Read Warren Buffett's latest annual letter to his Berkshire Hathaway shareholders

It is that time of year again. Every year uber-investor Warren Buffett writes a public letter to the shareholders of his Berkshire Hathaway. The letter covering 2008 just came out.

My short summary of what he said about how 2008 went for Berskshire Hathaway: It's complicated. Some good, some bad, and a lot of ugly. As Warren puts it:

By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.

-- Jack Krupansky

Friday evening at the FDIC - two bank failures

It was a typical week at the FDIC. Friday evening the FDIC announced that two banks were closed this past week:

1. Heritage Community Bank, Glenwood, Illinois. MB Financial Bank, N.A., Chicago, Illinois assumed all of the deposits.
2. Security Savings Bank, Henderson, Nevada. Bank of Nevada, Las Vegas, Nevada, assumed all of the deposits.

That brings to 16 the number of failed banks in 2009.

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.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls sharply and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell sharply by -1.53% vs. +0.85% last week to a new 13-year low, but its annualized growth rate was unchanged at -24.1, remaining near its record low for its 60-year history of data of -30.2 for the week ended December 5, 2008, which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "The WLI has dropped to a new cycle low, clearly indicating that the recession will intensify in coming months, with no recovery in sight."

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 2008 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

Paul Volcker argues for splitting commercial and investment banks

In a recent speech, Paul Volcker, former Federal Reserve Chairman and current economic adviser to President Barack Obama, argues that we need to separate traditional commercial banking from investment banking in order to get a more stable banking system:

I think a primary characteristic of the system ought to be a strong, traditional, commercial banking-type system. Probably we ought to have some very large institutions -- or at least that's the way the market is going -- whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit. They ought to be the core of the credit and financial system.

This kind of system was in place in the United States thirty years ago and is still in place in Canada, and may have provided support for the Canadian system during this particularly difficult time. I'm not arguing that you need an oligopoly to the extent you have one in Canada, but you do know by experience that these big commercial banking institutions will be protected by the government, de facto. No government has been willing to permit these institutions, or the creditors and depositors to these institutions, to be damaged. They recognize that the damage to the economy would be too great.

What has happened recently just underscores that. And I think we're at the point where we can no longer fool ourselves by saying that is not the case. The government will support these institutions, which in turn implies a closer supervision and regulation of those institutions, a more effective regulation than we've had, at least in the United States, in the recent past. And that may involve a lot of different agencies and so forth. I won't get into that.

But I think it does say that those institutions should not engage in highly risky entrepreneurial activity. That's not their job because it brings into question the stability of the institution. They may make a lot of money and they may have a lot of fun, in the short run. It may encourage pursuit of a profit in the short run. But it is not consistent with the stability that those institutions should be about. It's not consistent at all with avoiding conflict of interest.

These institutions that have arisen in the United States and the UK that combine hedge funds, equity funds, large proprietary trading with commercial banks, have enormous conflicts of interest. And I think the conflicts of interest contribute to their instability. So I would say let's get rid of that. Let's have big and small commercial banks and protect them – it's the service part of the financial system.

And then we have the other part, which I'll call the capital market system, which by and large isn't directly dealing with customers. They're dealing with each other. They're trading. They're about hedge funds and equity funds. And they have a function in providing fluid markets and innovating and providing some flexibility, and I don't think they need to be so highly regulated. They're not at the core of the system, unless they get really big. If they get really big then you have to regulate them, too. But I don't think we need to have close regulation of every peewee hedge fund in the world.

So you have this bifurcated -- in a sense -- financial system that implies a lot about regulation and national governments. If you're going to have an open system, you have got to get much more cooperation and coordination from different countries. I think that's possible, given what we're going through. You've got to do something about the infrastructure of the system and you have to worry about the credit rating agencies.

These banks were relying on credit rating agencies while putting these big packages of securities together and selling them. They had practically – they would never admit this – given up credit departments in their own institutions that were sophisticated and well-developed. That was a cost centre – why do we need it, they thought. Obviously that hasn't worked out very well.

This leaves open the question of whether commercial banks could offer retail brokerage services. I think they could. In today's model, retail brokerage has traditionally been a "sales" function for investments banks, but that is no longer working out very well for most consumers.

They key thing is that banks would once again be true banks, with a focus on absolute protection of the value of cash.

-- Jack Krupansky

Read PIMCO's Bill Gross with his latest investment outlook on the financial crisis

Bond guru Bill Gross of PIMCO has released his latest Investment Outlook, for March, entitled "Hairy Lips Sink Ships".

As to whether this is a recession or a depression, Bill says:

We don't know yet... Recessions are cyclical downturns of a relatively brief time frame, characterized by inventory corrections and addressed by low interest rates and mild doses of fiscal stimulus. Depressions are more extreme with double-digit levels of unemployment but defined more importantly by credit contraction and debt liquidation. The deflation that normally accompanies a depression is dangerous not because prices are going down, but because the "for sale" sign goes up on the credit markets which have always made capitalism possible. At the moment, ... policymakers are attempting to prevent that. We shall see.

-- Jack Krupansky

How could Harvard screw up their endowment so badly?

There is an article in The New York Times by Geraldine Fabrikant entitled "Endowment Director Is on Harvard's Hot Seat" about Harvard having some financial difficulty related to its endowment fund in these difficult markets. Actually, this does not surprise me at all, particularly since I never understood how they could be so cavalier about putting massive amounts of money into so-called "alternative investments" earlier in the decade. The story reminded me of an old joke allegedly from the Boston area:

Cashier for a supermarket express checkout line to a young customer with too many items: "Are you from MIT and can't read or from Harvard and can't count?"

