on offshore drilling in California, she clearly is not in tune with what most Californians want for their state. The People’s Republic of California is mired in a financial mess. The current budget in California is running a deficit in excess of $15 billion. California Governor Arnold Schwarzenegger has cut all government employees to minimum wage, and there is no current budget even though the state has already entered a new budget year. Due to significant restrictions on businesses in California, businesses are relocating to states that are less onerous to business owners.

Offshore drilling 50 miles outside the beaches of California would lead to a dramatic improvement in the financial resources spent in California. It is fairly obvious that Speaker Pelosi is not reading her own hometown papers.

I’m not suggesting that any of these energy savings incentives should or could be done without a Congressional vote. But with a straight up or down vote, we will know how each of our elected officials stand so they can be held accountable.

In researching this current rant, I came across an interesting tidbit of information: In 2001, newly elected President George W. Bush proposed a new energy bill. This bill provided for more drilling for oil and gas and new refineries. It also proposed incentives to build new nuclear power plants. More importantly, it described how the United States would have to revamp our electrical grid. It provided for $10 billion in tax breaks to help push energy efficiency and alternative energy. Does all of this sound remotely familiar?

I’m sure there were many positives and negatives in President Bush’s proposed bill, but as you might suspect, none of it was passed by Congress. Remembering that the Republicans controlled Congress in 2001, it can’t be solely blamed on the minority party at that time. However, this bill seems to be very similar to a measure worth bringing up for vote again today. If something had been approved in 2001 or 2002, we would be halfway there to energy independence. Unfortunately, today we haven’t even started.

Of course, it shouldn’t be forgotten that the Republican Party lost control of Congress in 2007. Even though they controlled Congress for a full 12 years before that point, they did a poor job of trying to push through any type of energy bill. At the beginning of 2007, the Democrats began controlling Congress without an energy bill in place. At that time, oil was at $50 a barrel and corn was at $2 a bushel. Today, oil is at $121 a barrel (a 142% increase) and corn is at $6 a bushel. Accordingly, in my attempt to equally criticize Congress, it’s easy to see that the Republicans did nothing for seven years while the Democrats have done nothing for a year and a half.

It’s now time for us, as taxpayers, to hold our elected officials accountable for effectively doing the job we elected them to do. It’s imperative that they perform a straight up or down vote on the energy issues during the month of September and that all of our representatives participate in the vote. If everyone communicates this urgency to Congress, maybe something will finally get done!

Friday, August 15, 2008

Energy Crisis Resolved!

From the Desk of Joe Rollins

It looks like the energy crisis has been left up to me and Paris Hilton to resolve… The complete incompetence of our elected officials being recapped on the nightly news only leaves me completely outraged. I’m talking about both Republicans and Democrats here – the incompetent are both in Congress and in the Executive Branch.

In recent years, politicians out of Washington, DC have become so dogmatic that it is paralyzing the real issues concerning average Americans. The energy crisis issue, in particular, is one of national importance, and it’s obvious to me that those now responsible for making decisions in Washington never had to try to buy gasoline back in 1973.

I, on the other hand, vividly remember what it was like to try to fill up the gas tank in 1973. Back then, even if a filling station had as many as seven or eight pumps, most of them had “No Gas” signs posted on them. It wasn’t a matter of cost – there just wasn’t any gas to purchase. Basically, America was facing a gas shortage because the Middle Eastern countries, in concert, had placed an embargo on shipments of crude oil to the United States.

In retrospect, this was a blessing in disguise. Due to the conservation that was required, the cost of oil was forced down as the Middle Eastern countries suffered a significant economic blow because of their unwillingness to sell crude oil to the U.S. However, the pain was equally as severe in the United States, and as such, the U.S. suffered a severe recession from 1973 through 1975. Once the embargo was lifted, the United States entered an era of hyperinflation. I’m assuming that a few of you remember when Georgia’s native son, Jimmy Carter, was in Washington and inflation was at 12%...

Compared to today, we’re not dealing with anywhere close to the same issues as those we faced beginning in 1973. There’s more crude oil being produced in areas outside of the Middle East, and contrary to the proclamations of the various candidates running for office, providing oil out of the strategic oil reserve would accomplish nothing. There is no shortage of crude oil anywhere at the current time; we are just suffering from the high price of the crude oil.

