Is President George Bush secretly trying to help Sen. Barack Obama?

Posted by Shyam Moondra

Sen. Barack Obama has been talking about his strategic vision on a number of different issues, only to be mocked by Sen. John McCain and his surrogates. However, in the last few weeks, President George Bush seems to be embracing some of Obama's ideas, which lends the question if Bush is secretly trying to torpedo the campaign of McCain, his one-time political foe.

Here are a few examples:

1. Obama has been consistently advocating direct diplomacy in dealing with Iran. He was the first to say publicly that he would be willing to meet with the Iranian president to discuss the nuclear issue. McCain and others quickly jumped on Obama, calling him naïve and inexperienced in foreign affairs. However, recently, President Bush dispatched a top State Department official to join the representatives of other major powers at a meeting with the Iranian officials to discuss the issue of nuclear enrichment, undercutting McCain's position on the issue.

2. Obama has been talking about setting a time-table for withdrawing American combat forces from Iraq, His main reason for this position is that a time-table will force the Iraqi government to speed-up the internal political reconciliation, so that Iraq could become a full-fledged sovereign country sooner rather than later. McCain is, of course, opposed to setting any time-table. But now Bush is talking about a "time-horizon" within which American soldiers could be pulled out of Iraq. Even Iraqi officials are now in agreement with Obama, leaving McCain in a very awkward position.

3. Long time ago, Obama correctly identified Afghanistan/Pakistan as the region to focus on in the war on terrorism and not Iraq, He even suggested that 2-3 brigades from Iraq could be moved to Afghanistan to deal with the deteriorating situation there with respect to Al Quaeda and Taliban. Lately, the Defense Department is also talking about the need to send more forces to Afghanistan. That led McCain to also jump on the band wagon and call for more troops for Afghanistan.

4. When McCain proposed a gasoline tax holiday, Obama called the idea a "gimmick," which will not provide any meaningful relief to the consumers. The Bush administration and other Republicans seemed to agree with Obama, and the McCain proposal was dead-on-arrival.

5. Obama proposed to make a major investment in transportation and infrastructure projects to create thousands of jobs in the construction industry. McCain thought that was pork-barrel spending. However, many in the Congress in both parties seem to agree with Obama, and now efforts are underway to position infrastructure spending as the second round of stimulus to give a boost to the sagging economy. While Bush has not explicitly signed-up on a second stimulus package, he has not said "no" either.

Lately, the way Bush has been aligning himself with Obama on so many different issues, it is forcing McCain to make u-turns, again and again. That makes McCain look like a typical politician, while Obama is winning the praise from the electorate as being a pragmatist, a strategic thinker, and a problem solver.

Should SEC ban short-selling by investment banks and hedge funds?

Posted by Shyam Moondra

It appears that investment banks and hedge funds are involved in massive stock manipulation via short selling and options trading. It's ironic that SEC issued orders not to engage in "naked" short selling of 16 financial stocks, including those of many investment banks, but these investment banks are free to do the same thing to other stocks and manipulate their prices. The stock markets were originally created to assist companies with capital formation so that they could build new factories and hire more workers. The stock prices of individual companies moved up or down based on fundamentals. But now, because of the computerized short-term trading practices of big institutional players, the markets have become very volatile and risky places in the mode of casinos. These big players make money at the expense of unsuspecting small investors

Since SEC eliminated the "up-tick" rule for short-selling, these big players have been abusing the markets and are engaged in manipulation of stocks of smaller companies that are powerless to stop their stocks from being beaten down, even though their fundamentals are strong. Case in point, Terex (TEX), whose CEO has gone public saying that the company's outlook for the next two years is very good, and yet its stock has been brought down by short sellers from $95 in Dec'07 to $42 last week. These investment banks and hedge funds have so much money that by engaging in relentless short selling they can bring any stock down, whenever they wish.

The usual practice they deploy is that they first sell a stock short and bring it down before the options expiry date and then they start buying call options, and then they start covering the stock to bring the price up again. In the process, they may lose some money on short positions but they make proportionately much more money on options (because of leverage). They repeat this process for multiple stocks every month before the options expiry date. Some times they play the reverse game just to make options worthless and pocket the premiums they collected from other investors when they wrote the options. Time and time again, we see certain stocks behaving in a peculiar way before the options expiry date, from which it's obvious that they are being manipulated. The losers are, of course, small investors and small and medium-sized companies that are powerless against these enormously resourceful investment banks and hedge funds that can afford to throw, say, $20-25 millions at a stock and pretty much dictate in which direction the stock will move. I saw a YouTube video clip, featuring financial TV commentator Jim Cramer, in which he talked about how hedge funds manipulate the stock prices (the clip has since been removed by the owner Thestreet.com because of the copyright claim). Even Warren Buffet has talked about increased trading in derivatives and how it is damaging our financial markets.