It would not be as funny if it were not so true.

-- Jack Krupansky

Is it all about trust or about honor?

The financial crisis is causing people to reflect on trust, but I think the core issue is honor. Honor has to be in place before trust can be established, otherwise the trust is simply empty and truly meaningless. For quite some time I have thought of Wall Street (and even most banks) as "Thieves Without Honor." Without a core of intense honor, any firm is just one giant Ponzi scheme, one ethical error away from disaster. Wall Street wants to take a CDO approach to "managing" trust -- with bad assumptions about the maximum default rate on their synthesized approach to "honor". We need a return to hard-core, true honor not the synthetic, artificial contrived appearances that Wall Street and banks in general have made their stock in trade.

In the old days, lots of marble, polished brass, fine-tailored suits, and an impressive-looking vault were all we needed to "trust" a bank. No more. Sadly, Wall Street and most banks still believe in a lot of that crap, albeit with a "fresh modern" veneer of a lot of slimy marketing as icing on their cake, but all of that needs to go.

The really tough thing is that trust is based on appearances for so many people. How do we go about emphasizing, measuring, auditing, and rewarding honor as "Job #1"?

-- Jack Krupansky

Financial models, variables, parameters, assumptions, "Garbage In, Garbage Out"

It is so easy to blame so much of the current financial crisis on complex "financial weapons of mass destruction", but it is not necessarily so simple. I have read descriptions about how CDOs (Collateralized Debt Obligations) are supposed to work. The actual ideas are not that bad. Clearly the models for these instruments ultimately failed, but as far as I can tell the basic models are in fact reasonable.

Like all models, there are plenty of variables and parameters. If you do not get the variables and parameters right, then of course the models will fail.

Any wizened old computer programmer can tell you a simple truth about even the most perfect computer software: GIGO - Garbage In, Garbage Out. In fact, it does not matter if you get 99.9% of the variables and parameters absolutely right, even one bad key parameter can spoil the entire model.

In the case of CDOs, a key parameter is the maximum default rate, how many people can fail to pay their mortgage payments before the model begins to fail. If the default rate is below some threshold, the models work extremely well and almost everybody makes lots of money. But, if the default rate is above some threshold, the models, as they say, "blow up" and either nobody makes any money (a CDO of absolute junk subprimes) or many people get wiped out and some indeterminate number are still magically protected by the models. But unless you can accurately predict how many will be protected, the safe assumption is that none will be protected. Unfortunately, we need to know the expected default rate in the future for a given pool of securities, and that is the one most important thing we do not know at this stage, unless the government steps in with a guarantee.

The crisis appears to have occurred because the assumptions about the near future and resulting parameter values were simply wrong, really wrong. Sure, the modelers may claim that they did not "know" that junk mortgages were being sold and that the housing boom was actually a bubble, but models are supposed to incorporate all of the variables and parameters of the real world, not some idealized world.

During the housing boom, modelers set their parameters on the assumption that the future would resemble the past. No gung-ho modeling group anxious to share in the corporate bonus pool was going to set their parameters based on the near future resembling The Great Depression (or worse.)

Wouldn't it be a hoot if it was all that simple, great models, but just a few "bad" parameter values?!?!

-- Jack Krupansky

The financial crisis and the Nuremberg Excuse

There is no shortage of finger-pointing as to the causes of the current financial crisis. I was somewhat stunned to read the following anecdote by former Federal Reserve Chairman Paul Volcker in a recent speech:

One of the saddest days of my life was when my grandson -- and he's a particularly brilliant grandson -- went to college. He was good at mathematics. And after he had been at college for a year or two I asked him what he wanted to do when he grew up. He said, "I want to be a financial engineer." My heart sank. Why was he going to waste his life on this profession?

A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn't communicate with me very much. He sent me an email, "Grandpa, don't blame it on us! We were just following the orders we were getting from our bosses." The only thing I could do was send him back an email, "I will not accept the Nuremberg excuse."

What else is there to say?

-- Jack Krupansky

Price of gasoline continues to slide off recent peak, headed lower

Although speculators had pushed the price of crude oil and gasoline up in January and early February, with the retail price of gasoline peaking recently at about $1.96 over a week ago. Today, the AAA Daily Fuel Gauge Report shows the national average retail price for a gallon of regular unleaded gasoline at $1.910, about a nickel below the recent peak.

Wholesale gasoline futures have declined lately, with April RBOB unleaded gasoline futures at $1.1535, indicating that retail prices could fall to $1.75 to $1.80 within a few weeks, about 15 cents below the current price level. March futures are down to $1.0450, but trading will shift to April futures after the end of the month, next week.

Gasoline below $2 continues to mean 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

Thomas Friedman: The government should give money to venture capital funds

I am no fan of Thomas Friedman, but I do agree with most of what he says in his latest Op-Ed in The New York Times entitled "Start Up the Risk-Takers" in which is proposes a fairly simple model for government investment to create new jobs:

Call up the top 20 venture capital firms in America, which are short of cash today because their partners -- university endowments and pension funds -- are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors' upside and keep 80 percent for themselves.

