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    Daily Digest – Feb 10

    by Davos

    Monday, February 9, 2009, 2:53 PM

  • California: Closed for business (Video), Judges back a one-third reduction in state prison population (Hat Tip Propamanda) and Redding City Council votes to lay off Six Cops, 3 Firefighters (Hat Tip GregRoberts)
  • Videos: Nouriel Roubini, Dr. Doom & the Black Swan, Obama
  • Charts:  Lose the News, Same Store Sales, Job Losses in Post WWII Recessions, TARP Review: Taxpayers Paid too Much, Analyst’s Recommendations
  • A Look at 10-Year Market Returns
  • Why Analysts Keep Telling Investors to Buy
  • GM, Chrysler May Face Bankruptcy to Protect U.S. Debt
  • Dealing pain to bank bondholders
  • Bad Bank 2.0 Now in Treasury Plan
  • Market Wrap Week Ending 02/06/09 
  • Rising treasury yields
  • Credit agency downgrades ratings for 22 countries 
  • CBOT Debt Service Estimates (Repost) (Table on page 2)
  • Bank Failures May Reach 1,000 on Bad Loans, RBC Says

Economy

California closed for business (Video)

Judges back a one-third reduction in state prison population Saves State $900 Million

Reporting from Sacramento — A panel of three federal judges, saying overcrowding in state prisons has deprived inmates of their right to adequate healthcare, tentatively ruled Monday that the state must reduce the population in those lockups by as many as 57,000 people. [emphasis added, mine]

Redding City Council votes to lay off Six Cops, 3 Firefighters (Hat Tip GregRoberts) 

The Redding City Council this evening swiftly sliced roughly $3 million from the general fund budget to bring spending into line with steeply-declining revenues.

The council voted to lay off 14 employees and eliminate nine other vacant positions. Those were by far the deepest cuts any Redding council has made in at least two decades. And City Manager Kurt Starman strongly suggested there may be more cuts to come next year.

The council approved the employee and program cuts as recommended by Starman, which included laying off three firefighters and eliminating six positions in the police department. The council also voted to lay off employees in development services, community services, support services and personnel.

Nouriel Roubini, How Long Will Recession Last? (Bloomberg Video)

Predicting Crisis: Dr. Doom & the Black Swan (CNBC Video)

Lose the News (Charts at bottom of page 2)

Third, because news organizations often try to appeal to as many people as possible, they have a disconcerting tendency to catch various trends just as they are peaking. 

Have a look at these charts provided by Neal Frankle, author of Why Smart People Lose a Fortune. They offer a compelling explanation as to why the mainstream media should not be the source of your investment strategy; in fact, they can often be a strong

A Look at 10-Year Market Returns

The New York Times published an article this weekend highlighting that the current 10-year stretch that ended last month was the worst for the S&P 500 in at least the last 82 years. The Times looked at total returns for the S&P 500, and below we provide a similar analysis of the 10-year rolling price change of the Dow Jones Industrial Average going back to 1910. As shown, there have only been four other periods where the 10-year return has been negative, and three of the four periods saw returns float around the negative to flat line for quite some time. While it may have taken "buy-and-holders" a few years to end up making money if they got in early when the 10-year returns went negative, they did end up making money.

Rolling 10-Year DJIA Price Change (Chart (%))

Why Analysts Keep Telling Investors to Buy

Even now, with the recession deepening and markets on edge, Wall Street analysts say it is a good time to buy. 

"Analysts completely missed the boat again with the subprime and credit crises," said Jacob Zamansky, a

At the top of the market, they urged investors to buy or hold onto stocks about 95 percent of the time. When stocks stumbled, they stayed optimistic. Even in November, when credit froze, the economy stalled and financial markets tumbled to their lowest levels in a decade, analysts as a group rarely said sell.

And last month, as the Dow and Standard & Poor’s 500-stock index suffered their worst January ever, analysts put a sell rating on a mere 5.9 percent of stocks, according to Bloomberg data. Many companies have taken such a beating in the downturn, analysts argue, that their shares are bound to bounce back.

Maybe. But after so many bad calls on so many companies, why should investors believe them this time?

When Internet stocks imploded in 2000 and 2001, Wall Street analysts were widely scorned for fanning a frenzy that had inflated dot-com shares to unsustainable heights. But this time around, credit rating agencies, mortgage companies and Wall Street bankers have shouldered much of the blame for the Crash of 2008, and few have publicly questioned the analysts who urged investors to buy all the way down.

Analyst’s Recommendations, Buy Sell Hold (Chart)

GM, Chrysler May Face Bankruptcy to Protect U.S. Debt

Feb. 9 (Bloomberg) — General Motors Corp. and Chrysler LLC may have to be forced into bankruptcy by the U.S. government to assure repayment of $17.4 billion in federal bailout loans, a course of action the automakers claim would destroy them. 

U.S. taxpayers currently take a backseat to prior creditors, including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to loan agreements posted on the U.S. Treasury’s Web site. The government has hired a law firm to help establish its place at the front of the line for repayment, two people involved in the work said last week.

If federal officials fail to get a consensual agreement to change their position regarding repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid. The government would finance the bankruptcy with a so-called "debtor in possession" or DIP loan, a lender status that gives the U.S. priority over other creditors, said Don Workman, a partner at Baker & Hostetler LLP.

