This is the Financial Almanac for Friday, March 4, 2011.
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On this day in 1933, Franklin Delano Roosevelt became President of the United States and kicked off legislation and executive orders that would later become the New Deal, a package of economic programs intended to undo the Great Depression with the “three Rs.” They were: relief for the unemployed and the poor, recovery of economic growth, and reform of the financial system to avoid another depression. Republicans opposed the New Deal either in parts or entirely as a threat to business and growth, but the success of the programs left them largely untouched by Republican President Eisenhower in the 1950s.
Part of Roosevelt’s New Deal efforts to repair America included the Banking Act of 1933, commonly called the Glass-Steagall Act after its sponsors, Democratic Senator Carter Glass and Democratic Congressman Henry Steagall. Certain provisions of Glass-Steagall blocked any single company from combining in any way the services of investment banking, commercial banking, and insurance. That prevented companies from getting so big that they threatened the financial system, and it prevented the conflict of interest that arises when the same entity grants credit through lending and uses credit through investing.
Those protections disappeared in November 1999, at the urging of then-Secretary of the Treasury Larry Summers, when Senate and House Republicans passed the Financial Services Modernization Act to allow Citicorp to combine with Travelers to form Citigroup, and other such mergers. Once the protections of Glass-Steagall fell away, too-big-to-fail financial companies rose again and — just as they had in the Great Depression, fixed seven decades earlier during President Roosevelt’s time in office — wrecked the American economy in the subprime mortgage crisis. Lacking leadership of Roosevelt’s caliber in modern times, America has enacted no new protections following the latest crisis. In fact, taxpayer money was used to prop up financial firms so that the survivors are bigger today than they were prior to the crisis, and a greater share of the nation’s financial system is concentrated in even fewer hands.
On this day in 1957, Standard & Poor’s introduced its iconic S&P 500 stock market index to track the prices of 500 large-company stocks traded in the United States. It replaced the S&P 90 as the company’s primary daily stock index. The 500 reached an intraday high of 1553 in March 2000 during the dot-com bubble, sold off to 769 in October 2002 in the dot-com crash, rose to 1565 in October 2007 during the housing bubble, sold off to 667 in March 2009 in the subprime mortgage crash, and closed yesterday at 1331. The months of March and October swapped positions marking the tops and bottoms of two mega bubbles and crashes so far this century. The two largest current components of the S&P 500 are Exxon Mobil at 3.6 percent and Apple at 2.7 percent. The index’s average company size by market cap is $24B.
On this day in 2005, Martha Stewart left federal prison after serving five months for playing part in a stock scandal. In December 2001, her broker at Merrill Lynch shared inside information with her to warn against impending trouble at biotech company ImClone Systems. Stewart owned nearly four thousand shares of ImClone’s stock at the time. She sold the entire lot just one day before the price plummeted 16 percent in a single session. When CBS anchor Jane Clayson asked Stewart about the sale during a June 2002 cooking segment on “The Early Show,” Stewart famously continued chopping cabbage and said she wanted “to focus on my salad.” She then paused and assured Clayson that an investigation into her stock dealings would exonerate her “of any ridiculousness.”
She was indicted in June 2003, tried in January 2004, found guilty in March, and sentenced in July. She paid a fine of $30,000, then appeared for her five-month incarceration at Federal Prison Camp, Alderson in West Virginia in October 2004. She made the best of her confinement, working a job, receiving the nickname “M. Diddy” among her peers, and acting as spokesperson for her fellow inmates to prison management. Upon her release, she came back in style. She expanded her company’s product line at Kmart, placed her line of interior paint at Sears, and launched “The Martha Stewart Show” on television. Her company, Martha Stewart Living Omnimedia, ticker symbol MSO, reported revenue of $230M over the past year.
From Sano, Japan, I’m Jason Kelly saying observe the world, find what makes it better, and profit from your discoveries.
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Sorry to nitpic but I must. President Obama blames everything on Pres Bush yet in year 2006 BOTH the House and Senate was controlled by democrats. Problems certainly existed before year 2006 but the dems didn’t fix any while in control. In year 1999, President Clinton was in office but you point out it was the Republicans who voted to support Larry Summers. President Obama to be consistent should say Pres Bush got all these problems from Clinton. Just to be clear, I think there is blame to go on BOTH repubs and dems and I hope in 2012 we get all new people.
Sorry for the rant. I enjoy your Almanacs.
“Just to be clear, I think there is blame to go on BOTH repubs and dems and I hope in 2012 we get all new people.”
All new people is not a solution. New faces, same results. It’s been that way for quite some time.
They’ll still be in the pockets of lobbyists, it doesn’t matter which party label they hold. Special interests do not act for the common good.
Without a doubt, blame lies with both parties. I deliberately mentioned Summers to show the bipartisan destruction of Glass-Steagall, and wanted to get in there that Obama hired Summers as his first economic director, but didn’t have space for that.
I’m not out to favor either major party. My strongest feeling is that America lacks anything near Roosevelt’s leadership qualities today. Don’t miss my article on how both parties are bad for America’s finances.
I’m glad you like the almanacs!
Concerning the idea that the Banking Act of 1933 was a good thing: What do you say to people who retort that this law would have been unnecessary had the government not also passed the law creating the FDIC? That without this insurance, people would actually have cared about where they put their money, thus forcing banks to compete with one another? That third-party consumer advocates would have kept track of the banks, thus forcing the latter to play by the rules, as it were? That, at the very least, those insisting on remaining opaque would have had no money to play with, as the public simply would not have trusted them?
This, by the way, is not my argument, but one that I heard from Peter Schiff. I found it compelling. Unleash market forces, and things tend to right themselves. Constrain them, and you get our mess.
The problem with trusting third-party rating firms to evaluate the soundness of banks is that they’ll be compromised. They were in the subprime crisis, rating as AAA some of the worst toxic securities ever created. Banks know how to get the ratings and laws they want. Always have.
As for trusting citizens to do their own due diligence and find the best banks, give me a break. The average citizen is too stupid to even stop eating before getting fat, agrees to loans they can never hope to repay, and finances unnecessary consumption on credit cards — the worst interest rates available this side of the Mafia. To expect such dopes to winnow out the best banks within well-oiled bank marketing efforts is foolish.
I’m afraid we need government insurance for banks that go bust, otherwise people would end up penniless after the inevitable shenanigans and money would find its way into home safes where it could not be lent out. I know it’s quaint to think banks need our deposits to lend anymore, but that’s how it’s supposed to work and how it should work again.
I once stayed at the home of a wealthy wealth management advisor in NH. The walls of his business office were lined with filing cabinets containing many portfolio files (a few thousand). He must have been investing hundreds of millions of dollars — I did not ask. I asked him about the current slump (it was 2009) and he started talking about the Glass-Steagall act being ditched and about the current administration having their heads in the sand about reforming the financial system. Your words ring true.
Will there be yet another major correction — is the S&P reaching a high? I find my exposure in US stocks at about 25% of my portfolio — mostly Apple, as I am a big user of their tech as a photographer. My relatives deal only in Canadian stocks — they refuse to enter the US market, not one dollar. Deep down they do not trust the financial system in the USA.
At this time, isn’t it safer to be in Canadian stock, banks, and resources (oil)?
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