The United States’ reliance upon foreign governments to provide us with crude oil has had a dramatic and potentially devastating effect on us during a time of war. Can you imagine if we couldn’t purchase crude oil from unfriendly governments right now? A vast majority of the largest producers of crude oil in the world are possible enemies of the United States, and they could potentially withhold oil from us which would be devastating to a war effort. The current conflict between Russia and the upstart province of Georgia only reemphasizes that possibility.

For several reasons, it was a breath of fresh air to see Paris Hilton’s spoof campaign ad that circulated the Internet last week and hear her resolution to the energy crisis. Hers was done in jest, but my idea for resolving this mess is for real:

Regardless of who is elected to be our next President, a solution to the energy crisis must be of the utmost importance. Our new President should declare that it’s in the best interest of the United States to pronounce energy independence from the rest of the world. By this, I don’t mean that we’d need to completely eliminate our need for crude oil; rather, our focus should be on not purchasing crude oil outside of our own borders.

Obviously, this solution would include drilling for oil within our own country, furthering wind and solar power efforts, and exploring new technologies that have yet to be contemplated. This would be a massive financial undertaking and it would take the best minds in the world to create the technology and infrastructure to ensure it works. Do you think this is only a pipe dream? Not me! Here are some similar examples of how this has worked for us in the past:

In a speech before Congress on May 25, 1961, President John F. Kennedy declared the U.S.’s “space race” between the Soviet Union, with the goal of successfully sending an American to the Moon before that decade’s end, saying:

“First, I believe that this nation should commit itself to achieving this goal, before this decade is out, of landing a man on the Moon and returning him back safely to the earth. No single space project in this period will be more impressive to mankind, or more important for the long-range exploration of space; and none will be so difficult or extensive to accomplish.”

At the time, everyone thought that Kennedy’s speech was based solely on political rhetoric, and I wonder if Kennedy even believed the same. In 1961, the technology did not exist anywhere in the world to accomplish such a lofty goal – a goal that was made even more difficult by Kennedy’s challenge for it to be accomplished within the decade. Nonetheless, Kennedy’s objective was reached in eight years on July 20, 1969, when Apollo 11 safely landed on the Moon and Neil Armstrong took his infamous steps on the Moon’s surface.

I recently visited the Smithsonian National Air and Space Museum, where they actually have some of the original space capsules on display. Compared to today’s airplanes (not spacecrafts), they looked like toys. It’s difficult to imagine that the astronauts were comfortable exploring space in a tin can strapped to a rocket.

The United States was able to accomplish this incredible goal because of governmental involvement. The government initiated a massive spending of money on technology, which allowed the goal to be realized. NASA is given credit for creating miniaturized computers, which, prior to that time, did not exist. Due to NASA’s insistence, computer miniaturization was created making space travel possible.

In time, NASA’s technology was made available to the private sector, creating a massive wave of new technology out of the United States. There’s a reason why the U.S. continues to be the worldwide leader in computer technology, and while it’s true that many countries duplicate our technology, the U.S. is ultimately responsible for creating the technology in the first place. Furthermore, nearly all of the major software developers in the world are based in the United States. In a nutshell, the U.S. government’s enormous commitment to the “space race” not only allowed us to succeed in landing a man on the moon, it also created a technology bonanza in this country that we continue to enjoy today.

The United States could do the exact same thing regarding the current energy crisis: The government could employ the engineers and scientists to create the technology we need to realize that goal. As we go forward, this technology could be turned over to the private sector for free to enjoy and exploit. There’s absolutely no question that in a 10-year period, the U.S. could be 100% energy-independent from the rest of the world. Of course, this can only be accomplished on a bipartisan, common-goal basis. Unfortunately, based on what I see being reported today, our elected officials in Washington are wasting our time and are endangering our security with partisan politics. Worse than all of that, almost zero has been accomplished regarding energy in the last 30 years.

