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Mark Bern, CFA

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  • Cash for Clunkers May Cost Up to $45,354 Per Vehicle [View article]
    The actual cost, terms of cash, to the taxpayer on each car is only the amount paid out, or on average about $4,000. However, the cost to the economy can only be calculated by estimating the actual benefit. This is the cost that the author is trying to use. It's not really the direct cost to the government, but is rather the measure of benefit purchased by the government investment to the econoomy as a whole. What the author contends is that the government added only the incremental sales to the economy and that the cost of those car sales that would have been made without the program were not the result of the program and, therefore, should not be counted. The result is that the government added maybe 50,000 incremental, or new, sales at a cost of $1 billion.

    He is not wrong in terms of how many additional or incremental sales resulted from this program. Taking the example of the average cost of $4,000 per vehicle to the government, there would be 250,000 cars sold under this program ($1,000,000,000 / $4,000). If 200,000 of those were going to be traded in for more efficient cars anyway, the incremental sales equals only 50,000. That 50,000 additional sales is the true benefit of the program because those are the sales that would not have happened during the current timeframe otherwise. Of course, they would have happened at some point in the future anyway, so we are only, as the author points out, moving future sales into the current period.

    So, what the author is asking is: Is this an appropriate way to use taxpayer money? Or are there other programs that would benefits more of us and the economy overall more effectively?

    On this issue, considering the manner in which the program has been managed thus far, I would have to say that it has not been money well spent. If, however, the government were to spend more over a shorter period of time the net effect to the economy would be greater at far less cost per vehicle sold. And that may provide greater short-term benefit to the broader economy.

    Let's take a new example: Assuming that over the same period, the government made available $4 billion for such a program. If the average cost per vehcile were still $4,000 the number of incremental sales would jump to 800,000 new vehicles. Now the cost per vehicle to the taxpayers is only $5,000. Could that number of sales be achieved? I don't know. Would the program create a long-term benefit to the economy? No. Once you clean out all the clunkers available owned by people who are willing to sell them the cost of the program increases again and no jobs are saved or created beyond that point.

    That said, I can't see any real justification for the program when alternatives are needed far more by society. While the impact on the environment would be miniscule, even that admirable goal does not justify the cost relative the benefits. Municipalities have put off replacing water and sewar systems that are over 100 years old. These systems are held together with patches and are inhabited by bacteria built up over many decades. Yes. We use chemicals to kill as many bacteria in our drinking water as possible, but it is not enough and the system does not provide an optimal health environment for the citizenry.

    Local governments, such as NYC, Philadelphia, etc. are not managing their funds efficiently enough and will never have the fiscal ability to make the necessary infrastructure investments. These projects would take years to complete and would employ thousands of people who need jobs. And they are projects that need to be done for health reasons.

    Obviously, there are many other investment in public infrastructure such as bridges that are desparately needed and would support future economic growth. These investments need to be made at some point in the near future. Why not now?
    Jul 31, 2009. 01:53 PM | 92 Likes Like |Link to Comment
  • Wells Fargo 'Profit' - People Have Short Memories [View article]
    According to the Wells Fargo report, the change in MTM accounting rules had very little effect on their 1st Qtr results. Let me interpret what that means: WF did not have to take the write downs on assets that they otherwise would have and so the effect was minimal.

    Write downs were in the range of $3 Billion this quarter instead of $6 Billion in the previous quarter. Had the rules not changed the number may have been higher that $6 Billion. That would have wiped out their profits for the entire quarter. But since profits were not wiped out, there was very little impact on results.

    Also, WF probably received payments from AIG, as did other major U.S. banks, in the unwinding of CDOs by AIG. Those payments would have included significant profits that would have boosted earnings, possibly in the $ Billions. Those results will undoubtedly be lumped in with other operating results so as to appear as ongoing. Take those profits out and we may have a loss.

    Add the lower write downs and subtract the one-time profits from AIG transactions and you'll get the real operating results.

    WF and other banks are all going to report profits and surprise to the upside, boost their stock prices, then do secondary offerings to raise additional capital. After that the Treasury will report aggregated findings from the stress tests so that we can't tell which banks are healthy and which ones are not. Then WF and others will accept additional capital infusions from Treasury.

