H&R Block [HRB: 17.18, +0.29 (+1.72%)] released earnings yesterday, reporting a profit of $706.9 million, or $2.09 per share, better then the earnings of $543.6 million, or $1.66 per share, released the same period the year before.  H&R Block missed on revenue, reporting that revenue fell 2.9% to $2.47 billion as opposed to the average analyst estimate of $2.52 billion, H&R Block however did beat earnings estimate of $2.05 per share.  The company’s tax unit was hurt as it saw a weak tax season, with revenues falling 3.2% in tax service revenue.  The company has noticed this fall in revenue, and as a result H&R Block’s CEO Russ Smyth said that it would be combining its tax and corporate structures into one unit in an effort to cut costs.  This is another move by H&R to cut down its management structure to make the company more efficient.  These actions follow its recent elimination of its brokerage and loan services.  H&R Block expects to see fiscal 2010 earnings between $1.60 and $1.80 per share, with the street estimating earnings of $1.66 per share.

In health care news, a federal jury in Texas ordered Abbot Laboratories [ABT: 46.00, -0.28 (-0.61%)] to pay rival Johnson & Johnson [JNJ: 56.62, +0.64 (+1.14%)] $1.67 billion for patent infringement on J&J’s arthritis drug, Remicade, which was infringed upon with Abbot’s Humira.  Humira is Abbot’s leading drug and accounts for $4.5 billion in revenue last year, or 15% of total revenue.  Johnson & Johnson was thrilled with the news and were happy that the court recognized its intellectual property with its arthritis drug.  Abbot said that they are disappointed with the verdict and are going to appeal the findings of the jury.  Abbot has seen great success recently, with a good part being attributed to Humira, it will be interesting to see how Abbot will handle and move on from this.

The Conference Board announced that its index of consumer confidence in June fell to 49.3 from May’s 54.8.  This is bad news, especially as economists believe that confidence below 50 following a month when it was above 50, indicating economic growth, changes the general feeling that the economy was starting to bottom out.  This is bad news as consumer spending is tied to consumer confidence and with these poor numbers this could severely affect GDP, as spending accounts for about 66% of GDP.  Economist and investors alike are looking for consistent economic data to indicate if the market is bottoming or not, and they have been presented with data that is mixed and therefore makes it hard to tell.

Check back tomorrow to Bullish Bankers for another market recap.

- Matt Shannon

Disclosure: The fund the author is associated with is long ABT and JNJ.

Unfortunately we are not yet in the clear.  The yield on the 10-Year Treasury Note increased 60 basis points during the one-month period from May 12 to June 12.  Oil prices rose 23% over the same period.  Keynesian economists argue that interest rates and oil prices are higher due to the expectations of economic recovery.  While the recovery may partially explain the increase in these prices, it doesn’t explain all of it.  The Treasury continues to auction billions of dollars, and auction demand has been less than great.  The rate on the 10-year recently skyrocketed to 4.00%.  Many economists are also predicting significant long-term inflation.  They point to the Federal Reserve’s policy of buying over $1.5 trillion of mortgage backed securities and US Treasuries, thus increasing the money supply.  They also fear monetization of the ever increasing national debt due to the exploding federal budget and the $787 billion stimulus package.

These fears are causing significant problems, especially in the housing market.  Without a recovery in the housing market, things aren’t likely to improve anytime soon.  Housing prices are the key to economic recovery.  Higher home prices will relieve the number of homeowners currently underwater on their mortgages, thus reducing the risk of them simply walking away.  Higher home prices also improve consumer sentiment, since more equity in their homes provides consumers with a sense of security.  This would result in both an increase in home equity loans and in personal spending.

But since mortgage rates are closely correlated with the 10-Year T-Note, the sudden jump in rates is threatening the economic recovery.  The 30-year fixed-rate mortgage rate increased 81 bps from 4.78% on April 30 to 5.59% on June 12.  Mortgage applications have been falling significantly, and it isn’t difficult to see why.  81bps adds $100 a month to a $200,000 mortgage.  $100 per month could be the difference between keeping your home and losing it to foreclosure.  If rates continue to climb, foreclosure activity will only get worse.

