As Originally Published and Authored - 

By Anthony Digiandomenico (MDB Capital)  •  February 26, 2009 10:00 AM

With what looks like imminent passage of the Mother of All Bailouts (following on the heels of a year’s worth of government-funded rescues of private homeowners, lenders, insurers, and the automakers), Washington has turned Aesop’s famous fable about prudence and hard work on its head.  The time is ripe for a revised 2008 edition of “The Saver and the Spendthrift” …

In a Suburb on a hot summer’s day, a Spendthrift was chirping and carousing his time away.  He watched scornfully as a Saver nearby struggled to save up money and food and build a secure home.  The Saver pulled overtime shifts to pay off his loans and accumulate retirement funds for the future.

“Give it a rest,” the Spendthrift said.  “Why bother saving and slaving and toiling and moiling? Let’s party!”  The Saver demurred: “I am planning ahead for winter and you should do the same.”  The Spendthrift blew off the Saver, squandered his supplies the rest of the season, and abandoned his home while on vacation (paid for by tapping every last cent of his home equity gain) instead of holding down a job.

When winter came, the Spendthrift’s pantry was empty and his shelter ruined from neglect.  The Saver, weary from working, saving, and stocking up for months, was dining comfortably in his nest.

Cold, hungry, jobless, facing foreclosure, and up to his two pairs of eyeballs in debt, the Spendthrift limped to the Association of Community of Lazy and Nearsighted  for Rescue Now (the ACLNRN) and demanded recourse.  The office was swamped with thousands just like him.  ACLNRN immediately put the Spendthrift to work registering dead Savers as new voters.

Funded with tax dollars from the rest of the suburb’s  residents,  ACLNRN organized mass protests at the Bank of Saveramerica, ambushed its top officials at their private homes, harassed their children, and demanded that the meadow’s politicians halt all foreclosures (”We must keep Spendthrifts in their houses!”) and outlaw discriminatory lending practices against starving, homeless Spendthrifts (”Well-stocked shelters are basic rights!”)

The banking industry capitulated; the HUD Lobby secured hundreds of millions of dollars in housing earmarks and grants and counseling subsidies to support the Spendthrifts with the shadiest credit and employment histories.  Saverie Mae, the meadow’s government-backed home lending giant, fueled the push for increased insect homeownership in the name of diversity.  Its executives cooked the books and headed for the hills.  Katie Fraudster and the Mainstream Suburban Media joined the grievance-for-profit circus, profiling Spendthrift sob stories and drumming up ratings as bewildered Savers wondered who was looking out for them.

The banks drowned in toxic debt. More Spendthrifts fell behind on their mortgage payments. Bailout mania and panic gripped the meadow.

Our little Saver, minding his own business, heard a knock on his door one late winter night a year later.  It was his old, sneering Spendthrift neighbor.  With ACLNRN presidential candidate, Barack Obama, now in office, the Spendthrift had been hired by the meadow as a tax collector.

“I’m here to take your provisions,” the Spendthrift cackled.

But it was the Saver who had the last laugh. “I’ve learned my lesson,” he told his shiftless friend.  “Why bother saving and slaving and toiling and moiling?  I’ve spent all my savings. I’m walking away from my mortgage. Thrift is for suckers,” the Saver said as he headed out the door, leaving the Spendthrift empty-handed.

I refuse to get off my soap box until we see concrete steps taken to end the ongoing economic and market malaise infecting all aspects of our society and world.

Step 1 - Courage.  Politicians need to gear down the rhetoric immediately, stop pointing the finger at others, take responsibility for their own actions, stop focusing on re-election, forget about who did what to create this mess over the last 2-3 decades and simply SOLVE THE PROBLEM by doing what needs to be done.  This is no longer a Republican or Democratic issue.  It is an American issue and nobody cares about the politics of any of this any more.  Period.  Have some courage and start doing what needs to be done instead of what needs to be done to get re-elected.  Doing the right thing may not be popular, but it’s always easy to do the right thing if you actually represent who elected you to do what you’re there for Mr. Politician.

