Banking Crisis

A possible  debt default from Dubai (which I'm called the DDD) has recently shocked the financial markets around the world. Dubai is one of the seven emirates and the most populous state of the United Arab Emirates.

The panic button has been hit again as Dubai "said last Wednesday it would ask creditors of state-owned Dubai World and Nakheel to agree to a standstill on billions of dollars of debt as a first step towards restructuring" (CNBC). Dubai has a bond maturity it has to pay very shortly.

Just as we thought the green shoots were growing exponentially, Dubai has come back to show us that not all that much has changed.

The panic comes form the fact that banks in Europe and Asia may have substantial exposure to Dubai. Given that most of the banks in Europe have barely recovered from the crisis last year, a hard hit from sovereign debt defaults could create problems. Additionally, a default by Dubai and other countries in trouble such as Greece would lead to the trigger of the credit default swaps written on their respective debt. Just imagine if the sellers of the credit default swaps (think AIG) fall into trouble because they are not in position to pay their liabilities.

As expected, the financial rating agencies Standard and Poor's and Moody's have decided to downgrade the Dubai debt after....AFTER....the country released it's statement asking for a debt restructure. Not quite what you would call "ahead of the curve

With all the tax credits going around, you might have missed the newest one: A tax credit for buying a brand-new Golf Cart.

Now that you got that $8,000 federal tax credit for buying a new house, received that $5,000 back for trading in a "clunker", it's now time to get another $5,000 back when you buy a "must-have necessity" Golf Cart.

The Wall Street Journal states the following:

"The federal credit provides from $4,200 to $5,500 for the purchase of an electric vehicle, and when it is combined with similar incentive plans in many states the tax credits can pay for nearly the entire cost of a golf cart"... "the federal credit is generous enough to pay for half or even two-thirds of the average sticker price of a cart, which is typically in the range of $8,000 to $10,000. "The purchase of some models could be absolutely free," Roger Gaddis of Ada Electric Cars in Oklahoma said earlier this year. "Is that about the coolest thing you've ever heard?"

The program is as cool as it is stupid in regard to wasting taxpayer money. WSJ also mentions that there is no limit on the amount of Golf Carts that you can buy under the rebate program. As a result, as one would expect, some people are trying to pile up on the Carts in order to make a sale at a later time for a profit. Talk about loopholes.

Makes you wonder...

The Bailout Lords of Washington D.C. have decided to stop handing out free lunches. After giving out a few trillions, they seem to be saying, "Enough is enough". That's too bad for CIT Group, a financial company that provides business loans, financial services and financing solutions worldwide.

The Lords have decided that the failure of CIT Group is not a systemic risk to the U.S. and world economies and, therefore, will go into bankruptcy if necessary. That means that the Federal Reserve believes that the bankruptcy of CIT Group will not create a domino effect of other failures and/or generate a panic. Whether that's true or not, we'll find out. Yay! Lehman Brothers proved to be a wrong call, so the odds may be on their side and they're right.

Let's dig into this matter.

Here is an excerpt from their website:

CIT (NYSE: CIT) is a bank holding company with more than $60 billion in finance and leasing assets. For more than 100 years, CIT has provided lending, advisory, and leasing services to small and middle market businesses guided by unparalleled industry expertise and focus. Headquartered in New York City, CIT is a Fortune 500 company and member of the S&P 500.

...

CIT Small Business Lending Corporation has been designated the #1 SBA [Small Business Administration] 7(a) lender for the 9th consecutive year in a row!

If you talk to some people, they think  hedge funds are near dead and ready to leave the face of the Earth. If you listen to the media, it seems like hedge funds failed in every manner possible. It is also assumed that they will continue to struggle.

It is true that being a hedge fund manager was not a walk in the park during 2008, but it was better than a lot of things (specifically, long-only money managers who cannot short, or bet against, securities). On a relative basis, most hedge fund strategies still outperformed the overall market (as measured against indexes such as the S&P 500 or the Dow Jones Industrial Average).

What's the catch? Hedge funds claim to offer absolute returns. That is, positive returns whether the market goes up or down. As we know, that was not quite the case for a lot of them.

[You can get a sense of how the hedge fund industry did in 2008 and has done in 2009 by looking at benchmark indexes such as the Credit Suisse Hedge Fund Index.]

What drove the bad performance?

The low self-esteem from consumers was not welcomed by the U.S. markets today. The Consumer Confidence Index was down to 49.3 in June after hitting 54.8 in May. This data point did not fall in the "less worse" category and made the U.S. markets tank almost 1% across the board.
 

In November 2008, the top half of the cartoon seemed relevant while in April, 2009 the bottom half seemed to be more true.

Currently, the markets have been trading sideways (but still with a positive attitude towards a fast economic recovery). Yet, as mentioned in my last post, it seems like no one really knows whether we're going up or if we're going down. Putting aside the questions about whether the recession is over or not, or what's going to drive the economic recovery/growth, it is important to analyze whether the current U.S. stock market is "cheap" or "expensive". Let us look at the S&P 500 and see how it is trading relative to earnings.