Chrysler

Well, the deal is done. Most of Chrysler's operations have been sold to Fiat, and a good third or so of their dealers are no longer dealers. Most of their debt load is gone, and their pension obligations are too which reduces their labor costs. But that's not going to help Chrysler too much.

The portion sold to Fiat is going to take at least a year to pick up steam. Fiat isn't a well-known brand in the US, and the kind of sub-compact they make is smaller than the popular size here too. It's going to take them a year to get the factories re-tooled, ramp up production and start actually getting cars into showrooms, with no guarantee people'll buy them over more well-known brands. The portion that remains Chrysler is in even worse shape. It's line-up is still heavily skewed towards large trucks and vans and SUVs, exactly what's not selling well anymore. It's going to take them at least a year, maybe two, to get new designs more in line with consumer demand into production. And both of them will be competing with GM's new models, with Ford's existing line-up, and with Toyota, Mazda, Honda, Hyundai, Kia, Acura, Nissan et. al..

Normally I'd consider a bail-out of a company in this bad a shape as an all-around bad deal. But to be honest the point of the bail-out isn't to save Chrysler the company. It's to keep the majority of it's employees on the payroll, to keep the factories open and buying parts from suppliers, to generally stave off the complete dissolution of a major US auto manufacturer until the stock market isn't wavering and economy isn't ripe for any small push to send it tanking further.

I'd note that this is something the Republicans seem to be forgetting. The choice here isn't between good and bad choices. 8 years of Republican policies has left us with choosing between bad and horrible. It's like a tourniquet: it's a horrible idea, one of the worst things you can do as first aid, topped only by letting the patient bleed out. So when you can't stop the bleeding any other way you put the tourniquet on anyway, knowing you're likely costing the patient their leg but at least he'll be alive long enough to worry about that.

Foreclosures moving on up

The mortgage meltdown has been painted by some as a meltdown of the subprime mortgage market. That's starting to change, as the number of foreclosures on prime mortgages to people with good credit records is starting to climb. 6% either in default or in foreclosure, in California it's 7.5% in default and 3.5% in foreclosure. Those numbers are disturbingly high, considering. And for the first time prime fixed-rate mortgages are a larger percentage of new foreclosures than sub-prime or adjustable-rate mortgages.

The bottom ain't here yet, folks.

The SEC and naked short-selling

The SEC's currently accepting comments on various rules intended to curb naked short-selling. I know a number of people who have a knee-jerk reaction, going "Why should the SEC tell someone they can't make a particular type of deal?". Well, it has to do with the nature of the deal. In a legitimate short sale, the seller has arranged to be able to cover the position and deliver the stocks. They may have an options contract to buy those shares before the delivery date, or they may be borrowing actual shares from someone. In the latter case if the stock price goes down far enough the seller can buy cheap shares on the market, deliver those to the buyer and never touch the borrowed shares. If the stock price doesn't go down the seller delivers the borrowed shares to the buyer and pays off the lender according to his agreement with them. In all cases actual shares exist to cover the position.

Naked short-selling doesn't work that way. When shorting naked, the seller sells shares that don't exist, that he doesn't have. If the stock price goes down far enough, he buys cheap and delivers to the buyer. If the stock price doesn't go down, he shrugs and walks away from the deal. He never delivers the shares to the buyer, and the buyer's broker unwinds the transaction leaving the buyer with his money back and no shares. If you think this is harmless, think about this: you've sold a put option to someone and made a purchase of shares to cover that option because the price is good and you'll make a profit. The guy you bought the shares from was naked-shorting the stock, and since the market price isn't below what he sold for he walks away from the deal. You don't lose your purchase price, but you also don't have the shares you need to have to cover your option contract. Now you're faced with two bad choices: buy at the now-higher market price and see your profit on the options contract turn into a loss, or default on that contract yourself. Your wallet or your reputation, one or the other takes a major hit. Still think the naked short sale was harmless? I don't. Just because you got your money back doesn't mean you avoided all the costs of a failed purchase.