    After that, the big banks will "invest" in the PPIP funds using their toxic assets (FDIC head has indicated that she would consider this option), sell their toxic assets to the PPIF at above market rates because their own PPIF will bid up the price using government money. They will pocket the proceeds and let the PPIF fail.

    This is called recapitalizing our financial institutions. It's really a transfer of wealth - from the poor and middle class back to the wealthy. We won't get the bill for all this until about 2011 or so. But the installments will go on forever.
    Apr 9, 2009. 12:40 PM | 79 Likes Like |Link to Comment
  • 25 Reasons We Will Not Have a Depression [View article]
    Yes. There are some areas of hope, if....

    But that's the problem. The if. If the government gets its act together, things might get better. I hope they do, but confidence is somewhat shaken.

    On the other hand, I suppose that sound politics would require the Administration to hold back so this long so that the majority of spending would hit in 2010. That would be prudent for a self serving leadership wanting to have an improving economy during the election season. After all, we can't start to early, keeping people from losing their jobs, if it might not help them get re-elected. We citizens need to get our priorities straight.

    "Our debt-to-GDP ratio is not at all bad, contrary to popular belief"

    For the moment, you are right. The last I heard from government is that the 2010 budget deficit is going to be $2 Trillion. Will that make any difference? And it appears that the 2011 deficit will likely exceed $1 Trillion. Will we still be okay then?

    Look. I want the economy to recovery just as much as the next guy. And I have no idea if we are heading for another depression. I hope not. I can't imagine wanting a depression. But my opinion (and it is only an opinion) is that things look like they could either get worse or stay relatively bad for quite some time unless our leadership changes directions soon.
    Nov 20, 2009. 10:14 PM | 43 Likes Like |Link to Comment
  • When Insolvent Banks Are Worth Billions [View article]
    I think I'll start a bank! Is there any better opportunity on earth? I mean, if I just lever up my assets to 40:1, I can report that I'm making all kinds of money, even if I'm really losing. For every $100,000 of my own money I put up, I can lend $4,000,000 and earn the interest spread over today's low rates that the Fed says aren't going anywhere anytime soon. And even if some of the loans go sour or the payments are late, I don't have to write these assets down because they're worth whatever I say they are. And even though my auditors know that I'm insolvent, there isn't anything they can say or do about it because Congress has told them to shut up!

    Wow! It just doesn't get any better than this. Or does it? Wait. What if I want to raise more capital? I can sell stock at a price that values the bank at a level many times that for which I could liquidate my assets, thereby not really diluting myself. Then I could leverage that up, too! Hey, this is so cool. I bet just about any idiot could make money in banking. So that's where they all work!
    Aug 13, 2009. 04:35 PM | 42 Likes Like |Link to Comment
  • Celebrating the 'Recovery': I'm Disgusted [View article]
    An Obituary reported to have been printed in the London Times. Interesting and sadly true:



    Common Sense was preceded in death, by his parents, Truth and Trust. His wife, Discretion, his daughter, Responsibility, his son, Reason. He is survived by his 4 stepbrothers; I Know My Rights; I Want It Now; Someone Else Is To Blame; I’m A Victim.
    Aug 24, 2009. 11:11 PM | 41 Likes Like |Link to Comment
  • 1929-32 Market Decline Has Almost Been Repeated [View article]
    No one knows for sure whether things will get better or worse. Of course, most of the pundits agree that we're out of the woods and on the mend. I really wish they were telling us that we were heading into catastophe. They haven't been right yet.
    Jan 30, 2010. 06:34 PM | 36 Likes Like |Link to Comment
  • Are Home Prices Headed for a Double-Dip? [View article]
    Feb 10, 2010. 01:25 PM | 33 Likes Like |Link to Comment
  • American Austerity Is About to Begin [View article]
    I also agree with the theme of the article. We are headed down the wrong path; a path that will culminate in a long and painful economic stagnation for the masses.

    Isn't it funny, though, that the party now in power has always positioned itself as the protectors of the poor and middle class? The evidence that we are witnessing currently would indicate that they are really the party of helping the rich get richer and the expansion of the number of poor people in this country.

