Wednesday – Stop GM Before They Kill The Economy Again!

Another $16Bn for GM – are they freakin' kidding us?

GM is currently producing 128,000 cars a month, a pace of 1.5M cars for the year.  $16Bn on top of the $14Bn we already gave them means it is costing the Untied States $20,000 PER CAR that GM sells to keep them in business.  But wait – it's worse than that….  GM only employs 140,000 workers in the United States and their "plan" is to lay off 47,000 of them.  That means they are asking for $16Bn to keep 93,000 workers – that's $172,000 PER WORKER!  Surely the money would be better spent just giving it to the workers themselves and telling them to find jobs with real companies or, better yet, start their own companies and maybe employ some other people. 

So who are we really saving here?  I have no pity for anyone who put money into GM over the past few years, they've been on life support for decades so high-risk doesn't even begin to describe the lunacy of giving them money, whether it was stocks or bonds.   Just let them die and let Chrysler and Ford buy the useful parts out of bankruptcy and leave us with two relatively healthy auto companies.  Even if "only" 1/3 of the current GM employees find work with the remaining auto makers, GM was going to let go of 1/3 anyway and we can give the remaining 47,000 people the $16Bn and that's $340,000 per worker – not bad for a severance package. 

This is what I find so frustrating about this entire economic crisis.  We are certainly spending incredible amounts of money but we are spending it stupidly.  Here is one example how the Phil administration would spend money.  It costs $40,000 to fit the roof of a typical home with solar panels.  In sunny areas, you can offset 80% of the energy usage.  If we assume just 1/2 of American homes are good candidates (50M) then outfitting them all would cost a total of $2Tn.  That would reduce our oil consumption by 2Mbd (20% of our imports) and if we assume it takes a 5-man crew 2 days to do an installation we're talking about 500M days of work or jobs for 2M people for a year.  As these are primarily construction skills, it's perfect to put those industry workers back on the job right away.  On the back end, we're saving 50M families an average of $3,000 a year in energy bills or $150Bn a year and we are cutting down about 20% of the drain on the US energy grid, something we are already concerned about. 

So we could look at it as spending $2Tn (and the money goes right into the economy) to create 2M jobs (and they pay tax so 1/3 of the money is returned to the government anyway, not to mention less unemployment, welfare etc.) and we can either give it away or recoup 1/2 of the energy savings or $75Bn a year over the 20-year lifespan of the panels or $1.5Tn.  That would still leave $1.5Tn in the hands of the homeowners over the same period and, since the governemnt can finance spending at 3.5% over 10 years, the whole operation would cost "just" $19.77Bn a month, less the $75Bn we collect (not including taxes) means we can start tomorrow for about $13.5Bn a month.  NOW THAT'S A STIMULUS BILL!

This is not rocket science people, just spend money on things that:

• Create Jobs
• Have A Lasting Benefit
• Save Money Over the Long-Haul

Take California's proposed high-speed rail system that could connect most California cities as well as Las Vegas by trains that travel 220 mph.  This program creates over 200,000 long-term jobs and will cost a total of $40Bn so $20Bn would be plenty to subsidize private investment that is already lined up.  That's a cost of $100,000 per job created and if the average worker pays $10,000 in taxes, then 50% of that money is returned to the government in 5 years.  Meanwhile, we save fuel forever as well as wear and tear on the highways as we create an entire new industry that is projected to generate $4Bn a year in revenues.  This is a project that is ready to go and could be launched with a pen-stroke.  Do this across the country and we won't have enough workers to fill the jobs!

THIS IS LESS MONEY THAN WE ARE GIVING TO GM JUST TO GET THEM THROUGH A YEAR!!!