Step 2 - Innovation.  Every politician needs to embrace the creators of jobs and wealth - entrepreneurs.  Why is it so hard for elected officials to understand that entrepreneurs create the ideas that create the companies that create the jobs that create the wealth.  I’m not talking about giving this idea “lip service”.  I’m talking about making this a national imperative as important to the fabric of the President and the government as JFK’s idea to put “a man on the moon”.  I want commitment, not talk.  I want an executive and legislative focus on this initiative that becomes the foundation of the United States government, the pillar of economic stability and the fabric of all legislative, policy and monetary initiatives going forward.  I want every politician talking about this every day of the week and the media to push this as a national priority in every broadcast everywhere.

Step 3 - Investment, *not* Stimulus.  Congressional officials and the President need to invest $5 BILLION in young companies, start-ups and entrepreneurs.  I have written about this before, but I want $100 MILLION put to work in each of 50 cities across the country.  This money will *not* be in the hands of elected officials.  Rather, it will be put in to each city in the form of a local start-up and young company growth capital fund and will be managed and run by a team of selected serial entrepreneurs, VCs, private equity investors and Angel investors so that a base level of scrutinty can go in to the selection of companies for investment.  This group will be investing on behalf of the American taxpayer and will receive a 0.5% management fee and 10% equity upside for success.  Why?  Because you need talent to make good investments and monitor and assess the investments until liquidity is achieved.  You get what you pay for and “free” doesn’t scale.  We want talent and we want investment discipline.  This structure achieves that.  Further, each $100 MILLION per city selected will be invested to the tune of $250K - $1M per company so that we can get stimulus rolling on new ideas and young company building for at least 150-250 companies per market.  This $5 BILLION investment from TARP will *always* result in more economic activity than giving it to Bank of America or Citigroup to backfill holes in their balance sheets.  And, it will result in investment returns to the American taxpayer both in the literal sense and the figurative sense as well.

Step 4 - Presidential Executive Order.  President Obama … immediately issue a Presidential Order to mandate that every *primary* residential mortgage in the United States be immediately and proactively refinanced to no worse than a 4.5% interest rate on a 30 year fixed interest mortgage.  No fees, no appraisals, no applications, no qualifications, no strings attached.  Advise all banks that they have until the end of February to make this happen through their entire portfolio of loans.  Advise any bank that refuses to comply with your Presidential directive, and that has taken even 1 penny of TARP money in the past, that they will be *nationalized* on March 1st unless they have performed under this Presidential directive.  This is not going to fix everything in the world of foreclosures, but this is going to allow *everyone* in the United States to get the same starting point whether they were responsible or irresponsible in their personal finances.  Since 92% of Americans have been responsible to date, they too will actually get a benefit for having been responsible just as those that have not currently are getting a benefit that they probably shouldn’t be getting at all.  Plus, it will put a real floor underneath the housing market and provide a foundation from which to move forward from for all of us.

Right now we need bold, bipartisan action with big thinking and new thinking.  We need leaders unafraid to lead, even if their actions are unpopular and even if that means that they are not re-elected to office.  We need people that can stand up and say “We screwed up.  It is all of our faults.  It is *my* fault and I intend to fix this.  Follow me.”  Note the last statement PLEASE … “Follow me.”

We are all tired of the noise.  We are also tired of the activity.  We want results and we want them now.  Stop confusing activity with results and lead, follow or get the hell out of the way already.  This is the greatest country in the world.  Let’s start proving that again and lead the world out of this once and for all.  If anyone lacks the commitment and conviction to make this happen, then do what needs to be done for the betterment of this great nation … RESIGN.

Young Chuck moved to Texas and bought a donkey from a farmer for $100.00.  The farmer agreed to deliver the donkey the next day.