IMO naked short-selling should be banned entirely. If you want to short, you should be required to make arrangements to guarantee delivery at the time you initiate the sale. You can purchase the shares, you can purchase an options contract, you can borrow from a willing lender, but one way or another you have to have something in hand to guarantee delivery before you can sell. Along with that I'd put in a rule saying that if you default on any sale your broker is then required for 1 year to refuse to initiate any sale for you unless you own actual shares to cover it. No borrowing, no options contracts, if you fail to deliver you're on shares-on-the-barrelhead until you prove you're reliable again. Now the whole problem's eliminated.

I'm sure certain traders who like to gamble won't like that, but I fail to see why they should be allowed to gamble in ways that leave other people unwittingly holding the bag.

GM financial woes

According to MarketWatch, GM's going to fail to make a $1 billion debt payment due in June. If that pans out, expect things to get very ugly. That may very well be the final nail in their coffin as an intact business.

Republican outrage at the "bailout"

I think I see why the Republicans are outraged at Obama's bailout plans. They aren't outraged that the government's bailing out corporations. They're perfectly happy to have the government simply buy up and write off bad loans, for instance, leaving the banks and borrowers who dug the hole financially undamaged by it and the taxpayers holding the bag. And they'd be perfectly fine with the government letting those corporations go bankrupt, leaving their executives to walk away with their bonuses and payouts and leaving the taxpayers to pick up the tab for unemployment and welfare for all the employees put out of work by it.

No, what outrages the Republicans is that Obama has the temerity, the audacity to put conditions on the bailout. To say "We'll loan you the money to keep you in business, but you're expected to pay it back with market-rate interest just like any other loan.". To say "We'll help you out, but we won't let you use the money to give rewards and bonuses to the executives whose fuck-uppery got you into this mess.".

They're outraged because Obama is expecting business to man up, admit that they screwed up by the numbers and accept the consequences instead of playing Uncle Sugar and shovelling money at them no strings attached like they want.

The economy

Don't look to the Crash of '29 and the Great Depression for a model for the current economic situation. Look instead to the Panic of 1873, the events that led up to it and the Long Depression that followed it.

Oh, and OPEC wanting oil at $70/barrel? Not happening, guys. Not unless they cut production by 100%, and maybe not even then. And they aren't going to shut themselves down to force the price of oil up. OPEC needs to accept that, given the current economy, their desires are just unrealistic.

Stock market

Looks like the Dow's headed to a close below 7000 for the first time in over a decade. The S&P 500 is flirting with the 700 mark. If the Dow closes under 7000, I expect a bad reaction the rest of the week. I'm also expecting the markets to continue to decline. Now's a good time to be solidly in money markets and other safe investments. Should make for some good profits once things bottom out and start to recover, though.

Stock market

Bets on the Dow hitting 7000?

No raises this year

No raises at work this year. With the economy, there's a very small pool of money for raises. Management set down a rule: raises are to go first to those in the lowest pay grades and with families. The reasoning was that those were the people being hurt most by the current recession, and they'd be able to spread that pool of money among the most people. So the high-paid people like me got pretty much nothing. Which I'm OK with, I'm in a better position to absorb not getting a raise than the guy making $30K.

OTOH, I'm watching the company's financials. When the economy and the company's profitability picks up again, follow-through will be expected.

Republican inanity

A wonderful quote from Rep. Steve Austria (R-Ohio) had this to say: "When (President Franklin) Roosevelt did this, he put our country into a Great Depression. He tried to borrow and spend, he tried to use the Keynesian approach, and our country ended up in a Great Depression. That's just history."

Well, Roosevelt and the Great Depression are history, that's true. However, that's about all of his statement that has any connection to reality. The Great Depression began in 1929. Roosevelt didn't become president until 1933, 4 years later. Keynes didn't write his book on economics until 1936, 3 years after that.

Now, admittedly, after being presented with the historical record, Austria did backtrack: "I did not mean to imply in any way that President Roosevelt was responsible for putting us into the Depression, but rather was trying to make the point that Roosevelt’s attempt to use significant spending to get us out of the Depression did not have the desired effect."

