A Look at the Coming Week - April 20, 2009
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Being the suspicious type, I couldn't help but groan as the nation's major banks released earnings this past week. In a remarkable turnaround that only Congress could pull off, banks are enjoying spectacular, "expectation-beating", and record setting profits! If you are wondering how Wells Fargo could have reported better profits than in the glory days of the housing boom then read on.
With the collapse of Lehman Brothers only weeks in the rear view mirror, banks suddenly took off and are Masters of the Universe once more. Apparently, either they were not in such bad condition or they were unaware that the demand for banking was so strong. Nonetheless, they have shocked everyone around the globe with robust revenues and earnings.
There are a few ways that they pulled this off. Goldman Sachs changed their reporting period from fiscal year to calendar year and conveniently dropped the month of December off the list. Adding December would have chopped a billion off the profitability reports or more than half. This took place because they had to convert to a commercial bank from an investment bank in order to be showered with lovely gifts from the Treasury Department.
AIG, once the largest insurance company in the world, was helpful as well. AIG was literally printing money. They figured out that by selling CDS (credit default swaps) instruments that they could make a bundle. CDSs are basically insurance policies written to insure against defaults. It seems that the smart boys (all 250 of them) in London determined that the chance of risk was nil so they cobbled together and sold all they could while gleefully pocketing out-of-this-world bonuses. The big banks bought these just in case, believing that spending money to manage risk was sensible. When AIG got their bailout money they funneled it to the banks and made them 100% whole. What a deal. You buy and sell speculative instruments all day long and at the end of the day you make money. It is hard to lose money when your buddies help you out and when we say buddies, we mean the sympathetic faithful in Washington DC.
The recent rush of refinancing is helping and raising credit card interest appears to be a winning tactic. As a matter of fact, the banks have determined that as long as they have a captive audience that is scrambling to meet their monthly bills, cutting credit, increasing bank fees, and raising rates is a good strategy. Another neat tactic is cutting credit lines. I had this happen. Wells Fargo lowered my credit card limit on my business credit card by almost 75%. I have my mortgage with them as well as my credit cards. Since I have had both, I let Wells Fargo take their cut each month automatically out of my checking account. Nice of me, huh? I could console myself by telling myself they did it out of spite since they make nothing in interest on my credit cards but the truth is they are running scared.
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Fortunately I don't need Wells Fargo. I have followed my own advice for several years. I have no credit card balances, no debt, good credit scores and have been hoarding cash. I don't need those vultures and am going to terminate my relationship with them. I don't need any bank for that matter but will continue to use them for convenience. I suggest that all Americans need to get solvent to the point where they too do not need these confiscatory banks. Banks should be a convenience for us and not a necessity. They should be a tool for managing money and not a noose that produces a groveling society. This is a good time to start supporting the local banks, smaller regional banks and the community banks that do a great job but don't seem to have million dollar appetites for compensation.
Keep your eyes on the state and local governments. They are starting to falter and struggle. The states and local governments tend to see a lag effect in revenue. Sales taxes, income taxes, and property taxes tend to lag and now we are seeing collections are down.
When you look at the chart below, you should get an ominous feeling. States like California are really suffering. The capital gains on real estate are plunging. The capital gains on stocks are plunging. The property taxes on real estate are plunging. So what is the problem? They did not see it coming. Huh? Whaz zat? They didn't see it coming? Property prices have been declining since mid-2006. The stock market has been rocked since October of 2007. It sure makes you wonder.
The damage is done. Almost all states are in trouble. Their pension funds are woefully underfunded. Their medical plans are in danger. And, their revenue streams are shrinking. The best excuses I have found is most of the states are shaking their heads in disbelief wondering what happened? Maybe they were all text messaging while the train was steaming toward a head on crash. In any case, we are seeing an increase in income taxes, sales taxes, excise taxes and fees. Maybe Congress will not raise taxes on those making less than $250,000 but the states will and those who make the least will suffer the most.
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That does it for another week! Thanks for reading the Vance Advance.
Working for your wealth and peace of mind,
The Vance Capital Management Team |
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