General Motors Ads Under Investigation By FTC

Correction - General Motors is under Investigation for misleading statements on it's debt repayment.

Earlier today I reported that GM's claims that it paid back all of it's bailout money, with interest, several years early, was an exaggeration since it is only 11% of the amount they borrowed.

Little did I know at the time that even that 11%, or $6.7 billion was an exaggeration since they just borrowed more money from the TARP to pay back the TARP.

This is the kind of accounting you get when you are owned by the government. 

The Federal Trade Commission is investigating the ads that GM is running on all networks declaring that they have paid off all their debt. Something about "truth in advertising" appears lacking. 

It appears that GM borrowed money from us to pay us back...what a country!

Here is the press release:

A top Senate Republican on Thursday accused the Obama administration of misleading taxpayers about General Motors' loan repayment, saying the struggling auto giant was only able to repay its bailout money by dipping into a separate pot of bailout money. 

Sen. Chuck Grassley's charge was backed up by the inspector general for the bailout -- also known as the Trouble Asset Relief Program, or TARP. Watchdog Neil Barofsky told Fox News, as well as the Senate Finance Committee, that General Motors used bailout money to pay back the federal government. 

"It appears to be nothing more than an elaborate TARP money shuffle," Grassley, the ranking Republican on the Senate Finance Committee, said in a letter Thursday to Treasury Secretary Timothy Geithner. 

GM announced Wednesday that it had paid back the $8.1 billion in loans it received from the U.S. and Canadian governments. Of that, $6.7 billion went to the U.S. treasury. 

But Grassley said in his letter that a Securities and Exchange Commission form filed by GM showed that $6.7 billion of the tens of billions the company received was sitting in an escrow account and available to be used for repayment. He called on Geithner to provide more information about why the company was allowed to use bailout money to repay bailout money, and how much of the remaining escrow money GM would be allowed to keep.

 "The bottom line seems to be that the TARP loans were 'repaid' with other TARP funds in a Treasury escrow account. The TARP loans were not repaid from money GM is earning selling cars, as GM and the administration have claimed in their speeches, press releases and television commercials," he wrote. 

Vice President Biden on Wednesday called the GM repayment a "huge accomplishment." 

But Barofsky told Fox News that while it's "somewhat good news," there's a big catch.  

"I think the one thing that a lot of people overlook with this is where they got the money to pay back the loan. And it isn't from earnings. ... It's actually from another pool of TARP money that they've already received," he said Wednesday. "I don't think we should exaggerate it too much. Remember that the source of this money is just other TARP money." 

Barofsky told the Senate Finance Committee the same thing Tuesday, and said the main way for the federal government to earn money out of GM would be through "a liquidation of its ownership interest." 

Grassley criticized this scenario in his letter. 

"The taxpayers are still on the hook, and whether TARP funds are ultimately recovered depends entirely on the government's ability to sell GM stock in the future. Treasury has merely exchanged a legal right to repayment for an uncertain hope of sharing in the future growth of GM. A debt-for-equity swap is not a repayment," he wrote.

Be careful out there,

Chris Wiles

www.rockhavencapital.com

Thing's That Make Me Go Hmmm...

How's Your Investment in General Motors Working Out?

What investment in GM you ask? I know it's hard to keep track of all of your government sponsored holdings, but you as an American taxpayer own GM. And to hear GM's CEO Ed Whitacre, and the Obama office tell it, it has been a huge success. Proof that the government is better at running a company than the free-markets are. CEO Whitacre announced yesterday that GM is "paying back - in full, with interest, years ahead of schedule- the $6.7 billion in loans made to help fund the new GM." While this is a true statement, it only represents 11% of the $58.7 billion we gave to GM. As a refresher, a year ago President Obama's auto task force decided to bypass the bankruptcy courts, trample on bondholders rights, and restructure the balance sheet of GM. The other $52 billion we gave them was classified as equity, and that can only be repaid in an IPO. For our $52 billion we own 73% of GM's equity, the United Auto Workers own 17.5%, and the old bond holders own 9.5%. Now it is nice that they were able to pay back that $6.7 billion so fast, but was it because of their newly found business acumen, or was it just a little bit due to the fact that the government used more of our money to motivate drivers turn in clunkers to buy American cars (Cash for Clunkers)? This is like the owner of a company giving his employees extra money to buy his products so he can show revenue growth...it's fantasy land. It also didn't hurt that Toyota took a mighty fall from grace over the same time period. So when do we get our remaining $52 billion back, and will we make a profit on it? Ford's market capitalization is about $48 billion, and they aren't in bankruptcy and they actually are making money. In order to get our $52 billion back, GM would have to do an IPO of $71 billion. While it is nice that we got 11% of our money back, let's not get carried away, it will be a very long time before we see a return on the remaining 89%!