Another day and another vast expansion of the bubble in US Treasuries.  The TLT, or iShares Lehman 20+ Year Treaury Bond ETF, has broken $120 per share and the yield on 30 Year Treasuries has dropped to a tiny 2.64%.  Look at this chart!  

When you see such hyperbolic (or vertical) moves in a stock or ETF, you pretty much know that it’s only a matter of time before the laws of gravity kick in.  It may not be next week, next month or next quarter, but it is very, very likely that when the Treasury bubble pops, it will be swift, severe and extreme and as the prices plummet, the paltry yield will spike straight up.  I also think that it’s a matter of when and not if and because I don’t know exactly when this is likely to occur, I play it by buying LEAP puts on the TLT for no earlier than 2010 expiration dates.

More ominously, China today announced that lending to the United States will not go on forever and we had better take advantage of this brief time allowed to clean up our house.  Separate from the link provided for the article, the quotes that jumped out at me the most were:

“China’s increased purchase of US Treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis.”  

“Given the global economic crisis , the consequences would be serious if China and other nations stopped channelling money into the US economy.”

“The current strong foreign appetite should not be taken by the US government as solid proof of the long-term value of its Treasury bonds.  Instead, it [the United States] should race against time to undertake painful but critical reforms to revive its economy before such demand peaks any time soon.”

All I can say is uh oh.

Meanwhile, the US dollar continues to fall and gold continues to rise.  UDN is the bearish play on the dollar and DGP is the bullish play on gold.  With the Fed cutting rates to effectively 0% and $8 trillion in new money being printed, there is very little choice but for the US dollar to fall against other currencies and gold and other commodities to rise in parallel.

Today we see more evidence of the stresses in “the system”.  It’s not so much that the markets are up or down in a big way.  In fact, today they don’t seem to be doing very much of anything, as the Dow is down a little more than 100 and the Nasdaq is off about 40 as of this writing.

The data continues to be bleak, whether it’s unemployment numbers, manufacturing numbers or pretty much anything else that we want to cite.  However, with that said, everyone continues speculating about our having hit “the bottom” back in October/November when we successfully retested the lows and held.  Even better though is the view that the market has already “priced everything in” except for “new surprises” or macro events.  Yeah, OK, sure it has.

Clearly Mr. Market is expecting the Fed to drop the Fed funds rate by at least 75 basis points to 0.25% at the end of its FOMC meetings today and tomorrow. But, while most of the world is focused on the Fed and “quadruple witching” options expiration this Friday, today I want to focus on the oil and gas patch and the latest announcement from Weatherford International that they too are leaving the United States for the greener pastures of Switzerland. 

Someone in Washington DC needs to start paying attention to how many large US corporations in the energy complex are simply throwing in their operational white towels and literally bailing out of the US in droves (at least in terms of their corporate structure, HQ leadership and investment).  At last count this puts Transocean, Foster Wheeler and Tyco in Switzerland and Haliburton in Dubai, in addition to many, many others that are probably less known by “the masses”. 

This is absolutely great, just great (insert frustrated sarcasm here for effect).  Perhaps as a next step our illustrious leaders can see if they can effectively drive Cisco Systems, Google, Microsoft, Apple and the entire core technology complex out of the country as well (again, insert frustrated sarcasm here for effect).  I’m sure that such grand political efforts would breed the basis for further improvement in the US economy and much stronger future prospects for the continued global leadership of our great nation.  Please, please, WAKE UP!!

Oil Companies Voting With Their Feet—Investor’s Business Daily

Source: 15 December 2008 (c) 2008 Investor’s Business Daily

Energy: Another day, another oil company fleeing the country. No, this isn’t Ecuador, the banana republic that just defaulted on its debt after chasing out investors. It’s the United States, and what we’re seeing is self-defense.

Much political hay has been made in Congress about “unpatriotic” corporations that move operations abroad. Weatherford International is the latest, taking its headquarters from Houston to Switzerland. The oil services company said that it wants to be closer to its markets. But what it really meant was that it no longer saw the future in the U.S.