Sounds like a plan. But, it is not quite so simple. True, professional venture capital firms operate in a relatively narrow range of financing and stage of development. The typical paradigm for a venture capital-funded venture is "early stage", were only a relatively modest level of capital is needed (rarely more than $20 million), and where only a modest number of jobs are generated. Sure, some venture capital firms offer "later stage" funding, but that is still for the relatively early life of a new venture when growth is high but revenue and jobs are still relatively modest. The Googles and Microsofts and Intels of the world did not require large-scale capital in their venture capital stages. So-called expansion capital on a large scale typically comes not from professional capital firms, but either organically funded from revenue and profits from dramatic early success of a Google or Microsoft or Intel, or from debt offerings on Wall Street or other non-venture capital sources. That is the stage when a high volume of jobs are created.

Professional VC firms do offer growth stage funding ($10 to $50 million), but that is still only the stage where a venture might be hiring no more than a few hundred people, not the major growth stage where thousands of jobs are being created and hundreds of millions of capital investment are being made.

Sure, I agree with Friedman -- and have already myself suggested -- that the government should temporarily step in to fund professional venture capital firms that are having difficulty raising capital from their traditional sources such as large banks, insurance companies, pension funds, and large endowment funds (all of whom are themselves struggling financially), but this is money to fuel a future wave of job creation, say three to ten years from now, and won't create millions of new jobs in the next two to three years.

There are also SBIR, SBA, and other government funding programs that can be boosted directly by the government. Government guarantees for bank loans and debt offerings for young, innovative ventures could also be a big help for growing innovative companies far beyond the early stages where venture capital is most successful at boosting promising companies and weeding out the good ideas that simple do not work in the real world.

Yes, by all means the government should ramp up venture capital investment, but that will not obviate the need for stimulating and supported significant chunks of the "old economy" for many years to come.

Besides, the last thing we need is yet another new "bubble", let alone a slew of them.

We want new ventures that are robust and durable, not flash-in-the-pan, "gold rush" style "opportunities."

Energy innovation is worthy of investment, as is filling the gap for funding of venture capital firms, but let us be careful to avoid turning this into another "dot-com boom", because we all know how that movie ended.

The good news is that it might cost only $20 billion (as Friedman suggests) to give the venture capital industry the shot in the arm that it does in fact need.

Personally, I am not completely convinced that any or many of the top VC firms could actually put $1 billion to use with their current investment paradigms and I would not want to destroy the current paradigm that works so well. To be clear, over-investment does not result in comparably greater success. Maybe $250 million average (per year) for the top 20 firms and $50 million average for the rest of the top 100 firms would be more than sufficient for the level of investment that these firms could manage successfully at this point. That works out to about $9 billion a year. Okay, double it to make sure that good businesses do not have trouble getting funded. That gets us to $18 billion, close to Friedman's number. My own original number was $2 to $3 billion a month or $24 to $48 billion per year. My model was simply that in times of financial crisis, better to err way over the top. At this point, I would prefer to hear the VC sector tell us what they feel that they need. Offer them $50 billion a year and sit back and watch the spectacle of them saying "Please give us less money."

Maybe the key thing is for the government to be able to assure VC firms that there will be "government supported" funding (e.g., debt securities) available for VC-funded companies that have advanced beyond the VC-supported stages to the point where they do need tens or even hundreds of millions to expand to the degree where individual firms are creating many hundreds or thousands of jobs. This might help to encourage VC firms to fund new ventures that will eventually require large-scale capital after they advance beyond the stages where traditional VC firms add the most value.

Finally, Friedman did not even mention so-called "angel" investing, where individual investors are funding innovative new ventures at a smaller scale than normally appeals to professional venture capital firms. Give these people more generous tax incentives, matching funds, and possibly some degree of government guarantees, or maybe outright tax credits, and you could see a dramatic blooming of innovative firms.

In any case, I do have to give Friedman credit for raising awareness of this critical issue to the national level. A single small paragraph in my own blog simply wasn't good enough to even get the ball rolling:

Provide government funding to venture capital firms which are experiencing extreme difficulty raising funds from traditional sources (big banks, pension funds, and insurance companies) due to the credit crunch and skrinkage of the economy, on the order of $2 to $3 billion per month.

-- Jack Krupansky

Friday evening at the FDIC - only one bank failure

It was a slow week at the FDIC. Friday evening the FDIC announced only one bank failure for the week:

1. Silver Falls Bank, Silverton, Oregon. Citizens Bank, Corvallis, Oregon, assumed all of the deposits.

That brings to 14 the number of failed banks in 2009.

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.

-- Jack Krupansky

Dow Industrials resumes bear market, but NASDAQ and S&P 500 still within trading range

The Dow Industrials did manage to break below its trading range of the past three months yesterday, signaling an ongoing bear market ("lower lows"), but NASDAQ remains in its trading range, moderately above the November low. The difference is that ongoing worries about the banks has hurt the Dow much more than NASDAQ.

As I write this, Google Finance tells me that NASDAQ is at 1,483.83, up from the intraday low of 1,423.36.

For the record, the closing low in November for NASDAQ was 1,316.12 on November 20, 2008. The intraday low was 1,295.48 on November 21, 2008.

The S&P 500 index has still not broken below its November low, but that could happen within the next couple of days. The S&P 500 was at 765.63. The intraday low was 761.69, so far. It's November closing low was 752.44 on November 20, 2009. The intraday low was 741.02 on November 21, 2009.

I suspect that although the more doomish and gloomish of traders and short-term speculators would like to use the new Dow low as an excuse to take the market down further, there is a moderate chance that the "down" crowd will soon run out of cash for more bearish bets and soon begin to reverse and push upwards for a new trading range. They may decide to wait until the NASDAQ and S&P 500 doom and gloom crowds hits "selling exhaustion", but that might actually have occurred shortly after the open this morning.

