Hello everyone! Since this is our last market update for 2008, we wanted to provide a review of the last few weeks in the market. We look forward to a brighter 2009.
Auto Bailout
On Friday, December 19th, the White House announced that GM and Chrysler will be provided with $13.4 billion in short term financing from TARP (Troubled Asset Relief Program) and an additional $4 billion in February.
Binding Terms and Conditions:
- Firms must provide warrants for non-voting stock in return for the loans.
- Firms must accept limits on executive compensation and eliminate perks such as corporate jets.
- Debt owed to the government would be senior to other debts, to the extent permitted by law.
- Firms must allow the government to examine their books and records.
- Firms must report and the government has the power to block any large transactions (greater than $100 million).
- Firms must comply with applicable Federal fuel efficiency and emissions requirements.
- Firms must not issue new dividends while they owe government debt.
There are additional targets set by the Treasury that are the real keys to viability. Unfortunately, at this time, they are non-binding. They are:
- Reduce debts by 2/3 via a debt for equity exchange.
- Make one-half of VEBA (Voluntary Employee Benefit Association) union payments in the form of stock. These payments are providing health insurance for union employees.
- Eliminate the jobs bank.
- Establish work rules that are competitive with transplant auto manufacturers by 12/31/09.
- Establish wages that are competitive with those of transplant auto manufacturers by 12/31/09.
The auto companies must use their funds to become financially viable. If this does not occur by March 31, 2009, the loans will be called by the Treasury.
It appears that even though Congress did not agree to “bail-out” Detroit, President Bush did not want the auto companies to fail on his watch. Therefore, he made sure the money was made available to the autos. Thus the auto industry problem is now effectively passed on to the Obama administration.
Source of data: Wall St Journal.com
The Madoff Debacle
Bernie Madoff, thought to be a pillar of the community, is currently under house arrest for pulling off what may have been a $50 billion Ponzi scheme. This type of scam was named after Charles Ponzi who attracted 30,000 investors in 1920 and issued notes totaling $15 million. The basis of a Ponzi scheme is that Ponzi, or Madoff in this case, never really invests the money received from investors. He pays off the old investors with funds from new investors and promises unrealistic returns. Bernie Madoff’s investors were mostly affluent investors, as well as hedge funds, charities, universities, pension funds, and foreign banks. Mr. Madoff’s social, country club and business connections brought in billions of dollars. Adding to his allure was exclusivity; you had to be invited to join.
Apparently the scheme came apart in December when redemption requests of up to $7 billion were unable to be met. What I would like to know:
- How can the SEC have two people spend four full days at the office of Kohlhepp Investment Advisors, Ltd. and not spend the needed time at the Madoff operation to find any wrongdoing?
- Where does $50 billion go? I can’t believe it is all gone!
- It is hard to believe his 2 sons had no idea what was going on!
A few tips as to how to prevent such scams:
- Never write a check to the firm directly, e.g., Kohlhepp Investment Advisors, Ltd., or any other firm, for other than hourly fees/retainer. Checks should be made payable to the custodian, e.g., Schwab, Fidelity, etc.
- You should always receive your monthly statements from the custodian, e.g. Schwab, Fidelity, etc. not just from the firm, such as “Bernard Madoff Associates.” Separate independent statements from the custodian confirm your investments.
We understand this can be very disconcerting to people and it is to us as well. We would like to assure you that we take our role in your life very seriously. We consider what we do to be a reflection of our character, and we take pride in our work. In fact, we are not permitted to take investment checks from clients. If a client writes an investment check to us mistakenly, we are required to return it. We must and do act as fiduciaries. As fiduciaries we must invest your money as if it is our own. We do everything in our power to uphold the values and integrity that you expect.
The Fed
On Tuesday, December 16th, the Fed lowered its key interest rate to a range between 0% and 0.25%, the lowest in history. At the same time the Fed reaffirmed its plans to buy mortgage-backed securities and possibly long term Treasuries. This will help push mortgage rates lower. The Fed stated that they will employ all available tools to promote the resumption of sustainable economic growth.
Note: This will provide almost everyone whose mortgage rate is above 6% to refinance to a rate closer to 5%. If you would like to discuss this, give us a call.
Stimulus Package
President-elect Obama has his economic team crafting a stimulus package which Congress could debate when it convenes on January 6th. The idea is to have a new bill ready for signing shortly after Inauguration Day on January 20th. The latest numbers talked about are $775 to $850 billion. The broad parameters of the package are now known and it will include:
- A $50 to $100 billion tax cut
- $100 million in aid to state governments
- Funding for infrastructure, school construction, energy efficiency, broadband access, and health-information technology
Happy holidays to all. Cherish your time with family and friends. During these difficult times, it is important to remember what is most meaningful in life and to be thankful for the many blessings we have. Once again, we thank you for your faith and confidence.
Best wishes,
Edward J. Kohlhepp, CFP®, ChFC
Edward J. Kohlhepp, Jr., CFP®, MBA
"Christmas is a time when kids tell Santa what they want and adults pay for it. Deficits are when adults tell the government what they want and their kids pay for it." ~ Richard Lamm
“The best of all gifts around any Christmas tree: the presence of a happy family all wrapped up in each other." ~Burton Hillis