Higher rates will also force out first time homebuyers, causing downward pressure on home prices.  Though enticed with an $8,000 tax credit, higher monthly payments may cause them to rethink their decisions, and higher debt-to-income ratios may make it harder for them to get financing.  Combine this with continued housing starts, and you have a housing glut, thus driving down home prices further.

At this point, the Federal Reserve and federal government can’t do much to lower mortgage rates.  If the Fed purchases more securities, the inflation screams will only get louder.  If the federal government spends more money, more investors will fear the government’s ability to repay its debt.  The President talks about the importance of balancing the budget, so let’s see him put his money where his mouth is.

- Nick Klein

Disclosure: None.

Breaking Ties

On March 16th, CSCO unveiled its two-year secret project: the Unified Computing System (UCS).  This new blade server capitalizes on two key trends in IT that deliver more for less:  virtualization and cloud computing.  The UCS harnesses the power of virtualization through combining computing, networking and data storing into a single energy efficient system that can power web-based apps of cloud computing.  With this courageous move, CSCO has chosen to sever the ties with longtime partners like IBM [IBM: 101.65, -0.08 (-0.08%)], Hewlett-Packard [HPQ: 37.73, -0.12 (-0.32%)] and Dell [DELL: 13.42, +0.45 (+3.47%)] in order to compete in the server market.  This trio sells (or DID sell) billions in Cisco gear each year as they helped tech companies build out its IT infrastructure; IBM alone accounts for $3 billion (per analysts’ estimates). 

HP’s relationship with CSCO began to crumble when CEO Mark Hurd began aggressively pushing the ProCurve segment that makes LAN, WAN and wireless gear for powering networks.  However, the Big Blue relationship first went sour when CSCO stole Internet conferencing company Webex Communications right from IBM’s hands in 2007.  This acquisition has been resilient in this recession as companies cut traveling expenses and adopt CSCO’s Telepresence resulting in y-o-y growth of 70% in orders and 130% in revenues.  The UCS debut has recently led IBM to jump ship to Juniper Networks [JNPR: 23.68, +0.13 (+0.55%)] for possible future partnerships to resell JNPR’s equipment as part of its family of products.

New Markets

Cisco CEO John Chambers told BusinessWeek’s Aaron Ricadela that the company will likely be in 50 fresh markets within a year, mainly in adjacent markets to its core business so it can integrate its diverse product offerings. 

“We’re moving into new [areas] with a speed nobody has ever attempted,” Cisco CEO John Chambers stated.

This includes in-house developments like the UCS, but also acquisitions such as Flip video recorder maker Pure Digital.  In addition to its Linksys offerings and TV set-top boxes, Flip will help Cisco further penetrate the $50 billion global market for consumer electronics.  They also bought out Tidal Software as an easy tuck-in company to enhance its data center business.  Furthermore, CSCO has made a push into the energy business by offering smart grid solutions that take advantage of secure IP-infrastructure to reduce energy storage, transmission and distribution costs for a more sustainable environment.  Cisco has struck an “alliance” to provide Clearwire’s wireless IP infrastructure along with plans to build new mobile WiMax supporting devices.  The Silicon Valley company has also made moves in virtual healthcare, sports and entertainment (with its StadiumVision) and much more.

Cisco CEO John Chambers

With $33 billion in its wallet, second in the S&P 500 to Exxon Mobil [XOM: 68.10, -0.39 (-0.57%)], Cisco is gearing up for acqusitions.  This comes as no surprise as CSCO has acquired 175 business since 1993.  However, of the $33 billion in cash, the majority of it (approximately $26 billion) remains offshore and deferred from income taxes indefinitely until the profits are repatriated.  The Obama Administration aims to change this rule (or loophole).  Even with that controversy, Cisco still stands strong in the M&A world:

“First, the exciting part about today’s market is just about everybody’s for sale. And the second most exciting part is the prices are pretty reasonable.  In fact, if I were betting, it would not surprise me to see us move on the consumer side before you see us even move on some of the other areas,” exclaimed Chambers in the January 2009 conference call.

