Search results matching tag 'bank nationalization'

Are we Sliding into Socialism, Comrade?

IanWyatt — Fri, 15 May 2009 16:32:00 GMT

Your Daily Profit

May 15, 2009

*****Government Intervention

*****Sliding Into Socialism?

*****Rising Gas Prices

You know over the course of the past few months I’ve not held Wall Street or the banking executives in high regard. I hold them almost—that’s almost—singularly accountable for our current recession (Uncle Sam and private citizens who borrowed too much are to blame as well), but the government is beginning to really stick its nose too far. For example, today’s headlines (those not about whether Nancy Pelosi knew about torture and when she knew it) are consumed with government pushing itself on private industry, most notably with the pressure on Bank of America (NYSE:BAC) to change its board.

Granted, “regime change” is a necessity for most of the companies receiving TARP money. After all, they’re the ones who got us into this mess. But shouldn’t it be shareholders forcing the issue? You saw how they forced Ken Lewis of Bank of America to give up his role as chairman. This was done at the shareholder level, not by some bureaucrats in a windowless office overlooking the National Mall.

But for many Beltway insiders this isn’t enough. Someone’s got to pay dearly for the bonuses paid out to Merrill Lynch just before B of A took them over. And since Merrill’s gone, guess who gets to play whipping boy? We’ll see how far this goes and which TARP recipient is next. Unfortunately, this is even more motivation for firms that received TARP money to pay it back as soon as possible, in some case, too soon.

A couple weeks ago the President and his Car Czar worked out a deal to “save” Chrysler. As part of that deal Chrysler is to come out as stronger, if leaner, automaker. We’ll see (ask Daimler Benz how their dance with Chrysler worked out).

But read the fine print on the ownership stake: the United Auto Workers (UAW) union will own 55% of the company with rest as U.S taxpayers, Canadian taxpayers, and Fiat somewhere in the mix, though it’s not 100% on board.

Let me rephrase this, the means of production will be controlled by the workers and the central government planners. They will control the production quotas and development of new products for the masses.

Does this sound familiar? Didn’t we spend 50 years and untold trillions to avoid this?

General Motors (NYSE:GM) is in the throes of its own bankruptcy deal. We’ll see how this plays out, but I’ll bet it won’t be too dissimilar from the fate of Chrysler, except Fiat won’t be at the party.

And this is rich…the UAW has graciously agreed to not strike Chrysler until September 2015. How magnanimous considering that as majority owner they’d be striking against themselves. But isn’t that kind of what they’ve done over the decades anyhow, just one degree removed?

So only Ford (NYSE:F) is left standing as a real company. In a sense, I’m proud of the management and decisions made at Ford to put them in this enviable position. I can only hope that their eventual fate is not that of Chrysler and GM.

*****Rising Gas Prices

While we’re on the subject of cars, I’ve been thinking about gas and oil prices. Have you checked the price at the pump lately? Here at our Washington, D.C. offices we’ve seen a gradual uptick in prices that if it happened overnight, or heck, even during one month, you’d do a double take.

After the markets collapsed last fall, regular gas was going for about a $1.70 a gallon. It was a nice reprieve just in time for the holiday season. But just yesterday I noticed the price at the local Shell station was $2.38, which also happens to be the local average.

So, let me get this straight: in the midst of the worst recession in a generation when we’re losing jobs at a pace of 600,000 and more PER MONTH, housing prices are falling, tax revenues are declining, retail sales are abysmal (unless you’re Wal-Mart (NYSE:WMT)), and businesses are failing, gas prices have increased by 40%? Something doesn’t jibe here.

Over the past few months Jason Cimpl and I have been doing a lot research on the oil sector. In fact, he’s been getting in and out of the ETF USO in the TradeMaster service to pick nice quick gains. One disturbing trend that we found was the rapid deceleration of oil field exploration and development. It’s virtually dried up. I’m not surprised given that according to the International Energy Agency current inventories are at all time highs. At current usage rates that equates to a stockpile of 62.4 days of consumption. That’s 8 days higher than just one year ago.

So oil, and by extension, gasoline prices should be going down, right?

Not so fast, you see oil traders work off not the here and now, but the future (that’s why they buy oil futures). And they’re anticipating greater demand toward the end of this year as the world economies (particularly the U.S. and China) pick up again and they have readily available data suggesting that Big Oil and nationalized oil are not ready to pick up the slack.

There’s no way they can. They’ve cancelled nearly three dozen big projects. And their existing capabilities are looking rather dubious.

For example, production in the developed world is way off: Alaska’s North Slope is way off, Mexico’s famous Cantarell Field peaked in 2002 at 2.1 million barrels per day and is now on track to produce only 772,000 barrels per day for 2009 (that’s 66% drop off in 5 years!), Britain became a net importer of oil last June—not from increased consumption but from depletion of its North Sea fields.

And then there are the other big players: Russia is having a tough time financing continued operations, let alone new projects; Iran, right, they peaked in 1976 at 6.6 million barrels per day and are now around 4 million; Saudi Arabia is well-known to be cooking the books on proven reserves numbers; Nigeria is constantly on the brink of implosion.

Then there’s Venezuela. What can I say? Chavez has done a great job in turning what was once one of the richest nations in South America into one of the poorest. He’s evicted Big Oil (not without stealing their assets first, just ask Exxon-Mobil (NYSE:XOM) and StatOil (NYSE:STO)), used PDVSA as his own piggy bank for keeping the masses at bay, and is now in the process of stiffing little guys like Williams Cos. (NYSE:WMB) and Helmerich & Payne (NYSE:HP) out of what he owes them for development and extraction purposes.

In 1997 Venezuela produced 3.18 million barrels per day. Today that’s down to 2.24 million, and continues to plummet.

But the real kicker is that Venezuela supplies 1 in 5 barrels of imported oil to the U.S. Talk about a real bind for the U.S. Two of its biggest providers, Mexico and Venezuela, have oil sectors on the verge of collapse and it’s own oil fields are drying up.

The only bright spot is Canada. Our friends to the north are our largest provider of imported oil giving us 1.9 million barrels per day. The only problem is that Canada’s got a lot more callers for oil than it used to, particularly the Chinese who are willing to pay top dollar (literally top dollar, as in the dollars from the exports they sell to you and me at Wal-Mart as I mentioned earlier) and at some point Canada might find itself hard pressed to resist China’s offer.

So, there lies the problem: production is down almost everywhere, new projects put on hold will take years to bring back up, and when the world economy turns around the reserves will be quickly depleted. I don’t want to sound like a pessimist, but perhaps the oil futures traders are seeing something much more clearly than anyone else is.

