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Saturday, January 26, 2008

Fact Sheet: The Bush Stimulous Package

Fact Sheet: New Growth Package Meets Criteria to Keep Our Economy Healthy

Today, President Bush announced his Administration reached a bipartisan agreement with House leadership on an economic growth package, and he encouraged Congress to deliver a bill to his desk as soon as possible to bolster the economy this year. The President's advisors and many outside experts expect that our economy will continue to grow over the coming year, but at a slower rate than we have enjoyed for the past few years – and there is the risk of a downturn. The agreement reached today meets the criteria the President set forward last week to provide an effective, robust, and temporary set of incentives to protect the health of our economy and encourage job creation. If enacted in a timely manner, it is expected to help create more than half a million jobs by the end of 2008.

The Growth Package Includes Measures To Bolster Both Business Investment And Consumer Spending, Which Are Critical To Economic Growth

1. The agreement reached today would allow Americans to keep more of their money to stimulate consumer spending. The growth plan provides approximately $100 billion in temporary relief that will allow Americans to keep or spend more of their incomes. Under the agreement:

• In 2008, taxes would be cut from 10 percent to zero percent on the first $6,000 dollars of taxable income for individual taxpayers and the first $12,000 of taxable income for couples. Taxpayers could receive rebates of up to $600 for individuals and $1,200 for couples. A minimum of $300 per person and $600 per couple would be available to those with at least $3,000 of earned income. This relief would be available to everyone with adjusted gross income less than $75,000 for singles and $150,000 for married couples filing jointly. It will be phased out for taxpayers above those income thresholds.

• Everyone eligible for this relief would also receive an additional $300 per child. For example, this would mean up to $1,800 of tax relief for an eligible couple with two children.

2. The agreement would also offer incentives to spur business investment. The agreement would save businesses approximately $50 billion in near-term taxes through a temporary change to the tax code that will allow American businesses that buy new equipment this year to deduct an additional 50 percent of the cost of their investment in 2008. This will encourage businesses to expand and create new jobs now because buying equipment, software, and tangible property this year will dramatically lower their taxes. The agreement also increases expensing for small businesses.

The Agreement Reached Today Adheres To Principles President Bush Set Forward Last Week To Guide Deliberations

The growth package:
• Is big enough to make a difference in an economy as large and dynamic as ours. The package is approximately $150 billion, an amount sufficient to provide a boost to the economy.

• Is built on broad-based tax relief that will directly affect economic growth, not Federal spending that would have little immediate impact on our economy. The package is not a collection of spending programs – it does not include any government outlays beyond the minimum rebate check and refundable child tax credit.

• Is temporary and will take effect right away so we can get help to our economy when it is needed most. The personal tax relief will begin to stimulate consumer spending and additional economic growth within about 60 days of enactment, when the first rebate checks are expected to go out.

• Does not raise taxes or include wasteful spending provisions.

The Growth Package Announced Today Would Use Proven Methods To Keep Our Economy Healthy

The experience of the 2001 and 2003 tax cuts shows that providing tax relief to families stimulates the broader economy by boosting household spending. For example, rebate checks increased total consumption by about 0.8 percent in the quarter that the 2001 rebates were received and about 0.6 percent in the subsequent quarter. As the non-partisan Congressional Budget Office noted, "Most analysts agree that the 2001 rebate stimulated the economy."

The approximately $100 billion of individual tax relief included in the growth package represents a substantially larger amount than the tax rebates of 2001. In 2001, $38 billion was distributed in rebate checks, amounting to 0.4 percent of GDP. $100 billion amounts to 0.7 percent of current GDP.

