Understanding the Dow Jones

I apologize for the lack of new posts. I've been spending a lot of time studying for the Chartered Financial Analyst exam. It turns out I've been wasting my time because this brief video clip explains it all.

The American Taxpayer is Getting Bamboozled!

You heard me: bamboozled. After taking tens of billions of dollars of our taxpayer money, AIG is doling out $165 million in bonuses to its Financial Products unit. This is the unit that has recklessly sold trillions of dollars worth of CDSs, or default insurance.

Don't get me wrong. I fully support paying out bonuses to top producers in profitable business units. But that principle does not apply here. This is outrageous. Let's get their names and make 'em famous.

March 12, '09. What a Day.

February retail sales were better than expected.

Bank of America's CEO, Ken Lewis, says business is profitable again.

GM says they don't need a previously requested $2 billion government loan.

Standard & Poor's says GE's credit is in better shape than we thought.

Congress and the SEC are finally going to review the mark-to-market rule, which arguably largely responsible for the credit market freeze.

And Bernie Madoff finally goes to jail.

Any one of these headlines would've caused the markets to rise, but we got them all at once. Three consecutive days of market gains is tough to get, but we got it. In the last three days, the Dow Jones roared ahead by 623 points to close at 7170 today. That's a 9.5% gain in your stock portfolio in under a week.

It's Not Just About Length, Ladies

Many ask, "How Long will this Recession Last?"
If payrolls fall by 1 job, consumer spending falls by 1 cent, home prices fall by $1, investment accounts fall by 1%, etc., then we are in recession. This type of recession could last for years, but would it really be that bad?

Depth Matters
An updated official estimate of economic activity said Q4 (Oct-Dec 2008) GDP fell 6.8%. A month ago, that estimate was 3.8%. In other words, the recession is deeper than what officials had initially measured. A recent survey revealed that economists were expecting a 5.4% decline. In other words, the recession is also deeper than what was expected.

Among other things, a deeper recession means more jobs are being lost and less money is being earned.

How Many Hairs are Attached to This Thing?
Think of the recession like you would a Brazilian wax. If you pull the waxing strip slowly, it will last a long time. If you pull it quickly, the pain is substantial but it's over quickly. Regardless, the number of hairs attached to the strip also reveal something about how much pain you will feel.

Recessions take the economy to a base level from which growth can start again. There's a bottom somewhere. We can get there quickly, or we can get there slowly. (Many, including myself, would argue it's better to get there quickly.) But remember, it may be just as important to ask "where is that bottom?" as it is to ask "when will we get there?".

Gov't Aid is Actually a Hindrance. Might be a Good Thing.

During my sophomore year of college, I asked my parents for $100 to help with some of my expenses. They were more than happy to help. But they made me regret asking.

They would call me almost everyday, asking if I was okay. They'd ask if I was starving. When I visited, they'd question me about any new clothes. They would tell me I should only wait for sales. They'd constantly lecture me about going out to eat. If I had to go out to eat, they would tell me how I should order. They actually told me not to fly home for Thanksgiving because I would be flying back for Christmas in just few weeks. Et cetera, et cetera, et cetera...

In hindsight, I would've rather starved then ask for that money. But I can't say I didn't learn a valuable lesson: never ask parents for money, EVER AGAIN.

Banks with TARP Money
The government has been giving a lot of shit to banks who have taxpayer money via the TARP. Among other things, the government wants to put a cap on compensation. More recently, Morgan Stanley and Northern Trust have come under pressure for sponsoring golf tournaments.

Gov't Mismanagement
Maybe, managers don't need to be paid much and banks don't need to sponsor events. But when you cap pay, you lose top performers to the competition. Many boutique banks are already reporting an influx of this type of talent. When you stop sponsoring events, you risk losing the reputation of your brand.

Like Depositing Money at the DMV
You see, the government wants banks to be run like the Post Office and the DMV. Dirty floors, limited hours, and long lines. It's cheaper to fund operations, but they'll lose a lot of business to the competition. And this is not what I want when my tax dollars are being used to invest in these very institutions.

Payback Time
This bank bailout came with a lot of strings attached. It turns out that government aid is actually a hindrance. Gov't influence is destroying the value of these firms. The managers realize this, and they'll never forget it.

Goldman Sachs and JP Morgan said they never wanted TARP money, and they plan to pay it back ASAP. Northern Trust says they're doing everything they can to pay back the TARP money. They HATE having the government this close.

A Bright Future
I've become much more responsible with my personal finances. Nowadays, I don't think just about earning money. I think about earning and saving enough money so that I never have to ask for money out of desperation from anyone ever again.

Once the banks start paying back the government money, I believe that they'll do whatever they can to keep the government away.

Not a GI Bill

In the wake of war and depression, the GI Bill sent a generation to college and created the largest middle class in history. (Applause.)
-President Obama to joint session of Congress, Feb. 24 2009

Let me remind you that I voted for Obama, and I support him. I'm PrObama. But it is a mistake to compare the current economic spending/investing activity to the GI Bill.

The GI Bill financed college educations, offered unemployment compensation, and extended home and small business loans. But this support was given to veterans returning from World War II. Let me tell you something about these veterans. They were soldiers who were trained in things like leadership, teamwork, and strategy. They were taught discipline and had a sense of responsibility for others. These are the types of people you want running businesses. These are the types of people who will use their educations. These are the types of people you want to invest in. These people knew not to take for granted what they had in this country.

The beneficiaries of the current plan include greedy people ranging from short-sighted bankers to irresponsible borrowers. From an economic standpoint, you can make an argument that these people currently need government aid. Of course, the non-greedy are getting aid too.

But don't expect to get the same kind of return on investment that we got from the GI Bill.

Marx's Prediction

This quote was forwarded to me in an email:

Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credit, until debt becomes unbearable. The unpaid debt will lead to the bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to Communism.
-Karl Marx

I haven't been able to confirm this, but it sounds like something he would say.