$700 Million Bank Heist: SEC Investigates Citibank

Did Citbank swipe $700 million from investors? Well according to an SEC filing, which alleges that Citibank sold securitized housing bonds, which they knew were sub-standard, and bet against them, something is definitely amiss. It’s easy to see why Banks are no longer seen as a safe place to invest your money, as a depositor or shareholder.

Citibank, being charged with fraud, is fighting the charges, but Recommended settlement of $285 million is likely going to stick. The SEC asked a federal judge to approve the amount, citing that $285 million would not unfairly punish the shareholders, who were essentially victims of the bank's unethical acts. Of the $285 million, the settlement breaks down as follows: $95 million is the fine, $160 million in for ill-gotten profits and $30 million in interest. We're about 18 months post signing of the Finance Reform Bill, and we're still unraveling the spoils of unbridled greed.

The national Occupy Wall Street Protest was founded on just this type of offensive conduct. I had a feeling that the near collapse of our financial markets in 2008 was the tip of the iceberg, and so far it has proven to be true.

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K.Reilly
The Cohn-Reilly Report

Netflix: Losing Its Grip

In business, being the first to market an product or service places the company (market leader) at a huge advantage over those that follow in their footsteps. Research has shown that market leaders are likely to maintain the lion's share of the market for decades. Of course, there are exceptions to every rule; and Netscape was one of the unlucky market leaders that was not able to hold its edge over followers. That said, Netflix may prove to be another such exception to the rule if they are not careful.
Netflix is still recovering from the summer debacle, where they raised their fees 60% and attempted to separate the physical DVD rental business, from the streaming videos business. The strategy to shift their business model was ill-fated. The response to the announcement should have given them all the warning they needed not to move forward with the plan. The idea probably sounded brilliant in the boardroom, but it was obviously not founded on solid research, or customer surveys. In roughly three months time, Netflix stock price dropped 36% to $115 per share. To put it in perspective, on July 7th. Netflix stock sold for $292 a share. That is quite a fall from grace.

Netflix reported a loss of 800,000 subscribers in the 3rd quarter. Analysts predicted a loss of 600,000, which had caused the stock to swiftly decline 20%. The company warned of more defections and stated that they anticipate losses for the first quarter of 2012 as a result of expanding their business to Europe. In the meantime, RedBox is enjoying the flood of subscribers looking for refuge from Netflix who took their loyalty for granted.

Netflix‘s short sightedness, is clearly a result of both lack of due diligence and arrogance. Hastings, founder and CEO of Netflix had the vision and leadership to innovate and steer the company to tremendous success, so what happened? It is hard to believe it the same person at the helm steering the company recklessly away from its customers. The loyal, or stubborn shareholders that choose not to dump the stock are looking for an explanation. The public apology did eventually come from Hastings, but the damage was already done. As they say, you can’t un-ring a bell. I am willing wage a bet this debacle has already become a "what not to do" lesson that will be remembered by Hastings, and board of directors for years to come. It will be interesting to see what strategy the company will implement for damage control, and rebuilding its US customer base.

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K. Reilly
The Cohn-Reilly Report

Job Stability & Economic Recovery May be a Long Way Away

The economic uncertainly is beginning to take root, and override any hope we may have had for a full economic recovery. Consumer confidence is at its lowest levels in two years, while corporations sit on their cash. The global financial discord is helping to fuel the fluctuating uncertainly. For the most part, the fiscal and monetary policies implemented to stimulate the economy have been lack luster. The high priced stimulus packages have fizzled out, amounting to inadequate results. What the average American doesn’t know is that these same programs would have worked famously under different economic circumstances.

The Financial crisis in the US and around the world, is far deeper than first realized. Neither the Bush Administration nor the Obama Administration were prepared for what we are facing today. The republicans can use the market fears and crawling economy for their political gain, but I dare say that NO Chief Executive in the white house, Democrat, or Republican, Black or White, would have gotten the U.S. economy moving any faster. What’s worse is that none of the world leaders appear to be willing to admit to their constituents or the world how bad finances are in their country. If the world leaders are not being completely transparent about the extent of their country’s fiscal troubles, we may never really know the depth of the financial crisis, or the optimal approach to repairing it.

Many of the economic indicators appear to be slightly off kilter, and the market seems disconnected to what's going on - particularly when you consider that corporations are reporting historically high profits for this year. All the while, Capitalism is struggling to save face, with an obscene number of fraud investigations and trading scandals coming out of the woodwork. It makes one wonder if capitalism and greed come as a two-for-one package deal, or if it's actually possible to have the presence of capitalism in a low percentage of fraud. The good news is we're not the only continent on the planet threatened with financial discord. The bad news is, we’re not the only continent on the planet threatened with financial discord. This is a complex, unprecedented situation we’re have here. In essence we have a global recession on steroids, so it’s going to take a combination of high octane, super powered fiscal and monetary programs to get the U.S. economy off life support.

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K. Reilly
The Cohn-Reilly Report

Boomerang Economics:the darkside of Globalization

In the past the effects a poor economy in one area, would impact other nearby regions or tri-state area in the case of the U.S.. Globalization, as a result of technological advancements, is a powerhouse game changer. We are no longer autonomous in our successes or failures as a nation. The U.S. financial fallout in of 2008 and 2009, sent trimmers across the Atlantic, as our economies are now more connected that ever. The financial Tsunami that followed the near collapse was powerful enough to shake the fiscal foundation of many other nations. Europe’s financial crisis began to surface in the Fall of 2010, but is now beginning show familiar signs of a near fiscal collapse for a number of its EU members. Our troubles certainly had an impact on the overseas markets, but we are not entirely to blame for the financial crisis which is quickly unraveling before us.