In a political atmosphere of blaming corporations, it’s no wonder. Halliburton fled to Dubai in 2007. Tyco International, Foster Wheeler and Transocean International all went to Switzerland. As a pattern emerges, America’s global standing diminishes, in part because it’s based on the willingness of companies to invest. It’s an especially bad sign when domestic companies flee.

“The U.S.is an important market,” Weatherford CEO Bernard J. Duroc-Danner told the Houston Chronicle Thursday. But, “it’s just a market. It’s not the primary market.”

How does that sound for a loss of global leadership? If that’s not clear enough, try this: “In the hierarchical pecking order, (Houston’s) not going to be Rome anymore.”

What accounts for this vote of no confidence in the U.S.?

Start with the demonization of oil companies. Executives have been hauled before Congressional star chambers, held up to abuse and ridicule, and then blamed for high oil prices as if they wanted to kill their markets. Rising global demand, nationalizations and Congress’ failure to open the country to drilling go ignored.

Huge companies such as Exxon Mobil, whose market cap exceeds the GDP of most countries, create $100 billion in earnings in quarters when oil prices soar. It looks high, but over the years, the industry’s average returns, at 9%, are less than other industries.

Nevertheless, Exxon’s profits are evidence of its success at extracting oil from miles below the earth’s surface, even underwater, and from unbelievably hostile environments, such as the Arctic. Instead of being objects of national pride for their productivity and efficiency, and subjects of heroic Hollywood movies, their success is considered to be dishonest.

Congressional hostility affects oil companies’ operations abroad, too: Exxon, remember, noted that Congress’ animus toward oil profits directly encouraged Hugo Chavez’s uncompensated expropriations of $1 billion of Exxon’s assets in Venezuela, which drove oil prices higher.

With an expanded Democratic Congress and an incoming Democratic president determined to create “patriot corporations,” it’s no surprise to see companies try to get out while they can. Make no mistake — it’s investment fleeing the country. As this goes, foreign capital could flee next.

Congress’ abuse sets the political tone for the worst to come.

First, oil companies, like all corporations, endure the second-highest taxation in the developed world (39.25% of their income), which dampens their competitiveness. The 2007 OECD average is 27.6% and falling. Worse still, U.S. firms are taxed on operations around the world, unlike the global standard, making a move of headquarters a defensive move.

Meanwhile, politicians openly say they want to hike taxes on oil firms. President-elect Obama seems to have backed off, but questions remain as to whether he can stand up to a rapacious and economically ignorant Congress that hasn’t.

Second, Big Labor is feeling its oats, swaggering confidently with newfound political power. United Steelworkers approved a “national oil bargaining policy” for higher wages and beefed up its “strike defense fund,” both of which point 15 plans to squeeze oil companies, if not launch strikes.

“You have to prepare your membership for 2009,” according to USW International Vice President Gary Beevers on a union Web site. “The oil companies are ready for us; we have to be ready for them.” With Congress at their back, oil companies are unlikely to lose.

None of this portends well for the U.S.business environment. That’s why top-performing firms, such as Weatherford, are exiting. Until Congress learns to appreciate and value oil firms, this will continue, leading to less U.S. investment and influence as more competitive climes beckon.

Well folks, the bad data just keeps coming.  This morning the Labor Department shared numbers not seen in the United States in decades.  Unemployment rises to 6.7%.  Job losses exceed 533,000.  Average work week drops to 33.5 hours per week.  Yuk.  Yuk.  And Yuk!

Estimates for job losses had a consensus around 340,000 jobs, with a 500,000 loss as the magic “whisper number”.  Unfortunately even the most pessimistic views on the number understated just how bad it was out there.  I think that these numbers are so bad that the U.S. government will start working aggressively on the next economic stimulus package so that President Elect Obama can sign something in to law as soon as he completes his oath of office in mid January. 