For the moment, I’ve been following small oil sector plays like Graham (NYSE:GHM) and a few others. If you want to find out more about oil exploration and services companies that stand to deliver big profits in the coming months check out my new report HERE.

In the meantime, feel free to send in your questions, comments, jokes, rants, observations and anything else on your mind to editorial@247investor.com. I enjoy receiving your emails and really do read every one of them.

Have a great weekend. We’ll pick it up again on Monday.

Best Regards,

Ian Wyatt

Editor

Daily Profit

Reality Bites

JohnMauldin — Mon, 09 Mar 2009 23:23:00 GMT

This week's writer of the Outside the Box is no stranger to long time readers. Michael Lewitt writes the HCM Market Letter and is one of my favorite writers and truly deep thinkers. He has recently decided to turn his letter into a subscription based model and is meeting with some success, as he should. So, sadly, he will no longer be a regular feature of OTB, but he did allow me to use the current letter, as I think it is one of his more provocative letters.

This is a piece you want to think through. Michael discusses the continuing series of bailouts, the consequences of the stimulus package, the various policy options and the likely response of the economy to all of the above. Plus he makes a few market calls and some interesting observations. I am truly pleased to be able to send this to you.

If you are interested in subscribing, you can to go www.hcmmarketletter.com/home.html or email info@hcmmarketletter.com.

John Mauldin, Editor
Outside the Box

Reality Bites

The HCM Market Letter by Michael E. Lewitt

"So long as risk is effectively concealed from borrowers and lenders or actually shifted to others, risk-taking will be excessive. The initial phase of excessive risk-taking will manifest itself as an economic boom, but eventually, when actual losses begin to change the perceptions of borrowers and lenders and begin to impinge upon unsuspecting others, the boom will give way to a bust....(A) market system whose credit markets involve risks that are partially concealed from the lender and partially shifted to others will be biased in the direction of excessive risk-taking. And excessive risks are converted in time into excessive losses."

Roger Garrison¹

The problem with bailouts is that you have to know what you're bailing out. But neither the U.S. government nor anybody else is capable of estimating the ultimate cost of bailing out such corporate giants as Citigroup, AIG, General Motors, Fannie Mae, and Freddie Mac (and the list goes on). There are two reasons for this. First, on a stand-alone basis, these companies are opaque and indecipherable entities. Financial innovation left transparency in the dust. Wall Street devoted much of its intellectual and political capital to concealing the risks it was creating. This concealment was deliberate; products needed to be priced inefficiently to produce profits. Second, these companies are integral parts of a networked global economy; as such, their value is completely dependent on the overall health of that network. Unless the network can be restored to health, these assets will remain severely devalued. Right now, the network is very sick. When a system is allowed to hide risk for so long, it is ill-equipped to manage that risk when it finally emerges from the shadows.

The Economic Policy Conundrum

The Obama Administration is facing a near-impossible task trying to bail the U.S. economy out of the muck of years of ill-begotten economic policies. The biggest challenge facing policymakers is not short-term recovery, however. Eventually, stimulus is likely to arrest the forces of economic collapse and stabilize matters – at least temporarily. But the real problem is sowing the seeds of long-term, sustainable, organic economic growth. This is really the crux of the policy challenge. The United States in the midst of the worst economic downturn in 80 years as the result of a panoply of extremely poor economic policy choices. Economist Roger W. Garrison draws an important distinction between "healthy economic growth, which is saving-induced (and hence sustainable), and artificial booms, which are policy-induced (and hence unsustainable)."² In other words, monetary policy that kept interest rates low for an extended period of time, tax policy that favored debt over equity, regulatory policy that allowed financial institutions to operate opaquely, and social policy that pushed home ownership regardless of affordability, all combined to create artificial economic demand that could only be financed with debt because the savings (i.e. equity) to purchase them did not exist.

Moreover, as more and more debt was created through financial engineering and policy prescription, the prices of these were bid up higher and higher. This led these products to become grossly inflated in value compared to any inherent economic worth they might possess. Once the bubble burst, their value dropped precipitously. Unfortunately, the face amount of the debt used to purchase these assets did not adjust downward at the same time. Assets that were purchased at inflated prices are now worth a fraction of what they were purchased for, leaving behind a serious dilemma for the owners of these assets and their creditors.

Following conventional economic thinking, the government believes that the solution lies in policies designed to reflate the value of these assets. The problem with this approach is that it is based on the incurrence of trillions of dollars of additional debt to create the demand needed to purchase these assets. Debt begetting more debt is a poor prescription for sustainable long-term economic growth. At best the government may be able to provide a short-term boost to the economy, but what the economy really needs is a solid, organic foundation for growth. Debt-financed government demand can't be sustained indefinitely, which is why this policy is doomed to fail in the long run. The U.S. balance sheet is not a bottomless pit, although it is increasingly coming to resemble a Black Hole. At some point, the economy will have to generate sufficient tax revenue to pay for this government spending or the country will lose its AAA rating and ultimately become a troubled credit. Economic demand will ultimately have to become savings-driven or it will again collapse.

This does not necessarily mean that the government should walk away from creating short-term demand, but it should be extremely circumspect in how it does so. This is where political reality collides with economic reality. The optimum long-term economic solution would be to allow the economy to hit bottom and then begin to rebuild demand naturally. But such a scenario would likely entail an unemployment rate on the order of 15 or 20 percent and an even worse human toll than is already being exacted by the downturn. But it would give the economy an organic base from which to rebuild. The government's job in such a scenario would be to provide the right kind of safety net (not only of financial support but also job and educational training) to see the citizenry through the crisis. What the U.S. really needs is an economic Marshall Plan to rebuild itself, with all of the sacrifice and public service that would entail. Apparently, that is asking too much in today's me-first society. Accordingly, the government finds itself compelled to follow policies that may or may not create unsustainable short-term growth and will have to be carefully targeted to promote sustainable long-term growth.

There is a profound difference between healthy, sustainable demand and unhealthy, unsustainable demand, just as we are living the unhappy lesson that there is a great difference between healthy economic activity (i.e. activity that contributes to the productive capacity of the economy) and unhealthy economic activity (i.e. speculative trading and corporate finance transactions). Propping up bad banks through a "good bank/bad bank" model would simply direct funds to the sustenance of past unhealthy economic activity. Starting a new Economic Reconstruction Bank, as HCM has recommended, could make loans available for new productive projects and direct funds into healthy long-term economic activity.

