READ THIS if you think the financial crisis is over and the stock market rally will continue...LINK

[Blackhatjack]

The FDIC is "in the red" and seeking huge contributions from banks of all sizes to become solvent again --meanwhile, the $250k coverage on bank accounts that the FDIC promised now rests entirely upon the full faith and credit of the US Govt. Smaller banks are dying out and being absorbed by a small group of even more powerful financial giants "too large to fail." The consumer middle class is buried under a mountain of debt and unable to purchase consumer goods in this market, even as their jobs, homes and healthcare are disappearing.

I don't think the 'recession is over' as the Wall Street Oracles have pronounced. I think what we have seen with the recent 'run up in the Stock Market' is a manufactured rally to allow those with holdings to cash out significant shares before the quick trip down in the offing.

Just my opinion. Read the whole article linked here and tell me where I am wrong. Please!


http://www.nytimes.com/2009/10/11/business/economy/11banks.html?_r=1&src=twt&twt=nytimes

"Small Banks Fail at Growing Rate, Straining F.D.I.C.
By ERIC DASH
Published: October 10, 2009

A year after Washington rescued the banks considered too big to fail, the ones deemed too small to save are approaching a grim milestone: the 100th bank failure of 2009. In what has become a ritual, the Federal Deposit Insurance Corporation has swooped down on a handful of troubled lenders almost every Friday, seizing 98 since January alone and putting their assets into the hands of another bank.

While the parade of failures still represents a mere fraction of America’s small banks, it underscores a growing divide between them and large institutions like Goldman Sachs, JPMorgan Chase and U.S. Bancorp, which are slowly growing stronger as the economy improves.

Burdened by worsening commercial real estate loans, many small banks’ troubles are just beginning. Many analysts say that the now-toxic loans could sink hundreds of small lenders over the next few years and place a significant drag on the economy.

Already, the bank failures are placing enormous strain on the F.D.I.C. and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red."

MORE

[Blue_In_AK]

1. We took our retirement money

out of the stock market last year when things started going down, but before the major crash. Our money guy thinks we should get back in, but now I'm feeling like I don't even want to invest at all since the money goes into buying stocks in big corporations that I feel are hurting the "real" people, and I don't know enough about doing it myself (and really don't want to know) to micromanage which companies I would invest in.

Until this whole "jobless recovery" nonsense settles out, I don't even want to be involved.

[Blackhatjack]

4. I cannot see anything supporting the present rally on Wall Street except unfounded hope...

There are no reports of recovery in housing, jobs, unemployment claims, debt load, etc. to support such a rally. It is just like hawking a stock to get suckers to invest and inflate the price so the principals can cash out at the top leaving the suckers with an empty bag.

[mwb970]

26. You must be watching the Bad News Network.

The fact is that there are many indicators of recovery in the areas you mention, albeit accompanied by some remaining problems:

The clouds part but underlying problems remain by American correspondent Irwin Stelzer
(London Times Online, October 11, 2009)

For one thing, the service sector, which accounts for about 80% of American economic activity, has moved into growth territory. The Institute for Supply Management’s index of non-manufacturing activity has passed the 50 mark, meaning that the sector is growing for the first time this year — not by a lot, but growing nevertheless. So is the manufacturing sector, with an index above 50 for the second consecutive month. Equally important, the growth is occurring in 13 of the 18 manufacturing industries covered by the ISM survey.

For another, orders for business equipment are picking up, perhaps because businesses see signs that demand is picking up, and have cash to spend. Business Week reports that non-financial companies have surplus cash flow of $156 billion, “a surfeit that allows companies to finance all of their current outlays for equipment and construction without borrowing”. With the exception of one year, “that is the largest surplus on record”.

Then there is housing. Prices are up, as is the index of pending sales (not yet completed), the latter for the seventh consecutive month. Consumer spending is showing a bit of life, even excluding the temporary jump in car sales arising from the cash-for-clunkers programme that doled out $4,500 of taxpayer money to anyone trading in a gas guzzler for a more fuel-efficient car.

Add to this an easing of credit markets. The default rate of speculative-grade companies has dropped for the first time this year and the premium that riskier corporate borrowers have to pay over safer US Treasuries has fallen by half. “Even cash-strapped companies have been able to refinance,” reports the Financial Times.

