Thank You Benjamin!

Today we saw the power detailed and precise plans have. In a semi-annual meeting with the Senate, Ben Bernanke gave the public a timeline on when he expects the recession to end, how the government plans on ending it and the steps they are taking to do so. He instilled confidence back into the government by saying that the Stimulus Plan will work, the measures taken to help housing will work and that the government is taking the right course of action with regards to helping the financial sector. He reassured investors today that an all-out bank nationalization is not in the government's plan at all. He shed light on the bank stress test. He stated that he believes the banks are still valuable franchises and he believes they will be able to recover. He reiterated that since the banks are still valuable franchises, the government is not going to let them fail. 

Tomorrow Geithner is going to reveal further details about the bank stress test and will begin conducting it. As more details come out about stabilizing the financial sector, I believe we will see a rally in the markets. Now that we are finally going to start the recovery program for banks that Geithner has planned, hopefully we will learn what liabilities the banks have and how much additional capital they may or may not need as well as the overall health of the financial institutions. Once investors have this information it will take away from the speculation there is right now about the state of the financial sector, putting an end to the recent sell-offs. 

Bernanke did a good job today of re-instilling confidence in investors - something they have been lacking recently. His statement that he believes the recession will come to an end this year gives investors an idea of when they can expect a recovery. 

Testing The Lows

Pay attention folks. The next few days are going to give us a good tell on how the market is going to perform this year. The market hates what the government is doing and we are seeing that with the Dow Jones shedding hundreds of points every day. What is the government doing that investors hate so much? Two things: uncertainty and too little stimulus spending.  The market hates uncertainty and the fact is that Geithner has not shed light on the details of his plan to help banks. Without details, it is hard for people to invest when they do not know what is going to happen with the government's spending. Now, to be fair, fixing the banks has no easy solution and it is going to take time to come up with one. But as long as we don't have the details of the bad bank plan, don't expect the markets to have a sustained rally. The second thing scaring investors is the stimulus package. Investors are afraid it is too big and is going to sink the U.S in debt. And more importantly, there is not enough stimulus. Businesses don't like the idea of 40% tax cuts because people rarely spend that money, they save it. With only 60% of the spending going to stimulus, investors are losing faith that the package will actually stimulate the economy.

You hear analysts giving predictions on what they think the market low is going/has been. But you can decide that for yourself in the next few days.

Now, the reason I say that the next few days are going to give us a good tell on how the market is going to do is because we are testing the lows. If the lows hold, then you can rest assured that we have created a bottom and that the market is not going to go much lower. The market has had bad news before and still held the November low, we'll see if the lows hold one more time. This is some of the worst news the market is going to have thrown at it and if the lows hold, we can be optimistic about the future.  

However, if we break the previous low, we could be in some trouble. It shows that the market has not priced in the worst of the news. I would not invest for the short term because no one knows how low the market could end up going. It could be a rough year if the market has not bottomed yet.

So make sure you pay attention to how the stock indexes are doing over the next few days, it will give you a good insight on what kind of investment to make. 

*Well on a funny note… while I was writing this the market finally got some details about the treasury plan and boy did we see a quick rally, I think the market just went up 200 points in 30 minutes all because we got DETAILS on what the government is doing! Be cautious though, quick movements in the market like this almost always overshoot and we see the repercussions the next day.*

Stimulus Finding Trouble In The Senate

Hope your weekends are going well, this is just a quick article from CNBC that I want you to take a look at. It's about how the stimulus package is losing more support from the Republican party. 

The U.S. Senate's No. 2 Republican warned Sunday his party's support for President Barack Obama's economic stimulus bill was eroding and "major structural changes" were needed to win Republican support.

"You have to start from scratch and reconstruct this," Sen. Jon Kyl of Arizona told "Fox News Sunday." He said the proposed bill, with a price approaching $900 billion, "wastes a ton of money." Kyl took issue with items in the bill, including a $500 tax rebate, the creation of dozens of new government programs and transfers of cash to states.

"There would be major structural changes that would have to occur," he said.

