Wednesday, November 12, 2008
(Cont'd from above)...

Jim (cont'd):    Second, Hank Paulson, the raspy-voiced Treasury Secretary, comes out and defends using the $700 billion he raised through the TARP, for everything but what he said he would use it for... TARP is now more of a tent for rich bankers than a tarp for struggling homeowners. Certainly nothing to do with the mortgage-backed bonds we thought would be bought. Fool me once... well I guess that's all that matters... because we don't even get a chance to be fooled again. That's how bad things really are...

Now for some of the parade stalwarts, the true dark-comedy mummers... AIG (AIG), once the best insurance company in the world, is now on federal life support, and it seems to need tens of billion of dollars more from taxpayers to make good it's on the hook for. General Motors (GM), Ford (F), Chrysler... paddles, clear!... And soon to be added, annuity and life insurance companies that made reckless, unhinged bets on stocks going higher forever, to fund your retirement. They seemed to believe it... Lehman, Bear, Fannie, Freddie... all failed. Disastrous consequences. Goldman Sachs (GS*), my alma mater, Morgan Stanley... the stocks say they're fighting for their lives... even if they're not. GM is fighting for its life...

Now, thanks to the New York Fed... thanks to the revered Tim Geithner (chairman), who runs the New York Fed, who's rumored to become the next Treasury Secretary... oh Lordy... oh man... why not continue the policies of continually-assured money destruction under the new administration? That works...

How do we solve all these problems?...

These issues may look all separate, but every single one of these crises, debacles and outright disasters is all about the same thing... It all comes back to one issue...

It all comes back to housing. And the Fed knew nothing about it... It comes back to the 14 million people who made the serious mistake of buying homes between 2005 and 2007.

Now, I have to tell you, there is a silver lining here... It's hard to find, but I've got it...

You solve housing, you stop house prices from falling, and you solve everything else...

We know housing will eventually get fixed. That's why, if you're young, and investing for retirement, if you've got more than a five-year time horizon, and don't need that money for the next five years, it still makes sense to own stocks... because, eventually, things will get better, even though the near term looks terrible.

See, every disaster I've described traces back to the fact that Wall Street issued and bought most of these bad mortgages, packaged them as bonds, and then sold trillions of them around the globe...

Now the bonds aren't paying off, and the banks, the brokers, the mutual funds and the hedge funds that bought them are drowning... because all the foreclosures are stopping the payments these bonds were supposed to make. That's forcing the hedge funds especially to sell everything that isn't nailed down, including your stocks, which continues to pulverize the market as it did today. Believe me, they are behind much of the selling.

The banks sustained such huge losses on these mortgages that they don't even want to make loans, even if they get federal money. AIG insured billions of dollars worth of these bonds, and is now making you the taxpayer pay off that insurance. It doesn't have the money.

You annuity insurer might have invested your money in the stock market and not hedged it. So you may never get your annuity money back without government intervention...

GM actually issued a gigantic amount of mortgages that went bad... It's being crushed by people who can't afford to buy new cars now, because it can't get loans for them... can't get a home equity loan to help pay...

These are all the same issues. It all goes back to a decline in housing prices.

In other words, as long as house prices go down, the consumer will spend less, the layoffs will grow larger, and the government will have to keep bailing out all sorts of entities... and, of course, the stock market, like it did today, will keep going down.

This time, you can't blame the price of oil...

I mean, think about it... oil, gasoline, here in Iowa, $2.10... and that's for premium... it's all on housing...

Which is why, everytime you hear something's being done to keep people in their homes, it's a win for you. That's what you want, even if it means bailing out a bunch of people this nation regards as deadbeats...

Frankly, if you want your stocks to go higher... if you ever want to see a bottom in stocks in your lifetime, it's time to support your local deadbeat homeowner! It should mean more to you that your house not go down 30%, than that some bum gets to momentarily cheat the man, or the system...

So, when Fannie Mae and Freddie Mac tell us they're making housing more affordable to keep people in their homes, like they did yesterday, you count that as a victory! Any forgiveness of the deadbeats is a victory! I know it's counter-intuitive, but any break is a win for you too if you own stocks!

We have to break the cycle of housing depreciation before the market can recover! And, as long as housing is still a problem, then the second Great Depression housing scenario is still on the table because of this vicious cycle.

So do not complain about this latest move... do not complain about the move to help homeowners, as it's probably the first thing that can really change things, because this is the first time the government has tried to get at the problem root and branch.

So, in immortal words of Lenin... what is to be done?...

What makes housing better and, thus, everything better?...

Okay, here we've got a couple of ideas...

One, we could get the napalm out... get the napalm and gasoline... and burn all the vacant houses to the ground, in a reprise of the New Deal... but I do not see that idea making it through congress, despite the potential championing of this plan by the politicians from the states that still produce napalm... Napalm belt...

Seriously... here's what we need to do...

We have to stop new building... The banks are making credit still available to the homebuilders... unbelievable! So they keep pumping out new homes. We could have the government buy up vacant homes. This is cheaper than what they're doing...

The most direct and logical way to help... President Obama, are you listening?... would be to offer a big tax credit for anybody who buys a house. That will get the buyers to take up the inventory.

Here's the bottom line...

●  ●  ●  ●  ●

The Bottom Line!:     Until we stop house price depreciation across the country... which is the only thing that matters... forget all the noise... forget the down 400... Until we stop house price depreciation, and then take the second Great Depression off the table... and fixing housing is the only hope left for that... I can't recommend any stocks other than the safe and accidental high yielders... the companies like Caterpillar Inc. (CAT)... companies trading at or below their cash, like KBR, Inc. (KBR)... some recession-resistant stocks with good dividends like Kinder Morgan Energy Partners (KMP) and Clorox Co. (CLX)... You stop the declines in house prices, you stop it all. You don't... well, you see why I've been saying you take any money you need for the next five years out of this market to make a big purchase.

[verbatim recap]

Read Jim's next Segment here