News Alert - Greece is Having Financial Difficulties

The biggest non-news of the morning is that Greece has officially requested to tap into the aid package just passed last week by the EU and the IMF. Yeah, nobody saw that coming. It appears that Greece's creative accounting was worse (or better depending on your nationality) than previously believed. Eurostat reported that Greece's deficit for 2009 was 13.6% of GDP, not the previously reported 12.7% of GDP. This is only 10.6% greater than the 3% deficit to GDP ratio limit for inclusion in the European Union! Greece and the Euro will continue to have issues for quite some time, massive austerity programs, and debt restructuring (quasi-defaults) are probable. Expulsion from the EU would be the best course for all parties involved, but is not currently likely. The EU would gain by showing the world that they are serious about maintain a strong currency. Greece would gain by being able to devalue their currency to the point that would make them competitive again, assuming that they can get their entitlement programs in order.

Investment Implications: Our indicators have had us at minimal weight in International Sovereign debt and that is where we continue to be- minimal weight. 

"Cash for Tanners"

In the "why haven't we thought of this category" the European Union has a new "social tourism" project. Yes, according to European Commissioner Antonio Tajani, visiting foreign countries is a right of all citizens, including the disabled, poor families, senior citizens, and youth groups. The program goes by the name of "Calypso" the lonely Greek nymph deserted on an island. The goal of the program is to help these disadvantaged, via subsidies (supplied by taxes on those still working), enjoy the many benefits of tourism. Maybe this is a way to transfer money from those tightfisted Germans to those fun-loving Greeks. Only a matter of time before we adopt this plan here? If over 50% of your voters fall in the "disadvantaged" category (old, young, disabled, unemployed, etc) which way do you think they will vote. 

Investment Implications: Going long Coppertone!

For those of you who have trouble differentiating the Keynesian School of Economics from the Austrian School of Economics this rap video does an excellent job of breaking it down:

"Fear the Boom and Bust" a Hayek vs. ...

Last week was tax week, and if you're like me you probably feel like you just threw a lot of money into a giant hole. This video is hilarious and spot-on:

Should The Government Stop Dumping Money Into A Giant Hole?

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

  

Whataya Want From Me

"Just don't give up I'm workin it out
Please don't give in, I won't let you down
It messed me up, need a second to breathe
Just keep coming around
Hey, whataya want from me
Whataya want from me
Whataya want from me"

"Whataya Want From Me" by Adam Lambert

Adam Lambert - Whataya Want From Me

We seem to be hearing it a lot lately...Whataya want from me? 

Two storied franchises, at the top of their professions, envied by their peers, loved by their supporters; faced with handling an unseemly incident that can destroy decades of image building.

