Financial topics

[mannfm11]

I was hoping John would have his latest earnings update, but I am disappointed. I just read where a sizable number of firms had beaten expectations. The question is, how low did they rig expectations to get a number that could be beaten. There is a lot of deception in truth and in numbers. Clearly the fall numbers were presented to paint a picture stocks were cheap. The winter numbers presented to pain a picture that the economy is recovering. I just read Staples earnings were down 33% from a year ago, but they beat expectations. Chances are that all the numbers are fictions.

Being most of you guys are pretty good researchers, I am going to probably tell you something you already know. I have found a site called scribd.com which has a lot of books and other material on it. I found this site because I wanted to see what they had on the web about a book called "None Dare CAll it Conspiracy" by a guy named Gary Allen. His contention was that if you looked, it wasn't so much a conspiracy as they were doing it right in front of us and we were trained to ignore the fact that what was going on was scripted. I read the book a long time ago, like the mid 1990's and it changed my view. That is beside the point. Curriousity caused me to put the name of other books, then other authors in the search. Someone on a page I was a prime writer on, but had recently been banned for calling the Obama people Nazi's because of their treatment of the Chrysler bond holders and some other evil acts I had witnessed, posted a link to a Martin Armstrong on the site. Armstrong has his own time theory, which in some fashion revolves around 72 years and also 8.6 year/ 51.6 year cycles and 224 year cycles, all of which is greek to me. He has a book posted there called the "Greatest Bull Market in History" about the 1920's market that he wrote in the 1980's. He is in prison and being held, according to him because his forecasting model worked so well that the SEC accused him of manipulating markets through his forecasts in advance. In any case, that wasn't my point here, just a mention of a few books that I had found on the site. They download right to your computer.

One of the searches I had made on the site was for Murray Rothbard. Rothbard wrote a book called "America's Great Depression" and was one of the top Austrian Economists of modern times. I found on this site, a book called "The Mystery of Banking", which just happens to be one of the best econmics books I have read. I am only partially through it and he describes the pricing mechanism in a manner that is not only clear, but presents a reverse idea of conventional economics, while not muddying the water much. I am not too far in the book, but I know Rothbard is going to paint banking as the fraud it is, the great inflation of supply and the devaluation of the existing supply by further money creation through lending by the fractional reserve system. This is not a modern revelation, as those that debated the establishment of the Federal Reserve such as Charles Lindberg Sr (father of the aviator) and Representative McFadden knew about central bank inflation through the statements they made. Clearly those behind Central banks knew that the key to long term success was government indebtedness to them, thus the immediate act of World War after the establishment of the Fed. That is another story, as the only purpose of this link is the understanding of what Rothbard writes. I am going to try to cover these ideas on my blog, mainly because I would like to keep up with the extensive writing I do over time and much of it gets lost otherwise, but I will present a few jewels I have found in Rothbards book.

The primary key is that money in itself is never in short supply and the price of a dollar, if you want to price dollars is 2 loaves of bread if bread is 50 cents. But, if bread drops to 25 cents, the dollar really hasn't appreciated, merely the supply/demand constraints of bread have shifted. Also, without inflation or bank credit, it makes little difference if you sell something for a greater number of dollars than you paid for it or fewer numbers of dollars if the purchasing pwoer of what you get back buys more other goods. Having to make a profit has everything to do with the payment of interest and little else, other than to reap the labor you may have put in the game. In Austrian economics, the boom/busts that relate to wild price fluctionations and depressions are all credit related and have nothing to do with actual money.

Rothbard brought up a really interesting idea, the supply of money and the demand for money. What he said was that people in general didn't have a lot of use for more money than they needed, thus they had a desire to spend down to what they wanted to have. If there as $1 million in the system and there was another million created, the system would adjust to having $2 million, thus prices would double over time. In fact, it would be clear in this situation that the people that got the money first and were first to spend it before the system had to adjust to shortage (rothbard described shortage as a price too low for the good involved and that higher prices solved shortages) of goods and thus the savers were penalized. The $2 million doesn't go away because it has been spent and because prices have doubled, so has the amount of money needed to feel secure for the population in general doubled. This blows a big hole in the money is coming out of one good and into another, as if the price was going to stay in one place long enough for this arbitrage to be done on the street. Thus, the real game is between the Wall Street money changing bankers and the saving public in times like these where cash balances get too high, they buy overpriced stock with it. This is known as asset inflation, something that has us in this mess, but in reverse of how most of us believe.