Another bout of policy-induced growth will not only repeat the mistakes of the past, but leave the economy even weaker, teetering on an unstable foundation of government support that cannot be sustained indefinitely without impairing America's balance sheet, credit rating, and ultimately its geopolitical might. Whether America's short-term political orientation can ever address this conundrum is the greatest question facing policymakers today. HCM has no hesitation in saying that much of what the government has proposed thus far to deal with the crisis won't come close to dealing with the long-term issue of creating savings-induced or organic growth. This means that any near-term relief (i.e. relief that occurs within the next five years) is most likely to give way to years of below trend growth because the economy will be lacking the organic foundation of growth it needs.

Dow 5000 Update

Year-to-date through February 27, the S&P 500 was down 18.62 percent and the Dow Jones Industrial Average was down 19.52 percent. Moreover, strategists and investors are increasingly coming around to the conclusion that corporate earnings are going to be nothing short of horrendous this year and that stocks are headed even lower, as HCM has been arguing for months (without pleasure, we hasten to add). Very recently, three of the smartest forecasters on Wall Street sharply lowered their earnings forecasts for the S&P 500.

On February 13, David Rosenberg, Bank of America's North American Economist, recently reduced his 2009 and 2010 S&P 500 operating EPS forecast to $46 (from $56) and $55.50 (from $63), respectively.ⁱ Mr. Rosenberg is now forecasting an S&P 500 low of 666 based on a 12x multiple of forward (i.e. 2010) earnings.
Francois Trahan of ISI Group dropped his S&P 500 earnings forecast from $60 to $45 on February 23. Mr. Trahan used a 13x multiple to forecast a potential market low of 585.
On February 26, Goldman Sachs' David Kostin dropped his 2009 and 2010 S&P 500 operating EPS forecast to $40 and $63, respectively, after deducting $23 and $8, respectively, for provisions and write-downs. Mr. Kostin uses a 13.2x multiple of 2010 earnings (pre-write-downs and provisions) to come up with a year-end 2009 S&P 500 target of 940.

These sharply lower forecasts are consistent with HCM's dim view of corporate earnings, but we believe that all three analysts are clinging to overly optimistic earnings multiples in predicting ultimate stock market lows. At this point, there is clearly a growing Wall Street consensus that S&P 500 earnings will come in well below $50 in 2009 and that the correct multiple on these earnings should be in the 12-13x range. HCM continues to believe that the multiple should be lower based on the fact that (a) we are in a debt deflationary spiral, and (b) government yields are artificially depressed and signal economic distress and do not signal an attractive investment alternative, and corporate yields are extremely high and offer real competition for investor funds.

Last November, HCM set 2009 price targets of 5000 on the Dow Jones Industrial Average (DJIA) and 475 on the S&P 500 based on applying a 7x multiple to Goldman Sachs' then 2009 S&P 500 earnings estimate of $65. (See The HCM Market Letter, Nov. 15, 2008, "Dow 5000") At the time, the S&P 500 was at about 850 and the DJIA was at about 8600. Our low multiple was based on our view that an environment characterized by debt deflation deserves a 6-8x multiple. Now that Mr. Kostin and others have lowered their multiple, it is only fair to raise the question whether we should be further lowering our target prices on these equity indices at this time based on applying our multiple to a lower earnings number.

For the moment, the market remains far above our previous targets. Our targets are intended to be directional in nature and we see no reason to lower them further at the current time. We have made our point, which is that the stock market is likely to head sharply lower in the months ahead. Moreover, the earnings estimates have been lowered primarily based on expectations for further write-offs by financial companies (and non-financial companies that wandered into the financial space). Investors may treat these write-offs and provisions as nonrecurring items and look to higher recurring S&P 500 earnings in pricing the market. While we continue to believe that the multiple should be in the single digits, the correct recurring earnings number remains a moving target. Accordingly, at this time it would be premature to lower our estimate further. Needless to say, we remain extremely comfortable with our prior estimates of 475 on the S&P 500 and 5000 on the DJIA.

A bear market rally is possible at any time. Investors should be aware that as the market moves lower, rallies have the potential to be extremely sharp since they are starting from compressed levels. Such rallies should be used to reduce overall equity exposure. That does not mean that equities should be abandoned totally. There are a number of stocks that are trading at well below book value (even taking into account the declining transfer value of their assets) that may be worth buying in the months ahead. The debt of these companies, which HCM is particularly active in, is even more compelling as an investment. But investors need to identify longer term changes in market behavior and the economic environment before becoming bullish again on stocks. Right now, there are no such signs, such as better employment, housing or GDP numbers, or tightening credit spreads, or improving market technicals. HCM is starting to sense that the forces of denial, as potent as they are, are starting to weaken. Accordingly, investors should structure their portfolios for further equity declines.

The "D" Word

The fourth quarter GDP loss of 6.2 percent (did anybody really believe the 3.8 percent estimate?) illustrates just how deep a hole our economy has to climb out of. The economy fell into this hole almost literally overnight, but it's going to take much longer to climb out. A quick recovery is out of the question. HCM expects first quarter GDP to be in the -6.0 to -7.0 percent range based on our reading of employment, housing and other economic data as well as the data we are seeing from the 200 or so companies in our portfolios across a wide variety of industries. Moreover, based on our view that the stimulus plan will be largely ineffective this year and that more large-scale business failures are in the works (many of them slow-motion car wrecks), we do not expect to see positive economic growth until sometime in mid-to-late 2010 (and then only modest growth).

Investors expecting a conventional bear market/bull market cycle are likely to be sorely disappointed. Over the past several decades, U.S. stock market investors have been conditioned to believe that the market will bottom and then rebound. Bear markets have been brief within the context of a long bull market that stretches back to the 1980s. But the current environment is likely going to be different. We are now experiencing a destruction of wealth on a scale that is both unprecedented and permanent because much of that wealth was built on a fragile foundation of debt; in reality, much of that wealth didn't really exist in the first place. As a result, what people believed to be economically valuable and stable was in fact nothing of the kind. In many respects, the latter stages of the bull market were little more than an illusion. Real corporate earnings and genuine productivity peaked years ago, and the economy has been operating on debt-induced fumes for years.

Accordingly, investors need to prepare themselves for a future that will not resemble the recent past. Ray Dalio, the wise man who runs Bridgewater Associates, noted in a recent Barron's interview that investors need to recognize that the current environment more resembles a depression than a recession: "Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis of the Japanese experience so that it becomes part of their frame of reference. Most people didn't live through any of those experiences, and what they have gotten used to is the recession dynamic, and so they are quick to presume the recession dynamic. It is very clear to me that we are in a D-process." (Barron's, February 9, 2009, "Recession? No, It's a D-process, and It Will Be Long," pp. 38-40.) Mr. Dalio's view is consistent with HCM's long-argued view that we are in a debt-deflationary spiral whose end is nowhere in sight.