Republicans sought not to delay the bill, but wanted "huge amendments that would redirect it" to address the housing industry collapse and provide tax relief measures, Kyl said.

Sen. Richard Durbin of Illinois, the Senate's No. 2 Democrat, told the program that Democrats were "very open" to Republican ideas and amendments to the bill, including provisions on infrastructure spending and to provide oversight to avoid mistakes made in implementing the TARP bailout program.

The Obama administration and Democrats have already cut two provisions in the bill passed by the House of Representatives without a single Republican vote.

Looks like the bill is going to take longer than expected to get passed. 

Bank Madness!

This post got featured in the Carnival of Financial Planning. Check it out!

So lately you have seen bank stocks plummet. Many of you may be confused as to why because bank CEOs and financial analysts have been saying that the banks are financially sound. You have even seen Bank of America, the largest bank in America buy back shares, a move done when management feels their shares will go up. So if there seems to be so much confidence in the banking system, then why, are their shares dropping? Because of what investors do not know. Investors do not know if the government is going to inject more capital into banks and end up nationalizing them. We have already heard talks of this happening in Europe, where the governments of the European Union have said they are considering nationalizing their banks. And after Meredith Whitney, from Oppenheimer & Co. came out earlier this year and said banks would need to raise more capital in 2009, the fear of nationalizing banks has spread to America.

So what if the banks are nationalized? If the banks are nationalized, all your shares in the bank will be worth nothing. You will lose your investment in the bank, hence why shares have fallen so drastically, no one wants to own them. Additionally, as the government injects more capital, they also make more rules on how the banks can spend it, and in essence, run their business. Investors do not like all the rules that the money banks are forced to take are coming with.

If you think the banks will not end up being nationalized, they might make a good investment. The managements of banks are claiming they are solid, and the analysts following them agree. If you are to invest in a bank, invest in a larger one like Bank of America or Wells Fargo. These banks are large enough to make it through these tough times. Additionally, Tim Geithner, the new Treasury Secretary, said he was against nationalization of the banks, instead he wants to seek private investment into the banks. Banks have been rattled by this fear and are trading at extremely low prices, if Geithner follows through with his statement, you could make a lot of money when the banks return to prosperity. If you are going to invest in banks, wait until we get a better picture of what team Obama is going to do. Let the new stimulus package go through talks with the GOP, because it will surely be changed to please both parties.

If however, you think that the government is going to take over one of the banks, stay away, you risk losing ALL your money.

Obama Effect? Look Towards Congress Instead

The upcoming stimulus plan will, without a doubt, have an impact on the markets. We saw the greatest point drop in history for the Dow Jones Industrial Index when the 700 Billion dollar Troubled Asset Relieve Program (TARP) bill did not pass Congress. And then we saw huge upswings when the bill was revised and passed. Investors everywhere are looking to President Obama (feels nice to not have to say President-elect anymore) to see how the stimulus plan will shape up. Investors are looking to invest in companies who will receive business from the stimulus plan, and therefore are following President Obama's every move.

So how important is Obama to the stimulus plan, and therefore your investment? Not that important. If you are following Obama's every word to try and gain some early insight on when the stimulus bill will be passed, you will not gain much information. Instead look at Republican leaders in the House and Senate. Most people forgetting that Congress will decide the fate of the stimulus bill, not President Obama, so they are not looking in the right direction. Follow what GOP leaders are saying, because they are the ones who will be the ones stopping the bill from passing. Depending on what the GOP leaders are saying, you will be able to tell if the bill gets passed or not.

Right now, it seems that GOP leaders are not opposed to spending money, but opposed to HOW the money in the stimulus bill is going to be passed. House Appropriations Committee's ranking Republican member Jerry Lewis, R-Calif., has said that Republicans are ready to vote against the bill if they are not satisfied with how the money will be spent. Republicans will be working with Democrats to get a bill that both agree on, but it might not happen quickly.

The following days will be critical to follow, make sure you are following what Republican congressional leaders are saying about stimulus bill, if they are satisfied or not. This will give you great insight on whether it will be passed or not, so you can adjust your investments accordingly.

Do You Know Where the Money Is Going?

