The details of the toxic assets plan are still unfolding. At this point, all we know is that the U.S. Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation [FDIC] and the private sector will partner to create a market for the toxic assets currently held by a number of banks.
The stock market surged in recent days with the surprising announcement that February housing starts were up 22% from January. The news has spurred some analysts to predict that we have finally landed at the bottom of the crippling housing slump with the euphoria of recovery soon to follow. Other experts insist that this outlook is overly optimistic and that the housing slump still has further to fall. With this division of opinion, it can be difficult for investors to determine whether or not now is the right time to invest in homebuilders.
On March 10th of this year, Federal Reserve Chairman Ben Bernanke made a bold statement when he declared that large banking institutions will not be allowed to fail. What this has essentially done is put a temporary bottom in the financial market, and gave investors a reason to starting buying shares of some of the large banks. Up until this time, there was a good deal of uncertainty regarding whether or not some of the large banks would be nationalized. The government had already taken a 35% stake in Citigroup (C), one of the largest financial institutions in the country with over 7,700 branches, and investors thought other banks may also fall victim to the same fate.
Competition is good. It drives innovation and rewards superior effort. In the current tough economy however, lack of competition is better. Best Buy (BBY), the electronics retailer, has skills honed by competition, and now it also has the advantage of watching its strongest competitor go out of business.
Best Buy (BBY) is a specialty retailer of consumer electronics, home office products, home appliances, and entertainment products in the United States, Canada, and China. One of their competitors, Circuit City, recently declared for bankruptcy and is currently in the process of liquidating their inventory. Most investors expected this event to be a catalyst of Best Buy’s stock; however, the current recession has had a prominent effect on the retail sector causing retail sales to steadily decline. One of the hardest hit areas of the retail sector is the consumer discretionary area. Consumer discretionary items refer to products consumers do not need, but are products they want to buy when they have extra money. During a recession people have very little money that can be spent on discretionary items which is why these companies tend to struggle during recessions.
One feature of the recent economic stimulus package, the American Recovery and Reinvestment Act of 2009, that has garnered a great deal of attention is the first time home buyer credit. This credit is actually a revision of a similar tax credit that was introduced in 2008. While there are many similarities between the two tax credits there are very significant differences as well.