Perhaps most important of all is the inventory picture because it is a forerunner of economic activity and the indicator most watched by White House economists. Many companies have so reduced their stocks of materials and goods that they have no choice but to restock. Whether this trend will prove durable, setting off a restocking boom, is difficult to say. Some businessmen tell me it is.

The economic system is very complex, and nobody has a functioning crystal ball. Still, I just don't see quite the level of "doom and gloom" that you do.

[AllentownJake]

30. Pardon me from being skeptical

However, I don't see how you have Service Sector job growth when unemployment is increasing. Who or what is that industry servicing?

What type of business equipment is being ordered. Is this seasonally adjusted?

On the Credit Markets. I read an article that said the exact opposite. That lending is actually down in the 3rd quarter by over 20% on both consumers and businesses.

Inventory, we'll see what the restocking levels are.

[CrispyQ]

28. So true.

I agree that that's what's going on. You have as good a chance in Vegas.

[KoKo]

9. Take Heart...you are not alone...sometimes a "a pause..stuffed in mattress"

is a good "Time Out" while things settle. Just saying...

[dixiegrrrrl]

15. We rescued our retirement in 08, and will NEVER trust the bankers,

investment companies, again. It did not escape notice that Geithner and Bernanke gave away
the sum total of the boomer's carefully saved retirement money. The timing was perfect.
The only people who made money on retirement plans were the ones who played with OUR money, money we were not allowed by law to touch without serious penalty.
Between the dot.com recession, and taxes, very little interest was added to the sum total of
all those years of savings.
And now interest rates are ZERO.

Never again. Never.
I suspect there will be whole generation of progressives who will keep their money out of the system's pockets. It will take a long time for banker's and corporations to earn trust now.

[CrispyQ]

29. May I ask what you did with your money?

You, of course, are under no obligation to tell, but I'm curious. Our sits in a savings account at one of the 'too big to fail' banks. I have reservations about that, but really have no idea where else to put it.

BTW, I love the quotes in your profile, especially the Susan B. Anthony one.

[dixiegrrrrl]

33. Thanks, Crispy.

Everyone I trust said deflation was coming and cash was king during deflation.
And sure enough, deflation seems to be here.
So we kept it in cash, in the local banks.
Local community banks.
NOT BIG banks, NOT "regional" banks, but in a couple of local banks.

[exboyfil]

16. I went back in on Inauguration Day

watched the decline into March and stayed for the run up to S&P 500 to 1000 and got back out. It has run up another 6% since then. I really think it is going to crash to the point I am considering shorting financial sector stocks through an ETF.

If you are talking about retirement dollars, I would refer you to the advice of Zvi Bodie the principal author of the most respected Investments text in use at colleges. Don't put your retirement savings into the stock market. Right now long term TIPS are trading at a little over 2% over inflation (low by historical standards but what is your intention for retirement).

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/06/15/zvi-bodie-debunks-stocks-for-the-long-run-on-pbs.aspx

Properly structured TIPS can guarantee you a future basket of goods every year. It is like Social Security - indexed to inflation so you have some idea what your purchasing ability will be. Unlike gold you have a floor on your investment. The major risks are a lag in the inflation calculation, the fact that the inflation calculation may not reflect your actual situation, and the possibility of Treasury default.

Another thing to consider instead of stocks would be corporate debt (unfortunately the really good deals on this have mostly past). I would be uneasy in locking in long term interest rates given that, if things eventually do recover, I feel inflation (along with interest rates) will start roaring.

Right now I don't see any real good places to turn for investments. In November long term TIPS were trading at 3-3.2% over inflation, and I put part of my portfolio in at that time. Even with the equity run up since then, I still would have been better off putting 100% in at that time and not worrying about it anymore.

401(k)s do their owners a disservice by not allowing access to the Treasury market directly.

[HCE SuiGeneris]

17. "Killing Sacred Cows"

is a book worth reading before heeding your financial adviser's suggestion. It is an empowering collection of great information for the average person who would like greater control over their finances. It is written by Garrett Gunderson.

[Blackhatjack]

2. Keep in mind 34 TARP recipients of taxpayer billions have FAILED to pay required dividends to Govt

.... which is an indication that they are trying to hold onto reserves to cover toxic assets still on their books.

Commercial loans are about to tank, and toxic assets have not been removed from the balance sheets of the TARP recipients. Add in the resetting of Variable Rate Option loans.

Does not sound like the recession ended months ago as WAll Street financial titans proclaimed.