In any case, best to give the market another week or so to sort it out and get past the euphoria of a new Dow bear market low before concluding anything about the NASDAQ and S&P 500 medium-term trend.

-- Jack Krupansky

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

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose moderately sharply by +0.89% vs. -0.48% last week, and its annualized growth rate rose moderately to -24.0 vs. -24.5 last week, but remains near its record low for its 60-year history of data of -30.2 for the week ended December 5, 2008, which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

I do not have a quote from ECRI today, but I am sure that they would agree that despite this one-week improvement, the near and medium-term outlook remains quite gloomy.

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 2008 currently shows no sign of an imminent end. There was a modest flattening of the WLI recently, but even that seems to have reversed. Still, the WLI has not set a new low for ten weeks now.

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

Monthly GDP for December fell by -1.3% (-14.4% annualized), Q1 tracking for a -4.6% 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 December by -1.3% or -14.4% annualized, after rising modestly by +0.4% in November (revised down from +1.2%), and real Q1 GDP is forecast to decline by -4.6% 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 for December:

Monthly GDP declined 1.3% in December, continuing the downward trend exhibited since the middle of last year.  The December decline was roughly accounted for by negative contributions from PCE, inventory investment, net exports, and construction.  The level of monthly GDP in December was 2.9% below the fourth-quarter average at an annual rate.  Our latest tracking forecast of a 4.6% annualized decline of GDP in the first quarter requires only 0.2% declines per month during the first quarter.  The average monthly decline in monthly GDP since the peak last June has been 0.5%.

Using the MA data, I calculate that Q4 real GDP declined by -5.84% on a quarter-to-quarter basis. We'll see how close this comes to the government's revised preliminary GDP when it comes out later this month. MA had previously forecast the Q4 decline to be -5.5%.

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

Stock market still in a trading range as the moment of truth continues

Traders and short-term speculators made a half-hearted attempt to push the stock market below its November low on Wednesday, but they failed. That does not necessarily mean that investors are in the clear, as traders and short-term speculators could make a couple of more attempts at pushing for a new low before throwing in the towel. The key is that traders only make money if the stock market is moving in some direction, regardless of whether it is up or down. They may engineer a modest "dead cat" bounce to draw in some suckers and then reverse and use the weak-will of the suckers to build up a little momentum to push to a new low. Maybe, but not guaranteed. Either way, within a few days people will conclude that either the November low has held or a new low will be set to begin the next leg down of a so-called "primary bear market."

In theory, the stock market is supposed to be a barometer of the economic outlook six to nine months in the future. Yes, the immediate short-term outlook is still quite gloomy (as the stock market "forecast" early last fall), but there is a great divergence of views about the economic outlook for the second half of this year. Some honestly believe that all of the fiscal stimulus and even the most heroic efforts of the Federal Reserve and Treasury will "fail", while others insist that there will be a modest recovery, lackluster, but a recovery nonetheless. What we are seeing right now in the market is a war between these two camps. Personally, I am in the modest recovery camp.

Read more of my comments from yesterday which are still relevant and will continue to be relevant until the market either marks a "double bottom" and reverses and heads back up in its trading range or finally makes a bearish break below the November low.

-- Jack Krupansky

Gasoline price spike peters out, may fall back

The recent spike in the price of gasoline from the $1.75 range has petered out here in the $1.96 range. The AAA Daily Fuel Gauge Report shows the national average retail price for a gallon of regular unleaded gasoline at $1.957, about a penny below its peak a few days ago.

Wholesale gasoline futures have declined lately, with March RBOB unleaded gasoline futures at $1.1215, indicating that retail prices are headed for $1.72 to $1.77 within a few weeks, about 20 cents below the current price level.

Gasoline below $2 continues to mean 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

Stock market still in a trading range, but moment of truth coming up

The stock market has been bouncing up and down within a broad trading range since the November low, "trading sideways" as they say. So far, none of the big three averages (Dow Industrials, S&P 500, NASDAQ Composite) has set a new low since November, almost exactly three months ago. Usually in a bear market you see new lows set at a greater frequency. Now, as the market approaches the November low, one of two things will happen: 1) the market will fall below the November low, setting a new low, and signaling to traders and speculators that the bear market continues and inspiring them to place further bets (i.e., to open more short positions), further pushing the market down, or 2) traders and speculators will soon reach the point of "selling exhaustion", they will begin to "take profits" by closing out short positions (essentially buying stock), causing the market to rally, signaling a "double bottom", which is a bullish signal, and kicking off a big rally to continue the next phase of the trading range (and maybe eventually a bull-market breakout, maybe.)

The grand question is whether the market is about to anticipate the success or failure of the government's stimulus efforts, whether the market believes that business will stabilize and begin to bounce back six to nine months from now.

Sure, traders and short-term speculators panned the revised bank bailout plan last week, but the recent market declines have been within the realm of this three-month trading range and "range traders" can only push the market so far before they run out of ammunition and patience and start closing out their positions ("taking money off te table") and placing their new bets as the market evolves. They managed to do a great job of talking down the new Treasury plan, ignoring the passage of the stimulus package, ignoring the GM recovery plan, and ignoring the upcoming foreclosure package. But very soon, within the next few days, we will see if their short-term, knee-jerk reaction was just a short-term range-trading strategy, targeting a "re-test" of the November low, or whether the underlying market is actually deteriorating faster than the recovery from the November low suggested.

It is very possible that we could see a minor bounce soon, but that could mask a so-called head-fake, inspiring short-term traders to abandon some of their short posititions, but quickly resulting in them re-opening those short positions when they realize that the bounce was a head-fake and inspiring a market decline to finally get to the actual "re-test" of the November low.

