Archives for February 2009

U.S. Economy In Shambles

Excerpts from a Bloomberg article on Warren Buffett’s opinion of US Economy.

Billionaire Warren Buffett said the economy will be “in shambles” this year, and perhaps longer, before recovering from the reckless lending that caused the worst “freefall” he ever saw in the financial system.

Stocks and the economy will rebound, and the best days for the U.S. are ahead, said Buffett, chairman of Berkshire Hathaway Inc., in his annual letter to shareholders yesterday. Buffett said he’ll spend the recession shopping for new investments for Omaha, Nebraska-based Berkshire.

“The economy will be in shambles throughout 2009 — and, for that matter, probably well beyond,” said Buffett. “Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so.”

Buffett, an informal adviser to President Barack Obama, said the consequences of the U.S. housing bubble are now “reverberating through every corner of our economy.” Gross domestic product shrank at a 6.2 percent annual pace from October through December, the most since 1982, the Commerce Department said Feb. 27.

Late last year, “the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country,” said Buffett, 78. “Fear led to business contraction, and that in turn led to even greater fear.”

“Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown,” Buffett said. “Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”

Buffett predicted bailouts will cause “unwelcome aftereffects” including inflation.

“Major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests,” he said. “Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”


Citigroup is down to $1.50 a share amid an agreement with the Federal government to convert 25 billion in preferred stock to common stock. Citi also announced that they will not be paying a dividend. There is no reason whatsoever to own Citigroup stock. The stock is worthless. if you want to see Dow’s future, look at AIG.

Dow Chemical (DOW) sank below $7.20 today.  Every day it seems like Dow Chemical sets a new low.  Dow needs to eliminate its dividend altogether to save capital.

GE Slashes Its Dividend

General Electric (GE) is cutting its dividend for the first time since 1940 from $1.24 per share to .40 per share. GE is cutting its dividend 68% after numerous comments from GE about how the dividend was safe  through all of 2009. The stock has since slumped to $8.50 per share. General Electric is trying to save about 9 billion dollars through its dividend cut. The stock was already trading at a level that seemed to expect a dividend cut. GE will probably have a huge loss from GE Capital when earnings are announced on April 17th. CNBC continues to defend Immeltand is describing the dividend cut as a wise move. The truth is that GE is going to lose its AAA credit rating and the dividend will likely be slashed further. According to some analysts, GE Capital is worthless due to massive international mortgage losses. Based on the company’s performance over the last 7 years; Immelt should be let go.

Warren Buffett’s Moves

Warren Buffett trimmed shares of Johnson & Johnson,Proctor & Gamble, US Bancorp, ConocoPhillips, UnitedHealth Group and CarMax. Buffett bought shares of Ingersoll-Rand, Eaton, Burlington Northern, NRG Energy and Nalco. Buffett seems to be moving from a defensive position selling the consumer staples to a more offensive position buying industrial and electrical companies.

CNBC: A Bunch Of Corporate Shills

Day after day CNBC hosts cry about free market capitalism, lower taxes and corporate bonuses. From Larry Kudlow to Dennis Kneale to Michelle Caruso Cabrera to Melissa Francis to Rick Santelli; they sit by and cheerlead for Wall Street excess. They are outraged when the government comes up with plans to try to keep people in their homes and prevent foreclosures. But when the government gives commercial banks and investment firms 750 billion dollars, that is just fine. CNBC is a cheerleader for Wall Street and Wall Street executives. Today, CNBC is complaining about a war on the rich because they will see a tax increase.

I listened to Francis, Kneale and Caruso Cabrera complain about CEO pay caps for banks that took TARP funding. They complained with a straight face about how does the government expect executives to live off $500,000 per year? This is ludicrous. The average American makes nowhere close to that type of money and is paying taxes so that these executives can stay in business after running their companies into the ground. No matter what lies banks tell; it is obvious that without government funding they were all bankrupt. All of the banks said that they didn’t need the money but has anyone given it back? No, and the truth is they can’t afford to right now because the US banking industry is insolvent.