[doc03]

5. If needed the FDIC will be bailed out.

In every recovery there are always the naysayers that convince people the world is coming to an end and they miss out on the profits. Myself I am much more worried about the Pension Benefit Guarantee Corporation PBGC it is in the red and millions of Americans depend on it for their pensions. You can bet if it needs bailed out the Republican'ts will fight it tooth and nail since those are mainly retired Union workers pensions.

[Blackhatjack]

8. The problem with the FDIC is it was designed to be independently funded by banks themselves...

... the Govt can 'guarantee deposits' to an extent, but soon you reach the point where there are too many outstretched hands asking for Govt to back them up... just like the PBGC you mentioned.

Of course the PBGC got millions of claims dumped on them when corporations raided funds that became undercapitalized, leaving their pensioners with sharply reduced benefits--even before the current crisis.

[doc03]

13. The government will never let the FDIC fail, they will

guarantee the deposits up to their limit even if they have to print the money to do it. Now the PBGC is a different story those are mainly Union pension plans and like I said you won't get one vote from a Republican to bail that out. The PBGC is also taking a big hit I assume because many workers like myself will be taking an early retirement because they lost their jobs. I read a few days ago that people filing for SS is up substantially for that reason. I just hope the PBGC is still there by next April, I figure once a person starts collecting benefits you are a little less likely to loose them. But if you haven't filed they can always say you could stay on your job. Another worry is they may just force people to take a token cash payment in exchange for the monthly benefit earned.

[KoKo]

3. Another View from "Market Watch!"--"Banks Cut Back on Loans to Businesses."

Capitol Report

Oct. 9, 2009, 6:00 a.m. EDT
Banks cutting back on loans to businesses
Credit squeeze on entrepreneurs threatens to derail recovery

By Rex Nutting, MarketWatch

WASHINGTON (MarketWatch) -- U.S. banks are reducing their lending at the fastest rate on record, tightening the credit squeeze and threatening to leave many otherwise viable businesses unable to borrow money to expand their businesses, meet their payroll or refinance their maturing debts.

According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace.

Last autumn, bank lending temporarily expanded when other sources of funding from the shadow banking system dried up after the collapse of Lehman Bros. Since then, however, total outstanding bank loans have dropped at an accelerating pace. See the data.

The decline in bank lending mostly affects smaller businesses. Larger corporations have alternative sources of funding, including retained earnings, corporate bonds, securitized loans and new equity. Those other sources of capital have increased in recent months, but not enough to offset the decline in bank lending.

In the first and second quarters, the U.S. private sector consumed more capital than it raised for the first time in more than 60 years. Negative net investment is "the hallmark of depression and difficult to reverse," said economist Leigh Skene of Lombard Street Research.

The big drop in credit also shows up as slower money growth. In the past 13 weeks, the money supply has fallen 0.3%. Most new money is created by borrowing, as banks credit the borrower's account with the proceeds of a loan. Conversely, the money supply is reduced when debts are paid off or written off. Deflation is not a threat -- it's already here.

The question is whether the decline in lending will be reversed soon.

If the drop-off in lending is mainly due to weak demand by businesses, then there's some hope that the recent upward momentum in industrial output and sales could lead to more optimistic business sentiment, greater demand for capital, and more lending by banks.

But if the decline is mainly due to weak banks unable or unwilling to lend, then a turnaround in credit creation may have to wait until banks' balance sheets are repaired, a process that could be delayed by further expected defaults in consumer loans, mortgages and commercial real-estate loans.
Running on fumes

The credit squeeze on small businesses remains a major hurdle for the economy to overcome.

Despite more than a trillion dollars from the Fed and from the Troubled Asset Relief Program, "the banking system has still not fully recovered," New York Fed President Bill Dudley said in a speech this week.

The biggest banks raised billions in new capital, as ordered by Washington after the stress tests, but "banks are still capital constrained and hesitant to expand their lending," Dudley said.

"Most importantly, some significant classes of borrowers -- namely commercial real estate and small business -- are almost wholly dependent on the banking sector for funds, and those funds are not easily forthcoming," he said.

Dudley said the credit squeeze is the most important factor that will "inhibit the pace of the economic recovery." Read the speech.

Businesses with fewer than 50 employees have been responsible for about one-third of job creation over the past few decades. In the 2001 recession, these small businesses were remarkably well-shielded, accounting for just 9% of job losses, said Melinda Pitts, an economist for the Atlanta Fed, writing on Macroblog. Read more.

