Street Speculator

One question:

If you were an investor, residing outside of the United States, would you invest any of your dollars into this country?

My answer would be NO. Many U.S. politicians like to give the appearance of U.S. superiority in many industries and areas (Education, Banking, Finance, etc….). But, none would ever dare state that the U.S. is also responsible for the current GLOBAL ECONOMIC CRISIS.

This week, Saudi Price Alwaleed’s investment company had reported losses in the BILLIONS (Specifically, $7.2 billion). This number is how much his company reported in losses for the entire ‘08 fiscal year.

Now a Billionaire is a Billionaire and a Billion is a Billion. I believe Price Alwaleed is the listed within the top 20 of the Richest People in the World (according to FORBES). But a $7.8 Billion Dollar lost will hurt anyone.

His losses are a result of his investments in, but not limited to Citigroup (Symbol:C), Time Warner (Symbol: TWX), News Corporation (Symbol: NWS), and eBAY (Symbol: EBAY).

So, we again ask the question. Why would anyone want to invest in the U.S.? The regulatory environment is non-existent when it comes to protection of Financial Crimes (Ex. Bernie Madoff). Businesses, Government, and Consumers alike are very UNDISCIPLINED when it comes to spending (DEBt, DEBT, debt). There is an abundance of greed (The FOOLS who fall for Ponzi Schemes and those who peddle them). The word NO is non-existent in some peoples vocabulary.

Foreign Investors, keep your domestic home until we here in the U.S. prove our, if any, FISCAL Responsibility.

These words were spoken by Craig Barrett, Chairman of Intel (Symbol:INTC) the world’s largest chip maker. Mr. Barrett stated this at a Seattle conference discussing the nations education system, it’s problems, and what actions need to be taken in order to prepare our students for the future.

Mr. Barrett also stated that Intel along with Microsoft (Symbol:MSFT) are already finding the talent they need offshore. WOW!!

Wake-Up call people. This is a bold statement, but I believe true nonetheless. I have been watching our largest tech companies over the past 8/9 years (Cisco, Oracle, Dell, etc..), and noticed that they are spending billions in Asia and other emerging nations. Now it is very evident as to why. Cheaper labor plus a willingness to learn the difficult Math and Science disciplines.

LESSON: Tech companies, and the Wal-Mart’s only need enough people in this country employed to purchase their products and keep them profitable. If the BIG “3″ automobile companies go bankrupt, so be it.

As we go through difficult economic times here in the U.S., many of you, especially parents and prospective parents, need to reevaluate the educational goals for your children. Enroll them in schools that provide academic disciplines that have a high probability of providing them with employment opportunities in the future (Foreign Language, all Engineering disciplines, Math, all Science disciplines, Economics), the in-demand areas.

Mr. and Mrs. middle-class, private school is not necessarily the answer. Private School is an investment. If this is the option you choose, make sure the school is not a high paid BABYSITTER. Trust me, some private schools are just that. Class size is but one consideration, but also look at the curriculum and grading scales.

Anyhow, let’s congratulate The Thomas Jefferson High School for Science and Technology, located in Alexandria, VA, for being named as the best public school in the U.S.

The U.S. may be on the verge of a huge economic collapse. Lending has virtually ceased, the Treasury Department continues to “print” money at will, and the latest job report showed that U.S. businesses are laying off employees at an alarming rate. What’s next?

One scenario as a policy change the new President and Congress can consider is a change in the way we tax the International revenue of companies. Companies now tend to not Repatriate (Repatriation is when a U.S. based company brings back into the U.S. commerce system any/all revenues made from sales/services produced outside of the U.S.) their international revenue to remove the potential of being taxed by the U.S. government. This is not a tax avoidance procedure. However, why would Yahoo! Japan bring its revenues into the U.S. to be double-taxed (One, by the Japanese government and then by the Uncle Sam). 

That would not be wise for the company nor to its shareholders to be “Double Taxed” on the same revenue source. Therefore, Yahoo (Symbol: YHOO) uses its Japanese subsidiary (Yahoo! Japan) to operate in and leave all of its revenue in Asia. As of May 31, 2008, Oracle (Symbol:ORCL) has $10.1 billion held by foreign subsidiaries, according to its latest public financial report. There was also a report stating that the giant pharmaceutical giant, Pfizer (Symbol:PFE) has about $10-$17 billion held in overseas subsidiaries.

The SPECs message to the new administration: Institute a new tax policy, where any U.S. based company can bring their international revenue back into the country and be free from taxes (Both at the State and Federal level).

What would this do? For one, IT MAY give these companies an incentive to invest more money in the U.S. in both Research and Development (R&D) and in hiring/training more U.S. workers. If more U.S. workers are hired, then that will ultimately create more revenue for the respective governmental bodies (Which is what Democrats like anyhow, BIG GOVERNMENT).

As more people are hired, they will spend more as well: Consumer goods, Real Estate, etc…. The credit markets may rebound faster from such increased spending.

This is just a hypothetical, but something will have to be done. As the new president-elect Obama stated, “All options are on the table” as well they should be.

If you agree with this policy, then write and call your local House and U.S. Senate Representative.

