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The Worst Market Predictions of 2008


You have to read it to believe it...

Tuesday, December 30th, 2008 - By Ian Cooper

It was February 2007 when we warned of the coming subprime collapse and the impending doom that we're now party to.  And even though the warning signs were clear as day, elected officials were blind and instead offered the following.

And if you think the following quotes are funny, bad, or just outright maddening, check out our free report on the Culprits of the Financial Crisis.

As reported by Yahoo:

"Here are some of the worst predictions that were made about 2008. Savor them — a crop like this doesn't come along every year.

1. "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" — Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008

At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8,500.

2. AIG "could have huge gains in the second quarter." — Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008

AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.

3. "I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They're not in danger of going under I think they are in good shape going forward." — Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008

Two months later, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.

4. "The market is in the process of correcting itself." — President George W. Bush, in a Mar. 14, 2008 speech

For the rest of the year, the market kept correcting and correcting and correcting.

5. "No! No! No! Bear Stearns is not in trouble." — Jim Cramer, CNBC commentator, Mar. 11, 2008

Five days later, JPMorgan Chase took over Bear Stearns with government help, nearly wiping out shareholders.

6. "Existing-Home Sales to Trend Up in 2008" — Headline of a National Association of Realtors press release, Dec. 9, 2007

On Dec. 23, 2008, the group said November sales were running at an annual rate of 4.5 million — down 11% from a year earlier — in the worst housing slump since the Depression.

7. "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system." — Ben Bernanke, Federal Reserve chairman, Feb. 28, 2008

In September, Washington Mutual became the largest financial institution in U.S. history to fail. Citigroup needed an even bigger rescue in November.

8. "In today's regulatory environment, it's virtually impossible to violate rules." — Bernard Madoff, money manager, Oct. 20, 2007

About a year later, Madoff — who once headed the Nasdaq Stock Market — told investigators he had cost his investors $50 billion in an alleged Ponzi scheme."

Unfortunately, the quotes, the people involved in the market malaise, the market failure, and tightened credit go much deeper than the people mentioned in the Yahoo article.  And for that we direct you to this report.

 

 

 

 


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Ten Municipal Bankruptcies Expected in 2009


And We Thought 2008 Was Bad...

Monday, December 29th, 2008 - By Ian Cooper

After a disaster of a year, 2009 isn't shaping up to be a walk in the park either.  Sure, Option ARM resets will wreak havoc on defaults and foreclosure rates, but that's the least of our concerns.

Now, the accountant (who predicted the 1994 Orange County bankruptcy) believes we'll see up to 10 municipal bankruptcies in 2009.  And if that happens, we could watch as the $2.7 trillion market for state, county and city debt is shattered.

In 1994, John Moorlach warned that Orange County, California's investing strategies could wreck its finances.  And he was right.  Six months later, the county went bankrupt after losing $1.6 billion. 

And he now believes that four cities in California and six others nationwide could seek court protection under Chapter 9 of the bankruptcy code in 2009.

But Moorlach may be too optimistic.  Richard Ciccarone, a research officer, for example, believes we'll see 36 bankruptcies over the next two years; 12 defaults in 2009 and at least 24 in 2010.

Note: For more on Municipal Bankruptcy Law, click here and here.

Here's more from Bloomberg.com:

"States project a $97 billion shortfall over the next two years, according to the National Conference of State Legislatures. This mounting pressure on public finances gives President-elect Barack Obama's administration "strong incentives" to provide federal aid, wrote George Friedlander, a municipal strategist at Citigroup Inc., the largest U.S. underwriter for tax-exempt bonds, in the firm's Dec. 12 Municipal Market Comment.

Three Considering

"In an environment where the federal government needs to stimulate the economy, keeping states from being forced to take steps that are rapidly and severely restraining will become absolutely essential," Friedlander wrote. He could not be reached for comment yesterday.