I listen to Larry Kudlow call a stock market bottom day after day as the market sinks to new lows. He talks about stimulating the economy through business cuts and fails to acknowledge that Reaganomics started this deficit that we now have. Business tax credits and eliminating capital gains taxes only benefit the rich. According to NPR,” In 2006, the 400 richest Americans had an average income of $263 million, a 23 percent jump over the previous year, the Internal Revenue Service says. That same year, the very wealthy paid, on average, an effective tax rate of 17 percent — the lowest in 15 years.” Sometimes I wonder do rich people think that they should ever pay taxes?

What is CNBC’s solution to the auto industry? Let it fail. What about people who are losing their home? They need to be foreclosed on. How about an economic stimulus bill? That’s just more unnecessary spending. What about the banking industry? You have to bail them out because it imposes a “systemic risk” to the economy. What bout CEO’s paying executives huge bonuses or sponsoring stadiums and sporting events with taxpayer funds? You have to do that to keep your top talent. It’s class warfare pure and simple. If you help the middle class or lower middle class, that is called socialism. We are becoming Sweden or Cuba. If you help big business and wealthy executives, it is patriotic. You are doing the right thing for your country. i actually listened to an “economist” at CNBC argue that increasing unemployment benefits will cause many people to quit their jobs and just live off unemployment. Who can live a qualitative life off of unemployment in America in 2009?

The interviews with Wall Street CEO’s are a joke. They never ask any tough questions and then ask the CEO, what he or she thinks the government needs to do to help them? That’s like me burning my house down and then someone asking me what I think is the best way to rebuild my house. CNBC has no credibility. Recently CNBC tried to do an “objective: analysis of General Electric, the parent of CNBC. I own GE stock so I wanted to see what they would say. CNBC spent the entire time praising CEO Jeff Immelt for turning down his 12 million dollar bonus. CNBC did not mention that GE is expected to report a huge loss next quarter and the company has done nothing but go down since Immelt took over. This is just one example that shows how CNBC defends Wall Street while not caring at all about Main Street.

Photo by ohl@work

Metals Look Cheap

US Steel (X) is looking attractive at $22.  The steelmaker is expected to earn $5.40 per share in 2010 which means the stock is trading at 4 times next years earnings. The industry average for steel companies is 7.5 which would value US Steel at $40.50.

Alcoa (AA) is interesting at $6 per share. Analysts expect .60 per share earnings for next year which would place a multiple of 10 on Alcoa. The scary thing about Alcoa is that the company may have negative earnings if aluminum prices stay cheap.

AK Steel (AKS) looks like at a takeover target at its current price. The company has a decent balance sheet and currently trades at $6.68. 2010 earnings are expected to come in around $1.70. It might be worth buying in the mid 5’s.

Staying Put

I haven’t really made many moves over the past two weeks. I have only been adding to two stocks in my short term portfolio: General Electric (GE) and Aflac (AFL). I have been buying General Electric at $9 and $10. I bought Aflac in the low 20’s and believe that the insurer is severely undervalued.

For my long term positions, I have been adding more Wells Fargo (WFC) and British Petroleum (BP) lately. I continue to like BP because of the upside if oil rises and the healthy dividend.

Bank Dividend Cuts

JPMorgan Chase (JPM) cuts its annual dividend from $1.52 to 20 cents per share today. JPMorgan is preparing for a longer recession and double digit unemployment. JPMorgan has been deemed to be in the best financial shape of the other major banks. In the current marketplace that is like having the best seat on the Titanic. Banks are hemorrhaging and need every bit of capital that they can get their hands on. If JPMorgan is cutting their dividend then other major banks dividends are in trouble as well. Now that JPMorgan has cut its dividend, it will be easier for the following major banks to follow suit.

Wells Fargo (WFC) and its $1.36 dividend will likely go down to about 10 cents per share.

US Bancorp (USB) and its dividend of $1.70 is currently yielding over 16%. The yield is way too high. The new dividend would be about 10 cents per share.

PNC Financial (PNC) needs to cuts its $2.64 dividend with its 11.4% yield. PNC has not cut its dividend at all since receiving almost 8 billion in TARP money. PNC’s dividend should be cut to about 25 cents per share.

Suntrust Banks (STI) will probably undergo it third dividend cut in less than a year. I expect a drop from 40 cents to 8 cents per share.

