Emergency Bailout

Short Selling Ban

RTC

Insuring Money Markets

AIG & Derivatives

Outlook/ Record High Corporate Cash

Commodities

Ike

We are now in the worst financial crisis since the 1930s according to Robert Altman, former assistant Secretary of Treasury; an assessment that we would agree with.  This week so far the Lehman Bros. investment firm has collapsed into bankruptcy, Merrill Lynch, the largest broker close to failure, was taken over by Bank of America.  If that was not enough, AIG, the largest insurance company in the United States, was effectively bailed out and taken over by the Federal Reserve.  By the end of the week the Federal Government had rushed out a $700-1000 billion bailout that had to be approved immediately according to them.  Never mind that all that spending amounted to over $3000 for every man, woman and child in the United States.  This has been the most tumultuous week in financial history that will have far reaching consequences for the United States economy. 

Much of these problems were brought on by two things: an overleveraging of the investment firms’ balance sheets and the less understood problem with the derivatives market.     In the MaxOut Savings Report we have predicted a failure in a major Wall Street firm for almost two years.  We have written extensively about the huge growth in debt at the Wall Street firms and how it would lead to failure.  Lehman Bros. failed under the load of over $600 billion in debt.  In just 18 months the total debt had ballooned by almost $130 billion.  The absurdity of the situation was amazing.  Its management did not wait too long to sell the company.  It was impossible to sell once the housing market turned down.  We believe there are other companies out there that continue to have problems and could fail.

Emergency Bailout

The Treasury’s recently announced emergency bailout package has 3 basic components.  Let’s take a look at them...

1. Short Selling Ban

The first was a blanket restriction on short selling of financial companies.  Short selling of a stock is the sale of stock you do not own with the hope of buying it back at a later date at a cheaper price, generating a profit. This emergency action was taken to stop hedge funds from running down stocks to make it look like the company was failing, thereby earning bigger profits.  We think the short sell ban was a good idea; it should be coupled with a reinstatement of the short sale up tick rule that was put in place during the Depression to prevent what just happened. The uptick rule was lifted less than two years ago. The ban on short selling of financial stocks should stabilize the financial stocks, but we could see more volatility in the non-financial stocks as the hedge funds try to short those stocks.

2. RTC Type Wall Street Bail Out

With this part of the plan, the Treasury plans to buy bad debt from the Wall Street firms and money center banks.  This will be done to re-liquefy the investment houses and banks so they can then raise capital to remain going concerns.  The cost of this program has been rising hourly and is now up to $700 billion.  We believe the final number for this part of the bail out could hit $1 trillion.  We have several concerns why this part of the program should not be enacted.  The cost appears to be open-ended and could cost tax payers upwards of $1 trillion.  The Treasury will be able to buy anything they choose including possible stock buybacks that could be used to manipulate the stock markets.  We believe part of the nearly $1 trillion will be used to bailout foreign corporations and some European Central Banks at the US tax payers’ expense.  We do not believe taxpayer money should be used to prop up foreign banks and Central Banks. We have never witnessed a request for a blank check of this size without any stings attached to help one industry.

Our major concern about the bail out is that the majority of the money will be used to allow Wall Street firms to reduce debt instead of making new loans. We also believe this money should be used to ensure home, credit card and corporate lending continues across the country.  Therefore, the money should be going to help the banks that are now making the loans to keep the economy going.  To put it another way, we think the money should be used to stabilize the economy and economic lending throughout the country.  We would vote against this part of the plan as we believe it is not in the best interest of the US tax payers.

3. Insuring Money Funds

The third part of the plan is for the Treasury to insure most money market funds using $50 billion of money in the Treasury Stabilization Funds used to support the dollar.  This was done to prevent a developing run on the money markets.  Money markets are pools of very short term bonds and commercial paper and other fixed income instruments that most people invest in for safety and liquidity.  Most of the “paper” in funds is very high quality and not a problem and now we have a government guarantee that makes them safe.  One problem we see is that this favors the big Wall Street firms at the expense of the national and regional banks that are much more conservative and have FDIC insurance.  For 75 years banks have paid for FDIC insurance with a $100,000 guarantee on deposits.  They have now been put at a disadvantage because of the US guarantee of money market funds does not appear to be limited to $100,000.  The government guarantee of the money funds announced at the end of the week has made them much safer.

If you are still concerned about your money market funds, one thing you can do is buy a treasury money market fund that invests in only US treasury securities.  We also like non- AMT municipal bond money market funds.  We think they are safer because you get a broad diversification on local and state bonds from all over the country.  The non-AMT municipal money market is better because they tend to be higher quality bonds.  One can also invest in US government money market funds and, for the highest safety, Treasury Bills.  The yields on all these investments are low at the present time as people have become more concerned about the return of their money than the return on their money.

AIG & Derivatives

AIG was rescued by an $85 billion bailout from the Federal Reserve and they were given a 79.9% option on the company.  We believe AIG’s insurance subsidiaries are in good shape and well run.  The problem was in the financial group and their derivatives business.  This business wrote derivative contracts that lost tens of billions of dollars.  These contracts were so large and complex that some folks on Wall Street believe the $85 billion will not be enough.  The problem with derivatives is that once they go bad, it is hard to figure out the extent of the problems.  If you have a policy on the insurance side of AIG we think that you will be in good shape as these were in separate subsidiaries and protected by state insurance regulators.

