Monday, November 24, 2008

Markets Soar on Citigroup Bailout

Good Afternoon Folks!

What a day in the markets! Stocks soared as the government continues to take money from the taxpayers and stuff it into the bankers pockets.

The bankers at Citigroup can now sit back and enjoy Thanksgiving after receiving a whopping $306 billion bailout b the US government.:

"Nov. 24 (Bloomberg) -- Citigroup Inc. received a U.S. government rescue package that shields the bank from losses on toxic assets and injects $20 billion of capital, bolstering the stock after its 60 percent plunge last week.

The second-biggest U.S. bank by assets climbed 58 percent in New York trading after the Treasury, Federal Reserve and Federal Deposit Insurance Corp. announced the aid plan yesterday. In return for the cash and guarantees, the government gets $27 billion of preferred shares paying an 8 percent dividend and warrants equivalent to a 4.5 percent stake in the company.

The regulators stepped in to protect Citigroup from losses on $306 billion of troubled U.S. home loans, commercial mortgages, subprime bonds and low-grade corporate loans when the firm’s tumbling shares sparked concern that depositors might pull their money, destabilizing a company that operates in more than 100 countries. The $20 billion of new cash adds to a $25 billion infusion the bank, led by Chief Executive Officer Vikram Pandit, collected last month under a Congressional bailout program."

My Take:

That'll buy a lot of turkeys won't it? They might as well just throw this money right out the window. At least then maybe a foreclosed homeowner might find a $20 bill on the side of the road!

Good idea Hank... Give them another $20 billion. I mean the last $25 billion injection you gave them worked so well! Yeah right... This has become a joke. All of these banks have become nothing but giant black holes that do nothing but vacuum up dollars and make them disappear.

Whats even more absurd is the stock market reaction to this insanity. Stocks at one point were up nearly 7% on this news! How could anyone with half a brain not realize how dangerous this is?

I often warn about crossing the line of "moral hazard". I say this because there are always potential unintended consequences in doing so. This is a classic example of crossing that line. Now that Hank and Ben have backstopped $300 billion of Citibanks bad debts they have set a dangerous precedent.

The danger here is every bank is going to want the same deal. The reality is the government doesn't have the funds to do this. I mean hell, one bank cost them potentially $300 billion if home prices continue to fall and these bad debts decrease in value.

The Fed has now created a mess with this bailout because they are now going to be forced to choose who gets the Citi deal and who gets left out in the cold. My first thought after seeing this deal is to go look for the weak regional banks and short the crap out of them because there will be no Thanksgiving TARP Turkey left when the Fed is done taking care of the big boys.

The Fed will be forced to do similar deals with all the big players in my opinion. I say this because housing prices continue to fall. Citi got bailed out first because they were in the worst shape. No bank will be able to handle additional losses as home prices continue to plummet.

And folks, they are plummeting. Look at the data we got today:

Prices fell a record 11% in October:

"Nov. 24 (Bloomberg) -- Home resales in the U.S. dropped in October and prices fell by the most on record, signaling a deepening housing recession going into 2009.

Purchases of existing homes declined 3.1 percent last month to an annual rate of 4.98 million units, the National Association of Realtors said today in Washington. The median price fell 11.3 percent to $183,300 from a year earlier, the largest year-over-year decrease since records started in 1968."

My Take:

Gee, do you think Citi's bad loans might continue to fall in value after home prices just fell another 11% in October which was the largest drop on record going back to 1968?

You know who is going to end up eating the $300 billion in bad loans that Citi made? Go take a look in the mirror. Its you the taxpayer. When will the US government learn that backstopping crappy, bloated, unaffordable subprime/alt a loans is pure stupidity.

There is some new data from the FDIC on Indymac's loan book that shows that 50% of the loans that were modified have now gone back into foreclosure. 1 out of 2 folks! You know why? BECAUSE HOMES ARE TOO DAMN EXPENSIVE!!!!

Watching the government attempting to prop up home prices drives me insane. You want this mess to go away? Let home prices drop 50-60% in the bubble areas to 3 times income, and allow the banks who made these insane loans to fail. Its that simple. Will there be horrific repercussion's to the economy in doing so? Of course, but at least we can then move on to the recovery process versus sitting here and and continuing to throw money into an endless black hole.

Lets look at the facts here folks. None of these bailouts have worked. We continue to throw good money after bad money. How many times are we going to do this? Its time that we end this ridiculous charade and try something different. Some transparency perhaps? God forbid we attempt to bring some clarity on what the losses are on these loans and put together a plan on paying them back.

BTW, Anyone thinking this is going to help the markets long term is smoking dope. This rally will fade just like the others. We set a lower low last week, and they are always retested. Take a look at this from JP Morgan:

Bottom Line:

As the terminator would say "Ill be back". This bear isn't over folks, not by a long shot. We have a new low that must be retested. Will it take three months like it did in 2002 is any ones guess at this point. The market is very oversold. Some type of sustained rally isn't out of the question here at these levels.

My advice here is to short the heck out of the market if we get some sort of 30-40% retrace which is not uncommon in bear markets. We have now bounced about 12% the last two days. There are no good entry points for right now.

Gold continues to work as the bailouts continue. The yellow stuff soared $30 to around $820 today after moving up $50 on Friday. Consider this to be a warning sign of concerns over the dollar as the government continues to spend like an out of control housing speculator.

Sorry about the rant today! Watching the US destroy itself is very painful for me to watch.

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