Rothbard made an interesting point in this description of supply and demand for money that can only be examined in the light of where finance is now. Much is made of the money that the Fed has put into the system, but remember this is between the Fed and the banks and not between the Fed and the banks customers, who are the deposit holders. In some cases, I know they are in fact buying from the public, but again this is saving and not likely money people are going to run down to the store with and buy a SUV. Home equity extraction is where that money comes from. In any case, if I had $1000 in the bank and a $2000 limit on a credit card, I would in essence have $3000 of money, even though $2000 of it wasn't mine. If the consumer finance game was such that once I had to exhaust that $2000, I could get a card with $5000 on it and actually move the $2000 and not have interest for 6 months in return for a 3% fee, then my $3000 prior balance would have been restored with another $1000 extra. This might mean that I could drop my cash balance in the bank to next to nothing, keeping all extra money applied to the card, thinking I could pay it off. But, the psychology is I need a $3000 cash reserve, so there goes my bank balance and now I am a debt slave. Once the available credit on the card drops much below $3000, I either have to seek another card, refinance my house and pay off the credit or I have to curtail spending. If I lose my job, up in smoke goes the credit.

My point is that the marginal debtor/consumer is living in that fashion. Fed policy will do nothing immediately to restore home equity to enable the old game to continue. The government can backstop the mortgage business, but they can't put equity back into the housing market short run. So, the exit of equity refinance, brought on by the housing bubble, which was brought on by excessive mortgage credit, consumer credit and speculation (what comes around, goes around) now has many people realizing they need more cash in their accounts. If the guy who had the security of a moderate line of credit has either lost his job and maxed out his card or lost his credit, then he too has a new need for cash balances. The example above, where the need was $3000, if the $2000 credit limit is gone or to the extreme, he is now maxed out on a $5000 card, he now needs $5000 plus interest to pay that off and if he has lost the use of the card, another $3000 to restore his demand for money.

What this means is that the growth in money supply that is going on is more likely a rise in the demand for money (demand for money is the desired level of cash balances one needs to hold for their lifestyle and likely emergency needs), first by businesses who needed more liquidity, then by others. The counter inflation argument is that those that have lost their credit cards have lost their cash balances and will now save to re-establish the cash balances they had in theory with credit. Since additional money in the system has to be borrowed into existance, not printed as the game is thought to go on. In fact I read something that I believe Armstrong wrote (He wrote a paper you can get off scribd.com or off his princetoneconmics.com website called the Death of Capitalism) which I believe stated that government debt was nothing more than a option on money in the future. But, in any case, one has to realize that all this paper money is liabilities, even the stuff the Fed prints.

In fact, there can be nothing understood about the current situation outside of money, credit, assets and liabilities. Opinions, optimism, Felix the Cat and Ben the Bosses bag of tricks don't matter. It is the assets that anchor the liabilities and in many cases the liabilities are the assets. The consumers liabilities are the asset of the banks and others. The depositors assets are the liabilities of the banks. The FRN's are the liabilities of the Federal Reserve. The entire world is most likely the collateral for the whole game. In part, this is where the wars start. The presence and lack of credit and its effect on populations is something that is extremely hard to understand. Instead it is easier to talk about the man behind the curtain than to recognize that there aren't many good credit risks any more and that all new debt is likely just going to add to the pile of growing bad debt. Believe it or not, contrary to the drum beat of international jawboning, the only recovery possible and the one they are gunning for is the one where the busted, out of credit, US consumer goes to Wal-Mart and the BMW and Toyota stores and loads up again. Unemployed people can't buy their own products. We are now watching one more Wall Street scam where they peddle more debt. Few understand that we not only bailed them out, but we now owe them every dime with which we bailed them out with.

[mannfm11]

You were just in time John. I guess I should have waited an hour. You hear they beat expectations, but the numbers were worse than expectations. It doesn't seem to matter that the largest industrial company in US history and in combination with its former self, maybe the largest in world history is going to liquidation. You might note that all the statistics they ever acknowledge are bubble statistics, kept since 1992 or 1998 or 2000. The NAR acts as if there wasn't a housing market prior to 2000. There is continued fall in the price of homes, swelling inventory and yet purchase activity that hasn't failed to exceed the pre-bubble record since it was broken in 1997. 4.6 million homes annual sales pace is a record high for non-bubble times. You can find the old stats on calculated risk. Collapsing prices in a wildly speculative market that is being propped by phony financing. The $1 trillion put in by the Fed is dwarfed by the roughly $5 trillion in missing home equity. Earnings occurred in a bubble and they will reflect something besides SPX bubble history.