Just to solidify my point, here’s another example of how our government has worked together in the past for the benefit of the country as a whole:

In 1941, the U.S. government along with the United Kingdom and Canada entered into an initiative to develop the first nuclear weapon (atomic bomb) because of fears that Nazi Germany had been developing its own nuclear weapons since the 1930’s. The U.S. hired the best engineers and scientists money could buy to accomplish this goal, many of whom were foreign born but with a vested interest in harnessing the technology.

From 1941 through 1946, the Manhattan Project provided the technology necessary to ultimately create the first nuclear weapon, and the project employed more than 130,000 people and cost nearly $2 billion. Based on CPI, this would cost us $24 billion in 2008 dollars, which is actually a relatively small amount compared to the billions and billions in pork barrel spending by our inefficient Congress today.

Due to the government’s intervention and funding of the Manhattan Project, a nuclear weapon was successfully created within five years. We obviously know the effect these weapons had on our outcome in World War II; the U.S. prevailed and hundreds of thousands of U.S. soldiers’ lives were spared because of the Manhattan Project. While the merits of a nuclear weapon are debatable, the technology we garnered is indispensable to our futures. Because of the technology created for a nuclear bomb, we now have the ability to generate clean and safe power to the entire world.

Kennedy’s “space race” and the Manhattan Project examples above illustrate that if the U.S. government commits its resources and personnel to accomplish a goal on a bipartisan basis, they can be accomplished. Based on my research, it’s totally unlikely that the United States would be able to furnish 100% of its energy needs solely from drilling within our borders and off the shores of this country alone. However, doing more domestic oil exploration than we do today along with a massive undertaking of new technology that some of us haven’t even contemplated is absolutely crucial to resolving the energy crisis.

I watched a special the other night regarding a new hydrogen-fueled car manufactured by Toyota, which emits water vapor and no carbon monoxide. Unfortunately, this vehicle is unlikely to be sold in the U.S. in the foreseeable future due to a lack of hydrogen fuel stations in existence today. Small obstacles such as this amount to nickels and dimes and warrants governmental intervention. Literally thousands of hydrogen-based fuel stations could be built within six months if only our government would get involved.

I hope that one day I’ll look back on this blog and say, “I told you so!” However, I fear (and expect) that due to the inefficiencies, incompetence and the unwillingness of our leaders in Washington to compromise, it’s more likely that I’ll instead be saying, “It was an opportunity lost.”

Wednesday, August 6, 2008

Many Reasons for Optimism

From the Desk of Joe Rollins

The news regarding the stock market and the economy has been just dreadful for the months of June and July. It seems that every day we are confronted with a new avalanche of selling on the stock market and negative news being reported by the media. For example, the largest mutual fund provider, Fidelity Investments, only had one fund in their entire portfolio of equity investments that is positive year-to-date through July, 2008. Virtually all of their mutual funds are in double-digit negatives for the year with only Fidelity Real Estate up a meager .8% for the first seven months of 2008. Even their more conservative funds, like Balanced and Puritan, have losses of 9.3% and 9.4%, respectively. This has been an unusually difficult year from an investing standpoint, but I’m a long way from throwing in the towel from a financial perspective.

Since it was a slow weekend anyway, I decided to sit down and read as much as I possibly could on current economic and investing news. I typically spend this time of year watching a considerable amount of Atlanta Braves games. This year, however, the team has become irrelevant (especially since Skip Caray is now on permanent D.L.), and frankly I am having a hard time finding anything else on TV to be worthy of my time. Therefore, I decided a good weekend activity would be to sit down and read all of the newspapers, Internet postings and reviewing other matters related to the news of the world and investing. I think some of my comments below might enlighten some of you regarding future investing.

My research project was initiated based on a couple of television events this week. The howling fool, Jim Cramer, declared this week to be the end of the bear market and the beginning of a new, more powerful bull market. Jim Cramer doesn’t say a whole lot that I agree with – this isn’t entirely his fault; he’s just become a slave to his own celebrity.

In any event, I watch at least a portion of Jim Cramer’s Mad Money practically every night, and I’ve come to realize that he’ll often change his opinion on a particular stock within the same week. To those who don’t watch the show consistently, it would be hard to pick up on these contradictions in stock recommendations. The pressure of trying to come up with new observations and ideas is perhaps limiting Cramer in giving the type of advice most investors need.