    The poor are being assisted by government. They don't pay any taxes. So they look to the government to bail them out. What it's going to take to get to the necessary pain is for the poor and middle class to realize that things just keep getting worse regardless of the promises that keep emanating from their leaders in Washington. They don't have a clue about who's making the money on Wall Street or how, so it doesn't matter. They listen to MSM for all their "input.."

    I am sorry to say that I suspect it will take a prolonged period of failed attempts by government to right the ship, with the average wage earner getting hammered by rising prices (due to a decline dollar increasing imports of oil and consumer goods), increased costs for health care in spite of "reform," a cap and trade system that also increases the cost of energy for every family, and the addition of a VAT that will increase the cost of everything before reality will sink into their heads. We may have to endure several more years of things getting worse before enough voters will actually understand that it is "their representative" that needs to be voted out of office, not just the other guy.

    I am not trying to be pessimistic. I don't like the answer I am offering. It's just human nature, and the track record of this nation supports the assumption, that we won't do anything about the real problem until it is completely out of control. Today, we are merely in the denial stage. As a nation, too many people still believe that all the problems we are living through were brought about by the past administration. We blame Bush for everything! It isn't just Bush, it's the system of career politicians on both sides of the aisle! They won't make the necessary, difficult decisions because it would mean political suicide for them personally. And their own career comes before country, before constituents, before everything. That is the foundation of our problem.

    Until we get back to the basics of the Constitution and reinvent our government to one that creates an environment conducive to productive growth. creativity, and the entrepreneurial spirit we will continue to flounder.

    While Peter Schiff is on the right track, it will take far more than one elected official to change the course of this great nation.
    Oct 18, 2009. 11:21 AM | 30 Likes Like |Link to Comment
    I like your analogy. I'm not a petroleum expert by a long strech. I did study the crack spreads for a project in graduate school, but that was a long time ago and I my interest was in the area of hedging future production during times of volitility in oil pricing, especially around OPEC meetings. The impact back then was significant.

    However, I would like to propose one other problem with the substitution of Natgas for Oil/Diesel. If we begin using significantly more natgas, the supposed 100 year supply becomes a 50 year supply pretty quickly. After all, there are proponents of substituting natgas for coal in producing electricity, too. If we adopt too many substitutions our reserves may suddenly be reduced to a 30 years supply at about the time all the conversions are completed and we will then be facing the same problem on the horizon.

    I am not arguing against increased use of natgas, but it wouldn't seem like the best solution to rely on only one alternative. I believe that our government should come up with a strategic plan that includes all potential sources of energy, optimizing the use of each within the confines of supply to create a balanced and sustainable approach to extending our resources toward independence from foreign imports. The plan should also be constructed with the target of making that indepence sustainable for an indefinite time.

    Unmfortunately, our leaders cannot look beyond politics to the real needs of our nation.
    Feb 7, 2010. 10:49 AM | 29 Likes Like |Link to Comment
  • The Hindenberg Omen Blog - August, 2010 [View instapost]
    Smart - I am as anxious to hear a good response to that one as you are. I suspect, though, that we will have to watch the market action around the multiple support levels and either add or lighten up our short positions accordingly. If the market drops below the 2009 low of March, it's going to be hard for me to find a reasonable support level below that. The problem I have had with the March 2009 low was that there didn't seem to be a real capitulation day filled with panic selling. That is what usually happens (in my experience) when we set a long-term bottom. Often there is a day with capitulation in the form of a gap down on really high volume and then a reversal sometime in the afternoon. That signifies that the true value investors are coming back in with conviction. If we see that somethings like that, where there is not an immediate claim that someone made a wrong entry, and the volume is massive with lots of orders in all sizes it would likely be a bottom.

