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Mark's Market Blog

8-27-11: Too Big To Fail tested again.

By Mark Lawrence

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The market went up this week on news that politicians were all on vacation and didn't do or say anything stupid. Bernanke and Trichet, the central bankers of the US and Europe, hinted that they might do something, something really, really kewl. Mostly hinting is what they have left in their bag of monetary tricks.


S&P 500 March 7 2011 to August 26, 2011

Spain will have a balanced budget amendment within weeks. France is debating a balanced budget amendment now, possibly passing one in the next few months. I'm jealous. Can we buy one of those at Walmart?

The San Francisco Fed released a report saying that as baby boomers retire, they will become net sellers of stocks for the next 15 years, driving stock PEs from 15 to 8. In other words, more or less they're predicting that in 2025 stocks will be worth half what they are today, with adjustments for inflation. Their good news? They see a major rebound by 2030.

It appears we will soon have another test of "too big to fail." BofA stock is seriously tanking. According to BofA, the company is worth $222 billion, about $20 per share. However BAC, their stock, is trading at about $6 and dropping like a rock. Why? Lots of reasons. There are fears about lawsuits resulting from their acquisition of Countrywide. There are serious doubts about many of the residential and commercial real estate loans on their books. There are questions about how much exposure BofA has to a European banking / debt crisis. Put this all together, and you can quickly decide that BofA is perhaps bankrupt. Three years ago we bailed out all the big banks. Today there's little or no popular tolerance for such actions. Perhaps BofA will get nationalized, broken up, and sold off. Perhaps they'll get another $200 billion bailout, allowing them to keep paying massive bonuses to their obviously highly competent work force. Tim Geithner, our fearless Treasury Secretary who never met a Wall Street Bailout he didn't love, thinks that if BofA goes down so will western civilization. Personally, I suspect western civilization is a bit more resilient. Whatever happens, the GM bankruptcy shows clearly that the Obama administration will not be very interested in the shareholders. Back in the 70's there was a popular bumper sticker in California, "Haven't had any sex lately? Try doing business with the Bank of America." Perhaps it's time to warm up the printing presses. My solution? BofA currently has a net value that's somewhere around $0 per share to $5 per share. If the stock drops a bit more, I think the Treasury should seize BofA, write down the assets to near nothing, and issue new stock, much like they did with GM. The stock could be sold off over the next couple of years, much like GM. News flash: BofA got Warren Buffet to loan them $5 billion at severely userous rates, so everyone now thinks maybe the company is OK because Warren fleeced them.


Bank of America stock, last five years.

What has the "great recession" really meant to countries? Mostly the developed countries still haven't reclaimed their pre-recession GDP levels, while a few countries who aren't afraid to spend public money like a drunken sailor seem to be doing quite well. The Economist prepared this chart:


GDP percentage change from 2007 to 2011, by country.

Yesterday at Jackson Hole, ECB Chief Jean-Claude Trichet reminded people that the ECB had options and was not afraid to use them. Sounds like he meant it. Everyone is very excited over his double-secret plan to save the Euro - one of the best parts about the plan is that no one knows what it is, which proves it will work. Also IMF Chief Christine Lagarde said European banks needed "urgent recapitalization."

Is Gold in a bubble? The price has gone straight up in the past few weeks, which certainly looks like a bubble to many. Alan Greenspan, who used to hang out with Ayn Rand and wrote a paper in the '60s claiming that gold was the only real currency, says that gold is not in a bubble, but rather the price reflects a growing world distrust of politicians and their paper currencies. It was known in 2006 that real estate never goes down. Now it's known that gold never goes down. Meanwhile, hundreds of millions of Indians and Chinese are buying more gold every day as their only protection against political and economic instability. Paper money only has value because people agree it does, it's all a big psychological game. On the other hand, gold is an almost worthless metal industrially speaking - the world demand for gold is about 10% of production, and most of that goes into jewelry. Gold only has value because everyone agrees it does. I have no answers.


Gold from 2005 to 2011.