As stated over and over and over again, focus on the data and ignore the media noise.  Hope is not a plan and we can no longer wish our way out of this mess.  I’ve been clicking my heels together for 3 months and despite saying “there’s no place like irrational exubberance, there’s no place like irrational exubberance”, I’m still looking at the same problems and unfortunately the data has only gotten worse.  Toto is not only not in Kansas anymore, but Dorothy also can’t even seem to find him to even start their road trip back home.  With that said, please make sure that you’re “following the yellow brick road” and adding to your gold position as 2009 is likely to result in either hyperinflation or stagflation (both of which will make gold move much higher).

With futures only off by 120 points this morning pre market, it is growing more and more apparent that the market is desperately trying to have all of this bad news priced in to the markets so that we can try moving forward again.  Retesting the lows of 7350-7500 appear very much in the cards, so expect that and also expect a battle between “holding that line” on the bull side versus “get real” on the bear side.  Downside in to the low 6000s is now very much on the table if the rate of decline in the data continues to accelerate rather than stabilize.  We’ll keep following this and let the numbers be our guide. 

Other than commercial real estate, the next major bubble appears to be 10 and 30 year Treasuries.  Start watching this closely rolling forward as yields are now hitting lows that haven’t been seen since the 1950s.  Yikes!

Since my original post suggesting solutions to the ongoing nationwide mortgage crisis, I thought I’d provide a few updates and also another new (and what I believe to be critically important) suggestion for the use of TARP funds to stimulate the U.S. economy.

First, the mortgage crisis updates.  While all housing, real estate and financial data remains horrendous, there are rumors floating around that the federal government may, in fact, be considering a version of one of my previous suggestions.  Namely, in addition to the recent Treasury announcement to purchase up to $500 billion worth of Fannie Mae and Freddie Mac mortgage paper, the feds are now contemplating a blanket move to drive 30 year fixed mortgage rates to 4.5%. 

This, to me, is a *great* idea and is even better than the 5% rate that I had originally proposed.  While nothing is going to solve the mortgage crisis overnight, federal intervention to get mortgage rates down to a level that provides sound refinancing options for existing homeowners and great initial financing options for new homeowners will make a material difference from coast to coast.  Additionally, this approach would remove the moral hazard of only rewarding those individuals that were irresponsible in setting up their original loans and/or biting off more economically than they could legitimately afford.

You may ask yourself, why was 4.5% the magic number selected by Treasury?  I don’t claim to know the specific answer to this, but I think that I can reasonable come up with the math that would have allowed them to arrive at this number.  Namely, if 3 month LIBOR rates are at roughly 2.20%, and if the 10 year historic spread between LIBOR and mortgage rates is roughly 1.68%, then that would put 30 year fixed mortgage rates at about 3.88%, or 2.20% + 1.68%.  Right now the historic spread is far higher than the underlying 10 year average of 1.68%, so the difference between the historic average and today’s reality is probably closer to 0.62% (or 62 basis points) higher.  As a result, 1.68% + 0.62% equals 2.30% … and thus 2.20% + 2.30% equals our magic 4.5% mortgage rate number.  Simple enough? 

Now, let’s move on the second topic regarding new economic stimulus.  This one is much more straight forward and is one that embraces the creators of new businesses and new jobs: entrepreneurs.  As a serial entrepreneur myself, I have always believed that entrepreneurs come up with ideas that create new companies.  These new companies, in turn, create new jobs, which then create wealth that then gets consumed, reinvested or saved.  However, independent of which item of these is ultimately selected, the process stimulates economic activity and growth and the overall aggregate U.S. economy benefits immensely.