First, my beloved Steelers. As everyone is aware, the owners of the Steelers are faced with the dilemma of what to do with a franchise quarterback who is a step or two slow in understanding the meaning of the word "NO". Now this is a quarterback that has already helped the team win two Super Bowls and is only 28 years old. He was signed to a ten year $100 million contract, and the hope was that he would at least match Terry Bradshaw's record of four Super Bowl victories. But he is also turning out to be the dumbest quarterback in Steelers history (yes, Bubby Brister is now safe). Four seasons ago Mr. Roethlisberger nearly died by riding a motorcycle without a helmet, last year he was accused of sexually molesting a young woman in Las Vegas who apparently said "no", and then this year he is pretty much guilty of, at the very least, plying a 20 year old college student with alcohol and then following her into a bathroom where she reportedly said "no". Mr. Roethlisberger's teammates may publicly support him, but how can they look at him in a huddle and respect him. Does he have any moral authority left? Moral's are really what this is about. Clearly Ben is lacking, and the Steelers front office knows and believes that morals still count for something. Morals are tricky, they are hard to teach and very hard to legislate, but in business and in life morals count. Professional football is a business, a very big business, and the Steelers have consistently been ranked at the top of that pyramid by making good decisions (three coaches in 41 years). This decision seems rather simple, to protect a franchise known as Steeler Nation, that has the largest percentage of female fans in the league, get rid of Ben. In a business where the average employee lasts three years, and the best last eight, you've probably gotten the best out of Ben. And in a business, where your customers are no longer buying one of your products (say number 7 jerseys), but actually burning them, it may be time to get rid of product number 7. Yesterday the Steelers signed Byron Leftwich, and now enter the draft with four quarterbacks, one of them suspended for six games. I think the Steeler Nation would love to see what kind of draft picks they could get for a morally challenged number 7. If the Rooney's are asking, "whataya want from me", the Steeler Nation is saying, "do the right thing."

Second, Goldman Sachs, the pinnacle of the investment banking world, who finds itself charged by the SEC of fraud. Now this is a much more complicated issue than an employee who shows incredibly bad judgement, but it still comes down to morals. I know some of you are laughing because I used the word morals in conjunction with a Wall Street firm, but bear with me. Wall Street serves a very valuable purpose in our society, they help individuals and corporations raise capital, manage risk, and invest. And as anyone who has ever worked with or for a Wall Street firm should know, their main goal is to help clients while collecting a fee. Sometimes, the collecting the fee part outweighs the helping the client part, but this is known (or should be known) by all participants. For every client that wants to create a security to sell, there is another client on the other side of the trade buying. Wall Street's job is to facilitate the creation of the security and see that the buyers and sellers get together, collecting fees along the way. Of course this doesn't excuse civil or criminal wrongdoings, but it does mean that you have to look after your own positions, and do your due diligence better than the other guy. Caveat emptor. Hopefully you are not shocked by this revelation.

Goldman, like the Steelers, has always been considered the creme de la creme of their profession. In fact the CFO of the NFL is a former Goldman media analyst (Anthony Noto). Not only would Goldman hire the best and brightest, but the best and brightest really wanted to work for Goldman. Sure they wanted the money, but they also craved the prestige and respect that came with becoming a Goldman partner. In simplest form, Goldman is charged with helping one client create a security that that client (Paulson) was pretty confident would prosper if housing collapsed, and then selling it to another client without disclosing to that other client that Mr. Paulson helped create the product. Again, this is basically what Wall Street does, but what makes this incident so morally challenged is that Goldman is being accused of taking advantage of one client to benefit another. An analogy would be a dealer in a Vegas casino encouraging a clearly inebriated gambler to bet heavily, to the benefit of the other players at the table. Not only is that unethical, but it is illegal, and a firm that condones such behavior will quickly be out of business. Now Goldman intends to fight these allegations vigorously, and that may or may not work. But what Goldman really has to do is restore its image as the fairest of the fair when it comes to dealing with their clients. Not an easy task, but if Goldman were asking "whataya want from me", the investing public would say, a little less arrogance, a little more transparency, and the knowledge that "not everything is for sale".

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

  

Who Can I Believe In?

I wonder how you're feeling.
There's ringing in my ears.
And no one to relate to, 'cept the sea.

Who can I believe in,
I'm kneeling on the floor.
There has to be a force; who do I phone.
The stars are out and shining, but all I really want to know.
Oh won't you... show me the way.
I want you ...show me the way.

