Net worth net loss of -12.25% for the year of 2008

It could have been worse. My net change in my net worth was a decline of -12.25% for the year of 2008. That is actually not bad considering that many people had houses that declined in value in addition to stock market losses. I do not own a house and by working most of the year I was able to save enough to make up for a good chunk of my stock market losses. I have no actual stock market losses, only paper losses. My net change in market value of my non-cash investments (mostly Microsoft stock) was a decline of roughly -37.93%, which roughly the same as the S&P 500 decline of -38%, a little more than the Dow Industrials decline of -34%, and a little less than the NASDAQ decline of -40%.

A little over half of my net worth is in cash (52%), currently earning a little more than 3.00%. My Microsoft stock is paying a dividend of roughly 2.70%.

Unfortunately, I am not working right now, so I will actually be burning cash for another month or two or three as I line up some new work.

-- Jack Krupansky

No recent bank failures

It has now been over two weeks since the last bank failure. FDIC reports bank failures Friday evenings, but has not reported any on each of the past two Fridays.

And this morning the news is that FDIC is poised to sell IndyMac Bankcorp, which failed this summer, to a consortium of investors. Despite IndyMac's subprime history, they are now viewed as a "solid" bank. FDIC did a lot of work to refinance "troubled" mortgages.

Maybe the doom and gloom is not as bad as the doom and gloom crowd are claiming.

-- Jack Krupansky

ECRI Weekly Leading Index indicator rises modestly for a second week but remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose modestly by +0.33% vs. +0.63% last week, and its annualized growth rate rose moderately sharply to -29.2 vs. -30.1 last week, but is still near its record low for its 60-year history of data of -30.3 for the week ended December 12, 2008, which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With WLI growth barely above its all-time low seen two weeks ago, the U.S. recession will persist in the months ahead."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

My personal outlook is that: The recession of the U.S. economy that started in December 2007 and sharply accelerated in August is currently shows no sign of an imminent end.

Although the current economic reports show significant weakness, there is also a vast amount of potential stimulus in the pipeline that could kick-start the economy within the next couple of months.

-- Jack Krupansky

GMAC conversion to bank holding company results in lower interest at GMAC Bank online savings

I was afraid this was going to happen. Maybe it is just a coincidence, but here we are at the very next business day after the Federal Reserve approved the conversion of GMAC to a bank holding company and GMAC Bank lowers the interest rate for online savings from 3.75% APY to 3.25% APY, a decline of 0.50%. Sigh. In truth, it does not surprise me at all. I half expected it.

Oh, and Capital One Direct Banking cut their online savings rate again, from 3.25% APY to 3.00% APY.

First National Bank of Omaha (FNBO Direct) cut their rate from 3.25% APY to 2.80% APY.

Somehow, I am still managing to get 3.25% APY in my Sovereign Bank money market account.

GMAC Bank is still offering 4.00% for a 12-month CD.

Fidelity Money Market fund (SPRXX) has a 7-day yield of 2.04%.

Microsoft stock has a dividend yield of 2.71%.

-- Jack Krupansky

Reduced credit limit on one of my credit cards

I had been reading for some time about people seeing their credit card companies reduce their credit limits, but it had not happened to me, until last week. One of my three credit cards, branded for Frontier Airlines by Barclays Bank, cut my credit limit by $750, saying that "Your credit line has been lowered to reflect your spending." They go on to say "Based on your spending history and since you are using only a small portion of your available credit, we have lowered your credit line to..."

Actually, my spending with the card for the past seven months has been zero. I used the card in May to pay for part of my move to New York City. Other than that one month I have not used the card over the past year.

The amusing thing is that I had not even noticed that they automatically bumped up my credit limit after I ran near the limit in May, so the cut actually leaves me with about $250 more credit that I had before the trip in May and which I thought that I still had. So, I almost feel that I am ahead of where I thought I was.

It is not my preferred card since I have a card (Household Bank from HSBC) that gives 2% cash back, but it is my second choice since it earns Frontier air miles for all charges.

Still, it is a bit disheartening to see your credit limit get dinged.

-- Jack Krupansky

Initial Kiva loans

I forgot to mention that my primary criteria for my initial Kiva loans was to make the final contribution of $25 or $50 so that the full amount of each micro-loan would be funded so that I would be sure that the loan would proceed immediately. In reality, that is not usually necessary since many of the micro-loans have already been disbursed by the time they are posted on the Kiva.org Web site. Still, it is nice to see the process completed promptly and the loan cleared through the system. I did not want my money to be sitting around idle.

Once I start getting repayments, I will no longer use this as my top requirement. Hopefully I can get to the stage where every month I get enough repayments to contribute to a new micro-loan regardless of how much of the loan has been funded.

Funding micro-loans in Kiva is a great response to all of the global anger about all of these big banks that require all of these bailouts and are not lending to people who can really use the money anyway. If you want a new world order that is not controlled by big banks, Kiva is a great way to go. It is an alternative to begging or forcing big banks to give "handouts" to "poor people."

-- Jack Krupansky

Trying out Kiva.org for micro-lending around the world

I still have not decided what to do with my extra $20, but I did decide to go ahead and try out Kiva.org which lets you participate in micro-lending around the world. I actually funded my Kiva account with enough money to fund a dozen micro-loans in the $25 to $100 range. The actual micro-loans are in the $225 to $2,500 range with a number of lenders such as myself kicking in $25 or more for each loan. I figured that since there was a chance that a single loan might fail, a dozen loans would have a better chance of giving me reasonable success and personally give me a broader perspective on the failure rate as well as exposure to different parts of the world and different types of micro-entrepreneurs. Note that Kiva micro-loans do not pay us "lenders" any interest, but they do pay us back our principle, unless they fail.

I believe that the micro-entrepreneurs (borrowers) are in fact paying interest, but that the local micro-lenders keep most or all of that interest to fund their operations and expand their capital for additional loans. I do not know whether Kiva gets any of that interest. I just know that Kiva does not pay any interest to us lenders. In addition, Kiva "suggests" that you make a 10% contribution to Kiva. I decided not to make any donations at this time. I will see how things work out as the loans become due and then decide whether to make a donation.

You fund your Kiva account via PayPal and then make loans from your Kiva account. When loans get repaid you can then choose whether to use the proceeds to fund additional loans or to take your money out.

It will be interesting to see how the current economic recession impacts these micro-entrepreneurs around the world.

Note that the borrowers are very small businesses, typically individuals. The loans are to support their businesses. These are not consumer loans.

Also note that Kiva does not loan directly to the borrower. There are a number of micro-lending "banks" (Kiva calls them Field Partners) in areas around the world. Lenders like me are providing the capital (through Kiva) that these micro-lenders are then disbursing to the micro-entrepreneurs.

The micro-lenders also provide support and advice to the micro-entrepreneurs. Some also require borrowers to collaborate in groups to support each other. The goal here is to increase the likelihood that the micro-loans really will improve the business of the micro-entrepreneurs so that they do earn enough to repay the loans.

The term of a micro-loan may only be five to eight months, but sometimes a year or maybe even eighteen months. The idea is that the loan should have an immediate impact on business. The first payment may not be due for three months or so. For my initial loans a bunch have an initial payment in February or March. One does not have an initial payment until June.

I am not particularly thrilled that I earn no interest, but it is nice to be able to see the face, name, and details for each micro-loan. The theory is that this money is really making a difference in the lives of real people around the world.

It is also nice to know that these micro-loans are actually helping "the working poor" to maintain and even enhance their income, rather than simply offering them a "handout."

It turns out that many of these micro-loans have already been made by the micro-lender by the time we see them on the Kiva web site, usually within the past few weeks. The micro-lender has decided that they have enough funds on hand to go ahead with the loan and is essentially selling the loan to us micro-lenders through Kiva and then the proceeds of that sale is capital for making other loans.