The number of obese people in the United States will increase from 99 million in 2008 to 164 million by 2030, and the number of obese people in the United Kingdom will increase from 15 million to 26 million. Obesity-related diseases and health care costs will soar as a result. Already, the U.S. and U.K. obesity rates are the highest among the 34 member nations of the Organization for Economic Development and Cooperation (OECD). The U.S. obesity rate will rise from 32 percent to about 50 percent for men, and from 35 percent to between 45 percent and 52 percent for women. The U.K. obesity rate will rise from 26 percent to between 41 percent and 48 percent for men, and from 26 percent to between 35 percent and 43 percent for women. Obesity prevalence varied by gender and ethnicity, the study said. In the United States, about one-quarter of all men were obese in 2008 regardless of their race, while 46 percent of black women, one-third of Hispanic women, and 30 percent of white women were obese. In the U.K., 19 percent of white men, 17 percent of black men, and 11 percent of Asian men are obese, along with one-third of black women, 20 percent of white women, and 16 percent of Asian women.

From The New Zealand Herald: Food inflation is 46% in New Zealand. Dishonest diners are enjoying their meals then fleeing without paying - forcing some restaurants to take defensive measures such as asking patrons to pay before they eat. Auckland's new Wynyard Quarter waterfront area has many restaurants with outdoor seating - one diner told the Herald he was told by a waitress he would have to provide his credit card before being served because of more than 100 eat-and-run incidents in recent days.

Science: Most bacterial infections can be treated with antibiotics such as penicillin, discovered decades ago. However, drugs are useless against viral infections, including influenza, the common cold, and deadly hemorrhagic fevers such as Ebola. A team of researchers at MIT's Lincoln Laboratory has designed a drug that can identify cells that have been infected by any type of virus, then kill those cells to terminate the infection. In a paper published July 27 in the journal PLoS ONE, the researchers tested their drug against 15 viruses, and found it was effective against all of them including rhinoviruses that cause the common cold, H1N1 influenza, a stomach virus, a polio virus, dengue fever and several other types of hemorrhagic fever. "In theory, it should work against all viruses," says Todd Rider, a senior staff scientist who invented the new technology. When viruses infect a cell, they take over its cellular machinery to create more copies of the virus. During this process, the viruses create long strings of double- stranded RNA (dsRNA), which is not found in human or other animal cells. As part of their natural defenses against viral infection, human cells have proteins that latch onto dsRNA, setting off a cascade of reactions that prevents the virus from replicating itself. However, many viruses can outsmart that system by blocking one of the steps further down the cascade. Rider had the idea to combine a dsRNA-binding protein with another protein that induces cells to undergo apoptosis (programmed cell suicide). When one end of the DRACO (Double-stranded RNA Activated Caspase Oligomerizers) binds to dsRNA, it signals the other end of the DRACO to initiate cell suicide. Most of the tests reported in this study were done in human and animal cells cultured in the lab, but the researchers also tested DRACO in mice infected with the H1N1 influenza virus. When mice were treated with DRACO, they were completely cured of the infection. The tests also showed that DRACO itself is not toxic to mice.

The War on Men: Steven Cross, 60 of Lakeville, MN, an unemployed architect, lost his house to foreclosure. He had sole custody of his 11 year old son; the boy's mother had visitation rights but apparently hasn't seen her son in 9 years. Mr.Cross's credit cards were also apparently maxed out. Depressed and fearful, he left a note telling the boy to stay with neighbors. "If this paper is wet it's because I am crying so bad. You know your dad loves you more than anything," the letter said. Elsewhere he wrote: "There are many, many great years ahead for you. Not so for me." Later Steven sent an email from a Carmel library to his girlfriend saying he was in California sleeping on the streets. "I probably only have a couple of days ... No one I called would help me ... I didn't know what to do. I am scared and hopelessly depressed," according to the district attorney's complaint. It's the last anyone heard from him. Police have placed the boy in foster care, and issued an arrest warrant for Mr.Cross, who is to be charged with gross child neglect and likely sentenced to jail. Notice if this was an unemployed and homeless mother she would get section 8 housing, food stamps, and welfare; but a single dad gets ignored, then an arrest warrant and likely jail time.

Further Reading: Stratfor has put together a really outstanding two part article, The Geopolitics of the United States. It's quite long and detailed, but I think it's the best thing I've read all year.

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