$700 BILLION - what does the number really mean?

Well the bail out passed yesterday, 700 billion dollars. So how much is 700 billion dollars anyway? Well I was thinking about some things we spend money on here on PEI and I decided to see how far $700 billion would go... here is what I came up with. With 700 billion dollars we could.......

- stop collecting all government revenue and fees ( think about it NO PROVINCIAL TAX of any kind) and run the entire government and all programs for 530 YEARS. We would even have a free bridge to the mainland.

- build 17,500 more wellness centers like we have in Summerside. Then there would be 2 for every resident of the greater Summerside area.

- pay Islanders $8400 for every dollar they bet on VLTs over the next 12 months

- build 14000 new hospitals

- give every islander 700 new corvettes.

Ok I will stop here, you get the point that its a ridiculously large amount of money. BUT IS IT ENOUGH TO STRAIGHTEN OUT THE US FINANCIAL SYSTEM?

considering the fact that there are $13 trillion in mortgages in the US, $700 billion allows for a 5% default. So the answer is most likely no. Last month 70,000 people were losing their homes every week! So what will fix the problem?

Well the $700 billion will allow participating banks to remove distressed loans off of their balance sheets which will allow them borrow and lend freely to each other. That gets the money supply moving and is very good for the economy. When money moves, the economic system starts back up. But at a much slower pace then we have become accustomed to. The fix will come from consumer debt reduction, increased savings and less dependence on consumer credit. Their may also new rules allowing increased foreign ownership of our public companies. These companies may be forced to raise capital by cash for equity swaps, as opposed to leverage borrowing. Keep a close eye on the finance divisions of the car companies and other companies who finance large consumer purchases. I think you will see these divisions get scooped up in the near future.

Since we are talking about the $700 billion and the revival of the banks, one has to wonder if US bank stocks might be a good buy any time soon. Without trying to sound continually negative, the answer is NO. The reason? Its the accounting. It needs to be changed and quickly. Heres why.

say you are looking at a US bank. You notice a huge loss 3 months ago and 3 months latter you notice a huge recovery. Seems like an improvement? Thats the problem, what seems to be, may actually not be.

When a bank decides to foreclose they move the loan off the books at $0 value. So they take a paper loss for the value of the loan. Lets say that they move 1000 home loans of $100,000 each off of the books or $100 million dollars in loans. For the reporting quarter they report a $100 million dollar loan loss. They then move the files to the recovery department and lets say that during the next quarter they sell all the homes at half price. Now for the next quarter they are showing a $50 million dollar profit. You as an investor are looking at the improvement and thinking it might be a good time to buy. Well nothing really changed. The bank has just turned some wood into cash. No profit.

So dont jump into stocks because the US passed the $700 billion package. You are going to need some serious professional help to get value in the next bull market. Your hunches and friendly neighbor tips could cost you big time. On the upside, as long as you are not losing money right now and dont get locked into a GIC, you stand to make huge gains when the market turns.


Jeff McLellan, President MN Investments