Bank of New York Mellon (BK) is in the same boat as PNC Financial. Bank of New York has not had a dividend cut since receiving 2 billion dollars of TARP funds.

All of the dividend estimates are based on the Bank of America, Citigroup, JPMorgan models. Each of these banks cut their dividends to a yield that was approximately 1% of the stock’s price.

Interesting Week

This should be an interesting week. The Dow Jones is at 7300 which is its lowest level since the mid 90’s. Financial stocks as a group are beaten down and the question is, Can they continue to go lower?  The government is reportedly thinking of taking a larger stake in Citigroup. The government is expected to announce a plan that will stabilize the banking sector this week.

I will also be keeping an eye on automobile company stocks. General Motor’s market cap is down to 1 billion and the stock is selling for $1.77 a share. Ford may be selling for only $1.58 a share but the company seems to be in better shape than GM. Ford has not yet asked for any government funding and is gaining marker share from GM and Chrysler. Since Ford has not gotten any loans from the government, the company will have greater access to loans than its competitors.

How much lower can these stocks go? Dell is trading for $8 a share and the company announces earnings this week. Dow Chemical is down to $8 a share. At the rate that the stock is dropping the company may be insolvent before it can complete the Rohm & Haas deal. General Electric at $9 is at its lowest levels in 14 years. Can GE drop to $5?

Jobless hit with bank fees on benefits

Interesting article by Christopher Leonard, AP Business Writer.

For hundreds of thousands of workers losing their jobs during the recession, there’s a new twist to their financial pain: Even as they’re collecting unemployment benefits, they’re paying bank fees just to get access to their money.

Thirty states have struck such deals with banks that include Citigroup Inc., Bank of America Corp., JPMorgan Chase and US Bancorp, an Associated Press review of the agreements found. All the programs carry fees, and in several states the unemployed have no choice but to use the debit cards. Some banks even charge overdraft fees of up to $20 — even though they could decline charges for more than what’s on the card.

“It’s a racket. It’s a scam,” said Rachel Davis, a 38-year-old dental technician from St. Louis who was laid off in October. Davis was given a MasterCard issued through Central Bank of Jefferson City and recently paid $6 to make two $40 withdrawals.

The banks say their programs offer convenience. They also provide at least one way to tap the money at no charge, such as using a single free withdrawal to get all the cash at once from a bank teller. But the banks benefit from human nature, as people end up treating the cards like all the other plastic in their wallets.

The fees are raising questions from lawmakers who just recently voted to infuse banks with taxpayer money to keep them afloat.

Rep. Carolyn Maloney, D-N.Y., a member of the House Financial Services Committee, said the situation points to “yet another example of how we need to regulate the ways in which banks charge overdraft and other fees.”

“Banks, particularly ones that have received federal help, should not be imposing endless fees and charges on the unemployed in this time of economic crisis,” said Maloney, who has written a bill to require that consumers be notified at the point of sale if they’re about to incur overdraft fees.

Some banks, depending on the agreement negotiated with each state, also make money on the interest they earn after the state deposits the money and before it’s spent. The banks and credit card companies also get roughly 1 to 3 percent off the top of each transaction made with the cards.

Neither banks nor credit card companies will say how much money they are making off the programs, or what proportion of the revenue comes from user versus merchant fees or interest. It’s difficult to estimate the profits because they depend on how often recipients use their cards and where they use them.

But the potential is clear.

In Missouri, for instance, 94,883 people claimed unemployment benefits through debit cards from Central Bank. Analysts say a recipient uses a card an average of six to 10 times a month. If each cardholder makes three withdrawals at an out-of-network ATM, at a fee of $1.75, the bank would collect nearly $500,000. If half of the cardholders also dial customer service three times in any given week (the first time is free; after that, it’s 25 cents a call), the bank’s revenue would jump to more than $521,000. That would yield $6.3 million a year.

Rachel Storch, a Democratic state representative, received a wave of complaints about the fees from autoworkers laid off from a suburban St. Louis Chrysler plant. She recently urged Gov. Jay Nixon to review the state’s contract with Central Bank with an eye toward reducing the fees.

“I think the contract is unfair and potentially illegal to unemployment recipients,” she said.