A derivatives contract has many forms; the most troubling are the CDS or credit default swaps.  These are guarantees that pay off when a company’s bonds go into default.  The problem is, in some cases, there are up to a hundred times the amount of contracts outstanding than there are bonds of the company.  This is why the government has been bailing out some companies’ bond holders while wiping out the shareholders to prevent the CDS contracts from triggering huge losses.  According to Bill Gross, chief investment strategist at Pimco, there are over $50 trillion in derivatives contracts out in the market.  This is why we believe the derivatives market on Wall Street should be firewalled to prevent it from wrecking the US economy.  If this derivatives market is as big as we hear it could be, it could wreck the US economy and make it very difficult to bailout these financial firms because the money is all going to the derivative problems, which keep growing.  We believe the derivatives market is now close to failing and would not buy into the financial sector.

As the credit crunch continues to spread, it will slow the economy further into a recession as credit tightens around the country.  We believe that we will see earnings cuts in many companies later in the fall as the slowdown becomes more apparent.  It is now becoming much harder for companies and individuals to borrow money as banks continue to tighten credit standards.

Outlook

We would continue to stick with the outlook we have maintained since the beginning of the year.  We have talked about the importance of having your money in the proverbial castle and being very cautious.  We continue to believe that cash is King and are sticking to companies with very strong balance sheets because these companies will have the ability to grow once we come out of these problems.  Many of these companies also have strong international operations.  The other opportunity could be in stocks that have been oversold due to hedge fund dumping.  Remember, in a crisis you should be getting a good deal on your investments.  The credit crunch bailout will lead to huge amounts of government deficit spending that will be inflationary over the long term.  The dollar will also come under pressure and should move lower.

Record High Corporate Cash

The vast majority of companies we are monitoring at MaxOut Savings Advisors appear to be in very good shape with high quality balance sheets.  We believe that corporate America outside of the financial sector is in much better shape than the press would have you believe.  Corporate cash is at record levels and the problems are really at a small number of highly leveraged companies.  Overall, we believe that most US companies are in good financial shape and are looking to selectively make new investments.

Commodities

It appears that the commodity selloff is being made worse by liquidation from hedge funds and investment banks in trouble.  The selloff seemed to gain momentum as Lehman Bros got into trouble and firms dumped commodities to raise cash.  We think the gold and silver bull market is still intact.  All of the government bailouts are bullish for the metals and will be inflationary.  Using 2007 earnings as a guide, many of the major integrated oil companies look like good values at the present time.  In 2007, oil was in a range from $50-95 per barrel—well below the present level—so if one figures that 2007 represents the new normalized earnings numbers, the majors on this correction look cheap.

Ike

I hope all our listeners in the Houston area came though Hurricane Ike with little problems.  Personally, we thankfully suffered little damage from the hurricane. It has been a very long week and we still do not have power at the house.  We are fortunate enough to have a generator to power a few things though.  One thing that was surprising is how quickly people cleaned up the neighborhood and removed trees resting on rooftops when there was no power and, in some cases, water damage.  We now have huge piles of debris in front of every house with neatly raked lawns.  This compares to Galveston where the government took control and will not let the population back in to clean up—little has been done.  There is a lesson in this for us to consider when we try to “solve” this credit crisis.

Who is MaxOut Savings Advisors LLC?

In these volatile times, investing your retirement funds can be difficult and time consuming.  Hiring the MaxOut Savings Advisors team to manage your money or IRA rollover is a great first step toward securing your financial future. MaxOut Savings Advisors is a SEC registered, fee-only investment advisor based in Houston, Texas.  Ted Geoca has over twenty year’s investment experience managing clients’ retirement assets. We invest in stocks, bonds and mutual funds for our clients using a value analysis strategy that we have developed over the last twenty years.   We use Fidelity Investments as the custodian for our clients’ assets. If you would like MaxOut Savings Advisors to manage your retirement investments using our value methodology, I would be happy to meet with you.  To schedule an appointment please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com. 

Remember Save Aggressively and Invest Conservatively!

Ted K Geoca                                     Doug Saam                Kellan Caldwell

President

MaxOut Savings Advisors, LLC

Houston, Texas

ted@maxoutsavings.com                                 713-627-0400

Remember to catch:

The MaxOut Savings Show with Ted Geoca on Saturday at 11:00am on KNTH 1070AM!

We have expanded the Show to 1 ½ hours from 11:00-12:30!!!

The MaxOut Savings Show and Report does not give out financial advice.  Any recommendation or idea may not be suitable for all investors.  Moreover, although the information contained herein is believed to be reliable, its accuracy cannot be guaranteed.  MaxOut Savings Advisors, LLc may or may not have positions mentioned herein.  MaxOut Savings Advisors, LLC is a Registered Investment Advisor with the SEC.  You should always make investment decisions based on your own financial situation.

To sign up a friend for our free MaxOut Savings Report or to remove your name off the MaxOut Savings Report list, email ted@maxoutsavings.com.