Now, I still need to figure out what to do with my extra $20. It is not even enough to make the minimum Kiva loan of $25.

-- Jack Krupansky

Christmas present for GM: Federal Reserve agrees to make GMAC a bank holding company

GMAC has been struggling to avoid bankruptcy and has been trying to raise capital in a bid to become a bank holding company so that it can get access to cheap money from the Federal Reserve and the U.S. Treasury bank bailout. Yesterday the Federal Reserve agreed to approve GMAC's application on an emergency basis. So, GMAC is now a bank.

The approval hinges on GM and Cerberus, each currently owning roughly half of GMAC, divesting most of their ownership of GMAC.

This is a fairly good deal. It dramatically increases GMAC's ability to raise capital to fund consumer car loans for GM customers. It helps push along the restructuring of GM by removing a management distraction and forcing GM management to focus on building profitable vehicles rather than profiting from financing. It helps to rebuild the banking system since GMAC will now be on a level playing field with other banks rather than GM competing with banks for consumer financing.

My biggest concern: With easy access to capital, GMAC Bank may no longer need to pay 3.75% APY interest on my savings account!

GMAC has been struggling to convince debt holders to agree to a debt for equity swap. GMAC has been incrementally sweetening the deal, but PIMCO and others were holding out. There was a hope that enough of the holdouts would agree by Friday. I do not know if the Fed deal was predicated on the swap going through or whether the Fed approval makes the swap easier or harder or unnecessary. But either way, GMAC has reached their main goal of being approved for conversion to a bank holding company.

There may be another casualty of the Fed approval: This may mean the death of 0% interest car loans. It is unclear whether there will be a legal way for GM to subsidize the interest on car loans anymore. That may seem like a raw deal for consumers, but the truth is that the interest was simply bundled in as a higher car price anyway.

Hopefully this deal will help pave the way for other car companies and other industrial finance "arms" to be spun off into separate, formal, and proper banks. CIT also recently was approved for conversion to a bank.

A next step might be for GMAC to be merged in with some other, larger bank.

-- Jack Krupansky

Gasoline price declines to $1.65, seems headed for $1.50 and lower

The AAA Daily Fuel Gauge Report show that the national average retail price for a gallon of regular unleaded gasoline declined to $1.655.

January RBOB unleaded gasoline futures are at $0.7933, indicating that retail prices are headed for $1.39 to $1.44 within a few weeks, about 25 cents below the current price level.

All of this means more cash in the pockets of consumers and less pressure on their budgets as well as the budgets of businesses and governmental entities. It also means more traffic on the roads.

-- Jack Krupansky

What to do with an extra $20

I have an extra $20 bill right now. What can I do with it? That is, what can I do with it which would make a noticeable difference in my life or anybody else's life? Sure, I could simply put it in my wallet and spend it eventually on something or put it in one of my savings accounts, but it really would make a negligible difference. Even if I donated it to some allegedly "worthy" cause, would it really make any noticeable difference six months or a year from now? Sure, maybe $20 would buy a fair amount of food for some starving people somewhere in the world, but once again, what difference would that make a year from now?

Actually, I did just remember that there is something called Kiva.org which lets you participate in micro-lending around the world. I keep meaning to check into it. That may be my answer. It is a way to "make a difference" that that is not necessarily just a one-time thing or recurring cost.

-- Jack Krupansky

4-week T-bills still yielding 0.00%

For the third consecutive week the yield on 4-week T-bills in the weekly Treasury auction has come in at 0.000%. Nothing. People are actually bidding in the auction to give their money to the U.S. Treasury for four weeks for free. That is essentially the same as putting money in a zero-percent certificate of indebtedness. People bid to let Treasury hold their money for 13 weeks for a mere 0.041% annualized rate, or for 26 weeks for 0.289% annualized rate.

These insanely low rates are evidence of the large sums of money that are still sloshing around in the financial system despite all of the paper losses of the past year.

Note that if you just want the government to hold your money, use a zero-percent certificate of indebtedness and keep unlimited amounts of cash at the U.S. Treasury. Of course, you can also keep unlimited amounts of cash in many checking accounts and still get full FDIC protection and maybe even get more interest than a 13-week T-bill these days.

-- Jack Krupansky

Microsoft moving higher even as market moves lower

My main stock holding is Microsoft (MSFT). These past two days Microsoft has moved modestly higher even though the overall market has been weak. Usually that is a good sign, suggesting that somebody is "accumulating" the stock even as people are dumping most stocks. Or, maybe it is simply the company buying back its own stock. It may also simply be random noise which sometimes only looks like a real signal.

At the current share price of $19.28, the stock has a dividend yield of 2.70%, which is better than the yield of almost all money market funds.

-- Jack Krupansky

ECRI Weekly Leading Index indicator rises moderately but remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose moderately by +0.65% vs. -2.67% last week, and its annualized growth rate rose modestly to -30.0 vs. -30.3 last week, but is still near its record low for its 60-year history of data, which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With WLI growth hovering near last week's all-time low, the U.S. recession is set to worsen significantly in the coming months."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

My personal outlook is that: The U.S. economy that started in December 2007 and sharply accelerated in August is currently shows no sign of an imminent end.

Although the current economic reports show significant weakness, there is also a vast amount of potential stimulus in the pipeline that could kick-start the economy within the next couple of months.

-- Jack Krupansky

Full FDIC protection for checking accounts

I just received an email from Sovereign Bank reminding me that my personal (business owner) checking account is fully FDIC insured, even above the current $250,000 limit, since Sovereign is enrolled in the FDIC Transaction Account Guarantee Program and the interest rate is less than 0.50%. I do not currently need all of that protection, but it is nice to know that it is there.

-- Jack Krupansky

Sovereign Bank money market account interest rates fall sharply

Sovereign Bank's financial situation must be improving lately since they are no longer offering hefty new account bonuses and the interest rates they pay on money market accounts have fallen sharply. Granted, the Federal Reserve has slashed their rates even more sharply, but some banks still pay high interest rates to attract capital. I can only guess that Sovereign is now doing well enough to not need to work as hard to attract capital. I do know that sometime in Q1 they expect to become fully-owned by Banco Santander.

Back in late September a new money market account with a $10,000 balance earned 2.75% APY. $25,000 earned 3.25%. A 12-month CD earned 4.25%.

Today, a new money market account with a $10,000 balance earns 1.75% APY. $25,000 earns 2.50%. A 12-month CD earns 2.80%.

The good news is that these rates are still better than an average money market mutual fund and these bank deposit accounts are FDIC insured.

The actual rates your account earns depends on when you open the account. The bank updates their new account rates every Friday. How long they keep an open account at a given rate is still a mystery to me. Fortunately, my account is still earning the 3.25% APY rate, but that rate could fall at any time.

Capital One Online Savings still earns 3.25% APY for $10,000 minimum and First National Bank of Omaha earns 3.25% APY for no minimum. GMAC Bank pays 3.75% APY, but that is if you can stomach the stigma of the association with General Motors. All of these bank deposit accounts are FDIC insured.

-- Jack Krupansky

Sovereign bank makes me $300 richer

Back in September I opened a personal checking account and a business account at Sovereign Bank and deposited $15,000 in a money market account to take advantage of a new account promotion. I also agreed to use the debit cards for the two checking accounts at least six times. By opening these accounts and keeping that amount of money at Sovereign, I was promised new account bonus payments totaling $300 after 90 days. They kept their word. Exactly 90 days after opening the accounts, $150 appeared in each of the checking accounts, for a grand total of $300. I also earned a very decent interest rate on the money market account. So, overall this has been a good move.

