Tuesday, June 9, 2009

Stock Market – Up 12 of the Last 13 Weeks!!

From the Desk of Joe Rollins

The first full week of June will be remembered as another great week for the stock market and for the U.S. economy. It’s absolutely amazing to me that the financial media has suddenly refocused their emphasis from the economy to other “important” issues, like world travel and national celebrations. This demonstrates the old adage that I’ve heard from so many journalists: “You can’t report that the cat didn’t fall out of the tree; you only have a story when it does.” Since the economy is now getting better, there is not much to report other than better news, which means they don’t seem to be reporting anything of any substance at all. Fortunately, I strive to bring you up-to-date on what is going on in the financial world in my posts…

Even in the avalanche of bad news regarding nearly everything concerning the financial world that we have read over the last 12 months, the stock market has recently continued to make a slow but steady rebound. In the first full week of June, the stock market (as measured by the Standard & Poor’s Index of 500 Stocks) had another excellent week. This index was up 2.3% for the week, bringing their year-to-date gains to 5.4%. Given how bad the market was down in January and February of 2009, it is nothing short of stunning to see the reversal that has occurred over the last three months. It certainly would not surprise me to see somewhat of a pull back sometime soon given how quickly the market has gone up; but clearly the trend is higher, not lower.

There are a few items that piqued my interest over the weekend that I wanted to share with you. The Washington Post itemized all of the banks that are ready and able to pay back their so-called “bailout” money. It was even more interesting to read about all of the road blocks the Federal government has put up to keep these banks from repaying their debts. In that regard, reflecting on what actually took place is appropriate.

In September of 2008, Henry Paulson, who was the Treasury Secretary at that time, called in 10 of the largest banks in the United States and basically strong-armed them into accepting Federal stimulus money. Many of the banks openly expressed that they didn’t need or want a bailout, and would rather the government keep its money. However, Paulson insisted that they all take it so that no single bank would be thought by Americans to be weak. Each and every bank was to take their appropriate stimulus money and pay the government 5% in non-taxed, deductible dividends. In addition, the banks were to give warrants to the government to buy additional stock of their banks, whether the banks wanted to or not. Each of the banks dutifully did the right thing for America (at that time) and took the money with the clear understanding that they could repay it as soon as their financial condition strengthened.

The Washington Post now reports that at least eight to 10 of these banks have been begging the government for some time to take the money off their hands. There may be as much as $100 billion repaid to the government in the next few weeks. The government has thrown up every possible roadblock to keep from accepting this money. I’m confused. Isn’t this the exact same plan that was proposed? I thought the banks accepted the money only until their financial situation strengthened, at which time they would repay the government. This quarter, the banks will report “blow-away” profits. Their strength has returned!

The bankers also were not told of important caveats that would occur while they held the government’s money. Each of these learned and brilliant bankers would be called to Washington and berated by a bunch of uninformed and almost unintelligible politicians. They would have the Federal government intervene in almost every aspect of their business. Even though many of the banks did not want the government’s money in the first place, the involvement of the government in their business became mandatory.

I hope everyone realizes that the government is basically attempting to interject itself in privately owned businesses. These banks are owned by their shareholders, not by the government. Hopefully many of the banks will repay the debts in the coming weeks and we will once and for all end this nasty intervention by government in businesses they have no clue about running.

Do you recall when the new stimulus bill was being debated that these projects would quickly put money into the U.S. economy? In fact, the website, www.Recovery.gov, so boldly said that it will “save or create good jobs immediately.” In fact, the White House economists in January predicted that unemployment would top out at 8% if the stimulus bill was passed. Of course, the government tends to exaggerate and then the facts get lost in time.

In fact, as of today, only $44 billion of the $787 billion in stimulus money has actually been spent. It should also be evident that $44 billion in spent stimulus money in an economy that exceeds $14 trillion is literally a drop in the bucket. If anyone thinks that this $44 billion had any material effect on the excellent job report we had on Friday, then they really do not understand the scope and scale of the excellent U.S. economy.

Remember the White House’s promise that unemployment would top out at 8%? In fact, unemployment hit 9.4% on Friday, which is a 25-year high. I reviewed the unemployment records and discovered that 1.5 million jobs have been lost in America since the stimulus package was instituted. Apparently, spending the stimulus money has not been nearly as easy as we were led to believe. It has been a slow, grinding bureaucratic mess with almost no positive results. In fact, many of the stimulus packages are bogged down in lawsuits and counter charges. In many cases, none of the stimulus money has actually been spent in some states. However, the economy and the stock market continue to improve without it.

Learned politicians (an oxymoron?) would quickly evaluate this positive economic trend and revalue the entire stimulus package. Rather than create unprecedented deficits in this country over the next two years, it is now time that half of the stimulus package that was previously approved be immediately repealed. It is not needed, and in the end, it will cause more problems than it will be worth.

Everyone seems to have lost sight of the fact that the Federal deficit for 2008 was roughly $455 billion. That’s large for sure, but it’s peanuts compared to 2009’s deficit, which is a staggering $1.8 trillion. The economy was never as bad as the press tried to lead you to believe, but we have opened the door to massive government spending at unprecedented levels that we have never seen in the past. In addition, we have opened up private industry and small businesses to be run by the bureaucrats in Washington who are clueless as to how to run our government, much less private industry where few of them have ever worked.