Despite its already large cash position, Cisco easily raised $4 billion in debt on Feb 9th, 2009, further substantiating the fact that Cisco is on the acquisition prowl.  Companies rumored to be in the crosshairs are EMC Corporation [EMC: 12.89, +0.11 (+0.86%)], virtualization software company VMWare [VMW: 28.07, -0.17 (-0.60%)], Red Hat [RHT: 19.66, -0.76 (-3.72%)], NetApp [NTAP: 18.85, -0.11 (-0.58%)] and BMC Software [BMC: 32.61, -0.79 (-2.37%)].

Conclusion

Despite recent economic indicators beating estimates, the economy is still contracting, albeit at a slower rate than before.  This has indicated signs of stabilization in the near future but the jury is still out on just when that will be.  Even after the recent market rally, P/E ratios are still relatively low historically speaking; cheap valuations are still present as market consolidation continues to occur.  Cisco has the fundamentals, management and courage to innovate to survive this cyclical downturn.  With $33 billion in its pocket, Cisco will be making acquisitions, buying back stock or pouring it into R&D.  All this boils down to one thing: maximizing shareholder value.  I believe CSCO is a great buy at current levels and so does the Dow Jones Industrial Average. 

- Jake Kimble

Disclosure:  The fund the author is associated with is long CSCO and IBM.

Now, we are seeing the other side of the bailout business. In the AIG [AIG: 16.19, -2.06 (-11.29%)] case executives and others were angry because the government interfered with bonuses and other executive decisions. And, we have the government putting lids on executive pay. And, we have government wanting to rewrite mortgages, and cap interest rates on credit card debt, and so on and so on.

This is the other side of the coin.

And, now we learn from testimony given by Ken Lewis, the CEO of Bank of America [BAC: 12.15, -0.49 (-3.88%)], that Hank Paulson and Ben Bernanke put a “sock” in his mouth and strongly advised him that he say nothing to the shareholders or anybody else about the implications of the merger between Bank of America and Merrill Lynch.

Furthermore, we hear from New York’s Attorney General Cuomo that Paulson threatened to fire Lewis and remove the entire Board of Directors it Bank of America did not go through with the merger with Merrill Lynch! The reward—money from the Government to help BOA through the process.

The shareholders? Well, they lost on the value of their stock. And, they also will have higher taxes or an inflation tax that they will have to pay in the future.

In addition, why should any company, financial or non-financial even think of an acquisition in the future because the government may force the management to swallow hard, take on something that is not necessarily desirable for the company, and, of course, not inform investors as to the implications of the merger transaction?

And, why should the stockholders of any company approve any acquisition that is at all questionable? The precedent has been set that they might be approving something that will cost them considerable wealth as the stock of their company tanks, and they are given no information to give them any confidence that the transaction might be a worthy one.

What if the shareholders balk? What if they fail to approve such a merger? Will the government step in and force through the merger anyway?

Talk about a mess!

Two thoughts come to mind that I must express.

First, the combination of Paulson and Bernanke was a disaster as far as I can see. I have written about how Bernanke seemed to panic last fall and the result was the TARP. (See my post “The Bailout Plan: Did Bernanke Panic”, http://seekingalpha.com/article/106186-the-bailout-plan-did-bernanke-panic.)

Paulson didn’t do much better in his handling of the crisis and the creation and oversight of the TARP. I always thought that Paulson found the whole bailout idea not to his taste and had hoped that he would be able to get out of Washington before the collapse. Unfortunately for him—and for us—he didn’t make it. As a consequence here was a man doing something that he despised, and his heart, and mind, was really not in the effort. He has left us a very unhappy legacy!

When I reflect on the events of the last fall I keep coming up with the feeling that we would be hard pressed to have found two people less capable of handling the situation than the two that were then in charge. And, then there was the “Decider”, but he was AWOL!

The second thing has to do with the fact that the bankers, and other business leaders, are getting pelted with all the blame for the financial collapse and crisis that we have experienced. Thus we have the “bad guys” in our sights. Thus, they should pay.