The personal checking account does pay a tiny amount of interest as well. The business account does not pay any interest, but has the advantage that as a "non-interest bearing transaction account" with the bank enrolled in the new FDIC Transaction Account Guarrantee Program it has unlimited FDIC insurance. I do not happen to need that degree of protection, but it is nice to know that it exists.

-- Jack Krupansky

Crude oil really is trading below $40

The February 2009 crude oil futures contract closed at $39.91, with today being its first day of trading as the front month contract. The January contract closed at $33.87 on Friday, the February contract at $42.36.

Although declining demand is now a reality, the actual demand declines have been quite modest, especially compared to the price declines since the July 11, 2008 bubble peak which was driven mostly by wild speculation and momentum trading rather than actual demand which probably peaked last spring.

-- Jack Krupansky

Gasoline price continues to tick down again after rising all last week, poised to continue to slide with $1.50 in sight

The AAA Daily Fuel Gauge Report national average retail price for a gallon of regular unleaded gasoline declined to $1.663. That is only slightly higher than its trough price last week of $1.660.

January RBOB unleaded gasoline futures are at $0.8890, indicating that retail prices are headed for $1.48 to $1.53 within a few weeks, about 15 cents below the current price level.

-- Jack Krupansky

First National Bank of Omaha offers 3.20% for online savings

I just noticed a Web ad for First National Bank of Omaha (FNBO Direct) offering an interest rate of 3.20% or 3.25% APY for online savings, with no minimum. That is fairly decent. And that is FDIC insured.

I am not endorsing them per se, but simply passing along what I have run across.

A quick Google search does not turn up any negative information.

GMAC Bank offers a higher rate (3.68% or 3.75% APY.) Capital One Online Savings was higher, but now appears to offer the same 3.20% rate (3.25% APY.)

-- Jack Krupansky

VIX is still not properly understood

There is a good article on Bloomberg by Jeff Kearns and Michael Tsang entitled "VIX Failing to Forecast S&P 500 Drop, Rebound Loses Followers" which discusses recent difficulties that traders have had when trying to bet on market moves based solely on VIX, the implied volatility index for S&P 500 stock futures. Sure, sometimes VIX is a rock-solid indicator of market movement, but sometimes it is not. No undex is or can be 100% reliable at predicting the future. Lately, the problem is that the impetus for market movements has not always been visible to traders who use VIX until after the fact. At best, all VIX can tell you is what people are anticipating, not what will actually happen.

Four core problems with using VIX to predict the future are 1) this is our first big bear market since VIX was changed in 2003, 2) VIX anticipates market movements based on trading sentiment, but cannot anticipate events that might also influence trading sentiment, 3) the evolution of the role of hedge funds is constantly changing the role of stock futures and options, and 4) too many people "playing" VIX can distort the relationship between VIX and the market at times.

At a minimum, volatility in hedge fund redemptions is probably also causing significant shifts in VIX that might be mistaken as trader sentiment changes rather than non-trader sentiment changes.

There may in fact be some very good strategies that are based on VIX, but it is abundantly clear that there are plenty of bad or dangerous or unreliable strategies that lure in a lot of people.

-- Jack Krupansky

Size of stimulus plan growing

It is a measure of the magnitude of the current "recession with adjectives" that the projected and rumored size of the fiscal stimulus plan continues to grow. The latest rumor is that the goal will be to "create or save" 3 million rather than merely 2.5 million jobs over the next two years and that the price tag over two years is now projected at $775 billion in contrast to the original $500 to $700 billion. And, the plan is still evolving as the economy continues to deteriorate.

An open question is how much of that money will be front-loaded for the first year and even the first six months.

Another open question is what a follow-on revision might look like if after six months the result is too weak or the underlying economic problems turn out to be significantly worse than currently anticipated.

Not to mention the fact that the net job loss might be more jobs than the stimulus will supposedly create.

Not to mention the fact that there are millions of people who are underemployed or have given up hope of finding jobs as a result of the quirky economy of the past eight years and are not counted in the official unemployment number even though they are not working at anything near their peak of productivity.

The big question is how much money will be deployed in the first three or four months and how quickly that money results in an increase in economic activity by the time we hit the six-month milestone and need to judge whether to adjust the course of the stimulus plan.

Still, this is a good first step. There really is nothing better to do than to give the economy a good swift kick, the stronger the kick the better. And if the first kick is not enough, keep on kicking.

This kind of approach is very likely to assure that the economy does not slip into a depression.

-- Jack Krupansky

Gasoline price ticks down again after rising all week, may be stabilizing, but may continue to slide

The retail price of gasoline may be settling into a relatively stable range, ticking down yesterday after rising all week, but it may continue to slide unless crude oil recovers.

The AAA Daily Fuel Gauge Report national average retail price for a gallon of regular unleaded gasoline declined to $1.671 from $1.673. The trough price last week was $1.660. Compared to the massive declines of the past five months, this is relative stability.

January RBOB unleaded gasoline futures are at $0.9693, indicating that retail prices are headed for $1.56 to $1.61 within a few weeks, about 8 cents below the current price level. Actually, wholesale and retail prices are reasonable closely balanced, so there is no inherent trend other than what happens with retail demand or wholesale prices.

The open question is whether the current glut of crude oil continues, gets worse, or gets better, especially if OPEC does manage to engineer some form of reduction in output. There are simply too many question marks to reliably guess the trend. My suspicion is that there is still room for more decline since there are still too many people who are go-go for speculating in energy for the long term, even in the face of a worsening recession in the near term.

-- Jack Krupansky

Has Detroit been rescued?

Although the so-called loans by the U.S. Treasury to the Detroit car companies are now a done deal, it is not clear what that means in terms of their long-term viability. Sure, they can pay their bills for a couple more months, but even if the economy steadies, they may be even worse off in a couple of months when they have exhausted the loan funds, and it is quite debatable whether they will have completed significant restructuring within a couple of months that will be sufficient to change their cost structure in a radical enough manner to be profitable in this weakened economy. Can it be done? Sure, it can. Is it likely to be done? That questioned will be answered by the auto workers and the holders of their debt.

I suspect what will happen is that they will make a few restructuring steps, enough to convince the Obama Treasury that they are at least on a plausible path, so that they can then be "loaned" more money.

I suspect that most of the original debt holders are long gone and that most of the debt is held by hedge funds and distressed debt specialists who have bought it at the current bankruptcy price levels or moderately higher. It may be simply a question of what level of profit these speculators want on their investments. Maybe if they are paid with government-guaranteed preferred stock they will be willing to sell the debt at a reasonable price.

The basic negotiating strategy will likely be that they will offer the auto workers and debt holders a deal with the caveat that if negotiations fail, full-blown banktuptcy is the next step.

In short, the car companies have been pointed in the direction of a rescue, but whether they will continue to progress down that path is unclear.

In any case, the deal was about as good a deal as we could have asked for given the overall situation. The message is quite clear, "restructure now or die."

-- Jack Krupansky

Monthly GDP for October fell by -1.2% (-13.0% annualized), Q4 tracking for a -6.5% annualized loss

Monthly real GDP, one of the five primary economic indicators that the NBER Business Cycle Dating Committee (NBER BCDC) uses to judge recession start and end dates, fell sharply in October (-1.2% or -13.0% annualized) , according to Macroeconomic Advisers (MA). The government does not publish GDP data at a monthly level, but the NBER Business Cycle Dating Committee says that they refer to sources such as Macroeconomic Advisers (MA) and their MGDP data series. As Macroeconomic Advisers summarized GDP in September:

Monthly GDP declined 1.2% in October.  This was the fourth consecutive monthly decline following a peak in June.  Contributing to the decline in October were declines in PCE, spending on capital goods, construction, net exports, and others.  Nonfarm inventory investment made a small positive contribution.  The level of monthly GDP on October was 6.5% below the third-quarter average at an annual rate.  Flat readings on monthly GDP in November and December would imply a 6.5% annualized decline in the fourth quarter, identical to our latest official tracking forecast.