The characteristics of our current economic situation are as follows:

Interest rates have dropped to zero.
Bank stocks have plunged by 90 percent or more.
The Federal Reserve's balance sheet has exploded.
Credit spreads have widened to historic levels.
The economy is seeing massive asset deflation.
Debt is being destroyed in record amounts.
Unemployment is increasing each month.
The financial industry is shrinking radically.
Manufacturing activity has slowed sharply.

This is not a situation that is consistent with recent American experience. HCM has previously described a depression as an economic condition in which traditional monetary and fiscal policy is rendered ineffective. For the moment, we are deeply entrenched in such a situation. The question is how long the economy will remain depressed before some of the remedies that have been proposed start to work. Unfortunately, HCM fears we may be in for an extended stay.

For these reasons, HCM believes that after the stock market bottoms, it will drift along at a depressed level for an extended period of time. The American economy will experience less-than-trend growth for a similarly prolonged period of time. The economy will have to absorb trillions of dollars of bad debts and transition its resources away from speculative activities and toward new productive endeavors. The economy has to be completely retooled, and this process will not happen overnight, particularly because such a program must be directed by a highly inefficient democratic political system that is inefficient in reaching consensus about its goals and how to achieve them. Unfortunately, the deeper involvement of the government in the financial and other sectors of the economy is likely to stifle growth, innovation and creativity and further contribute to lower growth for years to come.

Investing Today

This by no means is intended to suggest that investors will be unable to make money. It does suggest, though, that the era of bull market geniuses is probably over. Too many were paid too much for doing too little over the past several decades. Being at the right place at the right time is not going to cut it anymore. But as the debt destruction process plays out, new investment opportunities will arise in the capital structures of restructured and surviving companies.

As investors go about reallocating money to new opportunities, they may want to keep in mind something that HCM recently read in The Economist.

"Over the past 35 years it has seemed as if everyone in finance has wanted to be someone else. Hedge funds and private equity wanted to be as cool as a dotcom. Goldman Sachs wanted to be as smart as a hedge fund. The other investment banks wanted to be as profitable as Goldman Sachs. America's retail banks wanted to be as cutting-edge as investment banks. And European banks wanted to be as aggressive as American banks. They all ended up wishing they could be back precisely where they started." (The Economist, "A special report on the future of finance," January 24, 2009, p. 17.)

There are a limited number of investment opportunities that make sense in today's market, and there are a limited number of managers qualified to execute those strategies. Unfortunately, managers in out-of-favor or discredited strategies are now trying to reinvent themselves as managers of the few in-favor strategies in which they have limited or no experience. HCM is seeing this occur in the corporate credit space, where firms that have previously operated in areas peripheral to the credit markets such as private equity or mortgages are suddenly touting their expertise in corporate credit. These managers are wading into uncharted territory. Investors must insure that managers possess the expertise that is required for the strategies for which they are being hired. They have already experienced the disastrous results of private equity firms thinking that doing deals would prepare them for investing in bank loans.

Bank Nationalization

We are quickly learning the flaws of the half-baked approach to supporting the nation's banks that the Bush Administration adopted and the Obama Administration seems hell-bent on continuing. At least the Bush Administration had an excuse – the former Treasury Secretary was a career investment banker who saw the world through the eyes of Wall Street. Perhaps HCM was naïve in hoping that the new Treasury Secretary, having been a career regulator who viewed matters through the opposite end of the glass, would see things differently. We probably should have known better since Mr. Geithner participated in the Bush Administration's bailout. But the quasi-nationalization approach is clearly a disaster for all concerned (the recent article describing the hall of mirrors that used to be Citigroup is a case in point - see The Wall Street Journal, February 25, 2009, "Citigroup Chafes Under U.S. Overseers," p. A1.) There seems to be little disagreement that two of the country's major banks – Citigroup and Bank of America – are in the zone of insolvency. Their assets are worth less than their liabilities and their shareholders have been wiped out in all but name (and in the little drill-bits of stock that trade publicly as make-believe options on their long-term recovery). But the system can't seem to bring itself to admit that these banks have been effectively nationalized in all but name and that taking the final step of nationalizing them is in many respects just a matter of form over substance. The only thing worse than a banking system that has been privatized is one that has collapsed, but that is the choice we are faced with. The Rubicon has been crossed and we need to clear away tons of debris that are clogging up the river before we can cross back to the other side.

Moreover, maintaining the illusion of public ownership has enabled some of the individuals running these institutions to engage in some of the most irresponsible behavior ever seen in the history of American business. HCM is speaking specifically of the pay-out of billions of dollars of bonuses to the executives and employees of Merrill Lynch on the eve of its forced takeover by Bank of America. This act, which Bank of America's Chairman Ken Lewis claims he was powerless to stop (HCM does not believe him) and former Merrill Lynch Chairman John Thain, in what can only charitably be described as a gross breach of conscience and good judgment, somehow sanctioned, are prima facie evidence that the hybrid public/private TARP model is totally untenable and should be shelved immediately. Those banks that can repay the TARP money (or produce a believable plan to do so within three years) should be permitted to do so forthwith, and those that are teetering on the brink of insolvency should be nationalized. Otherwise, the managements of these firms are going to pay more attention to figuring out how to game government compensation limitations than maximizing the value of their troubled assets over the next several years. HCM never thought we would say that there are worse things than nationalization, but there are and we saw them when billions of dollars was paid out to the people who lost even more billions of dollars at Merrill Lynch. This has to have been one of the most brazen thefts in American history.

Let GM Go

General Motors has been insolvent for years. Yet political expediency has prevented recognition of this harsh truth. The company's unions have blocked efforts to bring the company's cost structure into line with changing economic realities. Michigan's powerful Congressional delegation has blocked efforts to improve American automobiles' fuel efficiency, creating an opening for foreign manufacturers with lower cost structures to steal the hearts and minds and pocketbooks of American consumers. Years of bad choices have now left the U.S. government with a terrible choice – whether to give GM billions of dollars of money inside or outside of bankruptcy. The correct decision, as unpalatable as it may be, is painfully obvious. All of the king's horses and all of the king's men are not going to be able put GM back together again. It is time to let this American icon declare bankruptcy in order to maximize the chances of salvaging something out of this American tragedy.

