Its now official, the $700 bailout will go through with some modest changes from what was previously expected.  Oversight, the amount of money and the automotive industry were all tough topics in the discussion to write this bill.

The bailout bill was quick to denounce companies that are leaving CEOs with “Golden Parachutes” of cash that could be better spent on a failing corporation.  The bailout will not cover banks and other institutions that are paying CEOs large amounts of money to head the companies into failure, instead those banks will not be able to access the funds.

The automotive industry pounced on the opportunity to get $25 Billion of government money that would be used to back the debt of the big three automakers in the United States.  The argument is that if the US government can bail out the banks to eventually help out the consumer, keeping these automakers in business will help keep employment numbers up while helping out the basis of any economy; the manufacturing sector.

One big plus for the American people is the necessity for requests for future capital.  The $700 Billion will not be allocated in its entirety.  Instead, the government will collect capital in three phrases in order to limit the amount the Government pays for these assets and to limit the risk of overweight purchases in a very small and select number of financial institutions.  One large problem with the bill is the lack of consistency thus far in bailouts.  Bear Stearns was left to rot but then sold with a $30 Billion government guarantee, then you have Lehman Brothers which was left to go bankrupt, Freddie and Fannie Mac that were backed up entirely and AIG which thus far has received billions in loans after making a deal with the US government.

Effectively moving the money between the new reserve to the level where it can be invested to guarantee US mortgage debt and other bad investments will be the trickiest part.  To balance out a freshly created $700 Billion in money supply plus an already large yearly deficit of almost $800 billion per year, something will have to be done soon.  A $1.5 Trillion outlay both on the current deficit and the creation of $700 Billion in new money adds 15% more to the M3 money supply in just one year.

The chance that the US will see even a portion of the $700 Billion back is minimal.  Likely, most banks will take the cash to cover their bad debts and be worthless as they have no credit or capital to make loans though their balance sheets are clean.  For this plan to work, more bailouts would have to follow along with huge inflationary steps to bolster money supply to the point where $700 Billion is a drop in the bucket.  Simply, to get all of the $700 Billion back, the US government will have to continue with inflating the currency, doing so of course will cost the US dollar even more.

As the price of oil drops from its all time high of $147 per barrel, OPEC is taking steps to cut production to keep the price of oil above $100.  It acted yesterday to reduce its overall output by 500,000 barrels.  Though 500,000 barrels doesn’t seem like much, the margin between the amount of oil produced and oil consumed is only around 1-2 million barrels per day.  A daily cut of 500,000 barrels will prop up the oil markets even as China and India slow down.

OPECs price targets slowly get higher as the price for oil reaches the levels they wish to see.  Used to be that a $60 price target was high enough, then $80 and now the OPEC alliance is searching to keep the price of oil at $100 per barrel.  No one can blame them, they have the power to manipulate supply to level s that are obscenely profitable.  OPEC does have a delicate balance to maintain, if they allow oil to reach levels that is too high for the current market, they face the problem of being ousted by alternative energy possibilities that will put a damper on oil purchases and eventually consumption.

The job of OPEC is to move oil policy through the members it represents.  Many countries are happy to each produce lesser amounts of oil if it means higher prices.  Cutting back on oil production will inevitably bring higher prices, but possibly a reduction in oil revenue.  If oil cuts grow too big, the problem is that oil revenue would drop even as OPEC receives more per barrel.  Many of the countries represented by their oil reserves have little income source other than oil production. Without ever increasing oil revenues, these nations would be broke, bankrupted by debts and other expenses and no income source to offset expenditures.

Saudi Arabia and the UAE are a couple of the OPEC nations that have taken their oil revenues to invest in other interest.  Saudi Arabia and the UAE have made huge investments in their resorts and made their nations a destination spot for the world’s travelers.  This is one way to invest the proceeds in a way that helps their local economy and moves their income from a commodity based economy to something more service oriented.  While oil may not be here 40 years from now, the business of luxury and overindulgence in the service sector will still be around.

Often in the media we hear of the current economic situation compared to several points in history.  Whether it’s the 1987 stock market crash, the 1992 housing bubble, 1970s stagflation and the infamous great depression there needs to be some clarification on the terms used by analysts and pundits alike on the current state of the economy.

First of all, because an analyst says it does not make it true, though a culmination of analysts generally do.  There is a problem with the majority of people in the media who make comments about the market, they’re all pumping their own funds and what they perceive as the general market performance going forward.  When analysts were screaming $200 oil and $5000 gold it is likely that their own positions were set to take profits at $140 a barrel and $1000 per ounce.  Analysts always overshoot, because even when the market goes up they’re right and they like to bring attention to their cause.