October marked a fourth consecutive monthly decline in real GDP off of the June peak and lower than the GDP level in June 2007.

Real GDP is -2.59% off of its June 2008 peak.

Annualized nominal GDP is running at $14.26 trillion. Annualized real GDP is running at $11.52 trillion.

If the NBER BCDC is the definitive expert on marking of recessions, MA is the definitive expert on measuring real GDP at the monthly level with their MGDP data series.

-- Jack Krupansky

Oops... Crude oil really is trading well below $40, at least for today

I made the mistake of trusting the NYMEX termination schedule for crude oil which said that the last trading day for the January contract was December 18, 2008. But, that date is not in line with the contract specification, which says:

Last Trading Day

Trading terminates at the close of business on the third business day prior to the 25th calendar day of the month preceding the delivery month. If the 25th calendar day of the month is a non-business day, trading shall cease on the third business day prior to the business day preceding the 25th calendar day.

Since December 25 (next Thursday) is clearly a holiday, the preceding business day is December 24 (Wednesday) and three business days before that is Friday, today.

I apologize for trusting NYMEX so blindly and not checking! Usually, they are quite reliable.

Nonetheless, although crude oil futures are currently trading at $35.74, that is for the January futures contract which ceases trading today. Monday, trading switches to the February futures as the front month, which is currently trading at $42.64. Basically, speculators who do not want to actually own the physical oil  are dumping the January contract and rolling forward into the February contract. So, even though oil is well below $40 today, that will not necessarily be the case Monday morning.

The February 2009 crude oil futures contract peaked at $148.17 on July 11, 2008. It has declined 71.90% from that peak price.

-- Jack Krupansky

Crude oil not really below $40, yet

Although crude oil futures did close at $36.22, that was for the January futures contract which ceases trading today. Tomorrow, trading switches to the February futures as the front month, which closed at $41.67. Basically, speculators who do not want to actually own the physical oil dumped the January contract today. So, even though oil was well below $40 today, that will not necessarily be the case tomorrow morning.

The February 2009 crude oil futures contract peaked at $148.17 on July 11, 2008. It has declined 71.38% from that peak price.

-- Jack Krupansky

Friday evening at the FDIC - two more banks fail

Friday evening the FDIC took control of two failed banks, arranging for Branch Banking & Trust (BB&T), Winston-Salem, NC to assume all deposits of Haven Trust Bank, Duluth, Georgia and for The Pecos County State Bank, Fort Stockton, Texas to assume all deposits of Sanderson State Bank, Sanderson, Texas. In other words, all deposits, including those above the $250,000 FDIC limit, were protected.

The FDIC does not give any advance notice of bank closures. In fact, it is usually a state banking regulator who does the closure and then FDIC is "named receiver" and then takes over and promptly arranges to sell as much deposits and assets as it can to a healthier bank.

The basic idea is to totally avoid old-fashioned "runs" on banks and pre-arrange the assumption of deposits by a healthy bank before the closure is even announced. In other words, there should be no disruption of service and no need for customers to lose any sleep.

There have been 25 banks that have been closed by regulators this year, which is a lot compared to a normal year, but miniscule considering that all that has happened this year and the fact that there are over 8,000 banks and savings associations in the U.S.

-- Jack Krupansky

Fed target rate is now effectively 0.25%

Although the Federal Reserve FOMC surprised everyone by cutting their federal funds target rate not just by three-quarters of a point to 0.25% but to a "target range" of 0.00% to 0.25%. But, all the banks cut their prime rate by three-quarters of a point from 4.00% to 3.25%. So, the fed target rate is effectively 0.25%, but the Fed has the flexibility to treat the rate as 0.00% or anything in between as conditions warrant.

Note that federal funds trade in a range anyway. Recently, the range had been between 0.01% and 1.00% and averaged below 0.25%, so there had been an implicit deline in demand in the market of more than three-quarters of a point even without FOMC "action."

It is not clear which rate is more significant to the economy, the prime rate or the inter-bank overnight lending rate. On the other hand, the difference (less than a quarter point) may not be significant enough to detect at a macro level.

The real bottom line here is that the Federal Reserve is assuring that the major banks will have all the money that they might need. That does not mean that banks will lend to any but the most creditworthy borrowers, but that is a factor that the Federal Reserve cannot control with the federal funds rate.

-- Jack Krupansky

Gasoline price decline screeches to a halt and makes a U-turn

It was great while it lasted, but the decline of gasoline prices has finally ended, at least for now, and the national average price for a gallon of regular unleaded gasoline has started to rise again. It hit a low of $1.660 on Monday and has risen for the past two days.

A big part of the reversal and gain is uncertainty over the impact of any OPEC output cuts. It is very unclear exactly how much excess supply is currently being produced, how much excess inventory is currently being stored in unneeded ships that do not count in the official inventory numbers, and the trend in demand. Traders and speculators can make assumptions and push up prices, but until the cuts are official and in operation, we will not know. Eventually traders and speculators will finish their current "push" and we will see whether OPEC members have enough discipline to enforce the cuts and whether supply really does fall to true demand.

Another factor here is that despite the economic turmoil, people are getting used to low gasoline prices and actually enjoying the holiday season. Traffic is terrible here in Manhattan and the streets are mobbed with tourists. I see a lot of school buses with kids coming in from outside the city. Cheap gasoline is enabling this "boom" in travel. How this increase in demand trends after the holiday season is another matter.

The AAA Daily Fuel Gauge Report national average retail price for a gallon of regular unleaded gasoline has risen to $1.667.

January RBOB unleaded gasoline futures are at $1.0900, indicating that retail prices are headed for $1.69 to $1.74 within a few weeks, about 5 cents above the current price level. Actually, wholesale and retail prices are reasonable closely balanced, so there is no inherent trend other than what happens with retail demand or wholesale prices.

-- Jack Krupansky

Even the best and the brightest of college endowment funds are getting slammed

Sure, there has been a bear market over the past year, but with all of their resources and sophistication you would have thought that the top university endowment funds would have repositioned themselves to avoid the brunt of the bear market and financial crisis. But, no, they in fact managed to pre-position themselves in a variety of "alternative" investments which in fact became very illiquid and resulted in dramatic paper losses which would be much worse if they actually tried to liquidate many of these positions in such assets as mortgage-backed securities, real estate, commodities and natural resources, and hedge funds. Harvard, Yale, Michigan, Columbia, you name them, they all have whopping paper losses, upwards of 25% to 30% and potentially more. What all of this illustrates is that the financial system and investment landscape has broken down to an unprecedented degree that is normally only associated with a depression.

Why did this happen? It happened simply because traditional common stocks were no longer attractive to so-called "institutional" investors, resulting in an excessive level of over-investment in so-called "alternative" investments, which help to fuel the real estate, commodities, and asset-backed securities "booms". Unfortunately, a lot of those alternative investments have proven to be one-way or dead-end streets with bursting bubbles at their ends.

What all of this means is that our financial system and investment landscape is seriously out of whack and in serious need of restructuring. A simply bailout will not do the trick, even $1 trillion would not be enough, but we may need to get the economy basically limping again before it will be strong enough for serious restructuring.

A failure to perform all of the needed restructuring would be a sure recipe for a depression, but I feel confident that we have enough smart people on the job now to be reasonably confident that we will have a much more sound financial system and investment landscape a few years from now. Still, there is plenty of room for Congress and others to make things even worse than they already are.

-- Jack Krupansky

Is deflation becoming a big problem?