Two California cities, Rio Vista, with a population of 8,000, and Isleton, a 10th as large, have said budget gaps and debt loads may force them into insolvency. Likewise, Jefferson County, Alabama, which is trying to restructure $3.2 billion in sewer debt, has considered what would be the largest U.S. municipal bankruptcy.

The most such filings in a year is 104 in 1940 at the end of the Great Depression, according to a 1964 study, "The Postwar Quality of Municipal Bonds." Since 1980, the record is 18 in 1987, the year of the Oct. 19 stock-market crash."

"If well-known localities turn up among the insolvent, he said, borrowers' costs will increase at least 50 basis points. A basis point is 0.01 percentage point. If the interest rate on 10- year bonds worth $1 million increases to 5.5 percent from 5 percent, borrowers pay an additional $50,000 over the bonds' life. Tax-exempt yields on the Bond Buyer 20-bond index were at 5.46 percent on Dec. 19."

"Now, he says, three or four of next year's insolvencies will be in California, the biggest borrower in the municipal bond market. State lawmakers are grappling with a $14 billion shortfall in the fiscal year that ends June 30. A $42 billion hole is projected for the year that begins July 1. The state this year has sold $21.6 billion in tax-exempt bonds while localities have sold $31.1 billion, according to data from Thomson Reuters.

"The market for municipal credit protection has "quite literally, gone haywire," Citigroup's Friedlander wrote Dec. 12, noting that the cost for California debt was higher than for Turkey's. "These prices bear no relationship to real risks whatsoever," he said in the report."

"More Chapter 9 filings are not inevitable, said Bruce Bennett, a partner at Hennigan, Bennett & Dorman law firm in Los Angeles who designed Orange County's 1994 bankruptcy strategy."

"Moorlach said many California cities are watching Vallejo, a city of 117,000 on San Francisco Bay that filed under Chapter 9 in May. The city hopes to rewrite its labor contracts with police and firefighters.

"If Vallejo is successful in unwinding pension agreements, you could see Chapter 9 become a whole new industry," Moorlach said.

Orange County needs to close a projected $84 million gap in next year's $700 million general fund. On Dec. 11, after the state cut funding for social services, county leaders said they would lay off 210 workers. Nick Berardino, general manager of the Orange County Employees Association, the county's largest union, said politicians have been slow to respond to suggestions on how to prevent layoffs."

 


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2008: A Year to Forget...


What's Next?

Monday, December 22nd, 2008 - By Ian Cooper

We've seen the unthinkable in just a few short years.

What's next? How about:

"It shouldn't come as a shock when mountainous Option ARM and Alt-A loans begin resetting and the second leg of the credit crisis begins.

Alt-A loans were given to borrowers with credit scores of between 620 and 700, and included the option of interest-only loans, option ARMs, and no documentation loans that required little if any documentation for loan approval. Ninety percent of those that got an Option ARM in 2006 provided little or no documentation.

Ninety percent!

And it's estimated that only 60% of Option ARM borrowers make only minimum monthly payments. Others estimate that up to 80%.

Say a borrower makes minimum payments on a $600,000 loan. That loan could easily be a $750,000 loan within two years.

And we're supposed to be shocked when this problem ends in the second credit crisis?"

And we're not alone in our thinking... Business Week recently said:

"With the subprime mortgage crisis already crippling the U.S. economy, some experts are warning that the next wave of foreclosures will begin accelerating in April, 2009. What that means is that hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset. About a million borrowers have option ARMs, but only a fraction have already fallen due.

That was the catch to option ARMs; borrowers were offered low initial payments that would recast higher after several years. Many home buyers thought they could resell their homes before their payments increased. But instead, many of them got trapped. According to Credit Suisse, monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Some of these loans have already started to recast. About 13% of option ARMs that were issued in 2006 were delinquent by 60 days by the time they were 18 months old, Credit Suisse said.

And there's only one way to profit from the coming chaos - put options.


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Congress Gives Itself a Raise


What's Another $2.5 million out of taxpayer pockets?

Friday, December 19th, 2008 - By Ian Cooper

What great timing Congress has.