Note that all of this is about short-term trading and speculation and has nothing to do with true investing.

One other thing... so far, the market action looks a lot like the run-up to the Iraq War, where a low was hit in October of 2002 and a significant rally occurred, but then the market traded sideways and down until it tested the October low in March of 2003 and then kicked off the next leg of a bull market recovery. We could be seeing such a setup right now.

In any case, the market is ultimately "the sum of all curves", the sum of all individual bets being placed. Do you believe that Obama, Geithner, Bernanke, and Summers are all idiots and really stupid? Or, do you believe that they are in fact up to the challenge before them? But also keep in mind Keynes advice that the market can remain irrational far longer than you can remain solvent.

-- Jack Krupansky

Death to the Hummer!!

As GM struggles to restructure to survive, it seems abundantly clear to me that the Hummer has to go. Sure, if they find a buyer they should sell the Hummer business. If they are unable to line up a buyer and the business is unprofitable, the solution is clear: they must kill off the Hummer business. Simply shut it down, kill the Hummer.

Besides, the Hummer is the epitome of excess of a world that no longer exists. Big, expensive, guzzles fossil fuel, favored by overpaid managers and executives -- including those of Wall Street.

At heart, the Hummer is a distraction to GM management. Rather than expending time, energy, and resources figuring out how to save the Hummer, GM management should focus all of that time, energy, and resources on the Volt and other paths that at least have a hope for the future.

The Hummer must go. GM should kill it while they have the chance.

What about Saab? Simply spin it off to local Swedish management for $1, let it file for bankruptcy, and let the Swedish government decide if there is anything worth saving there. If anybody actually wants to buy it for more than $1, great, sell it ASAP. Either way, get this dog off of the plate of GM management as well.

The only thing GM management should be focused on is the path to the future.

-- Jack Krupansky

Money from the past

Here we are in a big financial crisis and all of a sudden, out of the blue, on Friday I received a check in the mail as a "final distribution" for a class-action securities litigation settlement related to the last big banking crisis, the infamous S&L crisis of 1989, 20 years ago.

Like a bunch of other people, I had invested money in various limited partnerships being pitched by Paine Webber back in the 1980's. One was called Realty Southwest which basically used our investment to fund the down payments to build new apartment building in California and elsewhere. They were actually reasonably upscale apartments, but the problem was that everybody had the same idea, so there was a huge glut, causing rents to fall due to competition, resulting in a shortfall of rental income, causing these limited partnerships to default on the mortgage loans, helping to fuel the financial weakness leading to the overall S&L crisis. There were other factors as well, but these real estate limited partnerships were one of them.

At the time, the class-action lawsuit against Paine Webber (now part of UBS) was the largest to date ($1.5 billion.) The gist of the lawsuit was that the investments were "innapropriate" for some (all?) of us investors and that the risks were not adequately explained.

Over the years I have gotten several payments from the settlement. I actually had no idea that the suit was still "alive." Maybe now the ghost of that past crisis can finally be laid to rest.

Now I need to budget what to do with the money. The amount is on the order of 10% of my original investment. There may be taxes due on it. Obviously it will simply will go to paying for living expenses since I do not currently have any work income, but that does delay a further drawdown from my savings.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls moderately and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell moderately by -0.47% vs. -0.64% last week, and its annualized growth rate fell modestly to -24.8 vs. -24.5 last week, and remains near its record low for its 60-year history of data of -30.2 for the week ended December 5, 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 falling once again, a business cycle recovery remains elusive."

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 2008 currently shows no sign of an imminent end. There was a modest flattening of the WLI recently, but even that seems to be reversing. Still, the WLI has not set a new low for nine weeks now.

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

New job!

I received an offer for some work in the mail yesterday! Sort of...

A gentleman by the name of Norman Goodman seems to think I am qualified to do some work for him. He is not offering a lot, $40 for an 8-hour day, plus reimbursement for travel to and from work. That works out to $5 an hour. That's not great, but not so bad for this economy.

What kind of work? It turns out that all I will have to do is, literally, sit around all day and listen to a bunch of lawyers. Whatever.

It is called jury duty.

-- Jack Krupansky

Friday evening at the FDIC - four more bank failures

It was a busy week at the FDIC. Friday evening the FDIC announced four more bank failures:

1. Sherman County Bank, Loup City, Nebraska. Heritage Bank, Wood River, Nebraska, assumed all of the deposits.
2. Riverside Bank of the Gulf Coast, Cape Coral, Florida. TIB Bank, Naples, Florida, assumed all of the deposits.
3. Corn Belt Bank and Trust Company, Pittsfield, Illinois. The Carlinville National Bank, Carlinville, Illinois, assumed all of the deposits.
4. Pinnacle Bank, Beaverton, Oregon. Washington Trust Bank, Spokane, Washington, assumed all of the deposits.

That brings to 13 the number of failed banks in 2009.

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.

-- Jack Krupansky

Fidelity money market rates

Compared to the 3.05% APY (3.01% simple interest rate) that you can get from DollarSavingsDirect, Fidelity offers the following 7-day yields:

• Fidelity Municipal Money Market (FTEXX): 0.24% federal tax-free, equivalent to %0.33 at the 28% tax bracket
• Fidelity New York Municipal Money Market (FNYXX): 0.18% federal and New York tax-free, equivalent to %0.30 at the 28% tax bracket
• Fidelity California Municipal Money Market (FCFXX): 0.02% federal and New York tax-free, equivalent to %0.03 at the 28% tax bracket
• Fidelity Cash Reserves (FDRXX): 1.13%
• Fidelity Select Money Market (FSLXX): 1.17%
• Fidelity Money Market (SPRXX): 1.21%

According to Crane Data, the top retail money market fund yield is Touchstone Money Market at a 7-day yield of 1.67%. Touchstone also has the top institutional money market fund yield, but even that is only 2.23%.

