May 25, 2022

Archives for June 2010

US Treasury Calls TARP Repayments A “Milestone” While Ignoring The Elephants In The Room

Treasury’s Victory Call On Financial Bailout Premature

The Treasury Department’s latest public relations effort to highlight the success of the financial system bailout focuses on the amount of TARP repayments versus total debt outstanding.  In addition, the Treasury, which had previously estimated the cost of the TARP program at $341 billion, has now lowered that estimate to only $105 billion.

Wall Street Journal – The U.S. Treasury Department said Friday the total amount repaid to taxpayers for government funds used to bail out U.S. companies has surpassed, for the first time, the amount of outstanding debt.

The Treasury, in its May report to Congress on the Troubled Asset Relief Program, reported TARP repayments reached $194 billion, which has exceeded by $4 billion the total amount of outstanding debt—$190 billion.

Treasury’s assistant secretary for financial stability, Herb Allison, in a statement described the totals as a “milestone” and said this is “further evidence that TARP is achieving its intended objectives: stabilizing our financial system and laying the groundwork for economic recovery.”

Does the general public accept the Treasury’s view that the bailout was a resounding success at a relatively modest cost?  Recent Pew Research data, which reveals overwhelming negative public opinion for both the government and the banks, suggests that the Treasury’s spin on the bailout will be given little credence by the public.

Large majorities of Americans say that Congress (65%) and the federal government (65%) are having a negative effect on the way things are going in this country; somewhat fewer, but still a majority (54%), say the same about the agencies and departments of the federal government.

But opinions about the impact of large corporations and banks and other financial institutions are as negative as are views of government. Fully 69% say that banks and financial institutions have a negative effect on the country while 64% see large corporations as having a negative impact.

In March, during the final debate over health care reform, just 26% of Americans offered a favorable assessment of Congress – by far the lowest in a quarter-century of Pew Research Center polling.

Large majorities across partisan lines see elected officials as not careful with the government’s money, influenced by special interest money, overly concerned about their own careers, unwilling to compromise and out of touch with regular Americans.

The skepticism regarding the ability of government to operate honestly in the public’s best interest is well founded and the latest Treasury report on progress of the TARP program bears this out.  While the Treasury reports on the “success” of repayments under the $700 billion Troubled Asset Relief Program, other government bailouts and guarantees that are far exceed the cost of the TARP program are conveniently ignored.   If the Treasury really wants to provide a comprehensive accounting of what the financial system bailout will cost the American taxpayers,  here’s my short list of additional items to address in their next report.

1.  The amount currently owed under the TARP program does not include amounts committed by the US Treasury but not paid out.   According to the WSJ, “the outstanding debt amount does not include $106.36 billion that has been committed to institutions but has yet to be paid out by the Treasury. Factoring in that amount, the outstanding debt would be roughly $296 billion.”

2.  Two of the biggest ongoing bailouts in history go unmentioned.   The  Housing and Economic Recovery Act of 2008 provided for a $400 billion bailout of Fannie Mae and Freddie Mac.   The Government subsequently granted Fannie and Freddie an unlimited line of credit with the Treasury.   Fannie and Freddie have already drawn $145 billion and according to Bloomberg, the final cost to bailout out the two agencies could approach $1 trillion.

3.  Future banking failures constitute another sizable risk for increasing the cost of bailing out the US financial system.   The FDIC has been able to resolve banking failures to date using premiums collected from the banking industry, including a special assessment of $46 billion at the end of 2009.   While the FDIC has not yet had to tap its $500 billion line of credit with the US Treasury, future banking failures may require it to do so.

In its latest quarterly report, the FDIC reported an increase in the number of problem banks to 775, out of a total of 7,932 FDIC insured banks.  Assets at the problem banks total $431 billion.  Total deposits insured by the FDIC now total $5.5 trillion.   The amount of reserves in the FDIC Deposit Insurance Fund total negative $20.7 billion.   Liquid reserves of the FDIC total a mere $63 billion.   If the US economy weakens and more banks fail, the FDIC’s only option will be a costly bailout by the US Treasury.

The government seems to believe they can fool all of the people all of the time. Whatever happened to “change you can believe in”?