Taxpayers are already on the hook for the $700 billion bailout, another $17.4 billion for the automakers, and millions more.  So what's another $2.5 million in Congressional pay raises?  Yep, even though we're buried in debt.  Even though millions of Americans have lost their jobs, their homes, their livelihood, Congress voted to give itself a raise. 

Each will receive a $4,700 pay raise, which increases salaries to $174,000, as the deficit is on pace to reach a trillion dollar, and as the national debt stands at $10 trillion.  Plus, considering the ethically challenged Congress before us, hit with allegations of corruption, they should get nothing.

Here's more from TheHill.com.

"A crumbling economy, more than 2 million constituents who have lost their jobs this year, and congressional demands of CEOs to work for free did not convince lawmakers to freeze their own pay.

Instead, they will get a $4,700 pay increase, amounting to an additional $2.5 million that taxpayers will spend on congressional salaries, and watchdog groups are not happy about it.

"As lawmakers make a big show of forcing auto executives to accept just $1 a year in salary, they are quietly raiding the vault for their own personal gain," said Daniel O'Connell, chairman of The Senior Citizens League (TSCL), a non-partisan group. "This money would be much better spent helping the millions of seniors who are living below the poverty line and struggling to keep their heat on this winter."

However, at 2.8 percent, the automatic raise that lawmakers receive is only half as large as the 2009 cost of living adjustment of Social Security recipients.

Still, Steve Ellis, vice president of the budget watchdog Taxpayers for Common Sense, said Congress should have taken the rare step of freezing its pay, as lawmakers did in 2000.

"Look at the way the economy is and how most people aren't counting on a holiday bonus or a pay raise - they're just happy to have gainful employment," said Ellis. "But you have the lawmakers who are set up and ready to get their next installment of a pay raise and go happily along their way."

Member raises are often characterized as examples of wasteful spending, especially when many constituents and businesses in members' districts are in financial despair.

Rep. Harry Mitchell, a first-term Democrat from Arizona, sponsored legislation earlier this year that would have prevented the automatic pay adjustments from kicking in for members next year. But the bill, which attracted 34 cosponsors, failed to make it out of committee.

"They don't even go through the front door. They have it set up so that it's wired so that you actually have to undo the pay raise rather than vote for a pay raise," Ellis said.

Freezing congressional salaries is hardly a new idea on Capitol Hill. 

Lawmakers have floated similar proposals in every year dating back to 1995, and long before that. Though the concept of forgoing a raise has attracted some support from more senior members, it is most popular with freshman lawmakers, who are often most vulnerable.

In 2006, after the Republican-led Senate rejected an increase to the minimum wage, Democrats, who had just come to power in the House with a slew of freshmen, vowed to block their own pay raise until the wage increase was passed. The minimum wage was eventually increased and lawmakers received their automatic pay hike.

In the beginning days of 1789, Congress was paid only $6 a day, which would be about $75 daily by modern standards. But by 1965 members were receiving $30,000 a year, which is the modern equivalent of about $195,000.

Currently the average lawmaker makes $169,300 a year, with leadership making slightly more. House Speaker Nancy Pelosi (D-Calif.) makes $217,400, while the minority and majority leaders in the House and Senate make $188,100.

Ellis said that while freezing the pay increase would be a step in the right direction, it would be better to have it set up so that members would have to take action, and vote, for a pay raise and deal with the consequences, rather than get one automatically.

"It is probably never going to be politically popular to raise Congress's salary," he said. "I don't think you're going to find taxpayers saying, ‘Yeah I think I should pay my congressman more'."

 

 


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Spend it or Lose it...


Funds left on December 31 will disappear faster than booze at an office holiday party...

Monday, December 8th, 2008 - By Ian Cooper

It's "spend it or lose it" time for millions of Americans who set aside funds for flexible spending accounts. Any funds left in that account on December 31 will disappear faster than booze at an office holiday party.