I see increasing references in the media to deflation, but the simple truth is that we are a long way from true deflation. Sure, headline consumer prices declined by -1.0% in October and now -1.7% in November and that seems awfully deflationary, but we need to look to core prices to determine the underlying trend. Just as the Federal Reserve "ignored" high inflation when energy and commodities prices were soaring, we now need to "ignore" large price declines as energy and commodities prices revert back to their normal range before the commodities speculation took off a couple of years ago. In fact, ex of food and energy price changes, the inflation rate was flat in November after being down very slightly in October and year-over-year prices are up 2.0% and up 0.4% if the past three months are annualized.

In short, we are in fact seeing some welcome disinflation but are we are not yet seeing true deflation. Core consumer prices would have to come down substantially to indicate true deflation. Even if core prices decline for several months, that would not be enough to unwind much of the increase over the past three years with the commodities boom.

-- Jack Krupansky

When did Bernie Madoff initiate his fraud?

The main question I have about the Madoff scandal is when did Bernie Madoff initiate his fraud? Has he been doing it all along, or was he on the up-and-up originally and only decide to "go Ponzi" when he started having trouble achieving decent returns in recent years? In other words, what was the real turning point? Was he always a crook, or did he just get into a bind and pride and ego led him to "cheat"?

Given that he has been reporting smooth results for many years, I suspect that he engaged in a fraudulent variant of "earnings management" a long time ago, shifting results between years to show a smooth return, but eventually he got to a point where the net return was too slow to be easily smoothed up to his trend rate. At that stage he may have headed down the slippery slope of "borrowing" from imagined future returns. In other words, maybe his returns at that stage were largely or significantly fictitious.

It may only have been when the credit crisis began in 2007 and investors began taking money out of investments that he was suddenly faced with converting imagined returns over the years into hard cash by using incoming investments.

So, maybe he was not a true Ponzi scheme until that point where incoming investments were directly paid out to old investors.

This might explain why he was not discovered earlier -- his cheating may have been too modest until quite recently.

-- Jack Krupansky

Have you exercised appropriate due diligence?

This may go down as the catch-phrase of the year: "exercised appropriate due diligence." As in "have you exercised appropriate due diligence?" This comes from a Bloomberg article on the Madoff scandal by Katherine Burton entitled "Tremont Invested More Than Half Its Assets With Bernard Madoff":

"We believe Tremont exercised appropriate due diligence in connection with the Madoff investments," the firm said today in a statement. Tremont parent OppenheimerFunds is a unit of Springfield, Massachusetts-based Massachusetts Mutual Life Insurance Co.

So, here we have an investment firm (Tremont) which was responsible for vetting customer investments in another investment firm (Madoff.) It would seem that they should be on the hook for poor vetting, but maybe they can escape because of some strange or obscure definition as to how much vetting is "appropriate."

At a minimum, this provides plenty of fodder for reform. Hedge funds as we know them need to go.

Nonetheless, we all need to be on guard and challenge our own assumptions as to whether we have "exercised appropriate due diligence."

-- Jack Krupansky

Is bankruptcy a possibility for GM?

Although a bailout of Detroit still looks fairly likely, the underlying question is the exact financial status of GM (and Chrysler) and how any bailout can actually help them. With the recent steep declines in car sales and prospects for economic weakness in the next few months, even I have to conclude that GM is likely to need to file for bankruptcy within the next two months. It is not even clear if $8 billion in bailout funds will tide GM over for two months if sales continue to decline. If they had decent sales, restructuring would be doable, but with declining sales, restructuring on the fly with all of their debt, health care, and retirement obligations becomes problematic. If even Toyota is struggling and has decided not to open a new plant, then you know things have to be really bad for Detroit.

There are probably still quite a few tricks GM can pull to limp into January, but the question is whether it is really worth their effort if sales are still trending downwards. They might in fact be better off slamming on the breaks, shutting down all production and sales, filing for bankruptcy, and then seeking bailout funds simply to pay minimal bills as they spend several months working through restructuring.

A basic restructuring problem is how to deal with their massive debt. Bankruptcy is the easiest and cleanest way to deal with the debt burden. GM can probably continue to limp along with the debt, but that is not viable in the long term. There are probably a few trick that Treasury can do to help out with the debt (e.g., swap a Treasury guarantee for a much lower rate), but even that does not solve the long-term viability issue.

We will have to see what "plan" Treasury comes up with. If the conditions are onerous enough, GM might decide that bankruptcy is actually less painful.

-- Jack Krupansky

Madoff lesson: diversification

If there are any easy lessons from the Bernie Madoff scandal, it is one of the three basic lessons of Investing 101: diversification, diversification, and diversification. Here in the 21st Century, there is simply no good excuse for putting all of your eggs in one basket. Sure, maybe there might be some times when it is tempting, but the guideline has to be that if you do not diversify, you essentially have nobody else to blame if that one basket blows up. Sure, maybe you sincerely believe that this one basket will not blow up and maybe everybody says that it can't blow up, but a key lesson from history is that without exception every basket has the potential to blow up.

-- Jack Krupansky

Scene of the crime

All of these years, since early 1999, I have walked past the scene of a great crime and never realized it. Whenever I had some money to deposit or some paperwork to do at one of my brokerage firms, Muriel Siebert & Co., I would walk over to the so-called Lipstick Building here in midtown Manhattan, sign-in with security in the lobby, take the elevator to the 17th floor, walk down the hallway past the restrooms and some random, nondescript "investment" firm, and enter Siebert's office at the end of the hall. I never paid much attention to that random "investment" firm that I passed in the hall since it was simply a nondescript door with a nondescript little sign next to it. Nothing notable whatsoever. But, this morning, an article in The New York Times by Diana Henriques and Alex Berenson entitled "The 17th Floor, Where Wealth Went to Vanish" informs us that the nondescript office I walked past so many times in the past 10 years was in fact the "epicenter of what may be the largest Ponzi scheme in history":

The epicenter of what may be the largest Ponzi scheme in history was the 17th floor of the Lipstick Building, an oval red-granite building rising 34 floors above Third Avenue in Midtown Manhattan.

A busy stock-trading operation occupied the 19th floor, and the computers and paperwork of Bernard L. Madoff Investment Securities filled the 18th floor.

But the 17th floor was Bernie Madoff's sanctum, occupied by fewer than two dozen staff members and rarely visited by other employees. It was called the "hedge fund" floor, but federal prosecutors now say the work Mr. Madoff did there was actually a fraud scheme whose losses Mr. Madoff himself estimates at $50 billion.

Huh! Who knew!?!?

Just to correct The Times, Bernie's offices are only a portion of the 17th floor. Siebert has the rest.

Mind-boggling. It just goes to show how in today's world $50 billion is mere chump change.

This afternoon coming back from my noontime walk up to Central Park I noticed some TV camera guys and photographers just off Lexington Avenue at 64th Street. I asked one TV cameraman what was up and he mentioned "the gentleman with the $50 billion." That was 133 East 64th Street, just west of Lexington Avenue. Hard to say if it was the guy's apartment or some office he was visiting. Actually, a Google search shows that Ruth Madoff (Bernie's wife) used that address for an election contribution financial disclosure statement. There are numerous references to that address for Bernie as well. Note: That is not a fancy-looking building.

Lucky for me, I am too poor to have earned the right to invest in Bernie's "scheme." But, the owner of one of my bank accounts, Banco Santander (who owns Sovereign Bank), is high up on the list of firms with "exposure."

-- Jack Krupansky

Fed likely to trim their target rate by three-quarters of a point on Tuesday

The January CBOT federal funds futures contract is priced at 99.6800, suggesting a target rate of 0.32%, which implies a 100% chance that the Federal Reserve FOMC will cut their target rate on Tuesday by at least a half point to 0.50% and a 72% chance that the FOMC will cut by three-quarters of point to 0.25%.

In short, a half-point rate cut is baked into the cake and a three-quarters point cut is quite likely but not a certainty.

