Sushi Money

*** Update: Late today JP Morgan Chase announced it’s buying Bear Stearns for $2 a share (yes, 2 bucks) in a deal already approved by U.S. regulators… ***

Get ready for a tough week ahead. As corporate earnings come in, especially from financial companies, we’re going to hear a lot of negative stories about the economy. Some think we’re close to seeing a market bottom, but volatility may be huge this week as well. CNN/Money sees danger ahead, but the Federal Reserve is doing everything it can to reassure financial markets.

Expect the Federal Reserve to cut the Fed Funds Rate once again on Tuesday of this week. Lower Fed rates have not had much impact on lowering mortgage rates however, because banks are trying to make money by widening the spread between what they pay and what you pay to borrow money.

Treasury Secretary Hank Paulson has made the rounds of the media circles and also states that the government will do what it can to help:

“The government is prepared to do what it takes to maintain the stability of our financial system,” he said. “That’s our priority.” …From the beginning I have said, as we work through this period, if this was like other times in the past, there are going to be bumps in the road. There are going to be unpleasant surprises. You are going to find that an institution or so has problems. And when they do have problems, you work to deal with it,” Paulson said.

Is the government and our political leaders taking American’s concerns seriously enough? Many think so, but many do not. Perhaps it depends on if you’re the guy with the good-paying, secure job or the one who is struggling or recently laid off. Unfortunately we’re seeing more of the latter these days.

Secretary Paulson’s words are good, but I would like to see more reassurance out of the government. Not in the form of handouts or taking control. But in the form of leadership. Standing tall and telling Americans the straight story. Even the President could acknowledge the challenges a little more- and ask the nation to buck up and work together.

I said it six months ago and I’ll say it again-we’re looking at Financial Confidence In Absentia. I think the President could learn a few lessons from Franklin Roosevelt:

œAfter all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people.

Franklin Delano Roosevelt – First Fireside Chat œOn the Banking Crisis – March 12th, 1933

It’s one thing to speak from the pulpit, but it’s another to get out there and really understand what’s going on, and help people understand how we’re going to move forward. President Bush is meeting with top financial experts and economists tomorrow. I hope that meeting charts the course for a new future, and brings realization that rhetoric is not enough.

Well it seems I’m too much of an optimist lately, especially in light of the near panic we’re seeing on Wall Street, and how Bear Stearns is struggling to avoid a “run-on-the-bank”. After denying rumors all week about potential liquidity problems, Bear Stearns had to cry uncle and ask for help. Part of the problem is that after many rumors of insolvency and a rapidly declining stock price, they indeed faced liquidity problems after customers wanted their money back in droves.

It’s hard to understand how Wall Street traders and execs who make millions of dollars in salary and bonuses can lose so much money over time and the Fed bails them out? Yes, there’s lots of money involved and the Fed doesn’t want this to spread. But can they save everyone? Do all the banks and institutions that put themselves in this situation deserve a taxpayer bailout?

The government is going to spend billions to bail out these institutions, but Mr. John or Mrs. Sally Q. Public has to face a myriad of economic challenges without any help at all? Oh… wait, we’re having our bailout. It’s called the Tax Rebate.

I’m a fairly conservative guy with strong beliefs in free market capitalism. Yet it sure doesn’t seem like it’s working when the government’s bailing out the institutional folks who developed risky derivative financial products that have now blown up in their faces. But Bear Stearns is Too Big to Fail? Maybe so.

What happens if it’s just not enough? Who bails out the U.S. government? As the U.S. dollar continues to lose value, we simply can’t buy the same amout of “stuff” with it of course. It’s getting pretty tough on consumers out there.

I reached a “pain-at-the-pump” first today spending $49.00 filling up half of my car’s gas tank. If it ever costs me $100 to fill the tank, and we’re pretty close right now, I’m going to park the dang thing. At least more often. But fuel prices continue to rise and grocery, aka commodity, prices will rise further as well it appears.

When you have mass casualties, the rule of the day is triage. Save who can be saved, and say a prayer for the rest. Let’s hope we’re not there yet. But at some point the Fed’s going to have to conduct triage. Are they simply delaying the inevitable? I’m still hoping U.S. consumers can be saved. All this and the majority in Congress want to raise taxes? Now that’ll go over well.

But I’m still an optimist… I think the government does have a plan. The dollar will be supported, the credit crunch will fade over time, housing will bottom and rebound, prices will stabilize, the Bush tax cuts will be extended, inflation will remain low and markets will rally. That’s the rumor anyway.