Analysts have a vested interest in what the rest of the market does with their money.  When Goldman Sachs comes out with a price target of $45 on a particular stock, they’re shooting for $40.  Its just the general rule of thumb that analysts are pumping up a stock and taking profits far before their targets.  Its how the market works, otherwise there would be thousands of funds out there that have bought stock that they will never ever sell, or at least not within even a 4-5 year horizon.  Though analysts may be uppity and calling a buy on a stock with a high price target, just keep in mind that they’re in business too and happy to make the extra buck.

Worst since, and worst ever is a huge difference.  The worst housing market since the great depression sounds awful, but it means that the housing market is performing its worse SINCE the great depression, not during and not before.  Surely there have been plenty of localized housing booms and busts that have been forgotten by history never to be touched again.  Its becoming common to hear that the housing market is the worst since the depression and that might be so, but the fact remains that these are “shock tactics.”  Throwing the phrase great depression in any analysts opinion immediately makes it more catchy.

Look past the rhetoric and what we’re hearing on TV and pick up quality names.  Holding a few commodity stocks to balance out the inflation game and getting rid of low profit margin stocks will shore up your portfolio against even the largest of recessions.

Personal income is putting a damper on consumer spending and on the markets in general.  Recent drops in consumer spending is hurting retailers and the banking industry as people are shopping less and paying less on their consumer debts.  We’ll analyze what these numbers mean and how they’ll affect the market going forward.

Personal incomes dropped by .7 percent in July, this comes with an expectation for a .1 percent drop.  A .6% difference is no small difference when it comes to government reports.  Consider that personal incomes had dropped six times greater than expected with oil prices at their highs and its no small wonder why a .6% drop in income plays such a huge role in the economy as a whole.  Consumer spending rose by .2% in July, even though personal incomes fell by 3 times that much.  This is probably the result of higher oil and food prices which have since fallen before the statistics were fully known.

We should also consider the amount of money that the government, and the federal reserve has pushed into the economy to keep growth numbers in the positive and recession fears in the back of minds rather on newspaper headlines.   With a hundred billion dollar stimulus package and a variety of loans made to banks to collateralize bad loans,  personal income numbers should have risen rather than fallen.  There is more money running around now than at any time in history, it seems almost impossible for personal income statistics to fall.

Retailers are possibly the worst sector to be buying when personal incomes are dropping.  As incomes fall, so do the profits, and profit margins, of large retailers which may only make a few dollars per large customer.  Wal Mart and Target are certainly at the top of this list.  Target is going to have a harder time monetizing its traditionally more wealthier clientele.  Likewise, WalMarts customers are typically blue collar workers that are having trouble finding jobs or even to have enough money to spend on the necessities or the gas to drive.

One of the most important factors that is certainly lowering retailers expectations is higher gasoline.  Not only do high gas prices take money out of the customers pocket, it also limit’s the number of shopping trips or spontaneous purchases that American consumers make.  67% of drivers in a recent survey stated that they had limited or changed their driving activities as a result of higher gas prices.  People go to places to spend money, not to spend money to go places.  A trip to Wal Mart for many families costs $5-6 just to get there, that’s $5-6 they’re less likely to spend.  Multiply that by the thousands that may make a weekly homage to the grocery store, and its easy to see how margins are so easily squeezed.

The love for Google is starting to wane as its stock price is outgrowing its profit potential.  In the early days of $100 share prices it didn’t matter what Google was doing on the backend, its stock was going to soar as analysts piled on for reasons that might have seemed a bit frivolous.  Even today the stock is selling for a PE ratio of 32 that outpaces most tech stocks.  With a PEG ratio of .87 which is small but still high for a stock with so much risk to its earnings, Google might not have much room to grow in this web 2.0.

Consider all of its high class flops and large investments into sectors that seem a bit loose handed.  Its $1.5 Billion purchase of Youtube has led to little and its Google Apps eat more bandwidth than they do add to the bottom line.  Simply, Google cannot monetize the internet like it can search.  Strike that as problem one that threatens its business.

Next up you have the fact that internet advertising spending is slumping.  There are more websites than people and more advertising space can be created just by adding a page to a website.  Online advertising is a tough business to handle when more of it can be created just by adding pixels and code to a website.  Emarketer, a prominent research firm for online advertising has released revised numbers on expectations for online marketing.  The firm dropped its expectations on US online ad sales by $1 Billion to just under $25 Billion to rest at $24.9 Billion in 2008.  This also drops its growth rates to 17.5% from a figure of 22.2% in the US online advertising business.