The Credit Default Swap (CDS), the financial product everyone is blaming for the current U.S. financial crisis. With how they are structured, there “MAY” be some truth to it. The SPEC’s will try and explain what a CDS is and WHY they have caused so much panic & trouble.

When someone purchases a corporate bond, mortgage backed security, or any form of securitized asset (CDO), a CDS can also be purchased to “HEDGE” the purchase or (in laymen’s terms ) act as an insurance policy to make the purchaser whole in the event the company selling the asset defaults, breaks lending covenants, or files bankruptcy. Here’s the catch, or trick, and why we are in trouble:

The CDS’s can also be purchased by investors, those who don’t hold any assets, but purchase the CDS anyhow, gambling or SPECULATING that the underlying asset tied to the CDS will fail. This is similar to the OIL SPECULATORS who were blamed for running up the price of oil, but had no intention of ever taking “physical” possession of the oil purchased in the futures contracts.

Now, these products, the CDS’s are not regulated. As they were insurance products in theory, they could not “call” themselves an insurance product. If the term insurance was ever used then the company selling them would come under state regulation. That is why those Wall Street executives now testifying on Capitol Hill are telling Congress that no one knows how much of these contracts were purchased and are still outstanding. It is estimated to be at $62 trillion dollars, $62 trillion, which is more than the GDP of the United States.

Hedge Fund Manager, John Paulson, personally netted $3.7 billion last year gambling on the weaknesses in the U.S. real estate market. His company purchased real estate debt instruments and the ABX mortgage index where the investment would gain in value when these specific vehicles would decline in value, similar to purchasing PUTS. I would imagine Paulson & Company purchased a few CDS’s as well.

Why did the trouble arise? AIG (Symbol: AIG), Bear Sterns, Citigroup (Symbol: C), Lehman Brothers and other investment banks sold these Credit Default Swaps. But unlike regulated insurance products offered for sale the issuers of CDS’s did not have to have “adequate capital” in reserves to cover the losses in the event they had to pay the buyers of their CDS products (Totally opposite from that required of insurance companies).

EX: The SPEC’s, you and others form some investment partnership. We decide to purchase from AIG, the credit default swaps on the mortgage backed securities of the “subprime mortgages” issued by Bank of America’s State of Maryland portfolio (mortgages written were valued at $2 billion). Although we did not buy the specific subprime mortgage investment products, we brought the CDS’s on these products. We purchased $400,000,000 in CDS coverage and paid an annual premium to AIG in the amount of $300,000 per year. The CDS would expire in 2010 which is the date in which the mortgages in the portfolio would have to go into default or “foreclose” (No every last mortgage written, but enough where Bank of America could no longer meet its interest payments to the purchasers of the mortgage backed securities).

AIG and others, including Fannie and Freddie subsequently ran out of money. They did not have enough capital in reserve to cover the payments of the CDS products they sold. The high # of U.S. foreclosures occurred faster than anyone anticipated, including the CDS sellers. The premiums paid by the CDS purchasers did not provide enough capital to cover the payouts (Similar to homeowner insurance companies decision to no longer issue policies in areas the most susceptible to hurricane damage: Florida, Louisiana, etc..).

That is why the Treasury Department and the FED had to step in to save these firms. They were literally running out of money.

60 minutes did an excellent piece on Credit Default Swaps (CDS) this past Sunday. Take a look:

Watch CBS Videos Online

We probably mentioned this in a prior session, but we now believe that the U.S. is absolutely broke!!

The Chairman of the FDIC (Federal Depository Insurance Corporation), Sheila Bair, has been making rounds on the talking circuit the past couple of weeks. Her purpose was probably to settle the rattled nerves of U.S. bank depositing consumers. However, one critical statement she made is that the FDIC may have to borrow money from the U.S. Treasury Department, which would be used to be settle any future bank deposit guarantees in the event of future bank failures (The $100,000 guaranteed protection per bank account).

If they “MAY” have to borrow money, that means that they in essence “HAVE” to borrow money. Similar to the Social Security Trust Fund, the FDIC is running on an I.O.U.

In fact, Ms. Bair told Robin Roberts on GMA (Good Morning America) that the FDIC definitely has no money and is running a deficit. Ms. Bair then stated the FDIC will probably require banks to increase their premium payments into the FDIC. Translation: If and when this happens, be on the lookout for increased fees for all of your banking services (late fees, overlimit/overdraft, higher interest rates on credit cards and personal loans, etc…).

Now would be a good time to change your investment strategy. If the so-called government insurance companies have no money in their coffers, what happens when you, I, and some of our friends arrive at the FDIC steps to collect from deposit accounts we held in a failed bank? ANARCHY….

Consider leaving equities (individual stocks) alone for now. Buy company debt instead. During most corporate failures and subsequent bankruptcy proceedings, bondholders and preferred stockholders recoup some returns their investment and potentially more when there are asset sales(Ex. Bondholders of Lehman Brothers). The odd thing is that the value of some divisions of corporations are worth more as stand alone entities than when mixed in with the parent company.

Tomorrow we will list some publicly traded companies that we believe have the greatest potential of filing bankrupcty because of the slowing economy along with a high debt level.