But, what if the conditions that existed were created by the government and these bankers and other business leaders were just responding to the incentives initiated by the government? We had a credit bubble connected with the stock market in the 1990s. The credit bubble resulted in negative real rates of interest and consumers stopped saving. The saving rate fell from 7.7% of disposable income in 1992 to about 2.0% by the end of the decade. Then there was the huge deficits that resulted from the 2001 tax cuts and the “war on terror”. This was accompanied by negative real interest rates gain which resulted in the credit bubble in the 2000s and the housing boom. The consumer savings rate remained around two or below, even becoming negative for a short period of time.

The foreign exchange market in the 2000s indicated a fear of a renewal of inflation as the value of the dollar fell by more than 40% against major currencies. What were financial managers to do in such an environment? Generally, because spreads narrow in such times and arbitrage opportunities are based on smaller differences, you tend to leverage up and mismatch maturities. This response is a normal one to gain the needed returns on equity to keep money from leaving your fund or institution.

Is this greed? Yes, but it is also just the natural response of competitive people to the incentives that are created, in this case, by the government. The Bush 43 administration may have been composed of “Free Market Capitalists” but this “gang that couldn’t shoot straight” did more to harm capitalism than most other administrations in the history of the United States.

So, government gets it both ways. It can create the crisis. And, then it can impose itself on the economy to right the system after the crisis occurs. And, best of all, the blame can all be put on “greedy” bankers and the lack of regulation.

I am sure that before this is over we will hear many more horror stories.

- John Mason

Disclosure: This article was taken from Mase: Economics and Finance with the permission of the original author.  All disclosure questions should be refferred to the original author.

KB Homes [KBH: 12.14, -0.79 (-6.11%)] was down over 9% today as it reported a loss $78.4 million, or $1.03 per share, better then a loss of $255.9 million, or $3.30 a share, from the same period a year ago.  Revenue came in at $384.5 million beating the average analyst estimate of $339.1 million, but failed to beat the average analyst estimate of earnings per share which was a loss of $0.64.  The company’s impairment charges fell from $176.5 million to $49.5 million with new orders also falling 31% to 2,910.  Investors reacted positively to a decline from 28% to 20% in cancellation as some believe that the housing market is starting to show signs of a possible bottoming.  The fifth largest home builder by annual closings is trying to redesign their product in an effort to position itself to profit in the future.  The real test for KB is going to be how they perform after the tax credit for those buying new homes ends.  The Los Angeles home builder has a tough road ahead of itself and it will be interesting to see how they deal with the housing mess that currently exists, especially in California.

In tech news, Palm [PALM: 15.73, -0.02 (-0.13%)] announced earnings after the bell yesterday, reporting a loss of $105.0 million, or $0.78 per share with revenue of $86.77 million beating the estimates of a loss of $0.62 per share on revenue of $80.64 million.  Palm’s revenues were up after it released its first smart phone the Pre, which many analysts believe will either make or break the company.  Palm did not release the number of Pre units sold, but estimates are around 70,000.  The Pre is the reason behind the price appreciation of Palm’s stock reaching a new 52-week high today of $16.59.  Palm announced that they could have positive cash flow in the second half of the year and become profitable sooner than earlier anticipated.  Currently the Pre is only available on Sprint [S: 4.47, +0.15 (+3.47%)], but is believed to be soon available on other carriers.

The Commerce Department released May consumer spending numbers, which showed consumer spending increasing 0.3%.  Some of the results are a result of Obama’s administrations stimulus plan, leading to a jump in American’s incomes.  This government activity is leading to a better flow of credit and higher incomes leading people to spend even though unemployment is on the rise.  The report also stated that earnings climbed 1.4% higher driving the savings rate to a 15 year high.   This increase in consumer spending is a positive sign for the economy, but a continuing increase in this number is needed to prove that this is not just a temporary result of government spending, but a long lasting trend. 

 Check back next week for another market recap from Bullish Bankers, enjoy the weekend. 

- Matt Shannon

Disclosure: None

As it turns out while media talking heads were ranting about how the Fed was running their printing presses overtime to push up money supply the facts were very different. M1 has actually declined since the middle of December, 2008. During the same six month period M2 has only risen by a little less than 3%.