GM is still paying or accruing billions of dollars of annual interest payments on the company's more than $40 billion of debt. The company is negotiating with holders of $27.5 billion of this debt, which is unsecured, to reduce it to $9.2 billion (by exchanging stock for bonds). Yet all of this debt and stock is worthless. Instead of wasting time haggling with debt holders over exchanging a portion of their worthless claims for worthless stock, the company should declare bankruptcy so these claims can be wiped out. GM's ability to meet the government's February 17 deadline was delayed by its inability to come to an agreement its bondholders. The bondholders are institutional investors who believe they are exercising their fiduciary duty to their beneficiaries by trying to squeeze the best deal possible out of the automaker. But the sad reality is that they made a bad investment and should suffer the consequences. We need to stop trying to save everyone from the consequences of their errors or else they will keep making them.

The unions are also trying to salvage an ownership stake out of this mess. The company is negotiating to exchange half of approximately $20 billion of Voluntary Employee Benefit Association (VEBA) obligations into equity. Unfortunately, 100% of the VEBA obligations are likely worthless since GM will never be able to pay them. The VEBA was part of the bargain that the unions made with GM over the years. Workers gained generous wages, benefits and work rules that rendered the company uncompetitive. This was not a secret – the company's loss of market share and weakening financial position was apparent for years to the unions as well as to everyone else. The unions won the bargain but they lost the war. The company doesn't owe the workers anything more than what can be granted in bankruptcy, which is likely a meaningful equity stake in exchange for the VEBA and the billions of dollars of other healthcare and pension obligations owed to current and retired workers. This is undoubtedly a tragedy of enormous human dimensions, but responsibility for it is shared by all Americans who sat by while their politicians and business leaders allowed GM to sink into insolvency. Accordingly, America owes the workers a safety net when they lose their jobs and benefits. But this should be the same safety net society owes all of its displaced workers, not a special one for former GM workers.

Allowing GM to file for bankruptcy will be a blow to the American psyche. But GM has already gone bankrupt in all but name. In suggesting that it will require $125 billion in financing to undergo a bankruptcy, the company may be playing chicken with Congress but is more likely indicating just what a Black Hole of liabilities it has become over the decades. America must have the courage to deal with this reality. Bankruptcy will give the company, and the country, an ability to make the hard decisions that it refused to make before. Either way, GM's failure is going to cost taxpayers tens of billions of dollars. But until we are willing to be honest about our failures, we are never going to put ourselves in a position to avoid future ones.

Obama's Budget

President Obama's is in many respects a dramatic break with the past, although in many respects it falls short of the type of radical tax and other changes that are really needed (but may simply not be politically feasible). We just hope that Mr. Obama's reach does not exceed his grasp. Many things may have changed economically in recent years, but one thing has not: a country can't tax and spend its way into prosperity. Moreover, we are confident that the growth rate assumptions used in years 2, 3 and 4 of our new president's proposed budget are unrealistic. The economy is unlikely to grow at anything close to 3 to 4 percent in those years, and relying on that much growth to close the budget deficit by the end of Mr. Obama's first term will only lead to disappointment. This economy, which shrunk at an annual rate of 6.2 percent in the fourth quarter of 2008 and will almost certainly not show any growth at all in 2009, is not going to magically spring back to life in 2010. Mr. Obama is setting himself up for failure with these projections.

HCM was very happy to see that the Administration is prepared to rid the tax code of the egregious treatment of private equity carried interests, which we have recommended before (see The HCM Market Letter, April 1, 2008, "How to Fix It"). Now that private equity has become a loss-leader for its partners, we would caution those drafting the legislation to make sure that private equity does not gain an unintentional windfall from this legislation. This could occur if private equity partners were permitted to deduct claw-back payments (i.e. repayments of carried interests earned early in a partnership based on losses incurred later in a partnership) at the new higher tax rate if they were taxed on those original payments at the lower rate. In order to prevent such a benefit, if the original payment was taxed at 15 percent, repayment of that money should only give rise to a deduction at 15 percent, not the higher ordinary income tax rate.

We think limitations on charitable deductions are poor public policy. The argument that wealthier people should not receive a greater dollar-for-dollar benefit for charitable deductions than less affluent people is a red herring, particularly in view of the fact that the Alternative Minimum Tax already haircuts high earners' charitable gifts. We also believe that limitations on mortgage deductions would be better handled by limiting deductions for mortgages over a certain dollar amount rather than by income; such a methodology would be more effective in fighting housing speculation.

We are opposed to raising taxes on capital, but we also recognize that we are in a fiscal emergency and that raising the capital gains tax from 15 percent to 20 percent on the wealthiest Americans would not impose undue hardship and would keep the rate relatively low. We would prefer to see capital gains rates implemented on a graduated scale based on the amount of capital gains reported in a single year. Someone who earns an especially large gain could certainly afford to pay a little more in tax. We commend the plan for maintaining the 15 percent tax rate on dividends, which should not be taxed at all since they are already taxed at the corporate level and remain an extremely inefficient means of returning capital to shareholders.

The biggest problem with the budget – and with any budget, not just Mr. Obama's – is that the government just wastes so much stinking money. The reason people find higher taxes abhorrent is not because they don't want to help those less fortunate than themselves, or fund necessary government programs, but because they don't want their money to be treated like Congress's personal piggy bank. We would love to see the list of the $2 trillion of wasteful programs that Mr. Obama claimed his team has already identified for elimination. The amount of government waste is truly mindboggling, and Mr. Obama must insist on spending discipline if he is to have any chance to keep the budget deficit from exploding over the next four years.

The Coming Meltdown in Eastern Europe

By all accounts, the former Eastern Bloc countries that so successfully navigated their entry into world capitalism after the fall of communism have borrowed themselves into near oblivion and are about to inflict frightening losses on their own banks and Western European banks, their main aiders and abettors. Our good friend John Mauldin has been out front on this story, which has enormous implications for the global financial system. The ever prescient Christopher Wood has also been warning about an Asian-style banking crisis in the region, with serious ramifications for the Western European banks that loaned these institutions by some reports trillions of dollars. This is a story that needs to be followed in the coming weeks because it will have major negative consequences for world financial markets. To state the obvious, this is the last thing the world economy needs to deal with right now.

Michael E. Lewitt

Footnotes:
¹ Roger W. Garrison, Time and Money The Macroeconomic of Capital Structure (New York: Routledge, 2001), pp 111, 120.
² Garrison, p. 56.

Who's zoomin who

steven j cook — Wed, 25 Feb 2009 14:24:00 GMT

Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers up .6% over the prior week but down .8% versus the comparable period last year; Redbook Research reported month to date retail chain store sales fell 1.5% on a year over year basis.