You may know that Obama is calling for a new stimulus plan. But do you know how the money is actually being divvied out?

• $58 billion - Energy
  
  
  
  • $32 billion – towards funding a smart electricity grid
    
  • $20 billion+ -Tax credits and cuts related to renewable energy and research for clean/efficient energy
    
  • $6 billion - Weatherize modest-income homes
    
  
  
• $275 billion - Tax cuts:
  
  
  
  • Tax credit of $500 a person/ $1,000 for married couples, targeting payroll taxes
    
  • $2,500 tax credit for of higher education, up to 4 years
    
  • $7,500 first-time home buyer's credit, does not have to be repaid
    
  
  
• $141.6 billion - Education
  
  
  
  • $62 billion - School districts, modernizing schools
    
  • $39 billion – Aid to school districts/public colleges to prevent cuts in services
    
  • $15.6 billion - Reward states reaching performance standards
    
  • $25 billion - Prevent layoffs
    
  
  
• $90 billion - Infrastructure:
  
  
  
  • $30 billion - Highways
    
  • $10 billion - Rail/transit
    
  • $31 billion – Making public buildings energy efficient (saves money in the long run)
    
  • $19 billion - Water projects
    
  
  
• $102 billion - Aid to the poor and unemployed
  
  
  
  • $43 billion – Unemployment and job training
    
  • $39 billion – Unemployment health insurance
    
  • $20 billion - Food stamp benefits increased b y 13%
    
  
  
• $111.1 billion - Health care
  
  
  
  • $87 billion – Aid for Medicaid
    
  • $20 billion – Computerization of health records
    
  • $4.1 billion – Making sure patients are getting the best treatment and preventing health problems
    

The infractructure program in particular sounds like a good plan since it will create many new jobs. I suggest you read the USA Today article since it gives a good description of how the money will help the different areas the money is being relegated to.

So what is the government doing to help?

The state of economy significantly impacts your life.  You've probably have to make some kind of change in your life because of the current deteriorating economy, so it is important to know how the government plans on fixing it.  The government has two methods of stimulating the economy: monetary and fiscal policy.

Fiscal policy, in short, are those policies that involve taxes and government spending.  The "bailout" programs you have heard about fall under this category.

Monetary policy, in short, is the lowering and increasing of the Federal Reserve's interest rates.

So how do you set these policies to help our economy?  Well for fiscal policy, lowering taxes means people have more money to spend, which stimulates the economy. The second part of fiscal policy is spending money.  The government spends money by setting up projects for America.  For example, the government might decide to pay to have new roads put up all over America.  First, you need people to build those roads, thus government spending creates jobs.  More jobs are always better for the economy because it gives people money to spend.  Additionally, the government will need to get the tar, trucks, and various other supplies for building those roads.  These supplies will need to be bought from businesses throughout America, which helps out America's lagging businesses.  President-elect Obama plans on spending hundreds of billions of dollars on infrastructure (building roads, electrical grids, new water supplies), which will help out the economy.

The second policy is monetary policy.  Monetary policy is controlled by the central bank, which in our case is the Federal Reserve.  The Federal Reserve's most important job right now is the lowering the interest rates.  When the Federal Reserve lowers interest rates, local banks lower the interest rates they give out on their loans (more about why Fed rates dictate bank rates).  When interest rates are low, businesses can afford to take out loans and can use the money to expand and grow their business.  When businesses are growing, they create more employment and when they are able to access the money they need, they can prevent from bankrupting.  Small businesses are able to start up because they can acquire loans, which create even more jobs.  Also, when interest rates are lowered by the Fed, banks lower the rate they are willing to give people for investing their money into the bank.  For example if Bank of America offered 4% interest for anyone putting money into their savings account, and the Fed lowered interest rates, Bank of America might only now give a 2% interest rate for the savings account.  The lower interest rates are, the less incentive people have for putting money into banks and more incentive they have for spending it. As consumer spending comes back, so will the economy.

So that is what the government is doing to help the economy recover.  I will be talking more about the Troubled Assets Relief Program (TARP), which is all the "bailout” talk you hear, in an upcoming post!