So, what’s my plan?  My plan is to take $4 billion from the TARP program and split it in to 20 batches of $200 million.  What we will do is transfer $200 million to each of 20 cities to be used exclusively for investment in early stage companies.  15 cities will be selected based on their ties to start-up building and would include cities already known for their ability to successfully create Internet, technology, biotechnology, software, hardware, financial and health care companies, with the remaining 5 cities being selected based on their severe economic challenges alone.  For the 15 cities, my chosen list includes, Seattle, San Diego, Los Angeles, Denver, Phoenix, Austin, Dallas-Ft.Worth, Atlanta, Raleigh-Durham, Richmond, Boston, Chicago, New York, Miami and the Bay Area (which I will treat as one city composed of San Francisco, San Jose and Oakland).  For the 5 cities, my chosen list includes New Orleans, Detroit, Minneapolis-St. Paul, Nashville and Cleveland.

Now that we have the money and the initial cities identified, we will have fund managers with start-up, venture capital and/or private equity experience locally selected to deploy the investment dollars.  Then, we will have local companies, either newly created or in “early stage” mode, be showered with $500 thousand to $1 million investments each on behalf of the U.S. Treasury and the American taxpayer.  These investments will be in the form of equity and will provide for roughly 300 investments in local start-up companies to the cities selected before all of the $200 million fund money is expended in each local market.  And, if you’ll allow me to use experience as my guide, I will posit that for a material percentage of these companies invested in by the American taxpayer, others will provide matching or follow on private investment in the form of high net worth individuals, Angel funds, venture funds, private equity funds and/or corporate strategic funds.

So what does this do?  This direct stimulus addresses the heart of the problem accompanying the current ongoing crisis relative to unemployment and job creation.  I will be the first to admit that some of these investments will ultimately not pay off at all, and also that many of these companies underlying the investments will not survive.  However, for the U.S. taxpayer to make a good return on their investment, all we will need is a handful of successes in each individual market, or a few major successes anywhere throughout the country.  That’s all.  Simple, easy, straight forward and the best economic stimulus in the world … empowering ideas to spawn creativity to solve real problems to create real businesses to create real jobs that create real wealth to create real returns in spades.

Doubt that this is possible?  I sure don’t.  Way back in the late 1990s, Ron Conway, Casey McGlynn and Bob Bozeman took this exact approach in managing a $100 million Angel fund in the Bay Area called SV Angels LP (SV = Silicon Valley).  Ultimately they invested roughly $300 thousand per start-up company in a shot gun type of approach and as a result, were able to cover about 300 companies with the money raised.  Some of these investments, such as GirlGeeks.com and others, turned out to be spectacular failures during the Internet bubble and lost every penny invested in them.  However, some of their other start-ups turned out to have had liquidity events that ranged from modest wins to enormous successes.  These included companies like the one that I ran called Vovida Networks that was purchased by Cisco Systems for more than $100 million, and other companies that many of you would know well … from Napster to Plaxo to Google.  That’s right, Google, which as I understand it delivered more money back to the fund than the entire $100 million invested all by itself.

I know, I know, you’re saying that this is an unusual example that can’t be repeated again.  From my perspective I would suggest that not only are you wrong in this conclusion based on history, but also that even if you were right, this $4 billion in TARP money would have exponentially more valuable benefits to the entrepreneurs, companies, employees, governments and communities in which the money was put to work than the tens of billions of dollars already deployed through TARP to banks that are not putting virtually any of that money to work for the businesses and consumers that need it right now.

More specifically, out of a $700 billion TARP program, $4 billion put to work in this way wouldn’t even represent 0.6% of the entire TARP program.  Think about that.  Are you willing to invest up to 1% of TARP in a program like this across the country, or throw another $50 billion at Citigroup or AIG?  Exactly.  And, if anyone is upset about my choice of cities, let’s increase this commitment from $4 billion to $7 billion, take the full 1 percent of TARP as suggested and add another $200 million fund in each of another 15 cities across the country.

Trust me.  There would be no greater use of money than this modest investment in the great ideas of entrepreneurs to create the next wave of great American companies.  Period.  And, the return on investment to the American taxpayer will go way, way beyond the ultimate end state value of the equity purchased through all of these deals.

Mr. Obama, Mr. Paulson, Anyone in Government that Can Make Things Happen - please contact me and I would be happy to serve our country as the National Director for this program!