These big institutional players often spread false rumors to move a particular stock in a particular direction. The SEC is currently investigating some investment banks and hedge funds, who shorted Bear Stearns stock, to determine if they spread false rumors about the health of Bear Stearns just to propel its stock price downward. If these investment banks and hedge funds can do what they did to a prominent institution such as Bear Stearns, it's so easy for them to bring down a helpless smaller company.

Another irony is that many of these investment banks now qualify to borrow money from the FED credit window and thus potentially use those resources to manipulate the stock prices. This raises the question why the government is helping big institutions with tax dollars to manipulate the markets and make money at the expense of small investors (i.e the tax payers)!

Under the lax enforcement by the SEC, the stock markets have become casinos where fundamentals don't matter any more. These trends are very damaging to our system because they directly affect the integrity of the markets. If corrective actions are not taken soon, these big institutional players may completely destroy our financial markets.

The Congress should hold hearings and have the CEOs of investment banks and hedge funds answer questions under oath about stock market manipulation. The Congress needs to do the following:

1. Put in place regulations over hedge funds to discourage illegal manipulation.

2. Ban short-selling by big players such as investment banks and hedge funds (such a ban already applies to mutual funds).

3. Limit trading in derivatives that often enable big institutional players to manipulate the financial markets and make money at the expense of individual investors.

4. Impose stiff penalties for manipulating financial markets, including jail term for the CEOs of companies engaged in such activities.

5. The SEC needs to do more in terms of investigating and enforcing laws against stock market manipulation. In recent years, they have been way too lax and the rules changes they made (e.g., eliminating the "up-tick" rule for short selling) have only made the situation worse.

Is Dow Jones Industrial Average headed to 10,000?

Posted by Shyam Moondra

The stock markets around the world are going through turmoil. The markets in China, India, and elsewhere are down 30-40 percent from their respective records set last year. Inflation is heating up everywhere, thanks to the high oil and commodity prices. Many countries in Europe and Asia have been increasing interest rates to fight inflation. These actions, combined with consumer's reduced capacity to spend, will slow down the global economy. Many of these countries are also experiencing reduced demand for their products and services from the U.S. because of the weakening economy here.

The U.S. has its own special set of problems. The credit crisis, which the government officials declared was under control not long ago, seems to be in the forefront again. After the government bailout of Fannie Mae and Freddie Mac, the investors are now fixated at who is next. It has become a guessing game for the economy watchers about which bank will go under. It has been said that around 150 banks, mostly regional banks, could file for bankruptcy. It’s like Savings & Loan fiasco all over again. These credit problems will have negative impact on the economy. Because of sustained high oil and commodity prices, inflation is creeping through the economic system and we will see awful inflation numbers over the next few months. Just today, it was reported that the PPI increased in June by 1.8 percent, the largest increase in 27 years. Those kinds of headlines will persist for a while. The housing industry was hit hard because of the mortgage mess and now it looks like the auto industry is on the ropes. The consumer-driven U.S. economy is sliding down because consumers are busy trying to cope with the high gasoline, heating oil, natural gas, and food prices. They cut-down their discretionary spending and leisure travel, putting airlines and Las Vegas and Atlantic City casinos in dire situation.

The only segment of the U.S. economy that was doing well was the exports business helped by weak dollar, but even that's slowing down because of the shrinking economic growth around the world.

Unfortunately, the large federal budget deficit precludes any dramatic stimulus effort by the Bush administration. The FRB has already reduced interest rates as much as they could. So there is nothing any one can do right now to turn things around. We may very well be headed for a prolonged recession, like the one we had during 1970-1975. The tougher times are still ahead in terms of high inflation, high unemployment, meager or negative economic growth, and continuing bank failures – all of these will eventually affect the corporate profits. While the U.S. stock market has declined over 20% from the peak of 2007, the extent of the economic problems around the world suggests that the worst may not be over. A stream of bad news about inflation, unemployment, and corporate profits over the next few months is likely to sink the DJIA to 10,000.

Should Federal Reserve Board increase the interest rates?

Posted by Shyam Moondra

Economy in deep recession, the unemployment rate zooming up, inflation out of control, corporate profits declining, dollar taking a plunge in the currency markets, and the stock market in a huge downward spiral. No, I am not talking about "today," I am talking about the 1970's.