Why are the money market fund yields so low relative to what a number of banks are offering? Basically because they do not have FDIC protection and are forced to be far more conservative than they were in the past.

Incidentally, EverBank has a money market account that earns 2.73% APY for the first year and offers a 3.51% APY new account "bonus" rate for the first three months. They are also offering 2.40% APY for a checking account over $50,000.

-- Jack Krupansky

Shuffling cash around due to shifting interest rates

All good things sometimes come to an end. I was earning 3.25% APY in my Sovereign Bank money market account, but that rate has now fallen to 1.75% APY. Similarly, my Capital One Direct Banking online savings account fell to 2.50% APY. My GMAC Bank online savings account has fallen to 2.75% APY. Even my new DollarSavingsDirect account has fallen to 3.05% APY, but at least that is still the top rate for non-CD bank accounts.

I am no longer a net saver, but have become a net spender since I do not have any current professional income. I am looking for some new work, but given the nature of the current economic environment, I am not expecting any new work for at least the next two months, if not a lot longer.

I transferred cash from my Sovereign Bank account to my main Fidelity account which I use as my "checking" account sufficient to cover all of my anticipated expenses for the next two months. That account earns a very tiny interest rate, but at least I will not have to do any shuffling of cash to cover expenses for another two months.

I also transferred a big chunk of my Sovereign Bank cash to my new DollarSavingsDirect account where it earns that top 3.05% APY rate.

At the rate things are going [sorry for that pun!], the return on my cash from the much lower rates that we will be seeing in another month or two will probably quickly negate the value of spending any of my time searching and shuffling to maximize income on my cash.

My main wish is that Fidelity would offer a decent rate so that I would not need to do all of this shuffling of simple cash to begin with.

-- Jack Krupansky

Simple solution to the mortgage crisis

All manner of "fixes" have been proposed and will continue to be proposed to "fix" the housing/mortgage crisis, but none have so fare managed to gain traction. I have a simple proposal which I call the Mortgage Resolution Corporation (MRC), a government-sponsored entity (yeah, I know...), whose primary function is simply to make mortgage payments whenever the consumer fails to do so.

The bank or other mortgage servicing entity would simply electronically "debit" an account for the consumer at the MRC for the principal and interest.

In exchange, the MRC incrementally assumes a partial ownership of the mortgaged property, ahead of the consumer, and possibly ahead of the bank or mortgage servicer for the amount of principle paid down.

The MRC would maintain a debit account for the amount of mortgage payments paid so that if and when the underlying property is sold, the consumer would receive a capital gain only to the extent that they have paid down their MRC debit account. This would provide an incentive for consumers to eventually catch up on their payments and not get too much of a free ride.

The MRC would be like the old toxic waste dump "Superfund" program in that its first job is to keep payments flowing and keep people in their houses, but to also attempt to recoup costs whenever legally possible.

Initially, the U.S. government would fund the MRC, but after it has been in operation for a few years, it would be expected that the private sector would buy into the MRC and supply private capital to run the program with explicit government backing of the mortgages.

This plan would:

1. Eliminate foreclosures.
2. Keep mortgage payments flowing to banks, servicers, and investors.
3. Keep people in their houses even when they lose employment or have expensive health problems.
4. Earn the taxpayers a healthy return over a 5-10 year period as the housing market eventually bounces back.
5. Earn homeowners a profit to the extent they maintain the property for 5-10 years and eventually catch up on all mortgage payments.

Do you have a better idea??

-- Jack Krupansky

Stimulus II

Now that the stimulus bill is virtually a done deal, it is time to start thinking about what the next phase of stimulus should look like. The current stimulus package will have some positive effect on the ecnomy, but there is still a lot more painful restructuring of businesses needed that will leave millions more people out on the street in the coming months. Another 700,000 workers filed for unemployment insurance in the past week alone. The number of ex-workers on unemployment insurance is approaching 6 million. And there is no end in sight. Sure, there will be some firms that will begin rehiring over the next couple of months as some of the stimulus kicks in, but many firms will still be faced with declining revenues over those same months.

The current stimulus package is a decent stopgap measure, but it is still only a partial solution. Even if it creates several million jobs over the next two years, there will continue to be millions of people with no significant income and many millions of those who still have jobs who become more frugal, further savaging consumer spending.

By June, a lot of the reality of the current stimulus and ongoing restructuring of the economy will be somewhat more obvious, so that July might be an excellent timeframe for considering Phase II of stimulus.

My current thinking is that a "Stimulus II" package should include:

1. Direct stimulus to consumers, on the order of $50 to $100 billion per month "until further notice". Sure, some people will save much of this, but that will help to shore up consumer balance sheets, which is a necessary component of getting the economy on a sounder footing. Besides, there are so many millions of people out of work for whom "saving" is not an option. This spending would phase out as real consumer income gradually and eventually improves.
2. Increased government business investment spending on the order of $50 to $100 billion per month to spur demand for the goods and services of businesses. Businesses need to see higher demand and actual revenues before they start hiring in earnest. The simple reality is that we need a somewhat bigger government component in the economy to protect people from serious economic episodes such as this one. There is plenty of room for expansion of government services - paid for by the government, but provided by the private sector.
3. Provide government funding to venture capital firms which are experiencing extreme difficulty raising funds from traditional sources (big banks, pension funds, and insurance companies) due to the credit crunch and skrinkage of the economy, on the order of $2 to $3 billion per month.