    The Conference Board reported its February consumer confidence index at 25.0 versus expectations of 36.5 and January’s reading of 37.7.
http://www.calculatedriskblog.com/2009/02/on-consumer-confidence.html

    Home prices continue to fall:
    http://www.ritholtz.com/blog/2009/02/case-shiller-2008-home-prices-hit-record-lows/

   Other

    The big news yesterday appears to have been Bernanke’s statement during his congressional testimony that we shouldn’t nationalize the entire banking industry. Frankly, I am not sure that I would know what that means even if I knew what he means by nationalization, which I don’t. Here’s the full text of his prepared comments:
    http://www.ritholtz.com/blog/2009/02/chairman-ben-s-bernanke-semiannual-monetary-policy-report-to-the-congress/

    Barry Ridholtz on the N word:
    http://www.ritholtz.com/blog/2009/02/nationalization-the-new-n-word/

    Observation: as I read the comments of most government officials, they are equating nationalization of the banks with government ownership is excess of 50%. As Aretha Franklin would say ‘who’s zoomin who’. If the government owns 25/30/40% of a bank, who amongst you believes that it won’t be dictating policy on a micro level, That is nationalization.

    The path to debt repudiation:
    http://gregor.us/crisis/paths-to-repudiation/

Politics

Domestic

Here’s what’s coming in an increasingly regulated America:
http://www.american.com/archive/2009/february-2009/the-worst-option-on-greenhouse-gases

My favorite liberal’s take on Obama’s speech last night:
http://www.slate.com/blogs/blogs/kausfiles/archive/2009/02/24/state-of-the-notu.aspx

    A great article on our current economic dilemma and how (not?) to solve it:
    http://www.nytimes.com/2009/02/24/opinion/24brooks.html?_r=1

International War Against Radical Islam

The Market

    Technical

    Stocks bounced yesterday with the indices (DJIA 7350, S&P 773) closing above their October 2002 lows (DJIA 7146, S&P 766) and the S&P above its November 2008 low (741). Whereas they closed Monday above only one of those four support levels. For the moment, it would seem that we have dodged a bullet. Whether this was just a rally in an oversold Market or the real deal bounce off the (approximate) November 2008 low, we will know better by the close today.

Meredith Whitney on CitiGroup (NYSE:C) -- Read if you've got shares in Citi

IanWyatt — Fri, 20 Feb 2009 21:28:00 GMT

*****Whitney Speaks Again

*****Market Trends

*****Rant of the Year

Fellow Investor,

More depressing forecasts for the big banks from the best big bank analyst out there, Meredith Whitney. You may recall it was Whitney who forecast the dividend cut at Citigroup (NYSE:C) back in October 2007. That was three months before Citigroup actually cut its dividend. Whitney should also be credited as one of the few analysts to see the financial meltdown coming.

She still doesn't like Citigroup and would be a seller at current levels.

In an interview on CNBC yesterday she said, "Most of the big banks would be lucky to break even or earn a little bit of money this year. I don't think any of the banks that I cover will continue to pay their existing dividends."

*****Mutual fund giant picked a bad time to double down on Citigroup. Apparently a few different fund managers thought it would be a good idea to add 104 million shares of Citigroup at a roughly average price of $10 and change a share. Bloomberg reports that Fidelity is down $874 million on this round of purchases.

Throw in previous holdings and the losses are well over a billion.

If you've ever heard the expression "Don't try to catch a falling knife," this is what it means. I don't think it's so much about trying to bottom fish for quality stocks. I think it's more about assuming that one knows more than the market.

There are always clues and hints in the stock market... Sometimes they're subtle (like Meredith Whitney predicting a dividend cut), sometimes they're obvious (like Citigroup actually cutting its dividend). It's the investor who seeks to derive meaning from the signs (as opposed to imposing meaning on the signs) that has the most success.

*****One thing that never ceases to surprise me is how long it takes for trends to manifest in the consciousness of investors. The government is selling Treasuries like there's no tomorrow. Next week, a record $94 billion in short- and medium-term notes hit the block. The old record, $78 billion, was set just a month ago.

There can be no doubt that this is ultimately inflationary. And we got a taste of that from a larger-than-expected jump in the producer-price index Thursday morning. Eventually, investors will demand higher yields for Treasuries, which will really light a fire under inflation.

But despite that, long bonds still trade near record prices. I tell you, I feel better about my short Treasury bond position in my Recovery Portfolio every day.

*****Two more things, and I'm done for the week. First, last night's video conference went really well. My analyst Jason Cimpl gave out a stock that you shouldn't miss. It's a healthcare tech stock that's got nearly 25% of its market and growing.

There's a replay online HERE if you missed it.

Finally, in case you missed it, here's a LINK to the phenomenal video clip from CNBC's Rick Santelli that everyone's talking about today. He's got a great solution for stimulus spending. This is something we'll discuss for sure. Email your comments to editor@247investor.com.

Have a great weekend.

Best regards,

Ian Wyatt
Daily Profit

P.S. Just breaking: Gold broke $1,000 today. I was going to wait until Monday to share my new Gold Rush report with 5 great stocks in the gold mining sector, but this thing is too hot, so please see this link for more information on which gold stocks to buy.

Another government program underwhelmes the Market

steven j cook — Thu, 19 Feb 2009 14:26:00 GMT

Economics

   This Week’s Data

    Weekly mortgage applications jumped 9.1%.

    The International Council of Shopping Centers reported weekly sales of major retailers up .9% versus the prior week but down .9% versus the comparable period in 2007; Redbook Research reported month to date retail chain store sales down 1.4% on a year over year basis. Both these data points improved from the prior week’s readings.

    January industrial production declined 1.8% versus expectations of a drop of 1.7% and a negative 2.0% reading in December. January capacity utilization came in at 72.0 versus forecasts of 72.3 and 73.6 recorded in December.
    http://econompicdata.blogspot.com/2009/02/industrial-production-capacity.html

    The January producer price index (PPI) was up .8%, in line with expectations; core PPI rose .4% versus estimates of a .1% increase.
    http://econompicdata.blogspot.com/2009/02/ppi-january-up-month-over-month-down.html

    Weekly jobless claims were unchanged versus forecasts of a 5,000 increase.

   Other

    More on bank nationalization (bankruptcy):
    http://www.marginalrevolution.com/marginalrevolution/2009/02/coming-to-terms-with-bank-nationalization.html

    A short history of the national debt:
    http://online.wsj.com/article/SB123491373049303821.html

    The impact per capita of the stimulus plan versus that of the fall in commodity prices:
    http://bespokeinvest.typepad.com/bespoke/2009/02/the-commodity-rebate.html

Politics

Domestic

Limiting executive pay and the post office (you won’t believe this):
http://www.washingtontimes.com/news/2009/feb/17/in-hard-times-postmaster-earned-800000-in-pay-perk/

International War Against Radical Islam

    The covert war on Iran:
    http://www.telegraph.co.uk/news/worldnews/middleeast/israel/4640052/Israel-launches-covert-war-against-Iran.html

The Market

    Technical

    Looking at stock prices yesterday, one would have thought that there was little going on. The Averages (DJIA 7775, S&P 788) were basically unchanged, thus remaining above the November 2008 lows DJIA 7437, S&P 766 but having made no attempt at all to recover to the prior support level (DJIA 7853, S&P 804).