The 1970's were the troubled years. Huge government expenditures necessitated by the Vietnam War and the oil embargo by OPEC (after the Yom Kippur War in October, 1973, which led to a big spike in oil prices), fueled the inflationary pressures throughout the economy. The people were losing their jobs and everything seemed to be falling apart. If there was such a thing as stagflation, that was it. President Carter had no stomach for the failed Nixonian style wage and price controls of 1971 (free-market economy and massive government intervention are like oil and water, they never mix!). Then in 1979, came to the rescue Paul Volcker, the FRB Chairman, who rapidly increased the interest rates to get some control over the inflationary spiral. The elderly people were in a dreamland earning more than 15% on money market accounts and CDs. The sustained high interest rates broke the back of the inflationary spiral. By 1987, Volcker left an economy that was getting ready for the biggest economic expansion we have seen in the modern history. The 1990's go-go years were the years when we had very low interest rates, low inflation, low unemployment, high house ownership, budget surpluses at federal and state levels, and "irrational exuberance" in the stock market. The people generally felt very prosperous and confident about the future.

What we see today is not much different from what we experienced in the 1970's. We have the Iraq War, which has drained our economy of at least two trillion dollars (and still counting), oil and commodity prices fueling inflationary pressures, joblessness increasing, stock markets in the dumps, and people are generally feeling financially insecured. May be what we need is the Volcker treatment of high interest rates combined with responsible fiscal policies (especially on the side of government spending) to bring back the happy days again. It will surely be a painful period of several years before we are able to put our economic house in order.

At this juncture, high interest rates would have more upside than downside. Higher interest rates will strengthen dollar, which will bring down oil and other commodity prices and thus lower the inflationary expectation. Lower gasoline and food prices would enable consumers to spend more on other things, thereby revitalizing the economy. Surely, higher rates will make it difficult for the housing market to recover, but the housing troubles have more to do with the fact that mortgages were given to unqualified people, who are defaulting on their loan repayments. Overall, higher interest rates will be more beneficial than detrimental to the economy and they might even boost the stock market (which may seem strange, but it did exactly that in the 1970's).

Need a concerted effort to achieve independence from imported oil

Posted by Shyam Moondra

President Bush and other Republicans keep repeating one mantra, over and over again, that the only way to achieve energy independence is if Congress passes a bill to open up the Alaskan wild-life refuge for drilling and to extend off-shore drilling rights to cover all of the coastal areas. There are many experts, who correctly believe that the proposal for new drilling in the U.S. is just a gimmic and it will not really solve the real problem. First, the estimates of oil that could be drilled would cover the U.S. demand for just over two years; second, it will take at least 10 years before we see any meaningful quantity of oil; and, finally, it would potentially do serious environmental damage to our coastal areas, thereby negatively affecting the tourism industry. In addition, the oil companies have not taken advantage of the drilling rights that have already been accorded to them, so there is no need for a rush to grant them more drilling rights.

What we really need is a concerted effort on several fronts:

1. It's estimated that a price increase of at least $50 per barrel is caused by speculation and manipulation in the oil futures market by big players such as investment banks, hedge funds, and pension funds that have no commercial interest in oil (as airlines do, for example). One quick way to discourage speculative oil buying would be to increase the margin requirements and to place limits on how much oil these investors can buy.
2. Currently, many oil trades are executed on exchanges that are unregulated (such as ICE), and thus abusive trading practices go unmonitored. It's time Congress close the so-called "Enron loop-hole" and give CFTC the authority to regulate all oil futures trading in the U.S. and ask them to coordinate energy trading regulations on exchanges worldwide.
3. Impose oil windfall profit tax retroactively on the major oil companies and use that money to provide near-term relief to consumers in the form of a tax rebate and also to fund the development of alternative fuel sources and technologies. Congress could also require the major oil companies to invest more in such R&D efforts.
4. Vigorously investigate price-gouging and impose stiff penalties on violators (such as mandatory jail sentences for the CEOs and hefty fines on companies).
5. Congress should provide funding for the development of an extensive public transportation network and infrastructure, so that people don't have to drive their cars so much. This will create millions of construction jobs giving a big boost to the sagging construction sector.
6. The Federal government should invest heavily in the development and deployment of alternative fuels such as ethanol/hybrid, advanced battery systems for cars, wind-mill farms, solar, biofuels, cleaner coal burning technologies, and nuclear (with a safer waste disposal system). These new technologies will create hundreds of thousands of new high-paying jobs.
7. Congress should pass a bill to set very ambitious fuel efficiency standards for automobiles that will considerably reduce the energy consumption and thus bring down the oil price.
8. Explore bringing out lawsuits against oil cartel OPEC, which is acting as a monopoly and thus may be engaged in unlawful anti-competitive behavior in a free-market global economy. The U.S. and its allies could also take tougher trade and diplomatic actions against OPEC countries, denying them the sale of military hardware and high-technology products.
9. Break-up the largest oil companies to foster more competition. Recent misguided mega-mergers have made these oil companies way too powerful enabling them to easily manipulate the energy prices.
10. The U.N. should explore imposing a windfall profit levy on OPEC countries and using that money to provide humanitarian relief to poor countries that now have more and more people who can't afford to feed themselves because of higher food prices caused, in part, by higher oil prices.