For some reason that I can’t explain most financial, economic and media experts don’t bother to read the Federal Reserve’s weekly money supply data before writing authoritative articles or spouting off on TV about money supply and its implications.

Of course, M3 followers argue that M1 and M2 are bad money supply indicators because they are too narrow and that only M3 should be used to measure the growth in money supply. Unfortunately, the Fed stopped publishing M3 a few years ago (because they said it was irrelevant) which started a club of M3 conspiracy theorists, i.e., people that believe the Fed stopped publishing M3 as part of a conspiracy to hide irresponsible monetary policy.

However, even without M3 being specifically published we know that broader measures of money supply, like M3, haven’t materially risen in 2009.

M3 followers can get a very rough idea of what M3 would have been, if it were published, by looking at the Federal Reserve quarterly Flow of Funds Accounts of the United States which was distributed yesterday. As it turns out, total net borrowing of the United States (private and public) dropped approximately $255 billion in the first quarter and other indicators of M3 fell or are about flat (on a net basis). The Flow of Funds Accounts data is inconsistent with a large rise in M3 (or a large rise in any money supply measure). By the way, this data supports Brad Setser’s theory that the fall in private borrowing is more than offsetting the rise in government borrowing and therefore, at least for the time being, financing the deficit isn’t a problem.

And, I have a suggestion for the M3 conspiracy theorists; get a life. Worrying about a Federal Reserve conspiracy isn’t worth your time and effort.

Set forth below is a chart that was compiled from weekly Federal Reserve data that illustrates money supply growth, seasonally adjusted, since the week ending December 15, 2008. The data suggests that the Fed is hardly “out of control” or a drunken sailor.

To those readers who want to flame me for not accusing Bernanke & Company of ruining the economy because of the growth in the Fed’s balance sheet, just hang in there. You will get your chance soon enough. Over the weekend I am going to write about the “irresponsible” expansion of the Federal Reserve balance sheet (or maybe why it wasn’t irresponsible at all).

-Mark Sunshine

Disclosure: This article is taken from the website Sunshine Notes with the permission of the original author. All questions regarding disclosure should be referred to the original author.

American International Group [AIG: 16.19, -2.06 (-11.29%)] and the Federal Reserve Board of New York agreed that AIG can repay $25 billion that they owe the New York Reserve through initial public offerings of the two of its international life insurance units.  AIG will put equity from American Life Insurance Co. and American International Assurance Co. into vehicles and receive preferred and common interest in exchange.  AIG will hold the common interest while the New York Fed will receive $25 billion in preferred interest from these two vehicles, there in fact reducing AIG’s debt.  This deal benefited AIG, as it makes it easier to pay back the government debt, while also giving greater independence to American Life Insurance allowing them to maintain the value of the name.  The deal is expected to close in the second half of the year.

Federal Reserve Chairman Ben Bernanke appeared before Congress today and denied allegations that he pressured Bank of America [BAC: 12.15, -0.49 (-3.88%)] into buying Merrill Lynch.  He testified that he made no threat to BofA’s CEO Kenneth Lewis or the bank’s board members of the consequences if the deal did not go through.  This testimony comes after Lewis testified earlier this month that former Treasury Secretary Henry Paulson made it clear that if Bank of America did not go through with their promise to acquire Merrill he and the board would have been removed.  Bernanke denied this claim and defended the deal saying that the deal was needed to avoid another shock to the already shaken financial system.  Bank of America received $45 billion in total from the government in the bailout, with $20 billion directly coming from the acquisition of Merrill.

In earnings news, Nike [NKE: 51.91, +0.85 (+1.66%)] reported after hours yesterday, announcing earnings of $341.4 million, or $0.70 per share down from the year ago period when they reported earnings of $490.5 million, or $0.98 per share.  Nike missed on both earnings and revenue, as the street expected earnings to be $0.96 per share and revenue to be $4.71 billion as opposed to the reported $4.7 billion.  Future orders fell 12%, with Nike saying that they would have only fallen 5% but were negatively affected by the exchange rate.  Restructuring charges also hurt the Beaverton, Oregon company as it faced a $144.5 million charge that reduced earnings by $0.29 per share.  Gross margins also fell for the shoe maker due to higher manufacturing costs and markdowns, lowering margins from 45.8% to 43.4%.  Some analysts and investors are still bullish Nike as they believe in their innovation and cutting edge technologies.  Nike is down over 3% today as the majority of the market reacted poorly to Nike’s announcement.

