The Amazing Shrinking Economy

Prior to the market's open, the Commerce Dept. reported that GDP for the 4th quarter of 2008 declined by 6.2%, much more than the previous estimate of -3.8%, and more than the consensus estimate of -5.2%. Word was also spreading fast that the federal government was about to take a 36% stake in troubled Citigroup, more than quadrupling taxpayer's stake in the bank.

Right out of the gate, stocks tanked, with the Dow down nearly 150 points within the first 15 minutes. After trading in a tight range through most of the day, the markets finally succumbed to the intensely negative pressure in the final hour, sending the Dow, S&P and NYSE Comp. to new lows, surpassing those made earlier this week. As I said in yesterday's headline: GAME OVER!

Dow 7,062.93, -119.15 (1.66%)
NASDAQ 1,377.84, -13.63 (0.98%)
S&P 500 735.09, -17.74 (2.36%)
NYSE Composite 4,617.05, -95.97 (2.04%)

According to this report by Lauren Tara LaCapra, citing credit analysis by Egan Jones, a proprietary firm, Bank of America should be up next to follow Citigroup to the government hand-out window.

Hasn't it become evidently clear to Tim Geithner at Treasury that his plan for submitting the banks to a "stress test" won't even come close to relieving the stress to the credit and finance system?

First, the executives, Citi's Vikram Pandit and BofA's Ken Lewis, haven't come clean as to what's lurking on (and off - as in tier three) their books, awaiting implosion. Second, the government's benchmarks in the stress tests are simply too optimistic. For instance, the GDP worst case component calls for GDP to fall by 3.3% in 2009 and grow by 0.5% in 2010. We're looking today at a fourth quarter of 2008 in which GDP declined by 6.2%, according to the government's own report, issued today, so shouldn't the worst case be closer to a 5.0% decline in GDP for 2009 and a flat year in 2010?

As far as wost cases are concerned, a drop of 5.0% isn't even that bad. It is entirely possible that GDP could collapse by as much as 8 or 9% in the first two quarters of 2009 and get worse from there. The government simply doesn't want to face reality, believing, amazingly, after all we've been through, that the system is still resilient. It's not. The major banks are broken and the government is not only complicit through non-regulation, but now looking wholly incompetent, decrepit and corrupted to its core.

So, when the government finally gets the memo, they should have the FDIC close down Citi, zero out the shareholders, pay off bondholders at pennies on the dollar, recapitalize what's left and sell it off - in parts, if necessary - to private hands - shareholders, regional banks or private investors. Then, rinse, and repeat with Wells Fargo & Company (WFC) and JP Morgan Chase (JPM). anything short of a complete shutdown of the banking behemoths will only serve to prolong the agony in the credit, bond and stock markets, severely crimp lending and prolong the recession, turning it into a depression.

The Obama administration and Geithner's Treasury Dept. must take off the kid gloves, stop treating the banks as sacred cows and deal with the colossal problems facing the nation.

One of the reasons the economy is in such a staggering decline, is how lucrative not working has become. A woman caller to the Rush Limbaugh radio show today said she recieved $459 per week in unemployment insurance benefits and the government has just added an additional $25 per week, courtesy of the stimulus bill. That equates to $25,000 per year for not working. There clearly needs to be more incentive to find work, as being on the dole has now become better than the wages of 30-40% working Americans.

Elsewhere, General Electric (GE), slashed its annual dividend, from 32 cents to 10.

Market internals confirmed the headline numbers. Declining issues ran ahead of advancing ones, 4131-1390. New lows overwhelmed new highs, 815-7. Not a single NASDAQ issue made a new 52-week high on the day. The daily advantage for new lows over new highs has now run a full 16 months, since October, 2007. Volume was the highest of the week, in a week which was probably the highest it has been all year.

NYSE Volume 2,248,907,000
NASDAQ Volume 2,457,442,000

Commodities were quiet. Oil lost 46 cents, to $44.76. Gold lost a dime, to $942.50, while silver gained 13 cents to $13.11.

The major indices closed lower for the week, for the 7th time in 8 weeks in 2009.

