Friday, February 20, 2009

FDIC Needs to Bite the Bullet: No More Shotgun Marriages/NYT, SCMP/ the 10th Amendment & the Commerce Clause

The Philly Fed index for manufacturing activity dropped to a negative 41.3, the lowest reading since October 1990.  MarketWatch

The GM bondholders are complaining about the debt for equity swap due to concerns that GM is not cutting costs enough to weather the current downturn.  Senator Corker made a good point that the capital structure of GM is not really changing under GM's plan.  It is more of a substitution of government loans for existing private debt, thereby keeping the total debt level close to the same or even increasing it some.    

Fifth Third Bank (FITB) is hovering just above a dollar a share which suggests a consensus opinion among investors about that bank's ability to survive.  Suntrust (STI) hit a new 52 week low yesterday, trading below 7 bucks down from a 52 week high of 64 and change.  Regions Financial is trading at around $2.5  One problem with all of the shotgun marriages last year is that they weakened several larger banking institutions, whose survival may easily have been jeopardized by their acquisitions of insolvent financial institutions during 2008. The FDIC is just going to have to bite the bullet from now on, which means taking responsibility for all of the bad assets of  failed banking institutions regardless of its size-eating those assets rather than passing them on to a more healthy institution.  

The DJIA closed  at 7465.95.  A prior low in the last bear market for this average was 7,286.27 on 10/0/2002.  But that 7300 is also a May 1997 level.  So when the news media says that we are at six years lows, the truth is that this is almost a 12 year low in the DJIA. As bad as our major stock indexes look, they look good in comparison  to the long term chart of the Japanese Nikkei 225 which is close to breaching its lowest low in close to 30 years.^N225: Summary for NIKKEI 225 - Yahoo! Finance

It was interesting to me that the VIX fell 1.38 to 47.08 even with the carnage in the financial stocks and the drop in the major averages, with the Dow falling 1.19% and the Nasdaq down 1.71%.

The New York Times suspended its dividend which is a nice word for elimination. The price of one share of this stock is significantly less than its Sunday edition.  If I was not in a suspended, hunkered down mode myself, I would give the NYT a show of  support by buying 25 shares at 3. 

Sucampo Pharmaceuticals (SCMP), a 50 share position, reported earnings after the close. Cash and cash equivalents totaled 121.5 million as of 12/31/08 with no debt. The company earned 59 cents per share for 2008.  On 2/19/09 it entered an agreement with Abbott to market its lead drug, Amitiza, in Japan and received an upfront payment of 10 million from Abbott.  For the 4th quarter revenues declined to 16.374 million and the company suffered a loss of seven cents per share.  The loss was primarily attributable to increased expenses related to development of two clinical stage compounds funded solely by Sucampo.

Analysts were expected a loss of 6 cents on 15.57 million in revenues.  SCMP: Analyst Estimates for Sucampo Pharmaceuticals, Inc. - Yahoo! Finance 

After the close yesterday, the company issued a press release on the agreement with Abbott, which I view as positive.

This is a link to the earnings call transcript. Seeking Alpha

The life insurance companies look almost as bad as the banks. MarketWatch A Fitch downgrade of Prudential's commercial paper makes Pru ineligible for the Fed's Commercial Paper Funding Facility.  Reuters HIG lost almost 25% yesterday, closing at $7.73 down from its 52 week high of $79.88.HIG: Summary for HARTFORD FIN SVC - Yahoo! Finance Genworth is hovering in the 1 to 2 dollar range.   Except for the 30 shares of LNC that I bought at 6 and change, I am limiting my exposure to  life insurance companies to securities higher up the priority ladder than common stock, primarily senior and short term debt of Hartford and Prudential, long term senior debt of Prudential (JZH) and a floating rate preferred issue of Met Life, METPRA.  

I have more comfort with more senior securities in this sector but I understand that moving to more senior securities than common is far from a full proof method to avoid an implosion in value. Of all of those securities,  I am most concerned with the HIG senior bond maturing in 2011 and I dismissed the recommendation of Barron's to buy HIG's common stock. The bond is hovering at around 90 cents on the dollar and pays interest monthly.  

Marshall & Illsley (MI), one of the larger regional banks, reduced its dividend to a penny from 32 cents.  Another smaller bank that I owned many moons ago, UCBH Holdings (UCBH), also reduced its dividend to a penny which is the new normal for the American banks. MI closed yesterday at $3.45, down from a 52 week high of  $29.97.  While it is a member of the S & P 500, its current market capitalization is consistent with what used to be a small cap stock in the S & P 600.  The market capitalization of Citigroup is just 13.68 billion, not even a pygmy any more.  There is just no confidence left in the banks.  