[freddyv]

I'm not sure if anyone here has seen this, but I just had to share it.
It had me rolling on the floor, alternately, laughing and crying:

http://www.wimp.com/reservelosing/

I could only stare in disbelief. Just when you think you have seen everything....

We need to contact our legislators and demand that they support HR 1207 -- Ron Paul's Bill to audit the Fed.

Congressman Paul seems to be the only one that understands economics and the constitution.

Bill

I was one who said that Ron Paul had some good ideas but could not be elected. I hope he runs in 2012 as I expect to vote for him regardless of whether or not I think he has a chance to win.

--Fred

[freddyv]

http://www.cnbc.com/id/30843969

This page at CNBC reports is no uncertain terms that Caterpillar (CAT) had a .39 profit in Q1 2009:

It's very clear. The estimate was for .04 so they are reported to have "beat" by 875%.

In fact you can find the REAL earnings data here:

http://www2.standardandpoors.com/spf/xl ... EPSEST.XLS

Click on the "Issue Level Data" tab at the bottom and go to the row for CAT, row 83.

...and you'll see that Caterpillar's earnings were actually -.19 for the quarter. HOW CAN THAT BE?

CNBC has taken it upon themselves (though they certainly are not alone in this) to report operating earnings instead of reported earnings. Reported earnings are what has been used in the past and are what you would be comparing to if you wanted to perform any historical research and yet CNBC didn't even bother to mention that they were using operating earnings.

Bloomber takes this same approach, reporting the P/E ratio of the S&P 500 as 14 or 15 when in fact it is well over 100.

--Fred

[freddyv]

The following quotes an article from CNBC at

http://www.cnbc.com/id/30960813

Note the insistance that everything is coming up roses for paragraph after paragraph and then note the last two paragraphs, especially the last one...

Sales of existing homes in the United States rose 2.9 percent in April, according to an industry survey on Wednesday that supported views the three-year housing recession was near a bottom.

The National Association of Realtors said sales climbed to an annual rate of 4.68 million from a 4.55 million pace in March. That was slightly higher than market expectations for a 4.66 million-unit pace.

"Most of the sales are taking place in lower price ranges and activity is beginning to pick-up in the mid-price ranges, but high-end home sales remain sluggish," NAR chief economist Lawrence Yun told reporters.

During the month, single-family home sales rose 2.5 percent to an annual rate of 4.18 million, while condos jumped 6.4 percent to a 500,000 annual pace. Home sales were up in three of the four regions. U.S. financial markets showed little reaction to the data.

"This report seems to offer another piece of evidence that home sales are stabilizing," said Zach Pandl an economist at Nomura Global Economics in New York.

Housing, which is at the heart of the 17-month old recession, is showing signs of stabilizing. Analysts predict home sales and groundbreaking for the construction of new homes will probably reach bottom by mid-year.

Plunging home values and rising unemployment are forcing consumers to drastically cut back on spending, a factor seen holding back the economy from a quick recovery once the recession ends.

In April, the inventory of existing homes for sale rose 8.8 percent to 3.97 million. The median national home price fell 15.4 percent to $170,200, compared to the same period a year ago. That was the second biggest percentage decline on record.

Forget, "That was the second biggest percentage decline on record" as that is a sign that we are close(r) to a recovery, the much worse news is, "the inventory of existing homes for sale rose 8.8 percent", a clear sign that housing is a long ways from recovering. The very fact that these two are diverging is quite disturbing, IMO.

--Fred

[Gordo]

I wish you guys would stop talking about 1 year trailing P/E ratios. They are for the most part meaningless, and it will be high when the market bottoms, so using it for investment purposes could be fatal. Use either price to peak earnings, or price to 10 year average inflation adjusted earnings instead. Its much more meaningful. If you want to adjust these for the fact that we had above long term trend earnings over the last 10 years, that's fine (and appropriate in my opinion). Currently valuations by this metric are still high, it is not some irrational way to make it look like now is a good time to buy stocks. On the contrary, at a major generational bottom, I would certainly expect PE10 or P/PE to be single digits (anywhere from 4-7) which is at least a 50% decline from today's index levels...

