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Mark's Market Blog

7-31-09: Small Business Bankruptcies

By Mark Lawrence

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The market has shot up the last three weeks in an historic run-up, reaching its highest value for the year. The bulls among us still have energy to run off. There's talk on Wall Street that this is the beginning of a new bull market and stocks will continue to raise to achieve all-time highs in the next 18 to 24 months. Buy in now or miss the boat. . .

S&P 500, Jan 1 2009 to July 31 2009

The government last year was left holding a record $2.1 billion in write-offs of small business loans it had guaranteed. Officials expect the number of defaults to continue to rise. Despite having loans written off, little companies such as Caffe Sportivo, an espresso shop and small gym in Redwood City, Calif., are barely scraping by. "I just couldn't make any payments. I was barely making rent or payroll," owner Chris Sakelarios said on a recent afternoon when her cafe stood empty except for two patrons who read as they sipped coffee. "The same as everyone else. We're in a hovering pattern."

Even as record profits re-emerge on Wall Street, thanks to massive government loans and guarantees for banks deemed too big to fail, the pain on Main Street is as profound as it's been in half a century. The companies that were not too big to fail are failing. Economists expect a wave of bankruptcies by firms walloped by the recession and credit crisis. Standard & Poor's predicts the default rate speculative-grade companies to hit an all-time high of 14.3% in 2010. The default rate was 9.25% last month, and just 0.79% back in November 2007. So far in 2009 139 U.S. firms with assets of $386 billion have filed for bankruptcy. In all of 2008, 138 firms with assets of $1.16 trillion filed for bankruptcy. In 2007, by contrast, bankruptcy was filed by 78 firms with assets of just $70 billion. The SBA (Small Business Administration) loan program, primarily aimed at helping minorities and the disadvantaged get loans, has seen their default rate climb from 2.4% in 2004 to 12% last year. This year promises to be only worse.

One of the basic laws of economics is that if you spend more money on something, they'll make more of it. Joanne Nova released figures showing that the government has spent $79B in the last 20 years funding studies to find global warming. Publishing papers showing that global warming is caused by mankind has become a major industry, with revenues of over $4B per year. If the global warming scientists formed a company, they would make the Fortune 500 mixed in with H&R Block, MasterCard, Borders, Sonoco, Abercrombie & Fitch and Alaska Air. The large expenditure designed to prove the non-existent connection between carbon and climate has created a powerful alliance of self-serving vested interests. By pouring so much money into pushing a single, scientifically-baseless agenda, the Government has created not an unbiased investigation but a self-fulfilling prophecy.

Carbon trading worldwide reached $126 billion in 2008. Banks, which profit most, are calling for more. Experts are predicting the carbon market will reach $2 - $10 trillion in the near future. Hot air will soon be the largest single commodity traded on global exchanges.

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