Usually, the market has a more certain view on what the Fed will do, but given the current state of the economy in a "recession with adjectives" and very uncharted territory, the market is credibly somewhat uncertain.

I would lean towards a half-point cut, but given the state of the economy and hints of deflation and sharply falling employment and a potential collapse of the auto industry looming, this is not exactly the time for the Fed to be pulling punches. So, I would be more surprised if they cut only by a half-point than if they went for the full three-quarters point.

Meanwhile, there will be plenty of opportunities to earn more than 2% or even 3% on your cash at banks since they really need the cash. Thank your favorite deity for FDIC insurance.

-- Jack Krupansky

More stimulus needed

I do appreciate the desire of the incoming administration to put a lot of resources into infrastructure improvements, but the accelerated pace of job loss strongly suggests that even $350 billion over the next year focused on infrastructure will simply not be enough to "trickle" around to the full economy fast enough to recover from current job loss or job loss to be expected next year before the stimulus kicks in strongly enough to induce employers to stop cutting jobs, let alone start hiring again in a dramatic fashion. Besides infrastructure investment that will directly create certain kinds of jobs and boost certain sectors of the economy, there needs to be direct stimulus to consumers on an ongoing monthly basis until we see at least a hint of health returning to the jobs market. Something on the order of $50 billion per month is needed, like, now, or starting ASAP in February. That number could decline as employment picks up, but it actually could take two full years or more to recover from the business confidence destruction we have seen to date. That would be $600 billion per year. And that would be on top of the $250 to $350 billion per year for infrastructure investment.

So, we are potentially looking at close $850 to $950 billion per year, close to $1 trillion per year, for at least two years.

Seriously, that is the magnitude on the destruction that has been done to our economy.

Absent any significant stimulus to support and resurrect the economy, it could take five to ten years to gradually rebuild the economy. Such an extended period of contraction and very slow growth would certainly qualify as at least a low-grade depression.

The open question is what will happen to employment and income and economic activity if the stimulus falls far short of that number and amounts to only $250 billion for instructure investment. The result would probably be something on the order of half a million jobs lost every month for upwards of a year and a half, spiking unemployment to 15% or above, and for a number of years. That may not qualify for a true depression, but try convincing anybody who is experiencing the loss of job and income.

The $500 to $700 billion number from earlier in the fall was before we knew that Detroit was in such deep trouble and before many of the current job cut announcements.

And if Congress botches the Detroit bailout and car sales continue to plunge, the outlook will only get worse and the required stimulus will only grow larger. But the prospect of Detroit imploding may have the advantage of convincing people that more stimulus is needed.

-- Jack Krupansky

Prepackaged bankruptcy would be better for Detroit, but...

Although it does look like a short-term "bridge" bailout for Detroit will in fact occur, it is true that a prepackaged bankruptcy would be a better deal, for the simple reason that it would allow Detroit to blow away debt and other obligations which are dragging down the companies. This would let Detroit move forward in a lean and more agile way. Unfortunately, arranging the details for a prepackaged bankruptcy of the complexity of GM and Chrysler is unlikely in the near-term.

Personally, I still believe that Detroit can in fact squeak by without either government aid or bankruptcy, but some amount of "backstop" aid will help to beat back the bears and hedge funds on Wall Street who amazingly think that it is actually okay to manipulate the markets and drive companies into the ground.

The good news is that radical restructuring is now virtually assured. I had been expecting it to take a couple more years, but it looks like the short-term bridge bailout will actually require that the companies come up with a plan to restructure sufficiently by March so that a "car czar" can determine whether they are viable enough to get further bailout aid.

-- Jack Krupansky

Bank of America agrees to pay extortion in Chicago

Although it still seems to remain true that Bank of America does not have any obligation to extend lending to a failed Chicago firm whose ex-workers are demanding severance and vacation pay -- from the bank, the bank did in fact decide to "loan" the company enough money to pay off the workers. Yes, the workers are owed the money by the failed company, but BofA does not have any legal oblogation here. The governor of Illinois threatened to withold future state business from the bank if they did not comply with his extortion demand. Curiously, this same governor was in fact arrested toay for... extortion, demanding that companies make donations to him in exchange for state business and possibly even appointment to be the replacement for Senator Barack Obama.

BofA had little choice in this matter. Sure, they could have fought it and even won, but that would have been a classic Pyhrric victory and a public relations black eye. By caving and agreeing to "loan" the extortion demands, they can come out of this looking like the "good" guy, or at least a "victim" of Chicago politics.

Worst case, two months severance pay and, say, a month of vacation pay for 300 workers earning, say, $50,000 per year, comes out to about $3.75 million. That is chump change for BofA. It is a bad precedent, but it probably is their best option, and maybe that is simply the cost of doing business in this economic climate.

-- Jack Krupansky

Bad math at Bloomberg for T-bills

Demand for T-bills is so great that the 3-month T-bill was trading at a negative discount today. That means that you would receive less at maturity than you paid a trader for the T-bill. Bloomberg covers the story in an article by Daniel Kruger and Cordell Eddings entitled "Treasury Bills Trade at Negative Rates as Haven Demand Surges", but they screwed up their math in one example. They say:

If you invested $1,000 in three-month bills today at a negative discount rate of 0.01 percent, for a price of 100.002556. At maturity you would receive the par value for a loss of $25.56.

Not quite. $1,000 in 3-month T-bills would have cost $1,000.02556. The value at maturity would be $1,000, for a net loss of $0.02556. They were off by a factor of 1,000.

I suspect that they meant to refer to a purchase of 10,000 T-bills or a face value of $1,000,000. At a price of $100.002556 per T-bill, $100 face or par value, the total cost would be $1,000,025.56. Paying $1,000,000 at maturity, the net loss would be their $25.56.

That is if you bought the T-bills on the open market, but if you bought them directly from the U.S. Treasury via TreasuryDirect in the weekly auction today, the price was $99.998736 per $100 T-bill (a rate of 0.005%) or a total cost of $999,987.36, so you would have a net gain of $12.64. So much for $1 million being "wealth", earning you a mere 50 bucks a year.

Note that a single T-bill has a face value of $100, but you can only buy them in units of $1,000 face value, or multiples of 10.

The 4-week T-bill actually auctioned at a price of $100 per $100 face value or a rate of 0.000%, which is unheard of. What kind of person gives their money to the government for free?!?! Well, some funds have a requirement to be liquid and to be in Treasuries, so they have little choice.

-- Jack Krupansky

Would I buy an iPhone for $99?

I currently have no desire to get an iPhone. Would I buy one at Wal-mart for the rumored price of $99? Sure... but only for an unlocked phone without any mandatory cell service contract. Actually, I would prefer to buy an iPod touch for $99, but I expect that I will need to "dream on." I do not need or want a cell phone, but I could use a replacement for my six-year old Sony/Palm PDA.

Sure, I can spring for $99 or even $199, but adding $70 to my monthly budget is out of the question.

-- Jack Krupansky

Gasoline under $1.70, still further to fall

The AAA Daily Fuel Gauge Report national average retail price for a gallon of regular unleaded gasoline has fallen to $1.698, significantly less than half its peak price in July.

January RBOB unleaded gasoline futures are at $0.9630, indicating that retail prices are headed for $1.56 to $1.61 within a few weeks, about 10 cents below the current price level.

That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Energy commodities prices may begin to stabilize, especially if market participants begin to expect that Team Obama and massive fiscal stimulus are on the verge of turning the economy around. One scenario is that prices pop up on psychological expectations, and then reverse and head back down as people realize that even with massive stimulus a recovery will take some time.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

Some people are suggesting that we are seeing deflation, but the recent sharp declines on commodities-driven prices is simply the unwinding of the great speculative bubble in commodities of the past five years. If we see crude oil back down under $5 and gasoline under $1 and gold under $250, that would be an indication of true deflation. Besides, year-over-year core consumer prices rises are still above 2%. It takes more than a few months for there to be any sea-change in the price change trend. Currently, we are simply experiencing some welcome disinflation.