That would be a start. I am sure that even more is needed. But, maybe not a lot more. Basically, we need to keep stimulating until unemployment is low again, and then gradually withdraw stimulus as the private sector picks up the slack.

The key is that unless there is sustained stimulus, we risk facing a "1937" problem, where the U.S. actually began recovering from 1934 to 1937, but then ran out of steam and declined again and languished until another form of stimulus appeared (World War II.)

-- Jack Krupansky

What happened to the stock market on Tuesday?

Gee, with the Senate passing its stimulus bill and Treasury announcing a grand new revamped bank bailout plan, you would think that the stock market would have been primed for a monster rally, but instead we got a dramatic decline. What happened? Put simply, this was most likely an example of the old trading pattern of "Buy the rumor and sell the news." In other words, the market rose recently in anticipation of the vote and announcement, and then traders and short-term speculators decided to take their profits and bet that many others were going to do the same thing. It happens all of the time, or rather much of the time.

Another factor is that until all of these dramatic government efforts actually make real and visible traction in the real economy (or at least a sizeable consensus develops around that view) the stock market will be stuck in a trading range, swinging up and down repeatedly without setting any new high or low. The recent gains brought stocks up near an area of "technical resistance." Since there was no dramatic level of new money flowing into the market to push stocks dramatically up above that resistance level, the traditional inclination of traders and short-term speculators was to close out bullish bets and open up bearish bets, at least for the near-term. It happens all of the time, or rather much of the time.

In summary, the factors coming together today were:

1. Range trading.
2. Technical resistance.
3. "Bought the rumor, so now sell the news."

So, feel free to ignore the market and go about your life as if the market (or at least its crazy volatility) did not exist.

-- Jack Krupansky

Senate stimulus bill ready for final vote tomorrow

The Senate version of the stimulus bill cleared its main hurdle a few minutes ago with 61 senators voting for the compromise deal amendment. This means that the Senate can hold the final vote on its bill tomorrow. Then the House and Senate bills move on to a conference committee where the real horsetrading begins. Once the conference committee issues its final "report" for the bill, the House and Senate each hold one final vote to approve the final conference bill that will be sent to President Obama for his signature.

It is unclear at this time what House items might be added back or what Senate items might be removed. That will be a matter for the House and Senate leaders to negotiate, not to mention the three Republican senators whose votes are needed to pass the final bill in the Senate.

The bill remains a cross between an over-decorated Christmas tree and an over-stuffed sausage, but that is about how it started out in the House anyway. The final trimming and stuffing will not occur until Wednesday and Thurdsday when the House and Senate bills are reconciled by the conference committee.

-- Jack Krupansky

John Taylor: How Government Created the Financial Crisis

Monetary policy expert John Taylor has an excellent opinion piece in The Wall Street Journal entitled "How Government Created the Financial Crisis- Research shows the failure to rescue Lehman did not trigger the fall panic" that succinctly argues that it was a string of monetary policy errors and misguided interventions on the part of the Federal Reserve and Treasury that created and prolonged the financial crisis. Technically, he is absolutely correct, but unfortunately monetary policy has more than a little domestic politics guiding it that precludes a strict and correct monetary policy. Could we have done better? Yes, but we could have done a lot worse as well.

-- Jack Krupansky

Compromise amendment for stimulus bill still not quite ready, but coming soon

Senate Majority Leader Harry Reid just explained that staff has been drafting the 800-page compromise amendment non-stop since the 5 PM deal yesterday and it is expected to be ready to be formally submitted within a few minutes. There would be a procedural vote late Monday afternoon and then the big Senate vote on the entire bill could occur on Tuesday.

-- Jack Krupansky

Stimulus bill nearing end of its sojourn through the Senate

There does appear to be a compromise deal in place for the stimulus bill in the Senate, but the overall status is a bit murky. Even after the deal was announced, debate on amendments continued. The Senate meets at noon today to continue the debate even after the so-called deal. Most importantly, there has not yet been a vote on the deal and it is not clear when the vote will occur. Maybe Sunday, maybe Tuesday, or so I have read. Or, maybe it could happen today. In truth, it is not clear what exactly is holding up a deal to schedule the vote. Maybe the so-called deal also involves permitting at least the show of attempting a bunch more amendments. Or, maybe people are waiting to hear whether the president is really willing to accept only 60 votes or whether he will be willing to offer some additional compromise to get closer to 70 votes. In any case, the joint House and Senate conference committee will be deep into blending their two bills by Tuesday or Wednesday.

In short, good progress is being made.

-- Jack Krupansky

Friday evening at the FDIC - three more bank failures

Friday evening the FDIC announced three more bank failures:

1. Alliance Bank, Culver City, California. California Bank & Trust, San Diego, California, assumed all of the deposits of Alliance Bank.
2. FirstBank Financial Services, McDonough, Georgia. Regions Bank, Birmingham, Alabama, assumed all of the deposits of FirstBank Financial Services.
3. County Bank, Merced, California. Westamerica Bank, San Rafael, California, assumed all of the deposits of County Bank.

That brings to 9 the number of failed banks in 2009.

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.

-- Jack Krupansky

Job losses painful and will continue but not really a big deal, yet

Yes, losing another 600,000 jobs in a single month is clearly painful, and we will continue to see significant losses in the coming months, but there is still nothing about the losses to-date to suggest that we are seeing anything other than a significant recession. Sure, the job losses are a big enough deal to spur the passage of a massive fiscal stimulus package, but the resulting stimulus will blunt a significant portion of the impact of the job losses on overall economic activity.