What this means for Google and other online advertising sellers is that generating profits will have to come from the ability to sell rather than relying on good fortune.  Growth in the internet advertising sector automatically adds a base growth of 17.5% to advertising firms, thus additional growth has to come from either more customers or higher prices for its advertising.  Emarketer also stated that it expects online video revenue to come in at 66% less than originally expected to $505 Million from $1.4 Billion.  Sorry Youtube but you’ll have to work harder for your money.  The firm also expects little change in search engine advertising, which means that the organic growth of the online marketplace is essentially nil.  The fallout of the real estate market and less spending from automakers was cited as a reason for slowed advertising spending.  Real estate advertising is some of the most profitable advertising on the internet, especially on localized advertising sources.

Organic growth on the internet will not be around to prop up Google’s bottomline this time around.  Though it looks particularly cheap compared to others, the growth it has shown in the past will likely fall to levels equaled to that of tech stocks with tangible products such as Intel or Cisco.

An investment in commodities is not speculative, nor can it truly be called an investment.  Commodity players looking to hedge themselves against inflation are not investing or speculating but instead bracing themselves for the day that inflation truly becomes priced into the market.  Holding hard assets like gold or silver may seem like an investment, but it won’t pay off until a growing money supply and unchecked Fed powers are truly priced into the metals.

The rapid decline in the value of commodities seems a bit out of tune with reality.  Though the economy of the United States is faring better than that of Europe and Japan, there is still much work to do to restore full value to the US dollar.  Investors are fleeing the Euro and the Japanese Yen for the US Dollar which is comparatively performing well but the operative is comparatively.  The US markets are facing the same problems and delimmas as that of the European and Asian economies, it just so happens that recent numbers showed that the US wasn’t doing as bad as Europe but still doing poorly.

It should come to a surprise to any investor to see the great drop in commodities that has shaken the market the past few weeks.  Certainly it should have been expected that oil would fall from its highs, too many hedge funds and leveraged investors were snapping up oil without considering its intrinsic value as energy and not as a speculative investment.  This is the same kind of thinking that brought homeownership from a necessity of survival to a highly leveraged investment vehicle.

Though commodities are well off their highs, we believe that the bull market has truly just begun.  This coincides with the belief of famed investor Jim Rogers that the commodities market is just a few years in to what will amount to a historically repetitive 20 year bull market run.  What is happening with commodities is that investors are turning to assets rather than currency and instead of buying truly hard assets in the form of physical metals instead hedging themselves with exchange traded funds and mining stocks.  Paper assets are beginning to reflect the price for hard assets.  Try going to a bullion broker to buy physical gold or silver, chances are that its almost impossible to find.

Another reason for the fall may be a return to naked shorting of practically every metal across the board.  For a very long period of time, institutions and investment banks were holding more silver short than could possibly actually exist, creating phantom ounces of silver and gold and driving the price down.  Physical metals are indeed in a shortage due either to limited mining or a craving from investors.  Either way, the fundamentals that generally drive commodities prices are being ousted by paper trading on the worlds markets rather than consideration for hard assets.

As commodities continue to fall this looks like a great time to build a long term position into a bull run that will continue as soon as the world sees the lack of value in currencies and the value of commodities.  With gold under $800 and silver at the $12 level, investors need little outside reason to consider building a position.

The Labor Department issued a new jobless report that showed newly laid-off people seeking unemployment at 406,000 this represents a jump of 34,000 from its seasonally adjusted level and caused a major sell off across the board.  Tech stocks were hit the hardest, likely because the drop in employment is hurting customer’s wallets and sale of their products.

This comes just as a new housing report showed that existing home sales were down in June and the median home price has dropped 6% from last June.  Sales of previously owned homes fell 2.6%, something that worries the real estate market and homeowners across the country.

Huge quarterly losses coming out of Ford Motors likely helped the selling activity.  Ford posted a huge 2Q loss of  $8.67 Billion.  This totals out to $3.88 per share loss, even after the company was able to produce a surprise profit in the first quarter of $100 Million.  Ford is still in the same boat as every other automaker with slowing demand and a double whammy of excess “gas-guzzling” inventory.  The company is looking to restructure and focus on smaller, less energy consuming cars and trucks though the transition may cost billions of dollars, something it doesn’t have considering even the large amounts of credit it is able to obtain.