To Jim Cramer’s credit, it was he who, one year ago on August 3, 2007, set YouTube on fire with the clip of him exclaiming that “They [the Fed] know nothing!” It was Jim who first brought the credit crisis to national attention and brought the inaction of the Federal Reserve to the forefront. With his howling frustration about the Fed and his correct assessment of the credit crisis, he was the first to acknowledge that the Fed was just sitting on the sidelines doing nothing.

Perhaps because of (or in spite of) Jim Cramer, the Federal Reserve has picked up the ball and has performed brilliantly. I’m so impressed with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson and their current actions. While none of us can forecast the future, it appears a major financial crisis has been averted by the swift actions of the Federal Reserve and the Department of Treasury.

This past week also brought out the shadowy figure, Dr. Alan Greenspan. He once again made national news by opining that the U.S. economy had a 50/50 chance of recession. It’s somewhat interesting to note that at this same time last year, Dr. Greenspan was forecasting the odds of a recession in the United States to be 70%. It seems that his projection has fallen as the months pass. A recession has yet to be realized.

I couldn’t help but note Dr. Greenspan’s thoughts on deflating the financial bubble in housing. He should be a prime candidate for understanding how the bubble could be deflated. Since he is the one who created the bubble, surely he must know how to pop it. If there is any question that I didn’t correctly predict Dr. Greenspan’s missteps, please read any of my prior writings on the subject of his fallacies.

Furthermore, just so I’m clear, I have no empathy for the problems on Wall Street. The housing industry didn’t create the troubles on Wall Street; it was completely the other way around – Wall Streeters created the housing problems. Due to Dr. Greenspan’s irrational setting of low interest rates in the early years of this decade, Wall Street abused what was originally the banks’ function of lending on housing and created its own chaos.

By packaging and selling literally millions of sub-prime loans, Wall Street allowed builders and prospective buyers to create a complete nightmare. Homes were built that never should have been while buyers with unworthy credit were able to purchase homes with loans that never should’ve been extended to them. It seems somewhat ironic that for the billions of dollars that Wall Street made on selling these toxic sub-prime mortgages, it was they that ultimately paid the dear price. While the homeowners will suffer from the unwinding of this real estate fiasco, it will be Wall Street that suffers the true economic loss. While housing prices have come down over the last 12 months, they still stand substantially above their values going into this decade.

I thought one interesting piece of news from last week was incredibly ironic. At the same time that Dr. Greenspan was speaking on TV on Thursday regarding his forecast that there is a 50% potential for a U.S. recession, the Federal Reserve made an extraordinary announcement. They announced that the M2 money supply figures for the week jumped up a staggering $49 billion. What’s unusual about their announcement is that it came after a full three months wherein no money was created by the Fed.

As any follower of economic activity knows, unless the money supply is increased growth in the economy can’t occur. As we have seen, banks have cut off financing for housing and for economic expansion due to a lack of an adequate money supply. With this flood of new money into the system, banks will have no choice but to lend now. For this reason, I think it is almost assured that economic activity will pick up in the coming months.

In my own cynical mind, I wonder whether the Fed’s announcement regarding the explosion of the money supply was not a “We will show you, Dr. Greenspan. There will be no recession!” statement since it was released on the very day of Dr. Greenspan’s televised speech. I’m sure the timing was just coincidental, but it was entertaining nonetheless to those of us who study economic trends.

I have several other news items to cover, but I thought I would go through them in the order of importance. There was an interesting article that didn’t receive much publicity, but that I ran across in the New York Times, of all places. The article reported the results of The Conference Board’s consumer confidence report, reflecting that for first time in the poll’s 20-year history, 55% of all consumers expect the stock market to fall over the next 12 months. Given the inundation of negative sentiment, one would question why that percentage isn’t even higher.

What makes these poll results so interesting is the history of its consumer confidence results and what actually happened in the stock market in the 12 months after. There have only been six times when the results exceeded 36% of respondents being negative. Remember it is now at 55% -- an all-time high – and I’m referring only to the six prior cases when it exceeded 36% negative sentiment.