In closing, I want to take this opportunity to lay claim to the coinage of a new socio-economic terminology, by announcing the advent of the Post-Government Era, a spawning global movement of rampant avoidance and non-compliance of the various laws, taxes and decrees of governments around the world. As the myriad levels of government lay deeper and deeper burdens upon the populace in the large majority of industrial nations, people will naturally revolt, and that revolutionary fervor finds its roots in non-compliance, civil disobedience and outright rejection of authority.

It's deserving of the current rostrum of national governments to receive treatment of this sort, as they have, individually and as a group, compounded the problems of the people, overtaxed them to extraordinary levels and continues to treat them as worthless fodder. The Post-Government Era has begun.

You heard it here first.

Game Over! Stocks Swoon on Stress Test Suspicion

Stocks opened higher despite more sour economic news, but ended the day in the red as the reality that Treasury's "stress test" for the ailing banking sector was more smoke, mirrors, politics and PR than an actual remedy.

Secretary Tim Geithner's "plan" to resolve the banking and financial crisis has good probability to extend the recession by not addressing the core problems. (See earlier post below for details on Treasury's plan.)

Blow by blow, here's how the day went, as interpreted by Wall Street's desperate price discovery process (at least somebody's working).

8:30 am: The Commerce Dept. issues monthly Durable Goods Orders report for January, citing a deep decline of 5.2% from the previous month, the sixth straight monthly drop. It's evident that Americans have their wallets and purses closed tight. Some even have forsaken carrying such.

The Labor Dept. announces 667,000 new weekly unemployment claims nationally. The 5.1 million currently receiving benefits is the highest since the department began keeping records in 1967. The federal government celebrated the occasion by adding $25 to the weekly benefit. Each week, an additional $127,500,000 of taxpayer money will be spent, beginning immediately.

9:30 am: The markets open with sharp gains, ignoring the dire economic reports. The Dow is up 80 points in the first ten minutes. the other major indices are up more than 1%. Bank of America is up 0.69 at 5.85.

10:45 am: The Dow reaches what will eventually be the high of the day - 7400 - up 130 points. 26 of 30 Dow stocks show gains. Bank of America peaks at 5.89, up 0.73.

1:13 pm: Having given up all of the day's gains, the Dow briefly falls into negative territory. Bank of America is up only 0.24 at 5.40.

3:15 pm: Stocks are in full retreat, with the Dow lower by 97 points. Bank of America is down 0.05 at 5.11. There are now only nine Dow components with gains. Most have completely rolled over.

4:00 pm: Markets close with all indices near the day's lows. It's the 8th losing day in the last 10. The Dow closes below 7200 for the second time this week. 22 Dow components close with losses, 8 with gains. Bank of America finishes with a cheerless win of 0.16, at 5.32.

Dow 7,182.08, -88.81 (1.22%)
NASDAQ 1,391.47, -33.96 (2.38%)
S&P 500 752.83, -12.07 (1.58%)
NYSE Composite 4,713.02, -40.15 (0.84%)

Market internals verified the session's finish. Declining issues outgunned advancers, 3755-2761. New lows: 460; new highs: 4, the lowest number of new highs I have seen since October of 2007. Volume was high once again, as investors alternately test and flee from equities.

NYSE Volume 1,482,993,000
NASDAQ Volume 2,348,150,000

Commodities were split. Crude oil for April delivery was up $2.72 to an unsustainable $45.22. Gold continued to correct on profit-taking, losing $23.60, to $942.60. Silver tumbled 94 cents, to $12.98, an excellent buying opportunity for long term investors.

Today's results were startling, stunning, unprecedented in the level of pessimism on display, expressing a remarkable distrust of government and overwhelming lack of confidence in the economic future. There is little doubt among investors that the government has failed to offer reasonable solutions to stem bank losses, job losses, income deterioration and revive - or even stabilize - the economy.

Treasury's Stress Test is Not a Plan at All

Editor's Note: I've had to break today's market coverage into two parts due to a need to provide some clarity on what the administration is planning to do with the nearly-insolvent banking sector. This entry will cover that issue, while the usual post - after 4:00 pm - will cover the day's market activity.

We've been hearing about Treasury Secretary Tim Geithner's "stress test" for the nation's largest banks in shrouded tones for over a week. Finally, late yesterday, some details of the plan emerged - in an exclusive interview with Jim Lehrer on the PBS Newshour - and elsewhere.