The largest losses from Ford came from their lease portfolio.  Large trucks and SUVs are likely to come back to the company as leases expire and borrowers switch to smaller, more compact cars to save money.  Ford will probably see a huge influx of SUVs and trucks which will command a lower price than even just a year ago.  Consumers are wary to buy anything with low MPG ratings and its certainly reflecting in the US market with Ford and GM both struggling to break even.

Its safe to say the oil bubble has burst.  Oil has managed to erase $19 since topping out at $147 per barrel.  Without the impact of geopolitical events, its now our position that oil has topped and will be descending back to the $110 level where support exists.

Though very few investors are willing to call a burst, many are drawing back on their always bullish viewpoints.  After shorters took control of the market in June, representing more barrels of oil than long positions, the oil market has turned from “how high can we go” to “where is the bottom.”

In everyone’s interest should be Iran and the upcoming Olympic games.  Though past years have been peaceful, there is still much to worry about demonstrations in China and the prospect for trouble in an event that has been plagued with politics.  Not to mention the borders heating up in the Middle East and Bush’s go-ahead to Israel to fire back on Iran in case of a strike.  Now that the Middle East is entangled in what the future may see as the second Cold War, there are plenty of tensions that could send oil back to $147 a barrel or even more.

The drop in oil prices also means that the overall market will be less likely to be slave to a barrel of oil.  The market has been controlled by oil but as oil drops its probable that the price will stop making headlines.  Oil at $120 a barrel sounds a lot better than $147 a barrel, even an upward movement here would have little effect on the market.

The factor in future oil prices will probably be the subprime disaster.  Fannie and Freddie’s solvency issues will be closely tied to oil prices going out for the next couple months.  If the pair come back as insolvent, oil prices will likely drop on fears of the economy.  If a bailout is in order, inflationary concerns will send oil higher on an even lower US dollar.

So for now I believe it safe to say that the oil market has bubbled and popped.  Future movement upward will be the result of geopolitical and economic news events.  Hold on tight, the next week could bring prices to the sub-$120 level.

Moral hazard is something that comes into spotlight every few decades when the importance of a central banks becomes a topic of discussion.  Moral hazard is by definition what happens when people act differently because they’re insulated from risk.  Now as the credit crunch wanes on and hundreds of banks are on the brink of collapse, moral hazard is being brought up once again.

In a normal market, people would make decisions based on what they would consider a risk to reward ratio.  When the government subsidizes or insures banks and other institutions from loss through bailouts and FDIC insurance, moral hazard is created.  The banks can take an unlimited amount of risk without any chance of loss.  If problems occur then the taxpayer pays for the bailout.

Moral hazard also creates circumstances where the profits from businesses are privatized but the losses are socialized.  The possibilities are that corporations prosper before the odds catch up to them and then the losses are spread out amongst thousands of taxpayers.  The trouble is, plenty of moral hazard is in play today but still well outside the banking industry.

The US government heavily subsidizes ethanol at a rate of $1.45 per gallon.  Without this government subsidy, it is unlikely that as much ethanol would be produced.   The moral hazard of ethanol production works just the same as moral hazard in the banking industry.  Government intervention required to force moral hazard affects any market: this time around we’re afraid that Fed bailouts create moral hazard in the banking industry.

The importance of bailouts is something that has been sold to the American public as something that is a part of the natural business cycle.  The most natural though would be to let these corporations heavily insolvent to fail on their own.  The banks have to be forced to hold down their own risks and accept responsibility for the losses.

Foreclosures grew by 50% from last June.  Simply, for every two foreclosures then, add another one now.  That’s a worrisome statistic in this economic environment.  One in every 501 (.2%) of households received a foreclosure notice last month.

Just by taking a very quick glimpse at foreclosure and real estate data its impossible to understand how analysts are predicting a “second half rebound” or 2009 to be the savior of real estate.  These numbers represent homes either in foreclosure or those that will soon be in foreclosure.  After foreclosure comes a sale, usually at a very discounted price which will flood the supply of homes and drop property values universally.

As the supply of homes rise you also have the problem with dropping home prices, less HELOC availability and the worry that a huge supply of homes will ruin the overall real estate market.  Since the real estate boom started to the time it ended, home ownership was only up by 2% of the population.  So many of these homes are not first homes but second homes or third homes, all investments.  The shift was not into property but in and out of property.

A projected 2.5 Million homes will be in foreclosure this year alone.  That figure, though it seems high, represents one home per every 125 people.  What is staggering though is the year over year increase of 40% or 1 million homes.  At that rate its inevitable that trouble will eventually show its face.  Stay tuned, there will be more here.