Asset Planning, Inc Blog

The latest from the team.

Duck and Cover?

Were the insurance companies next? Yes, they were. Within days of writing that blog, they began to suffer the relentless panic selling, driving the companies down 40% within days. Some are down 80% year to date, the same as the banks that were taken over.

Why is the market still selling off? The Big 3 auto makers thought they would get their bail out money within days of the three CEOs appearing before Capital Hill. Instead of playing Show Me the Money, they were asked to Show a Plan for viability before they get the money. They have been given until December 2nd to introduce a bailout proposal plan. Why is this so important?

If one or more of the auto makers fails, it would render millions without jobs and retirees without benefits. This is the big fear driving the market down. Unemployment could easily reach 10%. It is said that for every person on the line in the factory, there are five more jobs supported from the auto line. It may be in auto parts, sales of the car, car repairs, etc. The trickle down effect would be great.

Many people blame the union for keeping plants at 80% production even when the autos are not selling. The benefits that unions have demanded equal $71 per hour. I listened to many hours of testimony from the head of the UAW and the three CEOs. Based on their testimony, I would not give them the money at this stage or they will be back in three months, needing more. They need a better plan to go with the request if they really want the money.

I think it is the necessary evil. The big three need to receive a bail out but their contracts also need to be rewritten, some of their car lines sold and most made more fuel efficient. The money also needs to stay in the US, not invested in their China factories.

The S&P is now down 52%- a level not seen since 1938. Most of the stocks are trading higher in after hours trading. Let's hope that translates into a rally tomorrow.

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Are the insurance companies next?

Treasury Secretary Paulson is sending mixed messages. The summary of his recent speech: we needed the money for the bail out, the bill finally passed and now he has changed his mind on what to do with the TARP funds. They will buy assets, no they won't, yes they will. We do know that AIG was the first asset purchase for the funds. On November 10th, $40 billion of assets were purchased from AIG, the troubled insurance company. This is after a loan of 85 billion was given to AIG for a two year period.

Five weeks have passed since the bill was passed. Asset managers have not been hired, nor have assets been outlined as purchases. TARP was sold to Congress as a way to buy, and thus remove, the worst assets from the bank's balance sheets. Instead, we have focused on giving the bank's capital instead of taking an ownership role. I would prefer the assets be purchased and we would have some upside in the asset when the industry returns to a profitable status.

The banks appear to have stabilized at their current levels but capital is not flowing to the consumers yet. Now the auto makers are asking for a bail out and that is proposed to be a separate tax bill of 25 billion. Next in line are the insurance companies and many were downgraded by Goldman Sacs research earlier this week. The life insurance companies have issued more annuities with life guarantees than they may have the capital for payout. If their assets fall, their credit rating will fall, and customers begin to withdraw assets as they fear the company might go into bankruptcy. We have already seen the banks play musical chairs and most of them were left standing when the music stopped and they are out of the game.

The market posted a nice gain yesterday of over 550 points. However, it was a swing of 900 points intraday and enough ups and downs to make me feel like I was on a teeter totter.

Please, Mr. Paulson give us some insight on your plan and actions.

Sandy

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Post Election

Welcome to our blog- our newest way to communicate.

On November 4th, Barack Obama was elected as our newest president. He is expected to move quickly to announce his selections for the top economic posts, including a new Treasury secretary. We could see Paul Volcker, the former Federal Reserve chairman, in this position.

There are a number of problems facing our nation. Unemployment is currently 6.1% and will probably rise over 7% in the coming months as more layoffs are being announced each day. There is no doubt we are in a recession. How long will it last? Will it be deep and prolonged like the 1981-82 recession, which lasted 16 months and unemployment was 10.7%? The last recession of 2001 was eight months long but consumers used their home equity as ATM machines to spend their way out of the recession. Interest rates were low so spending continued. I believe this time will be different. Home equity has been wiped out by falling home prices and home equity loans have been tightened or canceled.

The global liquidity crisis that had gripped banks around the world seems to be improving. Cash is beginning to flow and loans are being made. Home sales did pick up last month. Dr Adibi, economist of Chapman University, believes real estate values will fall another 10% as the Alt A mortgages begin to default. The majority of the five year arms (adjustable rate mortgages) will reset in 2009 to 2011. I would look to buy real estate in mid 2009.

Where do we go from here? The volatility of the market is unsettling and it seems to overreact to any bad news. We do not yet know how the new administration will impact our taxes and capital gains rates on investments. We are currently reviewing year end summaries of each managed portfolio for gains, losses and taxes.

For the short term, do not focus on the daily or weekly news and stock fluctuations. Investments are for long term horizons and trying to time a market top or bottom is nearly impossible. We have plans in place for purchases on a global level for several great companies that have been undervalued. Moves in the market happen quickly, including rallies on positive news. Look ahead to 2009.

"Be fearful when others are greedy, and be greedy when others are fearful" Warren Buffett

Sandy

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