Capitulation?

This year has been historic in many ways, but the most important issue seems to be our economic state. Only since 1931 have we seen drops in asset values from Equities to Mortgage related securities all at the same time. Last Thursday seemed to mark an important day as many well known investors finally threw their hands in the air and believed this was truly the end of capitalism as we know it. We have had many jump starts over the last few months but Thursday's volume surge and large drop seemed to mark an important psychological point. Even Friday many were skeptical that we had seen a bottom as fundamentals diverged from market prices to very wide margins. By the end of the day we had recovered and saw a major bounce in the market averages. Corporate America seems to be doing better than most believe although Americans seem to be feeling very depressed. This feeling is very different than what most felt in the 1990's and what I would call bipolar. I have argued for years that Real Estate was very overvalued but I was not aware that we had leveraged ourselves to levels that were unheard of and our Regulators were supposed to be monitoring. Our Government was well aware of this as I recall Alan Greenspan speaking volumes about how great our Hedge Fund industry was and that liquidity was the most important aspect provided to our markets by many crooked billionaires. A consistent framework is very important so you can trust what you are reading, whether it be ratings from S&P or our own FDIC speaking about how our banking system is in great shape (that is from an interview on Kudlow & Company with Sheila Blair of the FDIC in February of this year). It sickens me that we have lost the trust of our people just because of lack of oversight as the world spins into a chaotic economic frenzy. We have seen similar times before but this time, it is my belief that many should be sent to prison for a very long time (I guess Enron taught us nothing). What has been a relief is the American people taking back their own country through an election to change the very problems that have plagued this Nation for more the 35 years. No longer will we be lead to believe that all is well. Businesses are stocks and should be treated as if we are owners, not passive investors with no say in how things are run. If that was the case, we should ban all Public Pension Funds from owning stocks and other risky investments. It is time to take back our future and it looked to me that the free markets did exactly that. I say this only because it is the crooked billionaires who seem to have really lost as their Hedge Funds have blown up, their tax loopholes will be closed and a better society will emerge. With time we will repair the damage done to our economy and the stock market will once again rebound to higher levels. This time, we cannot forget why we are in this position and I hope that people will begin to believe that this is the greatest country in the world with the best principals. It is this thought that makes me believe we have seen the worst in the stock market and better times ahead. That is why I believe we saw real Capitulation last week for the first time in my life.

The Oncoming Corporate Merger Mania

With the market declining over the last two months and all the cash on the sidelines (approx. $2.35 Trillion), it only make sense that corporate mergers, to some degree, will begin. In the late 80's after the 1987 crash, values dropped and money from Japan and Europe made their way into our markets with many acquisitions taking place from foreign companies. Today, we see a similar pattern taking place although the credit crises has made it more difficult for the LBO style takeover. Also, many companies seem "frozen like a deer in the headlight" as to how they should reallocate their resources, while they assess the availability of credit. Those companies who posses a liquid balance sheet may look to enhance their portfolio of business' by using their cash for investment rather than returning it to shareholders in the form of dividends and buybacks. This in turn could help our stock market as the buyouts will be much higher than the stock prices in our current market. Most likely, this will begin in the new year but it could start sooner. I speak of this only in terms of companies who take a long-term view of value and see that many great franchises are selling for pennies on the dollar. If this does take place, it might be the catalyst to move our stock market much higher. This has nothing to do with the recession taking place today, but more to do with CEO's looking to strengthen their position for the future. For a CEO to buy a business growing at 8-10% and most stocks selling at single digit multiples, it sure makes the present value very compelling. I hope the bankers are advising companies during the tumultuous time as first, a business should not be over leveraged, and second, it should posses the right liquidity to take advantage of the fear gripping Wall St. The argument of Decoupling has been answered and put to bed for now so we must look to see what the future holds for our corporations. This brings me to our current recession. Layoffs and resizing a business tends to happen within two quarters or so. Over time, this quick transition leads to V shaped recoveries in Corporate America, although our consumer is still in a very bad spot. I hope our new administration acknowledges the need further stimulus, just not in the form of direct payments to our citizens, but by using the funds to enhance our infrastructure. This would in turn reduce unemployment and bring life back to certain industries that have been crushed. It was a good idea to make sure our system is recapitalized by sending money to our financial companies (although they are still not lending) but we now need to focus our attention on the people. Using Federal Funds to help our country rebuild it's infrastructure will enhance jobs (of all kinds like construction to engineering) but is necessary for our own safety. Change is here and I think the chance to really make the US a great place can happen and will but it takes our corporations and government working together. Placing a greater safety net is not the answer by bailing out everyone. We need to let the weaker players use the bankruptcy courts to workout their situations and concentrate on how to help the larger percentage of our population.

Spreading the Wealth

Every day I drive home to hear smear campaigns that have no legitimacy. Ads that ATTACK the American People, that they should fear that their personal wealth is going to being distributed throughout society. Well folks, that has been going on for over 100 years. There are many ways our Government spreads the wealth by taxing corporations and individuals and utilizing the money to employ 35% of the workforce. What about Section 8 housing or even the Public Finance in general. We all work hard to build a nest egg so that one day we can retire, but a portion of that income is taxed and sent to the US Treasury and State Franchise Tax Boards. This money is redistributed to less fortunate people or to build new projects like bridges or schools. In the form of Public Finance, it is your property taxes that pay back the General Obligation Bonds that we all vote on to help improve our society. It seems that personal GREED has taken a very dark turn during this election and the use of FEAR seems very unethical. The average citizen in the US has no idea how our own system works, so hearing adds about your taxes going up and a redistribution of wealth taking place is ludicrous. It was proven just 10 years ago, with the fall of the Soviet Union, that having a society where intellect has no value, fails. From an economic standpoint, we can't raise taxes while in a severe recession, but in the future we need to show some responsibility for the last 25 years of spending. The reason for our recession is multi-dimensional but most importantly caused by the American People using too much credit and not saving. In fact, we have the lowest savings rate in the world. The real FEAR is that if taxes do go up, the ability of greedy Americans to service all the debt they incurred, from credit cards to 100% mortgages, will not be sustainable. Trust your Fed President as he understands these problems and how to tackle them. I only write this as we are being sold a false bill of goods during this election. Let's hope the American People can overcome these personal issues and look at our society as a whole to make our country a better place.