Check back tomorrow to Bullish Bankers for another market recap.

- Matt Shannon

Disclosure: None

Shares slid on the day of the initial 787 delay by 6.46%. On the day of the Integrated Defense Systems’ falter, the stock fell an additional 5.81%. While this article is being written during a closed market, when we have not seen the activity resulting from the Qantas cancellation, I’d imagine shares won’t be off more than 4% more. Point being: Boeing’s sell off has created an opportunity for investors… but what kind of opportunity?

Investment research firms are all over the map on this one!

June 23rd:

• FTN Equity Capital: Neutral Rating, No Price Target
• Stifel Nicolaus: Buy Rating, $59 Price Target
• Credit Suisse: Neutral Rating, $39 price target
• Jesup & Lamont: Hold Rating, No Price Target

June 24th:

• Barclays Capital: Overweight Rating, $60 Price Target
• Broadpoint AmTech: Neutral Rating, $39 Price Target
• Gabelli & Co: Buy Rating, No Price Target
• Oppenheimer & Co: Underperform Rating, $40 Price Target
• Sanford C. Bernstein: Market Perform Rating, $40 Price Target
• Jeffries: Buy Rating, $52 Price Target
• UBS: Sell Rating, $30 Price Target
• Morgan Stanley: Equalweight Rating, $50 Price Target
• BAS-ML: Buy Rating, $60 Price Target

June 25th:

• Jyske Bank: Buy Rating, $69 Price Target

This makes 14 rating adjustments over the past three days: 6 Holds, 4 Buys and 2 Sells with the average target coming to just under $49/share. Put simply: nobody knows whether this stock is cheap or headed much much lower.

The Bear’s Case

Boeing no longer has any credibility with investors or myself in its ability to come through. I have been watching this company delay its 787 Dreamliner for years, and management was nearly certain to debut the first flight at the Paris Air Show last week or on Tuesday at the latest. Not being able to accomplish this small feat was astonishingly horrible for the firm, and has prompted calls to fire McNerney… which at this point I am not at all opposed to. It is always better to delay than release a bad product, but enough is enough.

After interviewing a few current and former employees of Boeing, things sound very, very grim. Workers are turning on their own company, even following the deadly workers strike that few seem to remember in a post-recession world. By outsourcing the manufacturing end of the work on Boeing’s flagship Dreamliner, the company took a gamble to break from tradition and potentially enjoy cost savings. Now, workers bicker that this mishap is another example of why BA “should have stayed American” in their operations. This is a  company that used to pride themselves on building strong wings in particular. By producing planes known for their stability, Boeing was able to make some of the strongest machines ever built. Now, this area of expertise has been undercut and challenged by computer modeling that failed to identify a weak point in the fuselage. This weak area could be a potentially major repair costing Boeing months more time.

Once a company is no longer able to meet quota, order cancellations start to appear as we have seen just a few hours ago with Qantas. While I do not forecast many more cancellations due to the delay, and was honestly quite a bit surprised by the move by Qantas, I could easily be proven wrong… and Boeing’s luck has yet to change. Knowing all the bad that has happened to the company over the past week, its tough to imagine shares falling less than the $10 that they have fallen.

The Bull’s Case

Jim Cramer stepped in to endorse shares of Boeing a week or two ago at $51/share. Later, after the stock briefly dipped to $50 before exploding higher, Cramer had remarked that investors had that brief window to buy… locking in a fantastic gain. Now that the stock trades in the low-$40s, Cramer fans are left wandering the streets in utter confusion. However, I stand by Jim Cramer and reference my last post on the aerospace industry which I think is truly recovering. Despite this uncontrollable and company-specific news, we can be sure that there are many factors that can drive aerospace higher. To reiterate, a few reasons include:  lower jet fuel prices, better hedging scenarios, historically-low inventories, old machinery in need of repair and promising increases in orders.