That's because flexible spending accounts, which allow taxpayers to use pretax dollars for out-of-pocket medical expenses, have a "use it or lose it" provision that requires them to be used up by the end of the year. It's the law.

The Important Rules Behind Flexible Spending Accounts 

While flexible spending account holders can spend the funds on medical expenses not covered by insurance, like laser eye surgery, dental expenses, psychiatric care, vaccinations, immunizations and dermatological services, etc., they can also spend them on certain over-the-counter-medications, thanks to a September 2003 announcement from the Treasury Department and the IRS. It said:

"Today, the Treasury Department and the IRS announced over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts. Treasury and IRS issued guidance clarifying that reimbursements for nonprescription drugs by an employer health plan are excluded from income. Thus, reimbursements by health flexible spending arrangements (FSAs) and other employer health plans for the cost of over-the-counter drugs available without prescription are not subject to tax if properly substantiated by the employee."

Flexible Spending Account Benefits Example: Drugstore.com

As it says on its site, "Drugstore.com offers some 2,000 OTC items deemed likely to be eligible at its ‘FSA Store.' Shoppers can print a detailed receipt to submit to their FSA administrator for reimbursement, and all purchases made throughout the year on the site can be consolidated in a single FSA receipt."

Here's more...


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Was Fuld Unfairly Vilified?


Fuld was no victim

Wednesday, December 3rd, 2008 - By Ian Cooper

Some, not all, financial CEOs should be publicly and harshly vilified... not because they're evil and money-hungry, but because they were dumb enough to leverage their companies by such great extents.

And sure, the Fed should have never allowed these companies to be leveraged by such amounts.  But they weren't responsible for the lies told by CEOs and in some cases, CFOs that allegedly mislead shareholders into the false belief that all was okay.

Take CEO Richard Fuld and CFO Erin Callan, for example.

As a direct result of the subprime spillover, Fuld, once named "America's Top Chief Executive" in 2006 by Institutional Investor magazine, watched as Lehman came under fire and suffered unprecedented losses that'd lead to its demise. 

But this was no surprise to us.

We knew Lehman was in trouble. Lehman knew it was in trouble. But foolish investors backed up the boat, as the bank issued one assurance after another. But how could its financial health possibly improve?  

By September 15, Lehman filed for bankruptcy, the largest filing in history and a devastating shock to the financial system.  Fuld became the symbol of failure, the face of the arrogant, money-hungry CEOs that leveraged debt to unsustainable levels. 

Fuld was blamed for betting the house as subprime ballooned, and for refusing to recognize failure on the way down.

You see, by leveraging heavily, revenues could be inflated.  At one point, Lehman borrowed $32 for every $1 it had.  Merrill Lynch and Goldman were leveraged by about 25 to one, for comparison.

Fuld was no victim. 

Though, if you listen to Fuld, he was more of a victim of circumstance, "A victim of his own success," some Wall Street insiders now suggest... rolling the dice on subprime debt.

"In the end, despite all our efforts, we were overwhelmed, others were overwhelmed, and still other institutions would have been overwhelmed had the government not stepped in to save them. What happened to Lehman Brothers could have happened to any firm on Wall Street, and almost did happen to others. A litany of destabilizing factors: rumors, widening credit default swap spreads, naked short attacks, credit agency downgrades, a loss of confidence by clients and counterparties, and strategic buyers sitting on the sidelines waiting for an assisted deal were not only part of Lehman's story, but an all too familiar tale for many financial institutions."

And then there was Callan, a tax lawyer turned CEO.  She became Fuld's mouthpiece, drawing heat for her bullish stance, despite apparent signs of imminent demise. 

You see, despite Callan sugar-coating, which never reflected the behind-the-scenes desperation, and the 50% decline in stock value, the company was over... done... kaput.  She knew it.  We knew it.  But foolish investors still backed up the boat.

By early June, Lehman announced a $2.8 billion quarterly loss... and the sugar-coating ended as Callan was soon shown the door.