    Of course, there was something going on, to wit, Obama announced his new foreclosure mitigation plan.......and nothing happened, Bear in mind that the source of all the agony we are enduring is the housing/mortgage market; and part of the any solution to the turmoil in the financial markets must include a plan for dealing with nonperforming mortgages. So clearly investors were underwhelmed with the new plan; and lack of clarity can’t be used as an excuse this time because the administration flooded us with details.

    I listened to experts all day long discuss the pros and cons of this plan; and the best I can say after hearing all of that is that it could partially alleviate the current stress in the housing market. So while I am basically as underwhelmed as the Market. Moreover, by eliminating moral hazard (the necessity of accepting the consequences of one’s own actions) for some mortgage holders, it (1) pisses me off that I don’t get the same break and (2) undermines the fundamental workings of our free market system--which is simply another burden that our future over regulated, over taxed, over spent, over protectionist economy must endure before it can create wealth.
http://www.ritholtz.com/blog/2009/02/is-there-any-such-thing-as-systemic-risk/

    And why it won’t stop the inevitable:
    http://www.ritholtz.com/blog/2009/02/homes-still-too-pricey-to-stabilize/

    The Market looks higher on the open. If we get a rally, I will resume the effecting our change in investment strategy outlined in last week’s Closing Bell.

   Fundamental

    A recap of fourth quarter earnings:
    http://bespokeinvest.typepad.com/bespoke/2009/02/earnings-beat-rate-goes-out-at-556.html
    http://bespokeinvest.typepad.com/bespoke/2009/02/earnings-season-one-wed-all-like-to-forget.html

We are too close to the November lows to panic---yet

steven j cook — Wed, 18 Feb 2009 14:23:00 GMT

Economics

   This Week’s Data

    The New York Fed’s February manufacturing survey plunged to -34.7 versus expectations of a -24.0 reading and January’s report of -22.2.
http://econompicdata.blogspot.com/2009/02/empire-manufacturing-survey.html

    January housing starts plunged 16% versus estimates of a 3.4% decline while January building permits fell 4.5% versus forecasts of a 3.4% decrease.
    http://www.calculatedriskblog.com/2009/02/housing-starts-at-another-record-low.html

   Other

    Greenspan backs bank nationalization (it looks like this train is leaving the station, get ready):
    http://www.ft.com/cms/s/0/e310cbf6-fd4e-11dd-a103-000077b07658.html?nclick_check=1

Politics

Domestic

International War Against Radical Islam

The Market

    Technical

    TraderFeed looks at today’s possible pin action:
    http://traderfeed.blogspot.com/2009/02/momentum-leads-price-what-happens-after.html

**********************************************

    Yesterday was pretty brutal. The Averages (DJIA 7552, S&P 789) busted through the lower boundary of the narrow short term trading range that I have been watching (DJIA 7853/9004, S&P 804/942) as well as the rising uptrend off their November 2008 lows (DJIA 7915, S&P 826). As you know, I tend not to be too strict about a one day breach of a support/resistance level; but the percentage decline below the aforementioned support levels was significant enough that it maybe wishful thinking to postulate a rebound back over these levels today. Indeed it was somewhat disconcerting that yesterday’s damage was done with virtually no panic because that suggests that there is more to go on the downside. The flip side of that is that the volatility index could not break out of its October 2008 to present down trend.

    On the assumption that we don’t get a bounce back to the narrow trading range’s lower boundaries (DJIA 7853, S&P 804) this morning, the next stop is the support levels of the broader longer term trading ranges at DJIA 7437, S&P 766 (roughly the November 2008 lows), which aren’t that far away. As it happens, S&P 766 corresponds to its October 2003 low and the comparable DJIA level is 7146. If those support levels are broken, there really aren’t many signs of support beyond a thirty year uptrend line (DJIA 3554, S&P 446) and the 1994 lows (DJIA 3871, S&P 581). Not something I find particularly comforting.

    The one factor that I find a little hope in is that most of our stocks are no where near their November 2008 lows; so perhaps the bank stocks whose performance has been abysmal are pushing the indices to a price level that is not reflected in rest of the Market.
http://bespokeinvest.typepad.com/bespoke/2009/02/best-and-worst-stocks-since-1120.html

    In the final analysis, prices are close enough to their November 2008 support levels that, at this moment, a selling panic on our part would be foolish. The strategy is to gut today or the next couple of days out, make the Market prove that it is going to break through the November 2008 lows, and then if it does alter our strategy accordingly (more cash, more gold, perhaps a hedging strategy via Market ETF’s--more on that if necessary). The good news is that there is not much risk in terms of distance (115 DJIA points, 23 S&P points) or time (a matter of minutes).
http://bespokeinvest.typepad.com/bespoke/2009/02/the-test-is-here.html

   Fundamental

    Impacting the Market yesterday were:

(1)    the perception of a widening global banking crisis, specifically concerns in the solvency of the entire banking systems of several central/eastern European countries,

(2)    no additional clarity on the US banking financial crisis. I have not been as negative on Geithner’s financial plan as others; but while he has taken some steps towards implementing the bank ‘stress test’ and foreclosure mitigation [Obama provides further details today, we hope], there is still nothing on a final solution for handling the toxic assets on bank balance sheets. That is biggest problem and there is no clarity. (see bank nationalization above)

(3)    the joke known as the ‘stimulus plan’.

Today, investors will also have to swill into this mix the auto bailout which still lacks a lot of detail especially with respect to labor concessions; though the GM CEO shared with us that his company needs another $16 billion to avoid bankruptcy.
http://www.calculatedriskblog.com/2009/02/quick-thoughts-on-gm-and-chrysler.html

Short-covering rally or the real deal?

IanWyatt — Tue, 10 Feb 2009 17:47:00 GMT

Today's Issue...

The Oil Indicator

Reader Mail

TradeMaster Daily Stock Alerts

The Oil Inidcator

So, on Friday I made the rally call. The Dow Industrials were up 217 points. Now, after a conversation with TradeMaster strategist Jason Cimpl, I'm a little nervous about stocks following through.

Jason believes Friday's rally was short-covering. His indicator? Oil.

