Silent Archimedes

Posts Tagged ‘interest rate’

2008 Year in Review – Top 10 in Finance

Posted by silentarchimedes on December 22, 2008

Let’s get right to it.

10. Yahoo rejects Microsoft’s $45 billion takeover offer – February 11, 2008. This one has to rank as one of the most stupid business decisions ever. Since Yahoo practically started the internet search business back in the 1990s, they have quickly given up their dominant position to Google in the past ten years without a major fight. By the middle of 2007, Google had a 53.6% market share of the search engine business, versus Yahoo’s rapidly shrinking 19.9%. Microsoft’s $44.6 billion in cash and stock offer was literally a lifeboat and gave Yahoo the best chance for long-term survival. Yahoo rejected the offer and a later offer in May valued each Yahoo share price at $33. Yahoo’s share price had been languishing around $19 in recent years. Yahoo’s CEO and founder Jerry Yang demanded $37/shr! Eventually Microsoft got tired of Yahoo’s demands and pulled all negotiations off the table. What is Yahoo today, end of 2008? The share price is $13.03 and Yang was ousted in November. Although Microsoft still has lukewarm interest in Yahoo’s search business, the main opportunity for Yahoo has passed.

9. Housing prices continue to go down town – It’s amazing how so many analysts and normal people knew that the meteoric rise of housing prices was due to risky ARMs and other loans that were impractical and ticking time bombs. It’s amazing the federal government did not see this coming or chose to not do anything about it. Because of the dot com bust from a few years ago and the recession soon after, the Feds turned a blind eye and let free credit run rampant. The bomb went off in 2006, and median housing prices have gone on a free-fall from an inflation-adjusted high of $275,000 in 2005 to near $200,000 at the end of 2008. It will take a good while to sort this thing out. Housing prices are still historically high and with high unemployment rates, increasing foreclosures will continue to flood an already over-supplied realty market.

8. Unemployment rate – The United States has been pretty lucky in terms of unemployment rates for the past two decades or so. Ever since the recovery from the high inflation, 9.0+% unemployment rates of the early 1980s, the rate has stayed well below 8.0%. Since 1995, the rate has performed even better, only touching above 6.0% once during the short recession recovery in 2003. In January 2008, the rate was around 5.0% but had already been steadily rising throughout 2007. Since this January, the rate has put on the rocket boosters and is now at 6.7% nationally, with no signs of slowing down. Several states, such as Michigan (9.6%) and Rhode Island (9.3%) already have unemployments rates above 9.0%! Another five states have rates above 8.0%! Stats were from Nov 2008 and look to be higher when December stats come out.

7. What happened to the commodities bull market? – Oil, gold, silver, platinum and copper. All were at multi-decade highs in 2007 and even in 2008. Since then? Crude oil prices have dropped from $150+/bl to $37/bl! Most commodities lost more than half their values. Exchange-traded funds such as SLV, GSG, and XLE all dropped more than 50%. The one exception so far has been gold. Although gold prices have dropped from a high over $1000/oz, they have not dropped below $700/oz, and have recovered into the $800s since then. Gold is an unique commodity and it appears that it mostly trades as a safe-haven currency than a physical commodity. In looking at the chart of GLD (below), gold prices have solidly bottomed out at $70/shr and is looking like it will have a strong 2009.

SPDR Gold Shares (GLD) Performance since Jan 2007.

SPDR Gold Shares (GLD) performance since Jan 2007

6. Remember the $168 billion original stimulus package? – That amount seems so little nowadays especially when Obama is bandying around an $800B to $1 trillion stimulus package. Add to that the $750B bailout package given to financial companies and automobile companies. This is a year of bailouts and stimuluses and so far they have not helped the economy. Instead, the state of the economy is at its worst at the end of 2008. The expected package by Obama will be an early focus of the Obama administration. I think most people could use an extra few hundred dollars in their pockets.

Pixar's Mater - Help me!!!
Pixar’s Mater – Help me!!!

5. The survival of American automobile companiesGeneral Motors, Ford Motor Co. and Chrysler became the poster child of the current economic crisis hitting main street. On display was the millions of jobs, especially blue-collar jobs, in America at risk of disappearing due to the recent decades of mismanagement, overhead and foreign competition of the US auto industry. With the finance industry easily getting a $750B bailout, it seemed absurd that an industry that for decades represented hard working Americans and unions had to literally beg for a few billion dollars to survive. It was obvious where the attention of politicians were. Although Bush recently said that $18B of the $750B bailout would be immediately used to prop up GM and Chrysler, the long fought battle was wasted time and energy by the attention garnering and bureaucratic Congress.

