They Get the Money, We Get the Bill

By: Allen Wells
# 018 March 30, 2009

I checked the markets this morning on the way to work, too early for the U.S but the major European and Asian markets were down, way down overnight, Great Britain down over 3%, Germany down over 4.5%, Japan down 4.5% and Hong Kong down more than 4.5%. That does not bode well for the U.S. markets.

Of course, by the time this is published the day will be over and we will know exactly what happened in the U.S. markets. As of 1130 AM the Dow was down over 3.6% and if a rally does not start soon (today) it may end up losing all its wonderful gains for March.

As I have said before, I do not think the U.S. stock market is a true gauge of the U.S. economy. The major traders are driving up the prices on the losers (companies losing money) and driving down the prices on the winners (companies making money, or at least holding their own in this market). The stock market is one big gamble. Traders are not buying for value, they are buying for quick profits, based upon a false economy.

What do I mean by “false economy”? Let me give you an example. Citibank is basically a bankrupt institution, the only reason the company is not in bankruptcy court right now is because the government bailed them out to the tune of billions of dollars. By bailing out Citi (and others) the USG has created a fake or “false” value for these companies. Just a few weeks ago, Citi’s values were dropping like a rock, ending up somewhere in the 80 cent range. Traders were well aware that the USG had committed to not letting Citi fail. When the stock hit this bottom, the traders came in and bought as much as possible – why not, they had a virtual guaranty from the USG that they would not lose their money. Today Citi is down over 9.5% (at 1150 AM), but is still trading at $2.37 per share. This is a spread of $1.50 per share (more or less) from just a few weeks ago.

Now, if you are a big trader and you bought 1 million shares at 80 cents, and sold today at $2.37 you would have made a $1,570,000 profit in just a few weeks. The stock market is no longer about investing in profit making ventures, it is about making as much money as quickly as possible. This is why I say that a rising stock market is not the best place to look for what is happening in the economy. A falling market is a better indicator, because as a company’s stock value goes down, their book value goes down and that affects their borrowing power.

Once a company’s stock value goes too low, they lose the ability to borrow. Falling stock prices are a good indicator that the economy (overall) is headed down. A rising stock market however, is not necessarily an indicator of great things to come. Just because a company’s stock value is rising does not mean good times are coming. If a company’s stock increases in value, but the overall market is slow or slowing, the company will not invest that new capital in more plants, or hiring or other capital expenditures. What a smart company will do is put additional credit in place, pull out cash and put it away for the inevitable slow down in the economy. Just because XYZ Corporation’s stock is going up does not mean that XYZ Corporation will be spreading that wealth, nor does it mean XYZ Corporation is making money (profit). Long term investors may buy the stock because it carries less risk than other companies.

Going back to my original point – false economy… when the government makes the decision to back a company or companies, they are basically stating that win or lose (profit or no profit) we will keep this company in business. The injection of billions, maybe trillions of dollars into these companies opens up tremendous opportunities for two groups of people:

1. Big money traders that can spend literally millions of dollars on one stock trade. An average
person can buy 1,000 shares at 80 cents per share of CITI and spend $800, thus making $1,570 when the price goes to $2.37. Not a bad profit, but not life changing. The average worker may not be able to risk the $800, and if he can, he does not have the inside knowledge the big traders have that the government will never let the CITI stock go to zero. Look again at the numbers (I quoted above) when you are able to spend $800,000! $1,570,000 profit in a few weeks is not so bad, is it? Once a stock (that is guaranteed not to fail by the USG) reaches a tipping point, it has nowhere to go but up. Those versed in this market know this, and knew it when the stock fell in price. Follow the money.

2. Politicians will also reap the benefits of this bail out boondoggle. By bailing out these massive corporations, they virtually assure themselves campaign contributions and special favors from here to eternity from the beholden industries. What do you and I get?

This is what we get: Our politicians have made the decision that major corporations are “to big to fail”. The result of that decision is you and I can go bankrupt; we do not matter. Even if we do go bankrupt, that does not relinquish us from our tax obligations. Citi, Bank of America, auto parts suppliers and the others are all too big to fail. Therefore, the government can bankrupt us (to pay for them) through higher prices (inflation) and through higher taxes to pay off those “to big to fail”.

What happens when there is none of us left to carry the burden of those “to big to fail?”

All I can say is this, “The United States of America, where we subsidize our failures and punish our producers.”

With warmth and regards (as always),
Allen
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