"Show Me The Way" by Peter Frampton

Peter Frampton - Show Me the Way

Who can I believe in? As investors we often fall for the siren song of the Wall Street Expert, but experts are only humans with educated opinions, just opinions...not truth. You see the truth is that no one can show us the way. I've often said that the most dangerous thing about investing is having a strong opinion, and it continues to amaze me that so many investors put so much credence in some "experts" opinion. Saturday's Wall Street Journal ( Treasury-Yield Forecasts Differ Sharply - WSJ.com ) had a great article on the various interest rate forecasts of Wall Street's "top" prognosticators (not sure how they define "top"). The article went on to show that Morgan Stanley's strategist, Jim Caron, expects the yield on the 10-year Treasury bond (currently 3.93%) to rise to 5.50% by year-end. Meanwhile Goldman Sachs's strategist, Jan Hatzius, believes yields will fall to 3.25%. The article makes for very good reading but the real take away from this gapping 2.25% spread in forecasts is that no one can forecast the future. If you were to believe Morgan Stanley then you wouldn't own any bonds, especially longer maturities. If you were to believe Goldman Sachs you would load up on long-term treasuries. The funny thing is that both of these men could be wrong and rates could end up unchanged...no one knows. 

We all search for someone to believe in, someone to show us the way, but we humans simply have no ability to forecast the future. Long-ago I gave up listening to so called experts forecasts, and have instead determined that listening to the market is by far more valuable. You see, the market is the collective intelligence of all of its participants, and although it can't tell us what is going to happen in the future, it does a pretty good job letting us know what is happening today. Mr. Market can show us the way, to being in harmony with the markets.

When it comes to interest rates, what is Mr. Market telling us today?

One of our technical indicators (MACD, moving average convergence divergence) has moved to a negative reading on the Vanguard Total Bond Market ETF (BND), this is causing us to go from a bullish allocation in US bonds to a neutral allocation. We have been at neutral for International Treasury Bonds (IGOV) for some time now, but our moving average indicators have swung negative, thereby putting us at a bearish allocation in International Treasury Bonds. Overall our fixed income weight is Neutral. And, in regard to interest rates, Mr. Market is currently confirming Morgan Stanley's forecast.

On the Bullish side, the continued rally in international equities has moved us from Neutral to Bullish on MSCI EAFE Index ETF (EFA). And we have also moved from Neutral to Bullish in International REIT's (IFGL).

Overall, Mr. Market is Bearish on interest rates, and Bullish on equities.

This bearish view of interest rates and bullish view of equities coincides with a new term, Biflation. Biflation is a relatively new idea initially proposed by Dr. F. Osborne Brown in 2003. It states that in a biflationary environment, inflation and deflation occur simultaneously. Inflation occurs because a massive amount of money is chasing goods, such as oil, grains, gold, and earnings based assets like stocks. In other words, an inflationary bubble is forming in certain assets. Meanwhile, deflation occurs for debt based assets, such as cars and houses, since credit dries up and debt loads are being worked off. 

I like this theory because it coincides with what Mr. Market is telling us today. Bullish on equities, REITs, gold, and commodities; and neutral to bearish on fixed income. Makes sense. That's not an opinion, just an observation.

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

  

Be Thankful I Don't Take It All

"Let me tell you how it will be,
There’s one for you, nineteen for me,
‘Cause I’m the Taxman,
Yeah, I’m the Taxman.
Should five per cent appear too small,
Be thankful I don’t take it all.
‘Cos I’m the Taxman,
Yeah, I’m the Taxman."

"Taxman" by The Beatles

 Watch this video while you write your checks. Beatles Cartoon - Taxman

The Beatles - Taxman

Shocking news from our friends at Gallup, "48% of Americans say the amount of federal income taxes they pay is "about right," with 46% saying they are "too high," one of the most positive tax assessments that Gallup has measured since 1956. Could this stunning revelation, that nearly half of all Americans think their tax level is OK, have anything to do with the fact that 47% of American's pay no income taxes at all? 