Boeing was cheap before, and is cheaper now. Despite the fact that management has lost all credibility, we will still see a bounce when the Dreamliner does finally come out. Until then, the company will enjoy strength in bookings from their defense unit. Keep in mind that BA is actually a 52% defense company, with 45.9% coming from commercial aerospace. With guaranteed government revenues, they are trading at an unbelievable discount to their industry peers Lockheed Martin (PE 10.5x) and Raytheon (PE 10.9x). They have a too-high 4% dividend yield, with a PE at just 8.75 times earnings. While debt stands at $7.5 billion, Boeing does hold an A+ credit rating, has $3.3 billion in cash on hand and has refinanced so that most of their debt doesn’t mature until 2012.

Boeing is a classic American company that I am convinced will eventually make good on their word. A major positive for the firm would be a management shakeup, though it could be short-term disruptive. With a nice 65% increase in aerospace durable goods orders yesterday morning, it’s very hard to say that the aerospace trend isn’t happening.

Bullish Bankers’ Boeing Thesis

While many other analysts have their new opinions in place, there is much to know about aerospace that people end up ignoring. For the bulls, it is typically a case of “look at how high they were trading a year ago” syndrome that simply doesn’t work anymore. For bears, it is the sheer volume of bad news that is pouring in on a daily basis. In reality, Boeing should be bought at or under $41. Personally, and for the sake of full disclosure, I have limit orders in place at just above $40. In my mind, this is a “can’t lose” scenario once shares drop to these March-low levels.

You don’t need technical analysis to make this trade. The future is very bright at Boeing. The defense space alone suggests honest stock price appreciation… and I think that the aerospace unit comes back to life before Airbus, their main competitor, is able to put their competing A380 in the air with any success. The world is waiting for a new, lighter and more flexible plane; with any luck, Boeing will deliver the goods.

-Jim Regan

Disclosure: At the time of this writing, the author holds unexercised limit orders for Boeing (BA) at $40/share. Should the stock price reach this level, the author will be long Boeing and the future success of aerospace.

Since I wrote my article Paul Krugman wrote an article citing research done by Brad Setser that supports my thesis. Setser’s analysis predates my article and is really high quality work.

I am certain that Krugman didn’t have any idea what I wrote when he published his article but, just the same, Krugman’s subsequent writing is a helpful addendum to my “why not to worry about the debt tsunami” theme.

Basically, according to the analytical work done by Setser, the amount of public borrowing is being offset by a fall off in private borrowing. Less private borrowing is another way of saying that the savings rate has risen. Below is a graph from Setser’s article illustrating how the rise in government borrowing is more or less being offset by a drop in private borrowing.

Krugman concludes “We’re actually borrowing less from foreigners than we were before.”

Setser, on the other hand, worries that “…the challenge…will be to bring down the government’s borrowing as private borrowing resumes.”

-Mark Sunshine

Disclosure: This article is taken from the website Sunshine Notes with the permission of the original author. All questions regarding disclosure should be referred to the original author.

The second method is to inflate or reflate yourself out of the nominal debt burden you have created. The Federal Reserve is doing its best to create an inflationary environment so that the real value of the debt will be reduced and individuals, families, and businesses will feel comfortable enough to begin borrowing and spending once again.

The third way to reduce the burden of your debt is to repudiate the debt. That is, declare that you will not pay the debt and that those that issued the credit to you will have to take only a partial payment on the amount of funds that they advanced to you. The partial payment, of course, can be zero.

The latter two methods have an “honorable” history that goes back centuries. (Read almost anything by Niall Ferguson.) Usually, it is the government that can get away with either or both of these efforts, but in the 20th century, the private sector got much better in following the lead established by governments, especially repudiating the debt. Individuals, families, and businesses learned the ropes of debt repudiation and are now taking this knowledge to new extremes.

The case that is before everyone’s eyes these days is that of the automobile industry. Both General Motors and Chrysler argue that bondholders must take a huge cut in the amount of money they are owed by these companies so that the companies can survive and thousands and thousands of jobs can be saved. The bondholders, remarkably, have some reluctance to consent to this offer. As of this date, the aimed for restructuring of these two companies depend upon what is worked out between the companies and the bondholders.