In each of those incidences, the subsequent 12 months following the poll were extraordinarily good times for the stock market. In November of 1987, the next 12 months brought gains of 19%. In October, 1990, the gains were 29% after such a reading. In December, 1991, preceding the first war in Iraq, the gain was muted at 4%. In April, 1994, the following 12 months had a gain of 14%. In October, 1998, there was a 24% gain, and in March, 2003, there was a 33% gain.

Just for comparison purposes, there has never been a negative 12 months after such an extreme bearish reading. Additionally, there has never been a bearish reading as high as the current 55%. From strictly a contrarian point of view, it would be hard to identify a more encouraging barometer. Additionally, if you will note the dates quoted in each of those time periods, the U.S. economy was in much more severe economic distress than it is today.

June and July gave us a complete breakdown in commodities speculation. During the last two months, we have seen corn prices plummet. Additionally, coffee, oil, heating oil, soybeans, and natural gas have dropped markedly. While all are still at elevated levels, they are significantly below their levels going into June. There should be no fear in anyone’s mind regarding inflation over the next few years. With the deflating of housing prices and the moderation of the net increase in commodities, inflation should be restrained. The current yield on a 10-year Treasury bond is 3.92%. You may rest assured that if bond traders felt that inflation was a significant threat to their principal over the next 10 years, they would not be trading the U.S. Treasury bonds at historic low levels.

It should’ve become obvious to all after last week that Iraq is no longer an issue. Due to the stabilization in Iraq, it should be clear that this is one potential fear we no longer need to worry about. Regardless of who becomes our President, stabilization in Iraq is now readily assured. It seems that the timetable for withdrawal by the current President and the candidates running for office are materially indifferent. Regardless of who is elected, there will be 40,000 to 50,000 American troops in Iraq as a peacekeeping force for years to come. While it is certainly not desirable that we would have to maintain a long-term presence in Iraq, surely none of us are so naïve to forget that we still have a large military presence in Germany, 63 years after the end of WWIII. And in Korea, 55 years after the end of the Korean War, there are still American troops present.

Contrary to the ill-advised proclamations of one of the candidates running for President, Afghanistan is not critically important, but Iraq is both significantly and strategically important to our economic future. A stabilized Iraq will reign in Iran and provide a buffer between Saudi Arabia and Iran. While Afghanistan will have to be dealt with in short order, it has no economic value to the United States today.

Once Iraq is completely stabilized, there will be adequate troops transferred to Afghanistan, the land of rocks and opium, to stabilize that country. It will only take a short order of significant troops to once again stand Afghanistan on its feet. However, the difference between Iraq and Afghanistan is that in Iraq, they’re generating billions of dollars a day in revenues from the sale of oil. Afghanistan has virtually no natural resources and little Gross National Product. In the coming years, Iraq will only increase their significant revenues from oil and Afghanistan will continue to struggle. While it is true that the war on terror must be fought in Afghanistan and Pakistan shortly, to assert that it is more important than Iraq is naïveté beyond comprehension.

Did you happen to read this week that President Hugo Chavez unexpectedly announced the nationalization of the largest Spanish-owned bank in Venezuela? Over the last few years, Chavez has nationalized industries such as oil, telecommunications, electricity and steel making. Now he is attempting to nationalize the banks in his quest for a complete socialistic government in that country. Nationalizing is when a government steals, by force, businesses from private companies – many of which are owned by Americans.

I find it interesting that Venezuela’s economy is now practically on the edge of breakdown. The vast majority of the country doesn’t even have reliable social services and economic chaos is ensuing. This is even more surprising given the oil producing capabilities of Venezuela. However, without foreign capital, the country is suffering from a severe downturn in oil production and technology.

This is just the most recent example of the inability of a socialist government to function in a democratic world, similar to Russia, North Korea, Iran, and many other socialist countries that have failed. Don’t you find it somewhat ironic that a socialistic government cannot and will not work, yet sometimes people in our own country, including certain politicians, believe that we are in need of socialistic reform? There is currently a plethora of misinformation in the United States that a socialistic government here would be better than the democratic one we enjoy today. Duh?!?

Have you noticed that the immigration issue has fallen completely off the radar screen as of late? Last week, the center for immigration studies estimated that 1.3 million illegal immigrants have left this country since Congress gave up the comprehensive reform bill a year ago. Many, of course, were deported, but most just went back to their homelands on their own accord. It seems the combination of stricter immigration enforcement along with a slowing U.S. economy has solved the issue for itself. Given that we now know enforcement works, it seems that this issue can be solved peacefully. Another threat to the U.S. economy has now been averted.