My Comments:
1. The tax rebates won’t be spent on consumption. They will be hoarded and used to make last ditch debt servicing payments. The rebates are barely the equivalent of a single month’s mortgage payment for a couple. These rebates will simply buy some time. A month or two. They will not stimulate the consumer.
2. Businesses are expecting a slowing economy. They will not purchase new equipment with wild enthusiasm just because they can deduct more of the cost. The primary driver of a business purchase decision is definitely not the tax implications. If a new machine is not needed, it is not still purchased because of some tax advantage. The tax break will likely only have a small affect on businesses purchases. Positive economic effects would be marginal and temporary. For example, it may push up by a quarter or two purchases that were planned for later. Naturally, this then results in weak business demand later.
3. Bottom Line: The average Joe six pack is a baby boomer quickly running out of time. His single largest asset, his primary residence, is deflating rapidly. This single largest asset is also the primary collateral for his single largest liability. His balance sheet is rapidly deflating as all his assets, from his home to his equity portfolio, all simultaneously deflate while his debt outstanding may actually still be increasing. His debt servicing costs not dropping, despite aggressive rate cuts, and may actually be rising. It has also become damn near impossible to refinance certain mortgages as easy credit evaporates. On top of that, Joe six pack should now be seriously concerned about his job security. So when a cheque for $300 to $1500 arrives in the mail, Joe six pack is not going to spend it on a $200 steak dinner or a new computer or on a vacation. Got it?

Friday, January 25, 2008

Rumours: Blackstone, FORTIS and ING

Heads up: Rumours of Blackstone, FORTIS and ING all being in trouble smashed equities off the open today and sent fixed income flying across the curve. There seems to be substance to at least some of these rumours...

... and they are all big players. This could end the bounce right here.

More Fuel For The Bounce: Microsoft, Ambac

Ambac Rises on Speculation of Takeover by Wilbur Ross (Update2): “Ambac Financial Group Inc., the bond insurer whose shares plunged 87 percent in a year, rose in Frankfurt trading on speculation Wilbur Ross will buy the company.

Ross, who became a billionaire by turning around distressed steel and textile businesses, is in talks to buy New York-based Ambac, the Evening Standard reported, citing people it didn't name. A deal may come within the next two weeks, the newspaper reported on its Web site.

Ross is ``looking at'' bond insurers, which have tumbled after posting record losses on subprime mortgage securities, he said in a Bloomberg Television interview this week. Ambac's stock market value has slumped more than $8 billion in the past year and Fitch Ratings last week stripped the insurer of the AAA credit rating it depends on to guarantee $556 billion of debt.”

More fuel for the bounce. Ambac (ABK) is up 10% pre-market. The broader equity futures like it as well and were already bid on the Microsoft (MSFT) earnings beat.

The monocline insurers need to be recapitalized. Anything less will just delay an inevitable disaster.

Ross may instead start his own insurer. This is not nearly the same thing.

“Ross may start a new bond insurer, the Financial Times reported on its Web site today. Fort Worth, Texas-based TPG Inc., the U.S. buyout fund formerly known as Texas Pacific Group, also may start a guarantor, following billionaire investor Warren Buffett, who set up a company last month.”

Starting an insurer would doom these ones to failure. For Ross, the smart thing would be to start from scratch and buy the best insurance off the troubled monolines. From a more macro perspective, that would leave Ambac and MBIA with the worst of the toxic sludge and guarantee their implosion. But such is life and such is capitalism.

U.S. Stock Futures Climb; Microsoft, Amgen, Ambac, Barrick Gain: “U.S. stock-index futures rose after Microsoft Corp. increased its annual forecasts and Caterpillar Inc. reported fourth-quarter earnings that beat analysts' estimates.”

A list of my recent posts on the ‘monolines’ including MBIA and Ambac:
MBIA, Ambac: Big Bailout Rumours
Ambac -60%, MBIA -30%
MBIA, Ambac: Update
Ambac, Monoline Insurer’s: The End Game

Thursday, January 24, 2008

Securing The Bounce: Microsoft Beats

Microsoft Profit Exceeds Estimates on Xbox, Windows (Update1) : "Microsoft Corp., the world's largest software maker, posted a second-quarter profit that surpassed analysts' estimates on sales of its Xbox 360 game console and Windows programs for personal computers. The company raised profit and sales targets for the year.