What a day in the stock market. The last few months haven’t been easy, and just yesterday we were looking for the bottom, and waiting for a rally. I didn’t think we would see it so soon, but today we finally had a reason for one as stocks advanced in their biggest gain since 2002. What was the impetus? Investors loved the news about the Federal Reserve’s plan to make guaranteed funds available to banks and financial insitutions, in fact allowing many to exchange risky debt such as mortgages for US treasury bonds.

“Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again…

“The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS”

“In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB).”

This is the plan the institutions and financial markets have been waiting for in my opinion. A bold, strong move by the U.S. Federal Reserve (with global collaboration) to shore up financial institutions, and the economy. In my opinion it says,

“We’re going to do whatever it takes to ensure the smooth flow of funds between institutions, and we’re not going to let the major banks or lending companies fail.”

Or the economy of course. On days like this I wish I had more cash to invest… but I’m also glad to be a long-term investor. If you’re in and out of the markets, how do you time something like this? Most people don’t.

That’s not to say it’s going to get any easier this year. The economy is still struggling and the credit markets have a long way to go to restore confidence among a lot of folks. But at least a few experts believe the U.S. will not see a recession this year.

“In its fourth quarterly report of 2007, the UCLA Anderson Forecast holds steadfast to the basic tenet of a forecast they have been making throughout the year, that the national economy is not technically in a recession, nor is there a national recession on the economic horizon.“

We’ll still have to wait and see on that one, but by June we should know the answer. With more uncertainty removed over time, the markets may really have a reason to rally this year.

You never see those market drops coming… especially on a day the Fed lowers rates.  At least I don’t, so that’s where diversification saves the day.    And why was the rate reduction just not low enough today?  Not enough of a rate cut?  I think that’s just journalistic license in the absence of any better explanation.  Okay, maybe because the “market” thinks the Fed doesn’t get it, and the credit situation is just getting worse.   But the quarter point reduction was expected, and the Fed left the door open to more rate cuts- if and when necessary.  The market reacts to the short-term however, and wanted more “relief” say the experts.  Like anyone really knows?  For millions of ARM (and other) borrowers at least today should spell relief.  Interest rates have now been cut three times since September and many of the ARM resets over the next 6-12 months will not be quite as severe.   The Fed will probably cut again, and I’ll bet the market grudgingly responds.   But first lenders need to figure out how to lend money again or we’re not going to get anywhere.  And I suspect that’s what’s got Mr. Market really troubled.

So the Fed cuts rates a second time, but the market is worried it won’t be enough to forestall a recession, especially if the Fed doesn’t cut rates any further? Maybe, but I think Ben Bernanke is going to stay in front of the impact that housing and the credit markets may have on the economy. The Federal Reserve will cut rates further if needed in December or beyond. But what about consumer spending? If housing is as bad as it seems, that means a lot of us are tightening our belts even more this year. If consumer spending trends down, then corporate profits decrease, hence falling quarterly earnings and stock market valuations.

Where do you put your money in the meantime? If you’re a well-diversified long-term investor, you probably stay right where you are. Status quo for me. I don’t think I’d chase the consumer cyclical stocks, since consumer spending may yet have an impact. Financials are out of favor with exposure to subprime and credit issues, yet the valuations for many financials are incredibly low. If the Fed lowers interest rates enough, the banks will make money hand over fist. But what if you have money you’re worried about… money you need in less than 3 years? Then the stock market is no place to put it. Money market funds still offer attractive interest rates, especially for high-yield accounts like ING Direct, HSBC or CitiDirect. And if you’re shopping for a home, or a mortgage loan, rates are now close to 6-month lows. Pretty good market for buyers, but many potential buyers are waiting on the sidelines, or re-thinking the homeownership equation. Can you blame them? For many people renting makes sense. Especially for young and mobile professionals… we live in a mobile society, so why not rent while the market works itself out? More power to those that do, but honestly, if you’re in the market for a home to live in for many years, there are tremendous opportunities out there. I’m glad to be living in a home we plan to stay in for many, many years.

In so many ways, the “mortgage mess” and “housing crunch” are just noise for many Americans. Sure we all hope our home valuations increase over time, but sometimes it takes a good many years to see that return. That’s why many people consider a home the best long-term investment they will ever make- it’s like a forced savings account. In the absence of dedication or disciplined investing, we pay our mortgage each month and eventually have a lot of equity in our homes, with the home value growing over time as well. That’s pretty nice, but only partially true, because the long-term rate of return on real estate is only around 6%! If you really want to increase wealth over time, you need to have some of your money invested in the stock market to provide some core growth for your portfolio. Preferably via a tax-deferred account such as a 401(k) or IRA. You know what else is just noise? That 360 point drop in the Dow today. But sometimes it’s hard not to hear it. Now where’d I put that penny…