I am incredibly amused by the arguments in the political arena regarding windfall profits. You don’t have to be much of a scholar in economics to understand that in a slowing economic environment, the absolute last thing you want to do is increase taxes. To increase taxes on the oil companies that essentially control our future regarding energy issues is practically insane. Without giving the oil companies incentives to explore and find new oil, we certainly will have even bigger issues in the future. Absolutely no one questions the need to go to alternative fuel. However, during the next decade we really do not have a choice. The answer to the energy issues in America is simple: do it all. Drill, use wind and solar power, alternative fuels, seek additional energy sources – even fill up your tires with air and get a tune-up! The absolute wrong answer is to have a windfall profits tax.

Do you realize how many Americans could be put to work seeking new energy in high-paying, meaningful jobs in this country? Why any person (or politician) would rather spend this money by purchasing from unfriendly governments belies logic and intellect.

Here’s an interesting tidbit of information that you might’ve missed this week: Exxon Mobil reported a record second quarter net income! Indeed, it’s the highest quarterly profit for any corporation, ever. However, with corporate profits also come a substantial payment of U.S. taxes. As economist Mark Perry has noted, Exxon Mobil will pay more taxes this year to the U.S. Treasury than the bottom 50% of all taxpayers combined – a staggering $61.7 billion for the six months so far this year. So let me get this logic straight: we want to tax a corporation more that is paying as much in taxes as 50% of our residents in order to give a rebate to the people who pay no taxes?!? Once again, the basic law of economics does not support the conclusion.

I’m fond of philosopher and poet Georges Santayana’s expression, “Those who do not study history are doomed to repeat it.” It’s not as if we haven’t tried a windfall profits tax before. In fact, as recently as the 1970’s, Jimmy Carter’s windfall profits tax led to a 6% drop in net domestic output and a surge of as much as 15% in oil imports, according to the Congressional Research Service. Some politicians clearly haven’t retained much from history if they’re proposing a tax that was such a miserable failure in the past.

Perhaps those politicians would rather use Winston Churchill’s philosophy. Churchill is one of my favorite politicians from history, and his statement on the subject of using history as a lesson was a classic: “History will be good to me, because I intend to write it.”

Maybe you haven’t read about the absolute explosion of new energy discoveries in the world. Due to the high price of oil, new findings are occurring virtually daily. There was a finding in Louisiana of natural gas that will double the known natural gas reserves in the United States. With the explosion of the expansion of wind power in Texas and the drilling of natural gas wells in downtown Fort Worth; Texas is moving rapidly towards energy independence. It is now believed that the largest deep water oil reserve that has ever been explored was found off the shores of Brazil. This field is larger than all the known fields in Saudi Arabia.

It is believed that there is as much oil in the Antarctic as all the known reserves in the entire world. While certainly the cost of exploring and recovering this oil is gigantic, with the high cost of fuel it is making the possibility of recovery more likely. There are significant oil findings in shale in Colorado and in the Rocky Mountains. Unfortunately, our Congress had to go on vacation before they could get around to voting on policy as important as the cost of fuel in every consumer’s life. I do not think any Americans would actually have a complaint with Congress if there was a straight up and down vote on energy exploration in the United States. But the fact that it cannot even be brought to a vote should be an embarrassment to all Americans.

With the recent explosion of nuclear power plants, you will see a conversion from coal and natural gas plants to nuclear in the coming decades. There are absolutely no negatives to this trend – only positives. The fact that we haven’t built nuclear plants in this country over the last 25 years should be an embarrassment to all Americans. Genteel and socially conscious France produces 87.5% of its electricity with nuclear plants while the U.S. produces 20%. What is wrong with this picture?