	Number of Returns with Positive AGI	AGI  ($ millions)	Income Taxes Paid  ($ millions)	Group's Share of Total AGI	Group's Share of Income Taxes	Income Split Point	Average Tax Rate
All Taxpayers	141,070,971	$8,798,500	$1,115,504	100%	100%	-	12.68%
Top 1%	1,410,710	$2,008,259	$450,926	22.83%	40.42%	> $410,096	22.45%
Top 2-5%	5,642,839	$1,286,283	$225,367	14.62%	20.20%	-	17.52%
Top 5%	7,053,549	$3,294,542	$676,293	37.44%	60.63%	> $160,041	20.53%
Top 6-10%	7,053,548	$933,297	$118,139	10.61%	10.59%	-	12.66%
Top 10%	14,107,097	$4,227,839	$794,432	48.05%	71.22%	> $113,018	18.79%
Top 11-25%	21,160,646	$1,817,515	$171,443	20.66%	15.37%	-	9.43%
Top 25%	35,267,743	$6,045,354	$965,875	68.71%	86.59%	> $66,532	15.98%
Top 26-50%	35,267,743	$1,674,859	$117,368	19.04%	10.52%	-	7.01%
Top 50%	70,535,486	$7,720,213	$1,083,243	87.74%	97.11%	> $32,879	14.03%
Bottom 50%	70,535,485	$1,078,287	$32,261	12.26%	2.89%	< $32,879	2.99%
Source: Internal Revenue Service

Bob Williams, from the Tax Policy Center, points out that our income tax code really has two purposes:

…The explanation is simple: the income tax serves two masters. On one hand, it raises nearly half of all federal revenues. On the other, it delivers a broad array of social benefits in the form of exemptions, deductions, and credits that reward people for government-favored behavior…

Over the past two decades, Congress has repeatedly used the income tax to encourage or subsidize specific activities. We subsidize kids with the child credit, college attendance with multiple higher education credits, retirement with all sorts of tax-favored savings plans, work with the earned income credit, and child care with, you guessed it, the childcare credit. And we’ve retained most itemized deductions that subsidize homeownership, state and local governments, and charitable giving…

This non-partisan Tax Policy Center also came up with a little "what if" scenario, to see what would have to happen to lower the federal deficit from its current 10.64% of GDP to something more sustainable like 3% (it was 3.18% in 2008). In order to lower the deficit to a more sustainable 3% of GDP, the government would have to find about half a trillion dollars every year in either new revenue or spending cuts. Half a trillion dollars is about what the government spends on Medicare each year. The Tax Policy Center calculates that, if we assume our representatives in Washington continue to focus their revenue generation efforts on those rich families with income over $209,000 annually, then the top two tax brackets would have to go from 33% and 35%, to 72.4% and 76.8% respectively. In real numbers, that means if you make $209,000 now you pay Uncle Sam about $69,000, and if you are to be counted on to lower our deficit you will have to pay $151,000. You get to keep $58,000. Now of course this is a worst case scenario for you wealthy folks, one of the big assumptions is that there is any political will to lower the deficit anyway. 

The top 1% of US income tax filers pay 40% of our nation's taxes, which is only fair since they are rich, why shouldn't they pay 80% of our nation's taxes? What are they going to do, leave? Well, in fact, they are leaving. We just found out that in the last quarter of 2009, 500 American citizens said good-bye to America forever. While 500 is a small number, it is double the number of expatriations in all of 2008. Good riddance, other millionaires will take their place, and if this trend continues we'll just increase the exit tax to something like 50% (it is now at 30% of your mark-to-market assets!)..."be thankful I don't take it all, cause I'm the taxman, yeah, I'm the taxman." 

So if you are fortunate to find yourself in that upper 5% with adjusted gross incomes of greater than $160,000, what are your options? 1) Work harder, make a lot more so you will be able to keep about the same dollar amount. 2) Work less, enjoy more free time, and have your income fall to the nearly tax-free range of $50,000. 3) Renounce your citizenship, pay the very heavy exit-tax and hope the country you emigrate too treats you and your money well. 4) Work very hard to elect representatives that believe in a smaller government.

Be careful out there, and don't forget, "Yeah, I'm the taxman, and you're working for no-one but me."

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.