Again, not exactly correct. The GDP had declined from $103.6 billion in 1929 to $56.4 billion in 1933, and started rising in 1934 to $66.0 billion and continued to rise through the start of WWII with only one drop in 1938 (the year FDR cut funds from a large part of the New Deal to help balance the budget). You can find detailed numbers at the BEA's web site.

Dow Jones Industrial Average

If you look at the Dow, the S&P 500 and the Nasdaq indexes, you can see how bad this latest crash was. We're down to the same level as the bottom of the last crash in late 2001 to early 2002. The last time before that that we were at these levels was back in late 1997. That was the point the indexes rose through current levels and stayed above them consistently.

IOW the current crash has wiped out a decade's worth of gains in the market.

That's a scary thought.

Daschle nomination withdrawn

Tom Daschle is withdrawing from his nomination as Health and Human Services secretary in the Obama adminisration. This is good. There's too many issues with taxes among nominees lately. Potential nominees need to be more careful about their taxes, and clear up things before their nomination is announced. The Obama administration needs to be more careful about vetting potential nominees, and prod them to clean up their records ASAP. And both need to be clearer about whether the problem is a real, clear error or just a disagreement about an item that could arguably go either way.

Now, personally I don't consider tax "errors" to be a killer simply by existing. The plain fact is, most of those "errors" haven't been found to be errors. They're cases where either the IRS or an auditor disagrees with the original preparer as to how to classify a particular item. This isn't anything odd on a moderately complex tax form. Besides the IRS regulations there's a huge body of administrative and case law government what can be considered how, and even IRS agents aren't familiar with it all (one reason good tax accountants are in such demand is that they know that body of law better than the IRS agents and, when the IRS wants to disallow a deduction, they can point to a ruling that says it is too allowable). For instance, take a home office. Expenses related to it are deductible, however if it's also used for personal use some things are deductible and some aren't. For instance, if it's mixed-use you can't deduct a portion of the utility bills. You can, though, deduct business calls on a mixed-use phone. And not all mixed-use disqualifies it. The IRS will try to argue it, but occasional and incidental personal use has been ruled to not disqualify the office. The personal use has to be regular and consitute a not-insignificant portion of the use to disqualify the office. You can have endless arguments with the IRS over this if you aren't careful. Get into investments or foreign earnings and it gets really fun. Eg. you were paid $50,000 for work done in a foreign country, the money was deposited into a bank in that country and used only in that country, and taxes were paid on it in that country per their rules. How much of that money must be reported as US income, how much of it is taxable as US income and how much of a credit against US taxes paid are you entitled to? What if the foreign country says you owed $20,000 in taxes to them on that money but the IRS says only $10,000? Note that in that last case, if you paid $20,000 to the foreign country for taxes and claim $20,000 in foreign taxes paid, you have an error on your return even though you're in compliance with what the rules say simply because the IRS disputes your (and the foreign country's tax people's) interpretation of the foreign tax laws.

Treasury appointment

For those pontificating about Geithner's tax problems, bear this in mind: if you hand the exact same set of original income/expense documents to 5 different IRS agents, you'll get 5 different numbers for the amount of taxes owed. If you take each one and hand it to one of the others to audit, you'll likely end up with 10 different numbers. And that's for returns a lot less complex than his likely is. Income from the IMF means dealing with international income and tax rules, and those are even more complex than the ones for purely domestic income. It's not hard to end up with a dispute about the amount of taxes owed, and it's not always the IRS that has the right numbers.

I'm minded of advice my tax instructor gave: "Never go into an audit or IRS hearing aiming to justify why you can take that deduction. Be ready to do that, but start off by making the IRS justify why they think you can't take it. And if they can't come up with a reason, dig your heels in and make them explain clearly why they're trying to disallow something without any justification."

