Monday, July 21, 2008

Thinking too Much

Pom pom TV continues to run segment after segment on where to hide in this market. I have a very simple and concise answer for them. If you are not inclined to get short, then get into cash and stay there.

Over the weekend I was sitting around thinking too much, mainly about the IndyMac situation, laughing at the irony of it all. For those that don't know, IndyMac was founded and spun off by Countrywide. Yes that Countrywide, too funny. The sad part is this not funny for the uninsured depositors of the bank as they look slated to receive about 50 cents on the dollar, if that.

As everyone well knows the FDIC guarantees bank deposits up to a maximum of $100,000 and the majority of the population believes the banks are safe. I bring this up on the heels of the IndyMac failure. Now I have read varying accounts of the cost of IndyMac to the FDIC fund. As the linked article outlines, Sheila Blair, the head of the FDIC claims that the IndyMac failure will cost between 4 and 8 billion dollars. The fund has assets of approximately $53 billion.

Now lets take the low end of the range, don't all government estimates come in at the low end on expenses?, and use 5 billion. According to my significantly defficient math this will use up almost 10% of the FDIC's current assets.

I have mocked previously on this blog how Fannie and Freddie have $80 billion in equity supporting $5.2 trillion in mortgages, I have ridiculed how Harry Maclowe amassed a $7+ billion dollar real estate portfolio supported by $55 million in equity.

Mike Shedlock on his excellent blog, had a piece last week called How Many Uninsured Deposits at Risk? From the FDIC year end 2007 material he found the following regarding insured deposits.

"The amount, from page 36 is $4,244,547 Billion ($4.24+ Trillion). Sorry, but I do not have a more current figure. It should be reasonably close.

FDIC Recap
There is $6.84 Trillion in bank deposits.
$2.60 Trillion of that is uninsured.
Total cash on hand at banks is $273.7 Billion."

Okay so using Mish's legwork which I appreciate, let me get this straight;

$53,000,000,000 in FDIC assets divided by $4,240,000,000,000 in insured bank deposits. So you can do the math at home on your handheld calculator, drop 9 zeros 53 divided by 4240 = 0.0125 multiplied by 100 gives you 1.25%

Yes you are reading that correctly, the FDIC has $1250 on hand for every $100,000 they have guaranteed. Now regular readers know all too well, I am not the brightest bulb in the room so I need someone to explain to me how this is any different than the crap that Ambac, MBIA, Lehman or your local neighbourhood hedge fund have pulled.

There is an epidemic that has swept this nation and it is called leverage and what we are finding out is that the most seriously afflicted has been the government agencies.

Once you understand this fact, it starts to become very clear why gold is running, why commodities are running, why the dollar is doomed. But why worry about a situation that is terrifying the more you think about it. I am not writing this to make you panic, I am writing this because in my opinion you need to protect yourself, you need to think ahead.

Experts in the financial planning arena encourage young people to save extra due to the industry wide held belief there will be no social security funds so why should FDIC deposit insurance any different.

Here is a question for you to ponder .....

Is sitting around expecting the government to make good on your bank deposits the equivalent to waiting for the government to rescue you from an oncoming hurricane?

Good speculating to you all and always remember that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 6 units Currencyshare Japanese Yen ticker FXY @ $88.55 stop at $91.40
Long 2 units Ultrashort Dow DXD@ $50.12 stops $60.49/58.62
Long 4 units Currencyshares Swiss Franc ticker FXF @ $97.70 stop at $93.82
Long 1 unit Ultrashort QQQ ticker QID @ $37.05 stop at $42.87
Long 1 unit Ultrashort S&P ticker SDS @ $57.20 stop $66.89
Long 2 units Hecla Mining ticker HL @ $8.50 stop at $7.74
Long 2 units Kinross Gold ticker KGC @ $18.93 stop at $21.24
Long 2 units Ultrashort 20yr Treasury ticker TBT @ $67.85 stops at $69.24/68.32
Long 1 unit SPDR Gold trust ticker GLD @ $94.95 stop at $91.84
Long 1 unit U.S. Oil Fund ticker USO $ 105.55 stop at $103.58
Short 2 units Brinker Int'al ticker EAT @ $20.07 stop at $19.64
Short 2 units Darden ticker DRI @ $36.35 stop at $33.16
Short 1 unit Deutsche Bank ticker DB @ $117.03 stops at $93.37
Short 1 unit of Visa ticker V @ $86.25 stop at $76.32
Short 2 units of Netflix ticker NFLX @ $30.35 stop at $29.43
Short 1 unit of Fedex ticker FDX @ $79.05 stop at $81.32


Concerned said...

It seems more and more likely that the FDIC is going to be overwhelmed. So what is your preferred method for keeping your deposits? T-Bills? Foreign deposit accounts (Everbank offers currency CDs). Or is your brokerage safe to keep your money in?
Most people are not even aware of the looming problems.

Harleydog said...


thx for reading and your note. Foreign currencies are an excellent choice, the Yen, the Swiss Franc and the Chinese Yuan or Renminbi if you prfer all my favs. Very short duration tbills another great choice. The debt paper of commodity producers who are have ore in the ground, collateral if you will, in legally sound locales, the U.S. coal producers come to mind also would suffice. With a CD you are lending the bank money, so as a case study who do you want to lend to? the IndyMac and Wamu's or the Massey Energy or Peabody Coal's?