    I'm actually thinking about starting an instablog for technical analysts who are more adroit at reading the charts and other indicators to discuss this very topic. I won't start it until after we see the HO event (assuming that we do) and will invite those whose insights I trust and rely upon. I'll probably call it something like: "Where's the Bottom?" Here's hoping you find it and that it does us all some good.
    Aug 8, 2010. 03:07 PM | 28 Likes Like |Link to Comment
    John, Eric and Rocks,

    Thanks for keeping us all posted. It really does look ominous. I think that now would be a good time to take, let me rephrase sell my hedge positions (hedging against my shorts). I don't think I'll be needing the protection from the upside much longer and I still have a little profit left. I may be wrong but it looks to me as though we are going to fall lower throughout the rest of the day and get some (probably not too much) follow through tomorrow before there is any real bounce. Just my gut opinion, of course.
    Aug 11, 2010. 02:59 PM | 27 Likes Like |Link to Comment
  • 10 Reasons to Believe That We're in a Depression [View article]
    j-dub - You've got a healthy sense of humor, buddy. We're all going to need it for as long as it takes to get the politics of this great nation heading back in the right direction. I don't mean that the correct direction is to the right. I mean, simply put, that we need to head more toward the moorings of our Constitution.

    To the Author: Excellent article! All points well articulated. It is the existence of people like you that give us all hope! Keep up the good work.
    Nov 19, 2009. 02:17 PM | 26 Likes Like |Link to Comment
  • The Wrong Kind of Falling Homeownership [View article]
    "Banks require a constantly increasing amount of debt in order to create the money with with the previous debts can be repaid."

    When I was growing up, banks were not the ravenous profit mongers into which they have evolved today. Banks were stodgy. Banks were solid. Banks were cautious. No more. Banks have become earnings growth machines. Is that really what a stable economy needs to pin it hopes and aspirations on? I don't think so. Where is it written that banks are supposed to take more and more risk in order to feed earnings growth? They are supposed to make a profit, pay a dividend, and underpin our economy. They are the foundation, the cornerstone of the capitalist economic model. But banks are not supposed to lead stock price swings up and down; they are supposed to provide capital to the rest of the economy in such a way that the core of the economy remains intact and growing. The high risk ventures can find funding from venture capital firms and hedge funds. The banks aren't supposed to be competing against those high risk / high return entities. But in today's world, that is just what they are doing and it is leading our economy into the abyss, IMHO. We need banks to get back to the basics and create a firm capital foundation that offsets the risks inherent to growth. And we need government to be less interventionist so the markets can heal and become self-sustaining.
    Jun 12, 2010. 09:21 AM | 25 Likes Like |Link to Comment
  • More Government = Fewer Jobs [View article]
    And if the rich decide to move and take up foreign citizenship, the rest of us will be left to pay those taxes, too. Microsoft has considered moving to Canada. We keep losing plants and jobs to overseas. We can lose our wealthy and the 80% of the tax burden they now pay. That would leave the rest needing to pay five times what they currently do. What a wonderful thought!
    Feb 5, 2010. 11:01 PM | 25 Likes Like |Link to Comment
  • Pinning the Blame on the House Republicans [View article]
    Sorry, Felix, this is one area where we part company. I don't think that the bailout has "saved" anything. I also don't think that having "saved" AIG was a good thing for the American public. While I do believe that steps were necessary to prop up the banking system and regenerate public confidence, I don't believe that companies should be rewarded for bringing about disaster through bad investments and management decisions.

    If Lehman made major mistakes, they should have gone through the bankruptcy courts. If AIG made major mistakes, they should have gone through the bankruptcy courts. We tend to forget that during bankruptcy the good parts of a business are sold off to healthier companies and live to prosper. It is only the bad assets that get buried.

    In the case of large banks, the biggest concerns revolve around deposits. If deposits are safe, we can avoid a total melt down. Mortgages will be sold to other banks, investors and processors. The shareholders and bondholders take the hit for having faith in management that made bad decisions and lost their money for them.

    I believe that we, as a nation, would be much better off today if the bankruptcy process were allowed to work. We, the people, would not be $Trillions more in debt. Yes, we needed a stimulus package to keep the country from coming apart. Yes, we probably needed to save large portions of major banks intact (while allowing the poorly managed portions to die or be sold off for pennies on the dollar), instead of trying to save the whole enchilada. Bad decisions were made in the financial industry and more bad decisions were made by government. The biggest problem now is that those bad decision-makers are still in charge and continue to make more bad decisions that will eventually need to be corrected. We are just making the problems bigger and putting off until tomorrow the pain we deserve to tollerate today.

    That is all we have done so far: put off the pain until sometime in the future. We haven't solved anything.
    Sep 14, 2009. 04:44 PM | 25 Likes Like |Link to Comment