Playing the game of selecting Obama's running-mate

Posted by Shyam Moondra

As the November presidential election approaches, the voters are now increasingly playing the guessing game of who would be Obama's running-mate and cabinet members.

Since Obama will make history, if he wins, it does not appear necessary to make another history by selecting a woman or a black or a hispanic running-mate (how much history people can take in one shot?). That means the choice would likely be a white man. Since the problems we are facing are so complex and entrenched, it will require an energetic team. That means Obama's running-mate should be a white man roughly his age. Based on that, the likely choices would be Edwards, Bayh, or Webb. Edwards didn't do good as a presidential candidate or as a VP candidate during the last election, so his vote getting abilities are in doubt. Bayh could help win Indiana but he lacks charisma. Webb has the military credentials and could help win support among the rural blue-collar white voters, but he is viewed by many as somewhat unpredictable. Other choices would be Biden (strong national security and foreign affairs background) or Nunn (a southern conservative with strong defense background, who might help win the votes of Republicans and Independents).

The cabinet should have at least a few women, black, hispanic, asian, and Republicans. The likely choices would be Powell or Biden (State), Hagel or Gates (Defense - someone who must agree to reorganize Pentagon and cut wasteful spending), Treasury (Dimon, JPM CEO), Health (Clinton), AG (Edwards), EPA (Gore), Energy (Richardson - he fumbled the job before, but should be given another chance), HUD or Education (Jindal, a pragmatic rising star in the Republican party), Labor (Reich), National Security Advisor (Dudd or Cohen or Nunn), Trade Representative (Ford), and U.N. Ambassador (Hill). Other important jobs to be filled would be new chairpersons for Federal Reserve Board (Bernanke has not been up to the task), SEC (Cox, who is in bed with Big Business, failed miserably in enforcing the laws), CFTC (let the oil and commodity bubble form hurting our economy), and FTC (failed to protect consumers).

The stock market needs a positive catalyst

Posted by Shyam Moondra

The stock market suffered its biggest loss for the month of June since 1930. From the record high set last October, the DJIA is now down over 20%. The question is where do we go from here. Oil and other commodities continue their upward price spiral forcing many companies to increase the prices of their products and services. That means inflation will continue to lead the headlines in the coming months. That also means the next move by the FRB on the interest rate front is most likely to be upward. The consumers, hard-pressed by astronomically high oil and food prices and rising unemployment rate, are pulling back on their spending. The financial sector is besieged by non-ending mortgage securities related losses and the need to raise huge amounts of new capital, which will cause dilution in the coming years thereby lowering their per-share earnings. The credit crisis is also keeping the housing sector meltdown alive and well. Increasing energy and material costs and declining consumer demand are likely to make corporate earnings for the 2Q08 fall short of expectation. All these negative headlines in the coming weeks will be enough to sink the market even further.

The sad part is that FRB has run out of ammunition and President Bush and Congress don't have much in their arsenal either that could change the course of economy in the short-term. However, the best opportunity for a turn around now rests on a new administration that could take some initial steps to lay the foundation for a big turn around in the second-half of 2009.

1. Increase income taxes for the very rich and close corporate tax loopholes (e.g., off-shore tax sheltering) and use that money to lower taxes for the middle-class and low-income people that will fuel consumer spending.
2. Implement the plan recently passed by Congress to stop the wave of foreclosures that's causing continued slide in housing prices. The sooner we stop this downward spiral, the sooner we will get the housing sector moving again.
3. Invest heavily in the infrastructure projects and public transportation systems around the country to revitalize the construction sector and help reduce demand for the imported oil.
4. Initiate a more effective energy policy that combines heavy emphasis on alternative fuel sources and conservation.
5. Strengthen regulations of banking industry (including investment banks) to avoid any future credit crisis.
6. Strengthen regulations of energy and other commodity markets, especially those that are currently not monitored because of the so-called "Enron" loophole . This should help reduce manipulative futures trades by investors that have no commercial interests in energy and other commodities (e.g,, investment banks, hedge funds, and pension funds).
7. Investment banks, hedge funds, and other big players have turned the stock markets into casinos. We need to ban short-selling by these institutions (or at the minimum, restore the "up-tick" rule for short-selling) and also limit trading in derivatives. The markets have become way too easy to manipulate; we need to restore the role of fundamentals in investing.
8. We need to show our resolve in protecting dollar. Strong dollar will bring down oil prices that will immensely help in improving the psychology of the stock market.