Central Bank did not return two messages seeking comment.

Glenn Campbell, a spokesman for Rep. Russ Carnahan, D-Mo., said the congressman would support a review of the debit card programs nationwide.

Another 10 states — including the unemployment hot spots of California, Florida and South Carolina — are considering such programs or have signed contracts. The remainder still use traditional checks or direct deposit.

With the national unemployment rate now at 7.6 percent, the market for bank-issued unemployment cards is booming. In 2003, states paid only $4 million of unemployment insurance through debit cards. By 2007, it had ballooned to $2.8 billion, and by 2010 it will likely rise to $10.5 billion, according to a study conducted by Mercator Advisory Group, a financial industry consulting firm.

The economic stimulus plan signed by President Barack Obama this week will increase federal unemployment benefits by $40 billion this year. Subsequently, there will be more money from which banks can collect fees. The U.S. Department of Labor allows the fees as long as states create a way for recipients to get their money for free, spokeswoman Suzy Bohnert said.

“Beyond that, the individual decides how to manage his drawdowns using the debit card,” she said in an e-mail.

A typical contract looks like the agreement between Citigroup and the state of Kansas, which took effect in November. The state expects to save $300,000 a year by wiring payments to Citigroup instead of printing and mailing checks.

Citigroup’s bill to the state: zero. The bank collects its revenue from fees paid by merchants and the unemployed.

“If you use your card the right way, you’re not going to pay fees at all,” said Paul Simpson, Citigroup’s global head of public sector, health care and wholesale cards.

But that’s not always practical.

Arthur Santa-Maria, a laid-off engineer who lives just outside Albuquerque, N.M., said he didn’t pay any fees the first time he was laid off, for several months in 2007. His unemployment benefits were paid by paper checks. He found a new job last year but was laid off again last fall.

This time, he was issued a Bank of America debit card — a “prepaid” card in industry lingo — but he was surprised to learn he had to pay fees to get his money. He asked the bank to waive them. It said no. That’s when Santa-Maria called back to ask how to check his account online. He logged on and saw that the call cost him a half dollar. To avoid more fees, Santa-Maria found a Bank of America ATM at a strip mall and withdrew $80 at no charge. When he got back to his car, he decided to take out the rest of his money — $250 — and deposit it in his bank account.

Afterward, Santa-Maria logged on to his account and saw a charge of $1.50 for two withdrawals in one day.

“They’re trying to use my money to make money,” Santa-Maria said. “I just see banks trying to make that 50 cents or a buck and a half when I should be given the service for free.”

New Mexico authorities bargained with Bank of America to get lower fees for unemployment recipients, said Carrie Moritomo, a spokeswoman for the state Department of Workforce Solutions. The state saves up to $1.5 million annually by switching from checks to debit cards.

Bank of America spokeswoman Britney Sheehan pointed out that the fees charged in New Mexico are similar to those charged in the 29 other states with unemployment debit cards. The bank believes “the fee schedule is reasonable and consistent with similar programs,” she said.

Banks could issue unemployment debit cards with no fees for cardholders, but that would likely mean that states would have to pay more of the administrative costs, said Mark Harrington, director of marketing for Citigroup’s prepaid card services. If a state demanded no cardholder fees and could pay the difference, Citigroup might enter such a contract.

“We would be open to that,” Harrington said. “We’re not looking to structure any programs where we would lose money, but we’re definitely flexible.”

Simpson noted that the cards can save money for jobless workers who have no bank accounts. In the past, these people had to use corner check-cashing shops that charged fees as high as 2 percent, or $6 for a $300 check. Now, they can swipe their cards at McDonald’s, Wal-Mart or elsewhere for free.

Kenna Gortler, a laid-off paper mill worker in Oregon, said her union is advising members to avoid the debit cards and sign up to get their benefits through direct deposit. More than 300 of her fellow workers have lost their jobs at the mill in the last three months, and horror stories about ATM fees and overdraft charges are starting to filter back to others who are just now signing up for their benefits.

“It’s discouraging,” Gortler said. “People have limited funds and they don’t need to be giving money to the banks. They need to be keeping that money to feed their families and pay bills.”