4. Bernard Madoff arrested on $50B Ponzi fraud scheme – When the $50 billion Ponzi fraud scheme by Bernard Madoff was revealed in early December, it was the main headline of major news websites for a mere few hours. Since then, as more details trickle out, the fraud continues to take a back seat to the macro-economic recession covering the globe. In any other year, the news of a legendary and consummate businessman (and a former NASDAQ chairman) being arrested for a fraud-scheme covering possibly the largest dollar amount in Wall Street history would ripple for weeks, if not months. However, with white collar crimes dominating the post-dot-com era (Enron, Worldcom, Martha Stewart, Tyco and the 2008 unraveling of the hedge fund industry), the public is now immune to financial fraud. Quite unfortunate. (See here for What is a Ponzi scheme)

Corporate bankruptcies on the rise in 2008.

Corporate bankruptcies on the rise in 2008.

3. Bankruptcies and those near it – It has been a sad year for many corporations as they head towards bankruptcy. Many of them well-known with years of solid profits. The list continues to grow and the impact of the recession on the consumer and his/her buying habits is only beginning. Circuit City, Linens ‘N Things, KB Toys, Frontier Airlines, Mrs. Field Cookies, Steve & Barry’s, Whitehall Jewelers, Mervyns, Sharper Image and Waffle House are some of the big name bankruptcies. And this list doesn’t even mention financial companies, which I discuss in #2. See this list for a more comprehensive list of corporate bankruptcies in 2008.

2. The demise of the hedge fund and mortgage finance industry – The derivatives market has become a multi-billion (if not, trillion) dollar investment industry that is complicated and largely misunderstood, even by the most astute financial advisors. Derivatives, as its name suggests, are investment products that are created off of actual traditional investment products. That means their intrinsic value is conjured up and their existence puts them closer to full-blown gambling. The current financial laws and oversight are not suited for such trading. Over the years hedge funds and derivatives took on more and more of the investment strategy of major financial corporations. Derivatives that were based on risky mortgages and insurance eventually collapsed as housing prices plummeted with lendees’ inability to pay the mortgages. The result has been a credit lockup unforeseen in decades. Major financial companies toppled and its effects are still not fully known. Major companies that totally collapsed include Bear Sterns, Lehman Brothers, Washington Mutual, ANB Financial, Fannie Mae, Freddie Mac, and AIG.  See this list for a more comprehensive list of financial collapses in 2008.

KBW Philadelphia Bank Index - Collapse since 2007

KBW Philadelphia Bank Index - performance since 2004

US Recessions since WWII (Courtesy of CNN)

U.S. Recessions since WWII (Courtesy of CNN)

1. Recession or Depression – Which leads to the number one financial news in 2008. Are we in a deep and difficult recession or a depression? In early December, it became official that the U.S. went into a recession in December 2007. To some analysts, this is good news because it means we are closer to coming out of it.  As you look at the chart on the right, most recessions last around one year. Based on the official Dec 2007 start date, historically we would already be on the tail end of the recession. However, to other analysts, this is bad news because the worst is yet to come, and we are already twelve months into it. With no light  seemingly at the end of the tunnel, these analysts portend a long recession. Bad news from around the world keep coming in and the bottom of the current economic crisis still has not occurred. Oil prices continue to drop, gold prices have since rebounded (bad for economy), and the dollar index has begun dropping again. Signs of major inflation on the horizon are evident, especially with the massive bailouts and the Feds lowering the overnight interest rate to its lowest level ever, 0%-0.25%.

The entire 2008 Top 10 in Finance is all bad news. Most of them have to do with the current economic crisis. The key hope is that the Bush administration is finally over and 2009 brings a more adept and intellectual administration that will do just about anything to get America out of the economic dump. An administration that seems focused on the middle class and job creation. However, with it comes more and more national debt and the mortgaging of the future. There seems to be no alternative. This will most likely lead to long-term inflation when countries such as China, India, Russia and other Asian countries continue their rise to redefine the existing  economic world order. This is not to say that the United States is doomed to be a second-bit player, as we know that is unlikely. However, the country needs to refocus on what made it a superpower in the first place, investments in technology, jobs, science, and innovation.


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A Letter to America

Posted by silentarchimedes on November 3, 2008

Dear Fellow Americans,

The land of the free and the home of the brave...

The land of the free and the home of the brave...

Tomorrow is one of the most important days in recent American history. It is a day that will affect the short term prospects of America and the standing of America in the world for the next century. The events and actions of the past eight years have accelerated the damaging path the country has embarked on for the past thirty years. The irresponsible actions have left America crippled economically, politically, morally and psychologically. Both parties have been hijacked by the special interests of corporations, ideological groups and personal interests. The values in which America was founded on have been distorted. The decision made by America tomorrow will go a long way in determining if we continue this egregious path of self-destruction.