Oil price decline

One thing to bear in mind about oil prices right now is that their decline has to do with more than just supply and demand. Part of it's the consequences of speculation. Speculators don't intend to take delivery of the oil they're buying contracts for. They plan on selling those contracts to someone else before they have to take delivery. They've no arrangements or facilities for actually accepting delivery of the oil if it ever reaches it's destination while they own the contracts. And the costs of parking a supertanker while you wait for a buyer are ruinous. Ports and shipping companies don't like having anchorage space and ships tied up idle, so they punish those who leave ships just sitting there doing nothing. All of which means that, as speculators near the delivery date on their contracts, they have to sell. At any price. Even if it means selling at a loss, because the alternative is an even bigger loss that just might wipe them out completely. That's causing prices to go down further than they otherwise would, as all the speculators get squeezed. Once the speculators are out of the market, expect the price of oil and gas to rebound somewhat.

Mortgage modifications not working.

More than half of the mortgages modified in the first half of the year to make payments more affordable are defaulting again. This isn't good news. OTOH, those mortgages were voluntary modifications and weren't the kind of major modifications being comtemplated by everybody but the Republicans. It does, however, fit what I thought: there's a lot of people out there who simply can't afford their mortgage on any terms, either we completely rewrite their mortgages (including massive (on the order of 50%) reductions in the principal owed, which the banks won't do voluntarily because of how that's going to affect them) or we let them default and get them out of the system completely. Small steps, minor patches, will just prolong the mess.

GM's done for

Stick a fork in 'em, they're done. They're delaying rebate and other payments to dealers. The first, best sign a company's auguring in is when they start being unable to make payments they knew long ago they were going to have to make. The only one better is when the company's payroll checks start to bounce (or when the company starts telling employees where and when they can cash their checks as a way to prevent them from bouncing). If I held stock in GM, I'd be looking at cutting my losses. If I were an employee, I'd be shopping my resume around and making plans for not having a job come January.

Gas prices

Arco's down to $2.71/gallon this morning. At this rate we'll be down under $2.25/gallon, a 50% drop from the peak price in mid-June, before Thanksgiving. This is making a big difference in my gas bill. The Focus gets good mileage, but I was still putting $50 or so into it every week in June. Now my weekly fill-up's down to less than $35. That's $60 a month more in the budget. OK, for me that's not a big amount, but for people getting by on less than $40K that $60 is probably 50% of their free money every month and makes a huge difference.

Gas prices

Correction: $3.03/gallon tonight at Arco. We're fast closing on a 1/3rd drop from what gas was at just 3 months ago.

Gas prices

The Arco station's down to $3.09/gallon today. That's a 20-cent drop in a week. Pretty steep there.

I don't think the threatened OPEC production cuts will reverse the decline either. Gasoline demand in the US is down 6.4% over a year ago, and world-wide it's slowing as well. Inventory levels are rising, indicating supply currently exceeds demand. OPEC's dream of $100+/barrel oil is just that, a dream. The world right now can't afford that price, and at that level it becomes economically viable to use alternatives. And quite frankly that price level was never set by market forces, it was set purely by speculators who're currently in the process of losing their shirts, pants, socks and underwear and absent another speculation bubble prices aren't going to go that high again for quite a while. The only way OPEC could drive prices that high again is to curtail production so severely (say in the 25% range) their members wouldn't honor the cuts. Prices went too high too fast and stayed there for too long, people have changed their behavior (abandoning SUVs for smaller more fuel-efficient cars, finding ways to not drive, etc.) and even as gas and oil prices fall the housing implosion and credit crunch are sending the economy into the toilet making people twitchy about spending money and keeping them from returning to previous expensive habits. It's going to take years for natural growth to offset the effects of those changes. Sorry, oil guys, but in your quest for a short-term windfall you screwed your profits over the long term.

Markets down further

I may have been overly optimistic. I was betting the Dow would be under 9000 by today. Instead, it looks to be making a good try at 8000. I pity those with 401Ks still heavily in stock funds, they've got to have seen 25-50% of their value evaporate in the last few weeks.