Mr Obama, Please Don’t Read This

US Companies Build Massive Cash Reserves Based on Economic Worries

Wall Street Journal – U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery.

The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952.

Idle cash of almost $2 trillion is a massive amount, but let’s put that into perspective by comparing that to the spending habits of the U.S. Government.  If the U.S. Government expropriated every dollar of cash held by U.S. companies, it would barely cover 16 months of U.S. deficits.   The entire $1.84 trillion of cash held by U.S. companies would pay for a mere 6 months of U.S government spending.

In the government’s last fiscal year, receipts were $2.1 trillion and spending totaled $3.5 trillion for a deficit on $1.415 trillion.   Latest figures from the U.S. Treasury indicate that the current fiscal year’s deficit will exceed last year’s deficit – here are the numbers month by month.

FISCAL 2010           RECEIPTS        OUTLAYS            DEFICIT

$MILLIONS

OCTOBER……………..135,294              311,657             176,363

NOVEMBER…………..133,564              253,851             120,287

DECEMBER…………….218,918              310,628              91,410

JANUARY………………205,240              247,874              42,634

FEBRUARY…………….107,520              328,429            220,909

MARCH……………………153,358             218,745              65,387

APRIL………………………245,260             327,950              82,689

MAY…………………………146,795             282,722            135,927

YEAR TO DATE      1,345,950          2,281,566            935,606

Graphical Representation of Looming Disaster

Government spending is now almost twice total receipts.   How long can any entity continue at this pace before hitting an economic brick wall?

chart

Source: Department of the Treasury

Fed Chairman Bernanke recently warned that unless deficits are reduced, the U.S. could become the next Greece, but the economy is currently too fragile to initiate deficit reductions.  Translation – we are facing social and economic disaster from out of control deficit spending, but we can’t do anything about it right now.  Conclusion – the government will need trillions every year for the foreseeable future to cover the gap between receipts and spending.

Let’s hope the President doesn’t connect the dots here – $trillions needed by the government while companies are sitting on $trillions that they are not investing, spending or paying to shareholders – not very patriotic!   After having already proposed a plethora of tax increases on everything possible, “idle corporate cash” could easily become a very tempting target.   Let’s hope Mr. Obama does not read this post.

Geithner Lectures Europe On Fiscal Discipline – This Is Like BP Giving A Seminar On Oil Well Safety

With Europe Facing Meltdown Geithner Offers Advice

After recently “saving” the US from economic Armageddon, Treasury Secretary Geithner must feel uniquely qualified to  advise European governments on their looming sovereign debt crisis.   Geithner’s solution to Europe’s out of control deficits is additional stimulus (via increased deficit spending), bailouts and stress tests on Europe’s tottering banks to rebuild public confidence in the banking system.

Wall Street Journal – LONDON—U.S. Treasury Secretary Timothy Geithner landed in Europe and reasserted a traditional American role of dispenser of financial advice to the world, telling European governments to get their fiscal houses in order.

After two years in which an historic financial crisis seemed to deprive the U.S. of its self-confident global economic leadership, Mr. Geithner signaled a new-found willingness to reassert American authority on the future of the world economy.

Inside No. 11 Downing Street, the home of his British counterpart, Mr. Geithner pushed continental Europe to speed up the rescue of debt-laden economies, and to not stint on fiscal stimulus.

The U.S. is also advising European countries that can afford it—the U.K., Germany, France—to keep pumping stimulus into their economies.

“This crisis is multifaceted, but I believe bank stress tests can be helpful as a critical component of any comprehensive plan to restore confidence in the European financial system,” said Lee Sachs, who was, until a month ago, a top adviser to Treasury Secretary Timothy Geithner.

Mr Geithner’s advice that over indebted nations should borrow more money to solve their debt crisis was met with scorn by European officials.  The recommended stress tests for banks was viewed as a mere public relations exercise.

WSJ – For Geithner critics, the new U.S. assertiveness is misplaced. Desmond Lachman, a former senior IMF European official who is now a researcher at the American Enterprise Institute, said the repeated bailouts engineered by Mr. Geithner have made the overall problem worse, and that the U.S. advice of providing even more financing for heavily indebted countries like Greece is bound to fail.