"They are negotiating to see if they can reach an agreement," said Workman, a bankruptcy lawyer based in Washington. "If not, they are saying ‘We are pretty darn sure that a bankruptcy judge will allow us’" to be first in line for repayment.

TARP Review: Taxpayers Paid too Much (Chart)

Dealing pain to bank bondholders

I’m counting on delaying the reckoning again, but it cannot last forever. the losses are so titanic in relation to the government balance sheet that treasury yields will rise enough to force monetization from the fed and the full measure of quantitative easing will begin. how that dynamic plays out in the press, public and political system will be interesting.

Same Store Sales (Chart)

Bad Bank 2.0 Now in Treasury Plan

The Obama Administration’s bank-bailout plan is now expected to include a new form of "bad bank" that would essentially combine public and private resources to take bad assets from banks’ books, sources told CNBC. 

In addition, funding for the bank-rescue plan is unlikely to exceed the $350 billion currently available under the TARP, another source said.

"We don’t know yet whether we’re going to need additional money or how much additional money we’ll need until we see how successful we are at restoring a level of confidence in the marketplace," President Obama said in a news conference Monday night.

A Treasury Department source said the plan was essentially complete with only minor "tweaks" being applied. The plan is being presented to members of Congress this evening, according to sources.

Based on details coming out that presentation, the plan calls for:

Some $100 billion will be committed to new capital injections
Another $100 billion will go to the Federal Reserve’s TALF program
And $50-100 billion on housing measures, as expected, according to the source
The package will be unveiled Tuesday by Treasury Secretary Timothy Geithner at 11 am EST

Job Losses in Post WWII Recessions (Chart)

Market Wrap Week Ending 02/06/09

Clearly, something is up with the dollar. Overall, it’s in a severe bear market for the last decade. From 2004-2007 interest rates rallied up and the dollar continued down to new lows. 

Starting in mid-2007 rates began to plummet, as low as they could go in late 2008 and earlier 2009, yet the dollar has been rallying strongly since mid-2008. What gives?

Not only is the dollar a very sick puppy, it acts completely schizophrenic as well. Even the Fed admits the dollar has lost 95% of its purchasing power or value since the Fed was created in 1913.

So, why the hell is the dollar rallying? It seems to make no sense. Often times, however, things appear to make no sense, because they are making someone a lot of cents.

Now let’s look at some charts of gold in various paper fiat currencies around the globe.

It’s simply amazing: gold is making new highs in almost every world currency except the U.S. dollar and the Japanese Yen.

Rising treasury yields

Even a casual market observer like your humble blogger has noticed the dramatic increase in Treasury bond yields from 2.5% on the 30 year bond to over 3.5% in a bit more than a month. (ten-year here via ft) I had assumed that the Fed, at its last FOMC meeting, would shed a bit of light on its December statement, when it said it would use all available means to free up credit markets and was considering buying Treasuries. The latter was particularly credible, since Bernanke has discussed the idea in some of his academic work. 

The long bond, which had fallen from its peak (remember lower prices mean higher yields) but stabilized and rallied a bit right before the January Fed meeting. Not only did the announcement fail to clarify how a Treasury program might work, but the language suggested an intent to focus on instruments other than Treasuries. This seems odd, for as long as the benchmark rate continues to rise, trying to control spreads over it can achieve only so much.

Or maybe the truth has dawned on the Fed: the market is bigger than it is. Even so, it had better learn to bluff better, since Treasury investors, discouraged by the latest announcement, are demanding higher yields.

Credit agency downgrades ratings for 22 countries

Coface, an international credit insurance and credit management services group, yesterday downgraded its ratings for 22 countries and territories, including Hong Kong and Taiwan, while putting the two biggest emerging markets – China and Russia – on its negative watch list for the first time. 

After a strong 5.7 percent growth in 2007 and 6.3 percent growth in the first quarter of last year, Taiwan’s economy slowed markedly for the rest of the year, Coface said in a statement.

The slowdown was mainly attributable to a weakening of overseas demand, particularly in China, Hong Kong and above all, the US – Taiwan’s main trading partner as it is the ultimate re-export destination for about 70 percent of the nation’s shipments to China, it said.

Given tight credit and dim sales prospects, companies have delayed investments, Coface said, adding that this raised risks that the Taiwanese economy could contract this year.

CBOT Debt Service Estimates (Repost) (Table on page 2)

Bank Failures May Reach 1,000 on Bad Loans, RBC Says 

Feb. 9 (Bloomberg) — As many as 1,000 U.S. banks may fail in the next three to five years, almost double the one-year tally at the height of the saving-and-loan collapse, as losses mount on commercial real-estate loans, RBC Capital Markets analysts said. 

Most of the failures will probably occur at banks with less than $2 billion in assets as their commercial customers default, said Gerard Cassidy, an analyst at RBC, in an interview today.

"There are billions of dollars of losses embedded in the system, and the system has to flush them out," Cassidy said. "The people that are going to take the losses are the taxpayers and bank stockholders, and if regulators say there won’t be much loss to taxpayers, they will be lying."

The U.S. seized 534 lenders in 1989, including 327 saving- and-loan associations, during the peak of a crisis among thrift institutions, FDIC data showed.

Obama Says Crisis Calls for More Jobs(WSJ Video)

Obama: This Is No ‘Run-of-the-Mill Recession’ (WSJ Video)

Germans get by without the euro 

The phenomenon, not seen since the Great Depression, has left experts scratching heads at the Bundesbank. 

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