The debt at the national, local and consumer levels are not only due to the actions of the past eight years. The decision by the Supreme Court in 1978 (Marquette National Bank of Minneapolis vs. First of Omaha Service Corp.) to deregulate interest rate caps at the state level was the precursor to the inundation of credit cards and the mortgaging of personal futures for the present. Although Reaganomics has been credited with bringing the country out of the vitriolic stagflation of the late 1970s, it has had a long term effect that has eaten away at the fiscal responsibility of the federal government. At the core of Reaganomics was reducing tax rates by reducing government spending which in turn was achieved by reducing costs associated with regulation and social programs. However,  unexpected costs from the burgeoning Cold War resulted in large trade and federal budget deficits. In order to cover such deficits, the government began borrowing heavily both domestically and abroad. This decision to mortgage the future of the country for the present instilled a belief that debt is good, even to other countries, such as China, Japan and India. America became a borrower nation instead of a loaner nation, which it had been for decades during its prominence.

The deregulation of these two critical issues are the main causes of the current economic problems. It instilled bad habits at all levels of society. Although quality of life continued to increase the past thirty years, it was mostly at the cost of the future. Both politicians and individuals began feeling entitled to such luxuries and expected it to last forever. However, as analyzed by Pulitzer Prize winner Jared Diamond (Collapse: How Societies Choose to Fail or Succeed), it is this infectious mindset that causes great societies to fail. This country is at that critical juncture. Do we reinstate the values, sacrifices and hard work that made this country great or do we continue down this destructive path?

In addition to the present economic and ideological problems that endanger the quality of life of America, there are many massive elephants in the near future that can derail any sense of comfort in the nation. A fundamental restructuring of social programs like Social Security, Medicare and Medicaid is required in the next one or two presidencies before the effects of the baby boomer population cripple the flow of aid from the system. The high quality of life has left Americans lazy, fat and indifferent, and the medical costs associated with treating related diseases and health issues threaten to destroy the already broken health-care system. The super-highway system that supported the rise of American power is also the bane of the country’s dependence on foreign oil and its lavish automobile lifestyle. Furthermore, the infrastructure of America is crumbling and poses a danger to the lifeblood of a large country like America. A massive government infrastructure initiative is required within the next twenty years. The only question will be where does all the money come from? As globalization continues to redistribute the wealth and power of the world, the education system and America’s ability to compete are also being tested. American children  continue to fall behind other countries at all levels of education, from middle school to college to graduate school. This country has been able to sustain its technological competitiveness partly through the immigration of top-level students from countries such as China and India. However, the current backlash on immigration coupled with the increasing prestige of other countries’ higher education systems, begs the question of how America will sustain its technological edge? Corporations and special interest groups as super-humans continue to eat away at the fabric of America. Their selfish narrow-minded view of profit and ideology permeate all levels of society, from individuals to the government. Ideology has especially polarized the country into two hardened stances, secularity versus ideology. The effects of this has left the country fearful and suspicious of each other. Finally, the effects of the internet and other entertainment-related technologies cannot be understated. Although they have created luxuries beyond anyone’s belief and increased the free flow of information, they have also created a schizophrenic society of 24 hour media frenzy and questionable freedoms of morality. The neutrality of journalism and the mental well-being  of society are at stake. Coupled with the constraints of global warming and moral responsibility, the above problems must be faced responsibly.

These problems will definitely be difficult to face and resolve. Most of these have been simmering for years, but have been effectively ignored. However, what has always made America great has been its ability to come together as a country and sacrifice for the greater good of the country and the world. The sacrifices by this country during the Civil War and World War II for the greater good cannot be forgotten. Although society was simpler and less polarized then, the country must come together once again to face the unprecedented wave of issues that threaten to send America down the road of self-destruction.

Tomorrow begins that choice. Tomorrow the country decides which path to take, one of sacrifice for the greater good or one of continued wantonness. Tomorrow begins the day where America can begin reinstating the values that made this country so great. A country of uniqueness not found anywhere else in the world. A melting pot that protects individual rights and helps others at times of need. A constitution so strong that the thought of a revolution is unfathomable. The land of opportunity and openness. A land of thousands of parks and natural resources. The separation of church and state and the freedom of religion. The land of the best medical care and higher education system. A land of tolerance and hope. And the land of the free and the home of the brave…

Whomever you vote for tomorrow, please think openly and clearly. Without any bias of age, race, religion, and fear, think who will be better for America. Who will lead America towards a path of redemption and strength. A path that requires sacrifice but cherishes American freedoms. A candidate that realizes that what America needs now is a problem solver with pragmatism and humility, and not one fixated on idealism, intolerance and fear mongering. Look closely at your choice, and know that when you go home afterwards, there will be a better America tomorrow. A better America for yourself and your family, and also for its great citizens of today and tomorrow.

America’s tomorrow begins now…

Thank you.

Silent Archimedes

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