So please don't tell me the situation is hopeless.  I've outlined several solutions to the mortgage crisis that could make it go away in days, not years – there's a lot you can do when you are willing to spend $1,000,000,000,000 and it is simply shocking to hear people say they don't think the $9.6Tn the government has already committed is going to help.  Our whole economy is only $13Tn so allow me to be the first to tell you that analysts will be "surprised" by the better-than-expected Q2 GDP report as they apparently have no ability at all to forecast the impact of ramped-up government spending against what is "just" a 5% drop in real GDP.  Still, the bears are firmly in control of the markets and the administration, rather than appoint me Commerce Secretary (a position that is still open), has provided nothing more than a poorly compromised stimulus bill and vague references to mortgage and bank bailout plans – it's just not enough to get investors back in the game…

I called yesterday "Terrible Tuesday Morning" and, as expected, we plunged back to November lows.  We fell below my 7,650 line on the Dow but hit my exact 50% off target on the Russell at 428 and finished 1 point over our S&P target of 788 so a successful bottom test overall.  We picked up a few bullish plays during the dip but ended the day with a new round of naked DIA puts – hopefully we'll have a reason to cover them this morning with 795 now being the line we're going to watch on the S&P to sell or buy back the Feb $77 puts,  now $2.45, which is half premium so a good sell.  I mentioned to members in chat this morning that it's time to take the money and run on the FXP covers while $23.50 would be a good re-erntry point on the FXIs, selling March $23 puts and calls for $4.25 for a net entry of $19.25 (19.5% profit if called away) or an average entry of $21.13 (10% discount) if put to us.  We're banking on the Hang Seng holding 12,500 of course and the Shanghai should hold 240.

Speaking of the Shanghai, they fell 4.5% this morning while the Hang Seng held flat while the Nikkei fell 1.5%, overall, a muted reaction to the dive the US took in yesterday's trading.   The Baltic Dry Index quietly added another 2.5%, finishing at 1,895, up 200% from it's December lows after a brief pullback from 2,055 last week.  Our pals at DRYS got all cheap again and the stock can be picked up for $4, selling the March $2.50 puts and calls for 2.25, which is net $1.75/2.13 and if making 43% in 30 days if called away with a 46% discount if put isn't sexy to you – then hedging is just not your style!  Investors are back to trading the market as if nothing has any value and that spells opportunity for us – especially with the VIX nosing back around $50!

Eastern Europe is still shaking the global financial markets pretty much exactly as I predicted on December 11th, when I said: "Speaking of Moscow burning – The Ruble is on the rocks and much closer to collapse than you may think.  If oil does persist below $50, the Russian economy may fall and that will imperil the Baltic states as well as the  breakaway nations that have joined Europe but are still in Russia's economic sphere of influence.  A breakdown in the ’stans will harm Asia as well and this was one of my "worst case" possibilities for the market along with GM failing (still on the table) and a major bank failing (not off the table) any one of which can take us to 7,000."  So here we are at 7,500 on only the fear of one of those things happening – a little overkill perhaps…

Europe is down another point today (8am) as the Ruble hits a new low against the dollar, which jumped 1.8% yesterday and accounted for almost 1/2 of the markets relative losses (and made gold's rise even more impressive).   Deficit spending is also becoming a problem in the EU as France, Ireland, Spain, Greece, Latvia and Malta are already at the first step in the European Union's excessive-deficit procedure, which forces states to reduce their budget gaps. The six countries all had budget deficits above 3% of GDP in 2008. The commission, in a statement, said France's budget gap was 3.2% of GDP last year. Ireland's budget deficit was 6.3% of GDP last year and is expected to balloon to 9.5% of GDP this year. "As a result of the sharp global financial and economic crisis, EU public finances are under stress. The crisis brought about a decline in tax revenues and a rise in expenditure," European Commissioner for Economic and Monetary Affairs Joaquin Almunia said in a statement.

We have plenty of data out today with Housing Starts, Building Permits, Import/Export Prices and Industrial Production & Cap Utilization ahead of the Bell with Fed Minutes coming at 2pm so busy, busy today and nothing likely to give us a big boost.  Tomorrow we have the PPI, Jobless Claims, Leading Economic Indicators, the Philly Fed and Oil Inventories with the CPI coming on Friday.  All this data looks back to January and there is little to make us think any of it will look good.  We still need bold action by the Administration – something that will change the game.  So far we are effectively using band-aids to reattach severed limbs and that is just not going to be a winning policy.

9am Update:  Now there are rumors of a $75Bn "homeowner stability initiative" that will bring down payments around 60% and includes some principal write-downs.  That should help HOV. XLF, FAS etc and SKF is always a fun short in these situations (we sold calls short yesterday).  Let's see what kind of boost this gives us!