I doubt that most Americans have read the Constitution and many who have read a provision or two find whatever they want to discover based on their predispositions.  The Tenth Amendment (Tenth Amendment to the United States Constitution - Wikipedia) is frequently a source of misinterpretation by those who oppose most federal spending programs, laws and regulations.

Many have probably never read a Supreme Court case or how that provision relates to other constitutional provisions including the Commerce Clause (  Commerce Clause - Wikipedia, the free encyclopedia)  and the  Necessary and Proper Clause (Necessary and Proper Clause - Wikipedia, the free encyclopedia). The Necessary and Proper Clause is found in Article 1, Section 8, clause 18 and reads as follows:

"The Congress shall have Power - To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof."

The Commerce Clause which is paired with the Necessary and Proper Clause as a source of federal power states that congress shall have the power to regulate commerce among the states.  The regulation of commerce among the states is an enumerated power within the meaning of the 10th Amendment reserved to the federal government.  So, it really comes down to what is meant by regulation of commerce among the states.  

To understand this clause as interpreted by the Supreme Court, I would recommend reading Gonzales v. Raich, a 2005 Supreme Court decision. Gonzales v. Raich The entire decision can be found at  GONZALES, ATTORNEY GENERAL, et al. v. RAICH  

In that case, California had passed a law allowing marihuana to be grown for medicinal purposes. This violated a federal law.  The Feds seized the marijuana crop of a Ms. Morrison and burned it. The marijuana grown by Morrison was legal under California law and clearly illegal under federal law. Did the federal government have the power to regulate the growing of marijuana permitted under state law?  The Court found that the federal government's regulation of this purely intrastate activity was lawful under the Commerce Clause. Scalia concurred in the result.  Personally, I viewed this case as difficult to explain in light of the Lopez decision. United States v. Lopez

In Lopez the Court held that a federal law preventing the carrying of firearms into a school was beyond the scope of the Commerce Clause. FindLaw  So Congress can not regulate the movement of guns into a school but can regulate the growing of marijuana?

Some other cases worth a read for anyone interested in the subject as I am:

United States v. Darby FindLaw | Cases and Codes

Why is this important? There is a movement among reactionary forces in the U.S., including several sitting members of the Supreme Court, to role back an entire century or more of Supreme Court interpretations of the Commerce Clause to fulfill an ideological desire to invalidate most, if not all, federal regulations that they do not like.

Oddly, this is why you have the so called liberal justices upholding the right of the federal government to burn Ms. Morrison's marijuana crop whereas a Justice Thomas wanted to allow Ms. Morrison to grow that marijuana.

The desire to go back to the 19th Century would require the Constitutional repeal of regulations for the health and safety of Americans that most people take for granted now like food and drug laws, as well as environmental and civil rights laws.  

All of those laws were found to be within Congresses enumerated powers through the Commerce Clause. The more informed ones who advocate an expansion of the Tenth Amendment to usurp Congresses regulatory authority realize that the first step in that process has to be a dramatic  alteration of about a century of the Supreme Court's interpretation of the Commerce and Necessary and Proper Clauses.  This has nothing to do with the proper interpretation of those Clauses, but only the reactionaries' desire  to turn back the clock, to enable individuals to do as they please regardless of the consequences to others,  and  to eliminate every piece of progressive legislation adopted by the federal government for the past 100 years.  Those individuals will identify themselves as conservative and align themselves with the GOP. I believe that there are millions of them, and a few sit on the Supreme Court today picked by their fellow "conservatives" in the GOP.  I previously discussed the use of labels in connection with this philosophy in prior posts.  

Limbaugh, the Titular Head of the GOP, on How to Save the Economy/ Dems Go Wild in Stimulus Package/GOP and the Lochner Era

Lowe's had a dismal quarter and forecasted 2009 earnings below the consensus estimate.  

Pinnacle West, one of my electric utility holdings, reported a quarterly loss largely due to an impairment charge from its real estate subsidiary. 

Hawaiian Electric (HE), which is just on a monitor list, stated it would maintain its dividend after missing the analysts' earnings forecast.  

There really is nothing positive to say about any corporate development today. My lottery ticket in Sunopta came close however with it guidance for 2009, but I have to emphasize that expectations are already really, really low when I talk about 100 shares of a stock purchased for just over a buck.  

I am interested to see if gold can move above a $1,000 an ounce, stay above that level, and then accelerate its move up.

I have always viewed gold as part of an asset allocation and it is starting to pay off now.  I am not yet a seller. Possibly, I may make some sales around $1500. My buying stopped when gold went over $300 several years ago, with my first buy being an American gold piece minted in the 1880s (what is called a coronet) bought when I was 13 with money saved from mowing lawns at $2 per, when gold was pegged at $35. 

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