If you need some examples of how private industry no longer needs the government’s involvement, here are a few: Last week, none of the major investment houses borrowed any money from the Federal Reserve. In fact, the last time they borrowed money from the Federal Reserve was the week of May 13th, almost one month ago. Since the large investment houses were able to raise capital easily in the public market, the involvement of the Federal government in bailing them out is no longer necessary. The banks and investment houses have raised $80 billion in private money in the last two months.

You may have recalled my earlier statements that the government would provide a much needed fund to handle commercial paper of large companies. When the banks suddenly quit loaning short-term money, the government stepped up and provided the liquidity that was needed for short-term commercial paper. The Federal Reserve identified $1.3 trillion worth of big business commercial paper that they were willing to purchase to assist the U.S. economy. But once again, politicians screamed that the government was bailing out businesses that deserved to fail. I guess they never bothered to read the whole story.

In fact, demand from private businesses for this program in commercial paper never came. Perhaps it was because the businesses were able to borrow their own money or banks actually started providing the necessary financing. However, as of last week, the Federal Reserve was only holding $145 billion in corporate commercial paper. In each week of the last six, this amount has been going down. Since most commercial paper matures over a relatively short period of time, as the maturity dates are reached, the Federal government will be repaid the principal plus interest and these amounts will continue to go down. While $145 billion is a lot of money, it is nowhere close to the $1.3 trillion that was originally proposed.

In order to fund these massive government programs – which the economy no longer needs – the government is proposing every type of new tax ever attempted in any country in the world. There’s a new proposal on the table that U.S. based corporations will be taxed based upon their foreign income in the United States. The fact that companies can presently set up corporations in a foreign country with low income workers and run and fund them economically from the United States without taxation has put literally millions of people to work in foreign countries with U.S. employers.

On Wednesday of last week, Microsoft’s CEO, Steve Ballmer, indicated that if such a tax was imposed, it would reduce the earnings of the Dow Industrial companies by 15%. Microsoft is arguably the most important U.S. company with 90% of the PC market. Ballmer stressed that it will benefit all U.S. corporations to export jobs if this proposed tax passes.

Given a normal multiple of 10 times earnings, we are talking about an astronomical sum of lost wealth by all Americans. Even scarier is that companies will not do business in the United States due to this unfair and unrealistic corporate tax. U.S. based companies will also relocate out of the United States to countries with friendlier tax laws. Once again, the idea of increasing taxes to pay for unneeded and unwanted social programs in this country will hurt the very employees the social plans are designed to assist. By increasing taxes on businesses, businesses will employ fewer people. If these American companies relocate to foreign countries, then the jobs will benefit foreigners in other countries, not individuals in the U.S.

There are other taxes that have also been proposed. You can call it whatever you want, but the new Cap-and-Trade Program is nothing more than a way to extract money from the economy under the misguided theory that it will help the environment. We’re now even hearing about a possible VAT (Value Added Tax) European-style tax of 10%. This would essentially be a national sales tax in addition to all the other taxes you currently pay. Furthermore, I continue to read about the possibility of a health care tax to fund the massive undertaking of government-sponsored health care in the United States.

Again, title them however you want, but when you take money out of an individual’s pocket and give it to the government, it is a tax. As the government involves itself in the daily aspects of running American businesses, the burden on U.S. taxpayers will only increase. You may say that this will only impact the rich, but all the taxes outlined above affect the poor proportionally. The poor will need to continue to purchase utility services which will go up under the Cap-and-Trade Program. Everything purchased will be impacted by a VAT. All people needing health care will pay extra taxes to fund a larger bureaucratic nightmare that government-sponsored health care will bring. In fact, every plan proposed will come with new massive governmental spending and corresponding massive government taxes.

There are solutions that should be pondered: The rest of the stimulus package beyond fiscal 2009 should be trashed. It’s not needed, it’s not good for the economy, and we certainly cannot afford it. Rather than increase taxes, the government needs to reduce spending. If there is any type of fiscal responsibility in Washington, the budget has an outside chance of being balanced in the next decade. The largest single increase in employees in the latest employment numbers is in the government. The government needs to be cutting employees rather than increasing them. The future of a better economy and a better way of life for employees is through private employment, not the government sector.

It is encouraging to see the stock market go up 12 of the last 13 weeks. It is encouraging to see the number of people filing for unemployment fall. It is encouraging that the banks and investment houses say they don’t need the government’s money any longer. It was only eight months ago that Congress was telling everyone the $700 billion bailout bill for the banks would amount to zero to the taxpayer in return. In fact, only $350 billion of the original bailout bill was used, and the government has received interest on every dime. In the next two weeks, half of that is subject to being repaid. There is so much good going on that it’s hard for the public to believe since they do not get a report of that in their daily news. The only place you see better news on the horizon is on Wall Street.

As always, the above are my comments and opinions. Heaven knows, I could be wrong.

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