-- Jack Krupansky

What does it mean to create or save 2.5 million new jobs?

P-E Barack Obama has promised an "Economic Recovery Plan that will create or save 2.5 million new jobs." I am still baffled by the inclusion of "or save" in that phrase. Sure, economic stimulus can "save" jobs, but why would you lump job creation and job "saving" in the same number? It renders the number meaningless. As it stands, if Obama were to claim that he had "saved" 2.5 million jobs over the next two years without creating even a single new job, he could still claim that he has fulfilled his promise. Most people, myself included, would like to presume that an Economic Recovery Plan will create a net of 2.5 million new jobs, even as it "saves" countless millions of existing jobs.

It is annoying that the media has not called him out and demanded clarification on what is being promised.

It is actually rather surprising that the media has not discussed this lack of distinction between creating and saving jobs.

I am all for saving jobs, but we need to put more energy into creating new jobs for the 2 million people who lost jobs over the past year.

-- Jack Krupansky

Does Bank of America owe the Chicago sit-in workers any money?

As far as I can tell, Bank of America does not have any obligation to extend lending to a failed Chicago firm whose ex-workers are demanding severance and vacation pay -- from the bank. Sure, BofA has gotten bailout money from the government which it is expected to lend, but the theory is that lending is supposed to be to creditworthy borrowers. There was never any intention that the bank bailout investments were to be used for charity handouts.

That said, the workers' situation is a classic political "third rail." No Democratic politician is going to stand up and play the role of Mr. Scrooge three weeks before Christmas. Even a lot of Republicans, who personally think such an obligation on BofA is preposterous and outrageous, are going to keep their mouths shut.

Given that the amount at stake may be peanuts compared to the degree of blackmail that the State of Illinois is proposing to exercise against BofA, it might in fact be best for BofA to simply go ahead and make the "loan" to the dead business and simply write it off as the cost of doing business, Chicago style. The real downside of doing so is that it would create a truly horrendous precedent. There may not be a better option.

Another alternative would be to simply return the $15 billion bailout investment to the government and then watch Congress squirm and try to figure out how to bailout the workers even as they struggle how to bailout Detroit.

Obama seems to be on the workers' side, but I suspect that he also sees the situation as a classic "third rail" to be avoided and is essentially sitting on the fence and letting BofA take the heat, for now. He obviously knows how to play politics, Chicago style.

Shame on him. And double shame for failing to realize that this is a great opportunity to introduce a new government social safety net program to provide cash grants to ex-workers whose jobs have been permanently eliminated at a time when re-employment is extremely difficult. Workers in such a situation should be able to apply to have the government pay their mortgage or rent for at least six months to a year or even two, in addition to normal, temporary unemployment insurance payments. That would cushion the impact of abrupt company shutdowns such as this case. The government should also have the right to go to the head of the line as a creditor of the failed company to recoup any payments from the proceeds of any liquidation of the company.

-- Jack Krupansky

Friday evening at the FDIC - United Bank acquires First Georgia Community Bank

Friday evening the FDIC took control of only one bank, arranging for United Bank, Zebulon, Georgia, to assume all of the deposits of First Georgia Community Bank, Jackson, Georgia. In other words, all deposits, including those above the $250,000 FDIC limit, were protected.

The FDIC does not give any advance notice of bank closures. In fact, it is usually a state banking regulator who does the closure and then FDIC is "named receiver" and then takes over and promptly arranges to sell as much deposits and assets as it can.

The basic idea is to totally avoid old-fashioned "runs" on banks and pre-arrange the assumption of deposits by a healthy bank before the closure is even announced. In other words, there should be no disruption of service and no need for customers to lose any sleep.

There have been 23 banks that have been closed by regulators this year, which is a lot compared to a normal year, but miniscule considering that all that has happened this year and the fact that there are over 8,000 banks and savings associations in the U.S.

-- Jack Krupansky

Gasoline finally under $1.75, still further to fall

The retail price of gasoline finally fell to $1.75 on Saturday.

The AAA Daily Fuel Gauge Report national average retail price for a gallon of regular unleaded gasoline has fallen to $1.733, significantly less than half its peak price in July.

January RBOB unleaded gasoline futures are at $0.9449, indicating that retail prices are headed for $1.54 to $1.59 within a few weeks, about 15 cents below the current price level.

That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Energy commodities prices may begin to stabilize, especially if market participants begin to expect that Team Obama and massive fiscal stimulus are on the verge of turning the economy around. One scenario is that prices pop up on psychological expectations, and then reverse and head back down as people realize that even with massive stimulus a recovery will take some time.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

Some people are suggesting that we are seeing deflation, but the recent sharp declines on commodities-driven prices is simply the unwinding of the great speculative bubble in commodities of the past five years. If we see crude oil back down under $5 and gasoline under $1 and gold under $250, that would be an indication of true deflation. Besides, year-over-year core consumer prices rises are still above 2%. It takes more than a few months for there to be any sea-change in the price change trend. Currently, we are simply experiencing some welcome disinflation.

-- Jack Krupansky

Economic depression watch?

I am in the process of starting a new blog, Economic Depression Watch, which will focus on the factors that could determine whether the U.S. economic may or may not slip into a depression in the near future. My personal opinion is that a depression can be easily avoided and will most likely be avoided, but technically one is possible if the government behaves stupidly enough.

The new blog is at: http://economicdepressionwatch.blogspot.com/

I have also registered www.EconomicDepressionWatch.com with stealth redirection to the new blog, but it may take some time for the new domain name to become functional. The blog is already functional, although I have yet to start adding "real" content.

-- Jack Krupansky

Why can't I see charts and quotes in Google Finance using Google Chrome anymore??!!

Just a couple of days ago I noticed that Google Finance was not displaying charts or quote information for stocks when using the Google Chrome browser. I thought maybe it was some service outage on Google's end, but I just tried again and those features are still broken. Even worse, those features do work fine in Microsoft Internet Explorer. What happened?!?! I have no idea. It is amusing that Google Finance is working better with IE than Chrome. Sigh.

I did a little Googling, but found no mention of the problem.

Wait... I just found something:

I discovered that if I empty the cache then pages would display properly.

See: http://www.google.com/support/forum/p/Chrome/thread?tid=6ba0171cffa12713&hl=en

But first I simply tried to empty the cache from within Chrome by going to "Customize", "Clear browing data..." and selecting only the checkbox for "Cache" and clicking the "Clear Browsing Data" button, but this still did not fix the problem.

So, I navigated to C:\Documents and Settings\xxxxxxxx\Local Settings\Application Data\Google\Chrome\User Data\Default\Cache and saw that there were five files there, "data_0" through "data_3" and "index". I suspected that maybe those cache files might be corrupted, so I deleted them (after closing Chrome first). Nope, that did not fix the problem.

Next, I cleared the browsing history from within Chrome. Still doesn't work!!!!

So, I bit the bullet and selected all of the check boxes to clear the download history, cookies, and passwords. Now... it works fine!!! Yeah!!!

My suspicion is that the cookies were the problem, so if you run into this problem, start by clearing the cookies. Unfortunately, my browsing history is now gone. Poof. Sigh. Maybe some cookie got corrupted. But, it is curious that Google Finance was still working fine with IE.

-- Jack Krupansky

The NBER recession anncouncement

The full text of the announcement of the start date of the recession by the National Bureau of Economic Research Business Cycle Dating Committee is available on the NBER web site.