The open question is whether enough of the stimulus will kick in within the first six months to actually prevent job losses and a gloomy business outlook from beginning to spiral down to the point where the damage to the overall economy does become a big deal and difficult to reverse within a couple of years. My suspicion is that the stimulus and other efforts (Treasury, Fed) will be enough to turn the tide. We will see in about six months.

In short, there is no depression on the short-term horizon.

-- Jack Krupansky

Stimulus bill continues to progress through the Senate

The stimulus bill continues to make good progress in the Senate. In fact, after they vote on the latest batch of ammendments and then have their final debate (maybe an hour on each side) we could see the final vote this evening, maybe in about three hours or so. This is actually great progress. Still, the close vote and last-minute arm-twisting could delay the proceedings into the weekend.

Sure, the bill remains a cross between an over-decorated Christmas tree and an over-stuffed sausage, but that is about how it started out in the House anyway. The final trimming and stuffing will not occur until next week when the House and Senate bills are reconciled by the conference committee.

The big question is whether this bill will actually be enough to stop the job losses and get the economy going again. The simple truth is that this is just the first step. Treasury will be outlining their financial plan next week. We will have a better view in three to four months after the stimulus package and new Treasury plan have had time to work through the economy. Then, adjustments can and will be made to both plans, either to accelerate them, or to pull them back a bit if the economy gains more traction than expected.

No matter what, job losses will probably continue for at least the next three to five months. Even if the economy does gain traction soon, it will be at a moderately lower level of economic activity and financial leverage that simply does not justify or support the current levels of business employment. Only later in the year and next year will some of the "green job" and other forms of investment begin to boost the needs for jobs for the future.

-- Jack Krupansky

ECRI Weekly Leading Index indicator falls sharply and remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell sharply by -1.11% vs. -0.21% last week, and its annualized growth rate fell moderately to -24.7 vs. -24.0 last week, and remains near its record low for its 60-year history of data of -30.2 for the week ended December 5, 2008, which is well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With the WLI falling for the fourth straight week, almost to its cycle low, an economic recovery is not in sight."

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 2008 currently shows no sign of an imminent end. There was a modest flattening of the WLI recently, but even that seems to be reversing. Still, the WLI has not set a new low for seven weeks now.

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

Save lots of money at Eddie Bauer online clearance

I have been wearing casual shirts from Eddie Bauer for a number of years. Usually, I pick them up on sale at the local store in the winter or spring in the $15 to $20 range, usually for odd colors that were in lower demand (orange, dark red). Unfortunately, there is no local Eddier Bauer store where I live now. There used to be a couple here in Manhattan, but they are gone now. There are a couple outside of the city, but not near enough to be convenient for me. I have been checking online in hope of seeing a little "deflation", but the cheapest I saw was $20 plus a $3 service fee and $5 shipping for their traditional "solid color signature twill" cotton shirt. Ouch. Besides, they were very low on stock, so I couldn't save money by buying a bunch of them.

But this morning I decided to see if they had a separate "clearance" section, separate from the usual "sale" offerings, and they do. Click here for Eddie Bauer Online clearance.

Unfortunately, they did not have any of the my usual solid color signature twill shirts available in my size. Besides, the price was still way up at $20.

But, they had just added the "original patterned signature twill" shirt to the clearance section for $11. Sure, they only had some odd color in my size ("Night"??), but the price was definitely right. This is regularly a $40 shirt. The solid color shirt I usually got listed for $5 less ($35.) What a great deal. I ordered four of them for $52 including all those charges and fees, so that works out to $13 each. That works for my budget.

 

-- Jack Krupansky

Stimulus bill progressing through the Senate

The stimulus bill is making good progress in the Senate. The Republicans are being given plenty of room to propose amendments, even if most of them are being voted down. Despite the chatter and headlines in the media, the debate in the Senate is quite civil. The ammendment process might even finish up this evening. The final vote is likely to occur tomorrow (Friday.)

The big question is whether President Obama is willing to let the ammended bill go forward as is with a bare 60 (plus or minus) votes in the Senate, or whether he will go along with some changes to make enough moderate Republicans happy to get a more bipartisan mix in the final vote.

Rather than further ammend the Senate bill, President Obama and congressional leaders could simply agree in advance to make a further collection of bipartisan changes when the bill goes to the conference committee. That might encourage more Republican support in the final Senate vote on th bill as is.

In any case, the bill is making great progress.

Sure, the bill is quite the cross between an over-decorated Christmas tree and an over-stuffed sausage, but that is to be expected.

-- Jack Krupansky

On to the next phase of the stimulus bill negotiation in the Senate

Despite the ominous media chatter and headlines, the stimulus package is right on course and schedule. We have now moved on to the phase where all of the big Washington animals loudly stomp their feet and trumpet and bellow and do all the other noxious things that big animals do to stake out their turf and draw their lines, and even loudly pronounce that they will not compromise on their core values (whatever they might be.) This will go on for a while, causing mere mortals to quiver in fear that the end of the world is near. Then, eventually, a few meetings will be held, a compromise will be announced, changes made, and the new bill will then proceed to a vote in the Senate, maybe even by the end of the week, or early next week. All it will take is to trim out some of the House's non-stimulus spending and adding a few tax cut proposals, and some "secret" promises of unspecified actions in future legislation or Treasury bailout efforts.

-- Jack Krupansky