In the early part of this recession, however, small businesses have accounted for 45% of job losses. If small businesses can't get financing, "then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries," Pitts said.

"The economy is running on fumes," said Brian Bethune, U.S. financial economist for IHS Global Insight. Although the Fed and the Congress have been trying to buy time for the economy while waiting for the banking system to recapitalize itself, Bethune worries that the support won't be strong enough or will be shut off too quickly.

"We need a longer bridge," he said. "There's a lot of risk in the first half" of 2010.
More write-downs, weak demand

The decline in bank lending reflects several factors.

First, banks are writing off more bad loans, which directly reduces the amount of outstanding loans. Data for third-quarter write-offs are not yet available, but in the second quarter, they surged to a record $44.5 billion, nearly matching the total write-offs in the six years from 2002 to 2007. For commercial and industrial loans, write-offs rose to $7.8 billion for the quarter, according to bank data reported to the Fed.

Weaker demand and constrained supply are also factors in the decline in lending. According to the Fed's quarterly survey of bank lending officers, banks have tightened their standards for commercial and industrial loans at the same time that demand has fallen for such loans.

According to the banks, the main reason for the decline in lending to businesses has been weaker demand. Reduced creditworthiness of the borrowers ranked as the second-most important reason.

The banks also complain that tighter regulation and a special assessment to replenish the Federal Deposit Insurance Corp. are hurting their ability to lend.

The need for capital has dried up as the recession worsened.

Many companies see little need to invest right now. About one-third of total manufacturing capacity in the country is sitting idle. Spare capacity is also rising in commercial real estate, especially in apartments, retail, offices and hotels. Fewer small businesses are planning to expand, invest or hire than at any time in more than 30 years, according to the National Federation of Independent Business.

Still, many businesses need credit to keep their operations going, or to expand into markets being abandoned by other, less nimble companies.

Many companies also need to roll over their debt because corporate loans tend to have short maturities. About $3 trillion in commercial real-estate loans mature in the next three years, Skene said. About half of those loans came from banks. Most of the $1.3 trillion outstanding in leveraged loans will also need to be rolled over in the next few years, he said.

"This is why the Fed hasn't flinched," Bethune said. The most recent Fed statement said the recovery would likely be subdued. The Fed and Congress have "lots of things in place to get us out" of the credit squeeze, he said. But he warns, "it will take us years."


http://www.marketwatch.com/story/story/print?guid=69C1A4B5-8CB0-4ABA-A7B9-CD233634A288

[Blackhatjack]

6. Yep... "$3Trillion in commercial real estate loans maturing in next 3 yrs".... IS A KILLER

With 1/2 coming from banks who are unwilling to refinance, this is a disaster of huge proportions about to happen.

[OHdem10]

7. The Stock Market is not based on our economy right now. It is

based on Corporations doing business in Asia amd China.

When you see rally it tells us nothing about American Economy.
Psst-American Economy (one in USA) is still struggling.

Millions of Americans with no jobs. Not particpating in the
economy.

[Blackhatjack]

10. EXACTLY! The point of the OP... n/t

[KoKo]

11. True...I think the "OP" gets that. They are disconnected but still...there

should be interest because the Stock Market controls the savings of so many in 401-K's and the rest that the Economy Recovery depends on at some point in the future because there are PEOPLE who are involved who need to depend on both Economy and the savings in Stock Market (401-K, etc.) that will be affected.

[KoKo]

12. BTW, "BHJ"...I took this book down to Wrightsville Beach this weekend...

"Bailout Nation" by Barry Ritholtz. Have you read it...it's really a good beach read about all this. Put's it all into perspective: (You might also like his Blog: "Big Picture.")

-----

Correcting a Review of Bailout Nation

Posted By Barry Ritholtz On October 9, 2009 @ 1:00 pm In Bailout Nation | 8 Comments

There was a nice review Monday in the Las Vegas Business Press <1> that, unfortunately, had one significant error. (I don’t mean something I disagree with, I mean a factual mistake).

I wrote the reviewer thanking him for “the kind words about Bailout Nation” — but gently noted this small correction in the review regarding “Who is to blame.”

Since I never heard back from him, I feel compelled to correct the record.

The reviewer wrote: “Ritholtz finds two main villains behind the current crisis: former Federal Reserve Chairman Alan Greenspan and former President George W. Bush.”