Net income in the period ended Dec. 31 rose 79 percent to $4.71 billion, or 50 cents a share, from $2.63 billion, or 26 cents, a year earlier, the company said in a statement today. That beat the 46-cent average of estimates compiled by Bloomberg. Sales climbed 30 percent to $16.4 billion."

Microsoft (MSFT) is up 9% in after hours trading. As the 3rd largest S&P component, this should secure the longevity of the broader equity bounce...

Rogue Traders, Stop Losses and Averaging

Societe Generale Reports EU4.9 Billion Trading Loss (Update2):Societe Generale SA reported a 4.9 billion-euro ($7.1 billion) trading loss, the largest in European history, and accused an unidentified trader of fraud after wrong- way bets on stock index futures.

France's second-largest bank by market value plans to raise 5.5 billion euros from investors after the trading loss and subprime-related writedowns depleted capital, the Paris-based company said today. The Bank of France, the country's banking regulator, said it's investigating the situation.

The trading shortfall rivals the $6.6 billion Amaranth Advisors LLC lost in 2006, and is more than three times the $1.8 billion of losses by Nick Leeson that brought down Barings Plc in 1995. An offer by Chairman Daniel Bouton to resign after the trades were discovered this past weekend was refused by Societe Generale's board, the bank said.”

The fraud was discovered Friday and the trade was unwound Monday and Tuesday. Since it was a long index futures position, it might help explain the carnage in say, the DAX, Eurostoxx 50, and maybe even the lock limit down we saw on the S&P 500. Aren't forced liquidations fun?

Every trader should know these simple rules:

1) Have A Stop Loss
2) Never Ever Average Into A Losing Position

The first rule is never disputed by trader trainees, but the second always is. Averaging works nine out of ten times, but the ONE time it doesn’t, it more than makes up for all the other times it did work. All the blowups in history were trades that were AVERAGED until the traders and their respective institutions were all in.

Averaging into a WINNING trade is entirely acceptable and desirable.

BTW, that trader from Societe Generale is only 30 years old and he has now gone MISSING.

Wednesday, January 23, 2008

Charts for the Big Bounce

I think equity indices the world over have put in a tradeable bottom.
Central Banks and Governments the world over have a quite a few catalysts pending, ranging from more rate cuts to outright bailouts and stimulous packages. This should result in a some follow through on today's gains.
Never forget: This is just a BOUNCE in a Bear market and not a trend change. We will retest the recent lows and most likely PLOW right through them.

MBIA, Ambac: Big Bailout Rumours

Heads up. The rumours of a massive monoline bailout are now gaining wide spread acceptance...

MBIA, Ambac Likely to Get Bailout, UniCredit Says (Update1): "MBIA Inc. and Ambac Financial Group Inc., the biggest bond insurers, are likely to be bailed out to avert worsening credit-market turmoil, according to analysts at UniCredit SpA."

Also, on Calculated Risk:

A CounterPartyParty: "Big banks and brokers that are counterparties to struggling bond insurers met with regulators in New York on Wednesday ... The counterparties to Ambac Financial and other bond insurers such as ACA Capital met with the New York Insurance Department, spokesman David Neustadt said in a statement. He declined to say what options were specifically discussed ..."

Should a bailout indeed be announced, expect an explosive short covering rally in all equity indices. I'm talking about a MASSIVE rally. An announcement of this nature would probably take place after the close.

No ECB Cuts To Match

Short post. Too much pre-market action. Should be a crazy day. I'll follow up with a big summary post at the close.

Trichet made it abundantly clear that the ECB is still in inflation fighting mode this morning. European equities went into free fall, sucking US equity futures down as well.

Levels that must hold on the S&P500 or all hell will break loose are:
1274 (support)
1265 (yesterday's open)
1255 (yesterday's lock limit down, and the low)
1225 (long run support)

* S&P just dropped to 1274 as I type. Look out below.

Tuesday, January 22, 2008

This Guy Went Bottom Fishing...

This guy (EDIT: Video was removed from YouTube. Link has been re-directed to went bottom fishing in the Russell 2000 yesterday.
If he held overnight, then good night.
S&P 500 Limit down right now... @ 1255.50.