The End is Here... and Now

American Express (AXP) has received preliminary approval for $3.39 billion in TARP funds along with CIT Group (CIT), which was also approved for $2.33 billion on Monday. Both companies have recently changed their status to bank holding companies, in order to qualify for the TARP money and other goodies from the Federal Reserve Bank and Treasury Department.

One wonders how the application-and-approval process actually works. Imagine a sleek CEO or CFO going to Paulson and Bernanke for money. Q: Are you and your firm both financially and morally bankrupt? A: Absolutely!

Ding, ding, ding! We have a winner!

Sadly, the entire US - and most of the world's - banking system is now defunct. Citigroup (C), Morgan Stanley (MS), Goldman Sachs (GS) and JP Morgan Chase (JPM) are all illiquid and have been for some time. Their status won't change. They all have to be broken up and sold off to healthier regional or local banks. Many of their "assets" will be liquidated, as the buyers will not want toxic structured financial instruments on their books. Buh, bye, bonuses!

On Friday, Treasury Secretary Paulson urged Congress to release the remaining $350 billion of TARP funds approved earlier this year. Today, the only independent voice in the Senate, Vermont's Bernie Sanders, urged congress to reject his request, saying, "It is inconceivable that we would provide another $350 billion to the banks – supposedly to ease credit – when they are refusing to tell us how they’re spending the money they’ve already received."

The latter portion of his comment was in reference to a Monday AP story describing how 21 recipients of TARP funds - all major banking or financial institutions - were unwilling or unable to answer questions on how the money already handed out was being used.

Essentially, the TARP, turned out to be a TRAP, like so many other government-sponsored programs under the Bush regime, essentially handing out taxpayer money (on loan) to the failed banking institutions. It has been more than two months since the bill passed congress, yet the economy has continued to worsen. What's becoming plain to all is that government is not going to save the average American from this maelstrom. We're all about to get sucked into the vortex of fraud, lies and deceit which ends in foreclosures, bankruptcies and discontent on a scale rivaling the Great Depression.

Getting to the title of this post, the end is here, and it is now. Americans will be facing some seriously ugly choices in the months ahead, and there's no guarantee that Mr. Obama's "infrastructure stimulus" package is going to produce anything more than make-work jobs in the construction trades. How that is supposed to revive an economy of which 70% of GDP comes from consumer spending remains a mystery.

It's apparent that there needs to be structural changes in almost every aspect of the American experience. The banking system is kaput, the government is corrupt, the taxes too high, yet they fail to meet budget demands year after year. Federal, state and local budgets need to be slashed now, not later, as does the budget of just about every household in the country.

A new way of finance and work ethic needs to be promoted, either from the bottom up or the top down. All the financial chicanery of the past 30 years has resulted in a near-death experience.

In response to the unfolding melodrama that is world socio-economic politics, investors took flight again on Tuesday, with markets sinking for the fifth straight day, and the eighth in the past eleven sessions. Some of the more oblivious in the financial media have been wishing for a "Santa Claus Rally" when the probability of such an event occurring is about the same as the Detroit Lions winning the Super Bowl. Personally, I'll be glad - along with about 10 million retail workers and countless investors - when this Christmas is over. It should rank as one of the most miserable ever.

Dow 8,419.49, -100.28 (1.18%)
NASDAQ 1,521.54, -10.81 (0.71%)
S&P 500 863.15, -8.48 (0.97%)
NYSE Composite 5,468.32, -52.50 (0.95%)

As expected, decliners led advancing issues, 4153-2549, while new lows continued to dominate new highs, 237-20, numbers that are becoming numbingly commonplace. Volume was again far below the norm, but the losses are so significant that volume isn't really part of the equation any more. So many hedge funds and individuals have already shut down for the holidays or longer that the remaining participants are being pushed by blind, naked fear, as that is the only emotion that hasn't already been fully drained, except possibly, desperation.

NYSE Volume 984,406,000
NASDAQ Volume 1,323,355,000

Oil slipped another $0.93, to $38.98. Gold fell $9.10, to $838.10. Silver slithered another sixty cents lower, closing at $10.26.

Underscoring the collapse of all asset values, the National Association of Realtors announced today that November existing home sales fell at a record pace of 8.6% and the median price of a home fell 13%, to $181,300 from $208,000 last year. The declines were the worst ever seen since the NAR began keeping records four decades ago.

At the peak of the housing market, in mid-2006, the median home price was $230,000. Since then, prices are off a shade more than 21%. In the short term, that's a large amount, though taking the longer view, there is surely more pain to come. Housing prices should fall another 25-40% over the next 3-5 years, and if that isn't the most pessimistic forecast you've ever heard, and are thinking I'm out of my mind, consider the following calculations.

Evan at the inflated value of 4 times annual pre-tax income, a person earning $40,000 a year could own a home worth $160,000. Now, let's do the new math: The average American will be (or already is) earning $35,000 or less in 2009, 2010, 2011 and beyond. At a more reasonable valuation of 3.5X annual income (and this is even pre-tax, assuming almost no income tax), that puts the "affordable" home at $122,500. That is 32.6% below today's median price. Of course, it could get worse, and probably will, since there aren't going to be that many banks willing to lend much of anything to anyone anytime soon.

Happy Holidays!