How all of the foregoing affects stock market investing is the most exciting part. I sit in amazement when I read the stock quotes every night and am baffled at the inexpensive pricing of stocks. As of yesterday, AT&T is selling at less than 10 times next year’s earnings with a 5.3% dividend yield. Likewise, Verizon is similarly priced and has a dividend yield in excess of 5.1%. The large cap technology stocks are selling at bargain basement prices; companies such as Microsoft and Oracle are selling at historic low prices, yet they continue to trend down on a daily basis. I could go on and on… Earnings have been extraordinarily good all but for the banks and car manufacturers. We are seeing current prices on great stocks that frankly I have never seen before in my investing lifetime.

I projected that we would see bank stocks rally significantly off of their lows and now they are up 30-50% in only a period of less than three weeks. I think we are seeing an upsurge of the combination of high earnings, low prices and an improving economy that will lead to significant gains over the next 12 months.

Even with my background in analyzing stocks and evaluating economic markets, there’s no way for me to forecast the movements of the gigantic hedge funds or the momentum players. Frankly, no one can make those predictions, and none of us really need that knowledge. Investors simply can’t compete with a group of hedge funds representing billions of dollars that collectively make decisions to go long on energy and short the financial stocks. When hedge funds work in concert with one another, they accomplish exactly what has happened this year: energy prices go into the ionosphere while financial stocks go to bargain basement, penny stock prices.

Truthfully, forecasting movements by hedge funds or momentum players has nothing to do with investing and more to do with speculation; my intent is to evaluate stocks on a long-term basis and determine when they are cheap and a good time to buy. If we tried keeping up with the momentum players, we’d suffer from wild swings in asset values, which is detrimental to everyone.

I’m sure there are readers of this blog saying, “Oh yeah, but what about the unemployment report this week?” First and foremost, this report, while unfortunate for those losing their jobs, was actually encouraging. An unemployment report of 5.7% is not anything close to major concern. While it may be true that consumers are cutting back, as long as they have jobs they will continue to consume. The most important economic reality is that unemployment is a trailing indicator. Increased unemployment, while certainly an unfortunate situation for the unemployed, is actually encouraging. It means that businesses are cutting back on excess employees and preparing for the future.

The stock market is a forecasting device and anything that happens in the rearview mirror is somewhat irrelevant. There has been a significant increase in GDP over the last three quarters. While it’s definitely still at a low level, it is increasing markedly on a sequential basis. This bodes well for future economic activity.

At the current time, there are an absolute record number of open “short interest” positions on the New York and NASDAQ stock exchanges. Those shorting the market believe that stock prices will be going lower, and therefore, they have sold stock they do not own. The encouraging part of this from a stock market investing perspective is that at some point, they will have to repurchase those stocks in order to cover their short sale. Investors shouldn’t care where the purchasing comes from, they should only care that they repurchase. I project that there will be a significant reduction in short interest in the coming months, and this will be an economic boom to the stock market as the shorts unwind the transactions.

Many of the mutual funds that we own have large concentrations of energy stocks. Due to the sell-off in oil during June and July, many of these mutual funds have performed poorly. However, it is our intention to stick with these particular mutual funds. First, because these funds have been incredibly successful over long periods of time, they make them well-suited to hedge against the future. Secondly, and more importantly, these energy stocks are incredibly cheap.

Most of the major oil companies perform their projections and value their reserves assuming $70 barrel oil, which is what they view as the true fair market value of oil. Given that the current price is $125 per barrel, this makes the stocks even more inexpensive. Realistically, I do not envision oil selling for $70 per barrel anytime in the coming couple of years; we will have to see a dramatic increase in the supply of oil or significant decline in demand for this to happen. While clearly there is conservation and moves to switch to alternative fuels, in the most optimistic forecast we are still five to ten years out for that to make a serious difference.

Admittedly, it’s hard to be optimistic in light of the avalanche of bad news we’re barraged with. While I try to remain objective, it’s sometimes difficult to sift through the negative news and focus on the optimism built into these stories. Yes, I understand that if you get your news solely from the national media, you need to understand that it is extraordinarily limited. If you put the entire script of the nightly news in print, it would probably only cover less than one-half the front page of the New York Times. Given the documented bias by some of the major news outlets meant to affect the political outcome of the upcoming election, I think you would be better served to review and analyze the news from other sources.

It has not been much fun investing over the last seven months. However, I do have an instinctive feeling that our odds for success have gone up dramatically over the last several months.

Source: New York Times