What the stress test will entail is having the banks examine their ability to function under a variety of very broad circumstances - first, a "moderate" scenario, in which unemployment

This commentary, by Adam S. Posen, Dep. Director, Peterson Institute for International Economics, lays out some guidelines which the Obama administration is conveniently avoiding.

And here's Paul Krugman opining in the New York Times that nationalization - in other words, having the federal government take over some banks, clean them up and resell the new, functioning, properly-capitalized entities to private investors.

Geithner and the Obama administration isn't listening, despite Krugman having won the Nobel Prize for Economics and other, similarly spot-on economists and commentators urging the government to make the appropriate hard choices, as opposed to the current piecemeal approach which hasn't - and isn't likely to - work.

The assumptions in the stress testing offers banks to look at two different sets of scenarios, a baseline and an extreme, or worst case outlook.

Under the baseline scenario, unemployment is at 8.4% in 2009 and 8.8% in 2010, housing prices decline by 14% in 2009 and another 4% in 2010, and the nation's Gross Domestic Product (GDP) falls by 2.0% in 2009 and rises by 2.1% in 2010.

In the worst case set-up, the assumptions are that unemployment reaches 8.9% in 2009 and 10.3 in 2010, housing prices fall 22% in 2009 and another 7% in 2010, and the nation's GDP falls by 3.3% in 2009 and gains 0.5% in 2010.

The banks will have about six weeks to report back to Geithner with either a confirmation that they're "OK" or a request for more funding from the government. That it will take six weeks to complete what is essentially nothing more than the testing of a theoretical set of circumstances against real world assets and liabilities suggests that the entire plan is nothing more than a politically-motivated cover-up for the banking giants which actually control the government.

This Bloomberg article suggests that the "worst case" scenarios laid out by the government are not severe enough, and that the banks will not not then be looking at what possibly lies ahead for the US economy.

The assessments may indeed be less severe than what's ahead, though the housing price assumptions appear somewhat on the money. Suppose GDP falls by 5% this year and another 2% next? What if unemployment hits 10.2% this year? Then the stress tests won't be testing the banks for reality and the entire plan will fail, meaning we will be sunk into a deeper recession for a longer time by supporting zombie banks which are at the heart of the problem.

In Geithner's interview with Lehrer, a the Treasury Secretary voiced a number of interesting comments, including, on the solvency of the banks involved:

"These banks now have very substantial amounts of capital relative to what you would have seen in the US economy going into previous recessions."

In other words, Geithner seems to be wanting to tell us that the banks are sound, despite what's been reported concerning trillions of dollars worth of bad loans, even more toxic credit default swaps and continuing credit-creation issues.

Geithner would have us believe that all of these pre-existing conditions have suddenly, magically, vanished. It's not a believable scenario.

On "nationalization", Geithner opined, "it's the wrong strategy for the country and an unnecessary strategy." Again, Geithner would have us believe that what's always worked for smaller, insolvent institutions, that being take-over by FDIC, recapitalization and an eventual return to a functioning entity on the other side, is not acceptable for the largest banks in the nation.

This is the kind of thinking which inspires skepticism in the banking system and the government's remedies. This approach would allow the likes of John Mack, Lloyd Blankfien, Vikram Pandit and Kenneth Lewis to continue to run their failed institutions - the same ones which caused the crisis in the first place - with only a limited amount of scrutiny and accountability.

This would allow the same excesses in the securitization of loans and largely unsupervised lending and investing activity to continue, while failing to address the toxic loans and swaps at the root of the problem.

There will be no accountability for what's already occurred, no civil or criminal charges brought against the bank and finance executives whose institutions already have benefited from taxpayer capital infusions. The same executives who nearly brought the world's financial system to its knees will remain at the controls of their now-defunct banks.

Naturally, the banks have lined the coffers of both the Obama administration and all members of congress with campaign contributions, so there will be no opposition from any government official - elected or otherwise - to this plan whatsoever.

The stress test and Geithner financial band-aid plan should be recognized for exactly what it is: further denial of the root of the crisis and a sure recipe for disaster.