Fuld was no Victim

Days before collapsing, a Lehman subsidiary urged Lehman executes to cut multi-million dollar bonuses to send "a strong message to both employees and investors that management is not shirking accountability for recent performance" to which top Lehman brass responded with:

"Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize."

But that's okay.

They can now explain themselves to federal prosecutors.  Fuld and Callan, along with 10 others, will have to face prosecutors and explain how they didn't mislead investors into the run-up to bankruptcy.

According to the lawsuit, the Lehman case "represents the worst example of the fraud committed by modern-day robber barons of Wall Street, who targeted public entities to finance their risky practices and then paid themselves hundreds of millions of dollars in compensation while their companies deteriorated."

But that's not the worst of it for Fuld.

Fuld, who earned $34.4 million in 2007, is stepping down at the end of 2008. And according to a Harvard Law professor, as mentioned by The New York Observer, says "a departure bonus or a severance package for Mr. Fuld would be illegal under the U.S. bankruptcy law."

But, hey, if he needs the money he can always sell the home in Greenwich, the $21 million Park Avenue co-op, his home in Vermont, his home in Sun Valley, and the home in Jupiter Island.

Note: Don't think that Fuld and Callan were the only culprits of our financial chaos.  We're about to release our full research report on the top people that sank the financial ship.  Stay tuned.


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Recession Began in December 2007


How Long it Lasts is Any One's Best Guess

Monday, December 1st, 2008 - By Ian Cooper

It didn't matter how many times we said it, or how we said it, we were always told we were wrong about the recession. We may have to wait six months for the "experts" to make the official announcement, but truth is we're already there, we once said. And we were right, as we some of you.

It was December 2007 when we first reported that America was knee-deep in a recession... the same time the National Bureau of Economic Research just said a recession began.

You see, like us, the NBER doesn't use the definition that a recession only occurs with two consecutive quarters of negative GDP. Instead, they use key monthly indicators, including employment, industrial output, and sales.

"The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment," said the group's statement. "This series reached a peak in December 2007 and has declined every month since then."

You can read more here: http://www.nber.org/dec2008.html

Shortly after the report, President Bush expressed regret that the financial crisis cots jobs and crushed retirement accounts.  He also said he would support more government intervention if needed. 

I'm sorry it's happening, of course," Bush said.  "Obviously I don't like the idea of people losing jobs, or being worried about their 401(k)s. On the other hand, the American people got to know that we will safeguard the system. I mean, we're in. And if we need to be in more, we will."

 

And, if you're interested, here are some of our original recession articles:


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Why We're Bearish on Credit Cards


Is any one really surprised that credit card companies are next to fall?

Tuesday, November 25th, 2008 - By Ian Cooper

Credit card debt is just beginning to resemble the mortgage debt problems at the core of our financial meltdown. And the last thing the financial sector needs to feel is further squeeze, as Americans have accumulated some $970 billion in revolving consumer debt since the end of September 2008, up 3.4% from the close of 2007.

Sure, the credit card industry is typically resilient during our economic slowdown, thanks to pricing flexibility. And the thinking was, that as the economy sours, and consumers become late on payments, credit companies can boost earnings through late fees and higher interest rates.

But that's no longer the case.

That's because consumers are tapped dry. Defaults are growing. Charge-offs have been pushed well beyond expectations. And losses are far outpacing what companies were hoping to account for with extra card fees and higher interest rates.

And, according to Moody's, there's plenty of evidence pointing to further downside.

"Issuance of asset-backed securities linked to consumer credit cards ground to a halt in September after holding up fairly well in the first nine months of 2008. Moody's doesn't expect the ABS market to rebound in 2009 and said credit card issuers will continue to rely on access to U.S. government liquidity measures," says a report.

"We continue to have a negative outlook on the credit card sector and believe collateral performance will deteriorate throughout 2009. There is a greater likelihood of credit card-backed debt downgrades in the coming year, especially among subordinate notes."

The best way to play this is to buy put options on American Express, Discover, and Capital One, and calls on the likes of Visa and Mastercard. 


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