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Economic/Market Highlights 1/5/09 . . . “Bad and Getting Worse”

Posted by Larry Doyle on January 6, 2009 10:00 AM |

On the first real day of business after the holidays, I will tip my hat to PEBO and his economic team. Obama opened his press briefing this morning with his take that the economy is “bad and getting worse.” In deft fashion, he then caught almost everybody off guard by leading his proposed economic stimulus plan with focus on a significant level of tax cuts and tax credits. In my opinion, this was a very, very strong first move. Well done, Barack!!

The general outline of these cuts and credits include:

1. tax cuts for those paying taxes or with an earned-income credit. Likely for families earning up to 200k, although that is not yet defined.

2. businesses can retroactively reduce tax bills going back 5 years by writing off losses from 2008 and 2009.

3. offer tax credits to entice firms to plow money back into new investments.

4. provide a one year tax credit for companies that make new hires or forego layoffs.

5. increase write-offs for a wide array of expenditures for small business.

The spending side of this stimulus plan will run upwards of $500 billion dollars. Will there be wasteful spending in there? It would be foolhardy to think that with that amount of government directed spending that there won’t be.

Again, for purposes of keeping these numbers in perspective, our federal government spends $300 billion annually to totally fund the Departments of Agriculture, Education, Energy, Homeland Security, HUD, and Transportation. Against that backdrop, both this stimulus plan and all the other rescue packages and bailouts need to be measured. I get increasingly peeved over the need to direct money to Freddie, Fannie, AIG, et al. However, given that I have been consistent in imploring BO and team to focus on providing tax incentives, I tip my cap to him for leading with them.

In other news of the day . . .

The biggest moves in the market today were on the opposite ends of the credit spectrum. Government bonds have very quickly backed up almost 50 basis points over the course of the last few days. We have cautioned people that we think this sector is very expensive. The risk our economy runs again is that as other nations need to incur their own deficit spending programs to stimulate their respective economies, we will find it increasingly difficult to finance our debt. Mortgage rates inched up as well. Against those moves, the most speculative credits continued to perform dramatically well as clearly investors are putting cash to work in that space.

Banks underperformed with expectations of ongoing credit charge-offs while oil and energy in general continue to move higher supported by ongoing turmoil in the Middle East.

We have not spoken in a while about “How Bernie “Madoff” with $50 Billion.” In Congressional testimony today, representatives from SIPC and the SEC as much admitted they are not properly staffed to handle the degree of complexity involved with investment strategies in the financial community. That is regrettably a pathetic response in light of the development of a wide array of derivatives and complex securities over the last decade.

In the midst of that hearing, word broke that Bernie tried to move $1 million worth of jewelry and heirlooms to friends and family overseas. If that is not a violation of bail I do not know what is! The fact that he is not immediately put in jail confirms in my mind what my guest John Moynihan shared with us on December 21st on No Quarter Radio: that Bernie is most likely holding some trump cards and waiting to play them.

We are continuing to build our list of  “Economic All-Stars” to watch. As we see and hear these people, we will pass along their thoughts. On our list currently: Nouril Roubini, Meredith Whitney, Laszlo Birinyi, Sheila Bair, Jeff Gundlach, Bob Rodriguez, and now Mark Carney, Governor of the Bank of Canada (a favorite of last night’s guest, Kevin Doyle).

In regard to Mr. Rodriguez, in today’s WSJ it was quoted that “Morningstar has dubbed Mr. Rodriguez prophetic and is considering naming him and his team at First Pacific Advisors their Fixed Income Manager of 2008.”

Read how “Manager Foresaw the Crisis…but Didn’t Avoid Big Losses“….

On a separate topic, ever since being prompted two weeks ago to address the topic of defaulting on a mortgage I have seen an increased media emphasis on the topic we have dubbed, “Everything’s Negotiable.” For those who are feeling increasingly pressured on their finances, be proactive with your lenders. Read how, “In a Hole? Speak Up.”

On a final note, for those who did not catch my interview last evening with KD, Kevin Doyle, it was fabulous. Kevin recently founded 12th Street Capital having most recently worked at Countrywide for the last eight years. Kevin shared his inside look at the following:

1. historical perspective of sub-prime originations…
2. thoughts on the state of our regulatory authorities…
3. view of the efficacy of the rating agencies…
4. opinion on the principal reduction plans promoted by Sheila Bair..
5. admiration for Mark Carney, Ben Bernanke’s counterpart at the Bank of Canada…

The interview is archived at NQ Radio. Well worth a listen!!


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