Oil prices fell Friday, while stocks rallied across the board. As you know I expect stocks to rally in anticipation of the stimulus bill and then next banking measure. It is my opinion that investors perceive these initiatives as help for the economy in recovering from recession. Not a cure-all, just help.

If investors see light at the end of the tunnel, oil should rally too. After all, production has been cut. And despite growing reserves, oil will rally when it appears the economy will get back to growth.

To Jason, the fact that oil traded lower while stocks rallied means that investors were buying to cover their short positions in anticipation of Geithner's bank bailout plan. And the fact that financials led Friday's charge lends some weight to Jason's argument. We'll see.

Reader Mail

*****I spent part of the weekend going through your most recent comments and suggestions. The bank nationalization topic still generates the lion's share of mail. Here are some of the responses…

*****S. Ravindra asks the all-important question about a nationalization plan for banks: Does the nationalization of these banks mean that US government will buy out all shares and delist the banks till the bank becomes healthy again before listing them back again?

My understanding of what nationalization means is, yes, common stock would wiped out. Nationalizing the banks is essentially the same as privatizing any company, except it's the government doing the privatizing.

In a privatization scenario, the group taking the company private usually makes a tender offer for all common stock outstanding. Investors sell because they know the stock will be cancelled.

In this case, where we're talking about the government taking over, it would probably work a little differently. Fannie Mae and Freddie Mac are examples. Common stock wasn't cancelled there. But shareholder value is gone for all intents and purposes.

Of course, if Fannie Mae and Freddie Mac were to be sold to private investors, common stock would be cancelled before the companies were brought public again.

Now, it must be noted that the Obama administration seems to have taken the bank nationalization plan off the table. Despite most leading economists advocating nationalization as the quickest, cleanest solution, it sounds as if Obama wants to go the "bad debt bank route." I can only assume that the administration is keenly aware of the impact nationalization would have on common shareholders and they are trying to avoid that outcome.

*****Steve writes: I agree with your recommendation to nationalize the "troubled" banks (Citi, BOA, WF, etc.). But with this recommendation, you should also recommend that shareholders consider liquidating their current ownership since a nationalization will most likely significantly reduce the value of their investment.

Nationalization isn't my idea. I'm just trying to generate a discussion of the issue that will help us be positioned properly for the potential outcome.

There are plenty of reasons not to own financials, and the potential for a nationalization plan to wipe out the common shareholders is a big one. I don't think it's a wager worth placing, but the Obama administration seems to be against nationalization.

Still remember how it played out with Fannie Mae and Freddie Mac: Paulson said he was not in favor of nationalization repeatedly. And anyone who bought based on his hollow promise, like Legg Mason's Bill Miller, lost big when nationalization became the only viable solution.

*****Neil P. writes: For those of you who think "taxpayers" should have ownership for footing the bill for the bank bailout, what you're saying is the government should own them. Please rethink your socialistic tendencies.

In the purest sense, the U.S. government is "of the people and by the people." And if the taxpayer is the lender of last resort, then it stands to reason that some ownership is part of the equation. When a venture capitalist invests, he gets part ownership. When you own stock, you are a part owner.

That's not socialism, it's capitalism. Because it's based on who has the capital. Clearly, right now, the banks don't have it.

Socialism is based on the idea that society at large should benefit from the wealth creation within a country. The medium for doling out the benefits is the government.

Now, rescuing the banks absolutely is for the benefit of our society. If they fail, we're up a creek. That's not socialism, it's survival.

*****M. Schofield The free enterprise system clearly failed us and taxpayers will forever be paying for the irresponsibility of the so-called leaders of this industry. What would be so wrong with nationalizing the banking industry or at the very least highly regulating it. What's the old saying "power corrupts and absolute power corrupts absolutely". Let's not give these people the reins of power again.

Some people blame the Democrats, some blame the Republicans. Some blame the mortgage industry, others blame the borrowers. The fact is, there's plenty of blame to go around. Greenspan and Fuld, Lewis and Paulson.

Ultimately, it was a systematic failure. The system broke down. There will always be loopholes and greedy people will exploit them.

I don't think it's the best use of resources to try to fix a broken system. Especially when you're leaving many of the people who broke the system in place.

*****W. Goss wants more nationalization: I don't know a lot about Nationalization of Banking but what I read in Robert A Heinleins "For us the Living" definitely piqued interest…It was interesting that he wrote it during the recovery of the great depression. We aren't anywhere close to that (I hope) but what we're in is scary enough. Nationalization of our natural resources is another interesting concept that would be appropriate for discussion.

As it now stands, much of America's natural resources are owned by the Federal government. Companies who wish to bring these resources to market have to lease the land and pay the government.

I don't know the specifics of how these leases are awarded and how much money they bring in, but I've read plenty that suggests the process is quite corrupt.

The U.S. is not Venezuela or Russia. There's no way we're going to simply nationalize our natural resources and give the companies that hold them the boot.

But at the same time, there's no way to ignore the benefit that state-run oil companies have provided to countries like Mexico and Brazil.

I would absolutely advocate that the U.S. create state-owned entities to exploit our natural resources in partnership with companies that have the technical know-how.

Take the Alaska National Wildlife Refuge (ANWR) for instance. That's a federally owned parcel of land. Would you rather see Exxon buy the rights and make a huge oil find? Or would you rather see the U.S. government share in the profits? And please, try to get more creative than simply saying the Post Office stinks so the government can't do anything right.

*****R. Watson brings up an investment idea we've discussed before: I'm thinking about buying some shares of the Las Vegas Sands and the MGM. What do you think about those purchases or should I hold on to my money?

If there were ever any companies that live and die on consumer spending, these two are it. Eventually these two stocks will be good buys. But I don't think that time is now.

Unemployment is still on the rise. That means people have less money to spend. And there's no telling when gambling in Vegas will make its way back in to people's budgets.

Casinos have been canceling expansion plans and laying off workers. So they are making the necessary adjustments to account for declining revenues. That's good, but it doesn't mean the stock prices are headed higher any time soon.

TradeMaster Daily Stock Alerts

As some of you know, I run a highly profitable trading service called TradeMaster Daily Stock Alerts. A number of you have recently asked about it and how to try it out. If you want more information about it, check out the web video presentation from Tuesday night. It features one of my star equities research analysts, Jason Cimpl. He talks about the indicators of a bottom formation, the sectors to be in (and those to stay as far away from as possible), and gives out his best picks. The video is free and it's pretty short. Here's the link: http://www.trademaster.tv.

If you're interested in giving TradeMaster Daily Stock Alerts a try but you don't want fork over a ton of money then click this link. My friends InvestorsInsight persuaded me to set up something easy for InvestorsInsight members to try the service. I think you'll like it.