I responded:

“While I was wholly unimpressed with President Bush during the crisis, I find many more people more deserving of blame than him. On page 232, I list two dozen players who are primarily at fault — and while Greenspan is at the top of the list, George W. Bush comes in somewhere around the middle (depending how you count ~10 or 15).

These more blameworthy folks are:

The Federal Reserve (monetary policy)
Senator Phil Gramm
Rating agencies
SEC
Mortgage originators and lending banks
Congress
The Federal Reserve again (as bank regulator)
Borrowers and home buyers
The five biggest Wall Street firms (Bear Stear ns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs) and their CEOs

In the book, I rated all of these players as more culpable George W. Bush.

If its individuals, rather than firms and titled positions (i.e., CEO), than the #2 man on the list (again page 232) has to be Senator Phil Gramm.”

Other than that, its a good review . . .

>

Source:
Big bailouts a perversion of capitalism, author argues <1>
MATTHEW CROWLEY
Las Vegas Business Press, October 05, 2009
http://www.lvbusinesspress.com/articles/2009/10/05/news/iq_31501104.txt

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2009/10/correcting-a-review-of-bailout-nation/

[Blackhatjack]

14. Thanks for the heads up... I have not read it yet.

I do agree that GWB was more a figurehead and puppet than architect of this massive implosion.

There are very smart people who engineered this and profitted handsomely from it.

[exboyfil]

18. How about Fannie Mae and Freddie Mac?

Don't forget AIG as well.
Legislators from both parties beyond Phil Gramm

[Odin2005]

19. Sucker rally, just like 1930.

[Roland99]

20. Financial institutions are hording cash, keeping "toxic assets" on the books, and not lending

Credit is still dropping.

Remember, the worst market levels of the Great Depression were not in Oct 1929 but, rather, a few years later.

[Rex]

21. 'Too big to fail' means capitalism as we think it should be practiced

is a big lie.

[OutNow]

22. Maybe reduce the percentage in stocks

Many financial advisers suggest that people in or close to retirement keep up to 40-50% of their portfolio in stocks. I don't like that much exposure.

Their view is that with Social Security and a pension, your investment portfolio is the third leg of the stool. Of course lots of folks won't be getting a defined benefit pension, so your investments including your 401K will play a larger role.

I've been pulling money out of stocks during this run up and growing my cash. I've gone from 40% down to 33% equities, with a goal of reducing it to 30% in the next 6 months.

Like others, I can not find any good reason for market behavior. It will come down sooner rather than later.

[mwb970]

25. You're pulling money *out* of stocks during a runup in prices?

That's hard for me to understand. I moved my stock money into a money market fund when the Dow started down from 14,000. It dropped to about 7000 then started back up. When it got up to 9000 I got back in; now it's around 9800. I've watched tens of thousands of dollars get added to my retirement balance during the runup (right while you were pulling your money out!). If the market starts down again in a big way, I'll switch back to the money market.

This is what works for me. Your mileage may vary.

[OutNow]

31. Yes of course I'm pulling money out

Remember the old adage - sell high buy low. It's always a good idea to take profits off the table during a run up by selling. It would be better to wait for the top of the market to sell, but I can't predict the top. It would also be better to buy at the bottom (at 7000 rather than 9000) but you also can't predict the low. That's why I don't make big moves in either direction. But yes, sell when stocks are up and buy when they are low - that's what I try to do. And yes, YMMV.

[Hannah Bell]

23. small banks failing is the plan.

[mnhtnbb]

24. We are thinking of putting significant assets into building a house

to replace the one that burned down in 2007--AND keeping the small house where we are now as a rental.
I figure if we refinance this house now we can either have a 15 yr loan, or a mortgage payment low enough
that we could more than cover expenses from rental income. If we could convince our son to live in the rental house instead of the dorms, it would really payoff for the next several years.

I don't see good opportunities in the stock market myself, now. The market has already come back
significantly this year from its low .

[jacko_be]

27. english newspaper on american economy

http://business.timesonline.co.uk/tol/business/columnists/article6869385.ece

[paulsby]

32. put yer money where your mouth is.

fwiw, if one thinks the stock market is headed back down , it is EASY to make money off of it. (i am admittedly a daytrader and swingterm trader and also have longterm accounts).

anybody with a stock account can buy DXD and short the market.

the market's had a HUGE run the last week fwiw.

i just find it amusing that so many people who KNOW the market will do X don't put their money where their mouth is .

predictions are worth what people are willing to risk on them. generally speaking.