Best guess is that the bondholders will lose. And, who will own the auto companies? Not the existing shareholders. The figure I have heard for General Motors is that existing shareholders will end up with about 1% of the ownership of the company after the restructuring takes place. And, not the existing bondholders. The biggest shareholders? The federal government and the labor unions.

The important thing, however, is that the debt problem being experienced by these automobile companies will be resolved. That is, the companies can move forward, leaner and meaner, without the terrible burden of having to honor the debts they had contracted for.

Furthermore, this is what has been proposed for the banking industry. In the plan to sell off bad assets, aren’t the banks being asked to repudiate a large portion of the debt they have on their balance sheets? The assets will be sold to investors and private equity firms to “manage” and this will get the banks out from under the burden of the “toxic assets” they have accumulated.

And, who will bear the risk of this buyout? The federal government, with the real possibility that it may, depending upon the way things work out, end up owning large portions of some of the larger banks. (An important critique of this program is presented by the economist Joseph Stiglitz in “Obama’s Ersatz Capitalism,” http://www.nytimes.com/2009/04/01/opinion/01stiglitz.html?scp=8&sq=jospeh%20stiglitz&st=cse.)

Might this plan work? Well, the people that the federal government wanted to get interested in the plan seemingly smell blood. We read this morning that Wilbur Ross and his firm’s parent company, Invesco, are leading a consortium that is going to bid on some of the assets in the government’s P-PIP. He is joining some other prominent money, like BlackRock [BLK: 166.23, -1.42 (-0.85%)], Pimco and Bank of New York Mellon, interested in getting involved in the program.

Do these people think that they might make some money out of this program? Do they believe that the risk-reward tradeoff is skewed in their direction? Damn betcha’.

Here is another case of “watch where the big money players put their money.” My guess for the future is that the evolving banking system is going to be somehow connected with the hedge funds and the private equity funds and will not have the same old “bank on the corner” feel to it that we experience now. And, somehow, this new banking system will be even harder to regulate than the current one. Otherwise, this money will not flow there. (Something to think about for the future.)

With these funds flowing into the P-PIP, one of the things the federal government is going to have to face is the huge profits that these companies will make out of the program. On the one hand, if P-PIP is successful in this way and these funds make huge profits, the banks will be freed up of their “toxic assets” and the tax payer will not be burdened with more taxes. On the other hand, the federal government will have to explain how it catered to all these “Wall Street Interests” and left the poor Main Streeter in his or her poverty.

The essence of the plan, getting back to the story here, is that the banks will have to take the “haircut”, the write down on the value of their assets. This is just another way of repudiating the debt, with the federal government standing behind the banks. Is it fair? Of course not!

A fund that made the wrong bet was Cerberus Capital Management. In a real sense, it hoped to do with Chrysler Corp. what Invesco, BlackRock, Pimco, and others, are hoping to do with the bank assets. It just got in too early when Chrysler was not in bad enough shape for the federal government to attach a “put” to the investment Cerberus made in the company. Too bad for Cerberus.

But, what about all the other debt out there? Mortgages on homes, debt on commercial real estate, consumer credit and credit cards, and small business loans? Why shouldn’t the people that accumulated all this debt get some relief as well? This is, of course, the big question and the big issue in terms of fairness. The basic answer to this is, as usual, size. The banks and the auto companies and others are big, their failures could case systemic problems for the system, and they have expensive lawyers and lobbyists working for them. Is it fair? Of course not!

The fundamental problem that is being faced around the world is a debt problem. There is just too much debt outstanding. And, actually, the amount of debt outstanding in the world is really not shrinking. Especially, as governments increase their debt to cover the debt that has been built up in the private sector. The debt problem is going to be with us for a while and will continue to get in the way, one way or another, of any kind of a robust recovery. How we get through it is going to set the stage for the type of world we have to deal with in the future.

- John Mason

Disclosure: This article was taken from Mase: Economics and Finance with the permission of the original author.  All disclosure questions should be refferred to the original author.