Mr. Lachman said Greece’s debt needs to be restructured and that weaker euro-zone countries should consider dropping the euro and reverting to their national currencies. “Geithner is part of the problem,” he said. “It’s obvious this can’t work.”

“You don’t need a stress test to tell you what would happen if Spain became bankrupt; it would be horrible,” one German official said.  German officials argue the U.S. tests were little more than public-relations stunts, designed so that banks would pass.

European governments realize that the American solution of borrowing trillions for bailouts and fiscal stimulus has only compounded the original problem of too much debt.   US Government debt now exceeds $13 trillion and the debt to GDP ratio of the US equals or exceeds that of many European nations that are now tottering on the fiscal abyss.  Based on continued unprecedented expansion of the national debt, the IMF is forecasting that total US debt will exceed GDP by 2012.  Debt to GDP ratios over 100% raise serious questions about a country’s ability to service their debt, especially if interest rates rise.

Tragically, Europe has bought into the “Geithner solution”.  Despite their doubts and with no other easy options, Europe will lend up to $1 trillion to bailout hopelessly over indebted sovereign borrowers.  Does anyone really believe that this latest bailout is a solution?

Time Tested Indicator Predicts Huge Gains For Gold Stocks

K-Ratio Flashing Major Buy Signal

The increase in gold prices over the last five years has outperformed virtually every other asset class.   From the low $400 range in 2005, gold has soared almost 300% to over $1200 per ounce.

5 Year Gold - Courtesy Kitco.com

5 Year Gold - Courtesy Kitco.com

Although many gold stocks have seen substantial gains since 2005, the overall price gains of gold stocks has underperformed the price appreciation of the metal as can be seen by viewing the PHLX Gold&Silver Index, comprised of 16 major gold and silver producers.  While the price of gold has appreciated almost 200%, the XAU has lagged considerably with a gain of 96%.

XAU GOLD&SILVER INDEX -COURTESY YAHOO.COM

XAU GOLD&SILVER INDEX -COURTESY YAHOO.COM

While the reasons for the price disconnect between gold and individual gold stocks are in many cases company specific, the question on most investors minds is where do we go from here?  Will the large increase in gold prices eventually translate into major gains for the gold producing stocks?   The emphatic prediction, according to the K-Ratio, a time tested method for timing the purchase of gold stocks, is telling us to stay long and accumulate gold stocks.

The K-Ratio is computed by dividing the value of Barron’s Gold Mining Index (GMI) by the Handy and Harmon price of gold.  The index reflects the relative value of the price of gold stocks to the price of the underlying metal.  When the ratio of the price of gold stocks to the price of gold is low, it is a bullish signal.  Conversely, if the price ratio of the gold stocks relative to the metal is excessive, it is usually a good signal to sell the gold stocks.

The K-Ratio works best at extremes.  The rule of thumb based on past history tells us that a K-Ratio at 1.20 or lower indicates that gold is cheap compared to the price of bullion.  A K-Ratio reading of 1.90 or higher is extremely bearish and indicates extreme overvaluation of the gold stocks.

The latest weekly reading on the K-Ratio shows a very bullish reading of .96 (Barron’s Gold Mining Index of 1158.99 divided by the Handy and Harmon Gold Price of $1203.50).   Since 1975, readings at or below 1.15 on the K-Ratio have resulted in gold stock gains 90% of the time over the next 12 months with an average gain of 40%. Lending anecdotal support to a large rally in the gold stocks is the overwhelming number of bearish articles on gold by the mainstream press.   From a fundamental perspective, of course, it does not hurt that logical minds are beginning to question the value of paper currencies of numerous sovereign nations.

Accumulation of high quality gold stocks such as NEM, GOLD, GG, KGC and AUY seems warranted, especially on price pullbacks.  Based on the technical and fundamental factors, the bull market in gold stocks has a long way to run.

Courtesy yahoo.com

Courtesy yahoo.com

Courtesy: yahoo.com

Courtesy: yahoo.com

Courtesy: yahoo.com

Courtesy: yahoo.com

Courtesy: yahoo.com

Courtesy: yahoo.com

Courtesy: yahoo.com

Courtesy: yahoo.com

Disclosures: Long NEM, GOLD, GG, KGC, AUY