One interesting change from past announcements by the committee is the emphasis they now put on "real Gross Domestic Income" (GDI), rather than GDP or real income. They have also started disclosuing a little more of their specific data sources and calculations. In fact, it appears that they did not even use monthly GDP this time, focusing more on employment. Their exact calculation for real income minus transfers is still a bit fuzzy.

-- Jack Krupansky

ECRI Weekly Leading Index indicator rises very sharply but remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose very sharply by +2.79% vs. -1.04% last week, but still near its worst level in 13 years, and its annualized growth rate rose moderately sharply to -28.5, but still near its record low for its 60-year history of data of -29.2 last week, which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "Despite the first uptick in WLI growth since mid-September, it remains in a steep cyclical downtrend, suggesting that the recession will deepen further in the coming months."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there some amount of stimulus as well as potential problems in the pipeline.

My personal outlook is that: The U.S. economy that started in December 2007 and sharply accelerated in August is currently shows no sign of an imminent end.

Although the current economic reports show significant weakness, there is also a vast amount of potential stimulus in the pipeline that could kick-start the economy within the next couple of months.

-- Jack Krupansky

Gasoline finally under $1.80, still further to fall

The stabilization of crude oil in the $50's is now history. Crude is now below $45. Wholesale gasoline is now under $1.00.

The price of retail gasoline was declining at a slower pace for the past week, but the pace of decline may pick up again now that the price of crude oil has moved down sharply. The AAA Daily Fuel Gauge Report national average retail price for a gallon of regular unleaded gasoline has fallen to $1.789, significantly less than half its peak price in July.

January RBOB unleaded gasoline futures are at $0.9720, indicating that retail prices are headed for $1.57 to $1.62 within a few weeks, about 15 cents below the current price level.

That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Energy commodities prices may begin to stabilize, especially if market participants begin to expect that Team Obama and massive fiscal stimulus are on the verge of turning the economy around. One scenario is that prices pop up on psychological expectations, and then reverse and head back down as people realize that even with massive stimulus a recovery will take some time.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

Some people are suggesting that we are seeing deflation, but the recent sharp declines on commodities-driven prices is simply the unwinding of the great speculative bubble in commodities of the past five years. If we see crude oil back down under $5 and gasoline under $1 and gold under $250, that would be an indication of true deflation. Besides, year-over-year core consumer prices rises are still above 2%. It takes more than a few months for there to be any sea-change in the price change trend. Currently, we are simply experiencing some welcome disinflation.

-- Jack Krupansky

Consumer confidence and the car companies

One interesting argument for giving the Detroit car companies a hefty bailout is the claim that consumers will not buy cars from a bankrupt car company due to concern about the vehicle warranty. GM is currently arguing that data shows that 30% of consumers who decided not to buy from GM did so primarily because of concern that they would be going bankrupt.

So, even though I still believe that GM, et al can somehow squeak by from a raw financial perspective over the next year without a bailout, this consumer confidence angle would argue strongly for giving them enough extra cushion so as to "guarantee" that they will not have to file for bankruptcy.

I hate the idea of the government bailing out companies, but I have a greater hate of Wall Street speculators attacking companies and spreading rumors and contrived speculation just to line their own pockets no matter who in the real world might be hurt by their exagerated claims. The car companies do need restructuring, but that is something than can be worked out, assuming that the companies can get a "time out" from the assaults of the hedge funds.

-- Jack Krupansky

Will the car companies get their money next week?

I find it heartening that the Detroit car companies are talking seriously about some serious restructuring. That dramatically increases the likelihood of their getting the money that they are asking Congress for.

Personally, I still think that all three companies will be able to limp through the coming year without any new capital, but that presumes that they do a fair amount of the restructuring of the kind that they are proposing to Congress.

In short, if they do all the restructuring that Congress demands, they will not need the money at all.

But, having that backstop credit available will help to keep the short-sellers at bay.

The bottom line is that bankruptcy of any of the Detroit Formerly-Big Three is very unlikely.

-- Jack Krupansky

Bill Richardson for Secretary of Commerce?

The latest leak from Team Obama is that Bill Richardson will be nominated to be Secretary of Commerce. I would have preferred to see him as Secretary of State, but since that position is no longer open, Commerce is about all that is left for him that makes any sense and that he has not done before.

One question I have is whether P-E Barack Obama will consider Commerce to be part of his core economic team. For example, should Commerce be driving the planning for any fiscal assistance to corporations such as Detroit? I think they should, but I am not in charge.

I also think that Commerce should be leading the charge on "smart" regulation, figuring out how to rewrite federal regulations on businesses to work better and be less expensive and restrictive at the same time.

One logical fiefdom for Richardson would be promotion of U.S. economic interests around the globe. That intersects with Hillary's fiefdom, but she will probably have her hands full with security and social programs at State.

Presumably, Richardson will be looking after promotion of U.S. exports, trade policy, and international economic agreements.

In any case, I think he is qualified for the job and will probably bring enough energy to the job to effectively make Commerce a legitimate and productive part of the economic team even if it is not today.

-- Jack Krupansky

How significant was the big stock market "plunge" on Monday?

A handful of negative economic reports were certainly a factor in the market decline on Monday, but that was not the full story. There was not any new news per se. Sure, the NBER Business Cycle Dating Committee officially called the start of the recession to be December 2007, but that was simply consistent with common knowledge. The ISM and construction spending reports were weak, but once again they were not inconsistent with the general view that the economy is weak enough to require $500 billion or more in fiscal stimulus over the next year. The real basis for the sharp market decline was simply short-term technical range trading. The market had drifted higher last week on light volume due to the holidays while many people were off. Lacking further immediate upwards pressure it was only natural for short-term technical traders (including banks and hedge funds) to reverse and bet on a move down. The negative "news" sure helped to accelerate the process, but it was more a matter of short-term momentum traders jumping on the bandwagon rather than any significant change in the economic outlook six to nine months down the road. In addition, plenty of traders are chomping at the bit to "test" the recent market lows. It may take them several attempts over the coming weeks, but they will keep trying.

Short-term traders will keep pushing the market hard one way and then reverse when volume peters out and push hard the other way, and repeat that process over and over. Overlaying this process is any longer-term trend that is gradually evolving. Funds may or may not be net sellers of buyers of stocks, or may be rotating between stocks that have differing weights in the market indexes, but ultimately funds will determine the overall, long-term market trend. In the intermediate term, hedge funds may also place speculative positions to bet on perceived market trends, which may then become self-fulfilling in the intermediate term (four to fifteen months), but not for the long term.

General uncertainty about the economic outlook while the incoming economic team gradually develops its economic recovery plan and then waits until January 20, 2009 to begin implementing it also adds to market volatility, even if it is overall a long-term net positive.

In summary, Monday was simply the kind of trendless market volatility that we should get used to expecting whenever there is significant uncertainty in the economic outlook. In no way did the market activity on Monday represent the longer-term market trend, but it may well represent the level of market volatility that we can expect until the economy is clearly on the mend.

-- Jack Krupansky

NBER decides that the recession started in December2007

The NBER Business Cycle Dating Committee (NBER BCDC), the quasi-official arbiter of dating of recession start and end dates, has officially declared that the current recession commenced with the payroll employment peak in December 2007. It had not been clear whether they would decide to use the peak of GDP or the peak of payroll employment as their top criteria, but they decided that there was a significant enough decline payroll employment that commenced on that date.

This decision should not be too big a surprise to anyone who has been watching the data.

By definition, December 2007 was both the end of the previous business cycle and the start of the current recession. The recession technically ends when the economy begins to recover, the so-called trough, rather than when the economy completely recovers from the decline of the recession.

The committee is not forecasting when the recession might end or how deep it might become, simply because that is not something that they do. They look solely at actual economic data and do not examine or get involved with forecasts.

-- Jack Krupansky