In a boomerang-like cycle, it is possible that the financial discord in Europe, will have a negative impact on the U.S. So much so, it is feared that this Boomerang effect may spur another recession. This was the concern of the IMF yesterday, as they discussed the importance of the EU tackling the debt crisis. If Europe fails to lasso the problem soon, there is a strong possibility that both regions will fall into a recession.

Who would have thought that boomerang economic would become one of the harsh side effects globalization.

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K. Reilly
The Cohn-Reilly Report

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U.S. Economy Stalls as Europe's Fiscal Crisis Worsens

It’s almost certain that the U.S. economy will continue to stagger through the 4th quarter. Budget and economic analysis provided to congress by the CBO (a bipartisan federal agency) supports the theory of continuing slow growth, and an unyielding jobless rate through 2012. I contend that the jury is still out were 2012 is concerned, as there are so many pending elements to the economy that leave room for reasonable doubt. For example, Obama’s jobs creation program, which offers tax cuts and other incentives to corporations has the potential to positively impact the economic picture for 2012. According to a WSJ article by Stacy Curtin, the results of austerity measures implemented in Greece are questionable and may prove to be in large part overated. Nevertheless, the fate of the EU’s financial crisis, has the potential to an impact on the US economy, negatively or positively. Being a generally optimistic person, I’m reluctant to say the idea of the U.S. slipping back into a recession is not out of the question. Meanwhile, Europe is not out of the woods either. In fact, the continent seems to be experiencing a deepening crisis.

The EU crisis has reached a new level, as the alarms are set off concerning the likelihood of Greece defaulting on their debt. Thankfully, for some inexplicable reason, the U.S. financial markets don't appear to be fluctuating as drastically in reaction to bad news from Europe. Nevertheless, the European Union's Fiscal discord is the primary focus of a meeting scheduled for this Friday, as EU Prime Ministers prepare to gather in Poland. Resolving Greece's financial crisis is undoubtedly at the top of the agenda, but the larger economies are also under heavy financial pressure. Angela Merkel, the Chancellor of Germany, took her message to the media in an attempt to diffuse the rising fears of Greece defaulting on its debt. In one radio interview, Merkel emphatically proclaimed that the EU was doing everything in its power to avoid a Greek default.

Echoing my opinion in previous articles concerning the financial crisis, Chancellor Merkel, also stated "We face a completely new challenge - one that has no historic precedent". Speaking of historical precedence, U.S. Treasury Secretary, Timothy Geithner is expected to attend the meeting with the EU Finance Ministers on Friday. This should prove very interesting, and serve to enhance our battered image.

Also, see Article citing Soros' views of the EU crisis in the Huffington Post.


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K. Reilly
The Cohn-Reilly Report

Facebook: Untouchable, & in a League of Their Own

It is clear that Zuckerberg is Superman, and his Facebook is untouchable. In the midst of a downgraded, underrated, crawling economy, Facebook managed to double its revenues in the first half of this year with a staggering $1.6 billion, according to the Wall St. Journal. There was much talk about Facebook feeling the pressure from competitors, which was obviously completly unfounded. Although, at somepoint, Facebook may have to face external threats to its marketshare, but at the moment, they're in a league of their own. As market leader, having overtaken Myspace, leaving them in struggling to retain name recognition, Zuckerberg has successfully carved a permanent mark on the pop culture around the world.

In a Superman-esque feat, Zuckerberg’s Facebook platform saved the internet advertising industry. Although, it's safe to say social networking has revolutionized the online advertising, Facebook alone accounted for nearly 1/3rd of the internet display advertising impressions in June, which is more than Yahoo, Google, MicroSoft Corp and AOL combined. This illustrates the tremendous power of Facebook, and more importantly, the power of social networking as a whole. You don't have to be a marketing guru, or economist to see the impact social networking will have on allocation of advertising dollars in the not-so-distant future. But for now, it’s all about Facebook and the hundreds of millions of people, spending millions of minutes just "hanging out" on their page, or checking out their friend's pages.

The growing obsession has created global opportunities for advertisers, and businesses looking to market directly to their target in a personal environment - which (in the case of social network sites), is a captive audience.

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K Reilly
Cohn-Reilly Report

Corporations Hoard Cash, Await Signs of Stability

There was reported 1.9 trillion in corporate profits by the end of 2010, and hoarding of cash at record levels. This tells a story of corporate fear and uncertainly when you consider the back drop of a flat job creation report for the month of August, and a S&P downgrade of US debt. I strongly believe that the catalyst for the low hiring rate last month is the S&P downgrade. The S&P downgrade shifted the climate dramatically from hopeful to not sure. Employers seem to have been shaken by the uncertainty and elected to curb their enthusiasm about the Country’s economic future. This sentiment is echoed by Jeffrey Kleintop of LPL Financial, who was quotes in the Associated Press as saying the new job figures are likely skewed by the unusual events that may have made employers reluctant to add jobs in August.

Let’s clarify; there were definitely new jobs created in the month of August (I happen to know of two in particular), but unfortunately there were just as many jobs lost, yielding a net zero for the month. In about 4-6 weeks there will likely be an adjustment made on the August numbers for better or worse. Being of a a glass-half-full mindset myself, I believe the adjustment may prove to be slightly better than the net-zero reported on Friday before the Labor day weekend. Nevertheless, fear of the country dipping back into a recession is having a dramatic impact on the market.

Friday’s New jobs report was disappointing, leaving Investors and economists alike surprised. The expectation was that there would be approximately 93,000 new jobs added, but there was no indication that jobs growth would be completely and utterly flat.. The months of June and July were revised lower, so the overall jobs growth picture for the summer is looking more and more bleak as the U.S. economic drama unfolds.


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K Reilly
Cohn-Reilly Report