Here's a good recent article that briefly mentions some of this:

If You Think Worst Is Over, Take Benjamin Graham's Advice
by Jason Zweig
Wednesday, May 27, 2009
provided by

It is sometimes said that to be an intelligent investor, you must be unemotional. That isn't true; instead, you should be inversely emotional.

Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events.

At this moment, consulting Mr. Graham's wisdom is especially fitting. Sixty years ago, on May 25, 1949, the founder of financial analysis published his book, "The Intelligent Investor," in whose honor this column is named. And today the market seems to be in just the kind of mood that would have worried Mr. Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over.

You can't turn off your feelings, of course. But you can, and should, turn them inside out.

Stocks have suddenly become more expensive to accumulate. Since March, according to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That's the sharpest, fastest rise in almost a quarter-century. (As Graham suggested, Prof. Shiller uses a 10-year average P/E ratio, adjusted for inflation.)

Over the course of 10 weeks, stocks have moved from the edge of the bargain bin to the full-price rack. So, unless you are retired and living off your investments, you shouldn't be celebrating, you should be worrying.

Mr. Graham worked diligently to resist being swept up in the mood swings of "Mr. Market" -- his metaphor for the collective mind of investors, euphoric when stocks go up and miserable when they go down.

In an autobiographical sketch, Mr. Graham wrote that he "embraced stoicism as a gospel sent to him from heaven." Among the main components of his "internal equipment," he also said, were a "certain aloofness" and "unruffled serenity."

Mr. Graham's last wife described him as "humane, but not human." I asked his son, Benjamin Graham Jr., what that meant. "His mind was elsewhere, and he did have a little difficulty in relating to others," "Buz" Graham said of his father. "He was always internally multitasking. Maybe people who go into investing are especially well-suited for it if they have that distance or detachment."

Mr. Graham's immersion in literature, mathematics and philosophy, he once remarked, helped him view the markets "from the standpoint of eternity, rather than day-to-day."

Perhaps as a result, he almost invariably read the enthusiasm of others as a yellow caution light, and he took their misery as a sign of hope.

His knack for inverting emotions helped him see when markets had run to extremes. In late 1945, as the market was rising 36%, he warned investors to cut back on stocks; the next year, the market fell 8%. As stocks took off in 1958-59, Mr. Graham was again pessimistic; years of jagged returns followed. In late 1971, he counseled caution, just before the worst bear market in decades hit.

In the depths of that crash, near the end of 1974, Mr. Graham gave a speech in which he correctly forecast a period of "many years" in which "stock prices may languish."

Then he startled his listeners by pointing out this was good news, not bad: "The true investor would be pleased, rather than discouraged, at the prospect of investing his new savings on very satisfactory terms." Mr. Graham added a more startling note: Investors would be "enviably fortunate" to benefit from the "advantages" of a long bear market.

Today, it has become trendy to declare that "buy and hold is dead." Some critics regard dollar-cost averaging, or automatically investing a fixed amount every month, as foolish.

Asked if dollar-cost averaging could ensure long-term success, Mr. Graham wrote in 1962: "Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions."

For that to be true, however, the dollar-cost averaging investor must "be a different sort of person from the rest of us ... not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past."

"This," Mr. Graham concluded, "I greatly doubt."

He didn't mean that no one can resist being swept up in the gyrating emotions of the crowd. He meant that few people can. To be an intelligent investor, you must cultivate what Mr. Graham called "firmness of character" -- the ability to keep your own emotional counsel.

Above all, that means resisting the contagion of Mr. Market's enthusiasm when stocks are suddenly no longer cheap.

Write to Jason Zweig at intelligentinvestor@wsj.com

[John]

Dear Gordo,

> I wish you guys would stop talking about 1 year trailing P/E
> ratios. They are for the most part meaningless, and it will be
> high when the market bottoms, so using it for investment purposes
> could be fatal. Use either price to peak earnings, or price to 10
> year average inflation adjusted earnings instead. Its much more
> meaningful. If you want to adjust these for the fact that we had
> above long term trend earnings over the last 10 years, that's fine
> (and appropriate in my opinion). Currently valuations by this
> metric are still high, it is not some irrational way to make it
> look like now is a good time to buy stocks. On the contrary, at a
> major generational bottom, I would certainly expect PE10 or P/PE
> to be single digits (anywhere from 4-7) which is at least a 50%
> decline from today's index levels...

I have no objection to using these other measures, but I disagree
that P/E1 is meaningless. To the contrary, it's crucially
meaningful, for two reasons.

First, we have to remember that I have a completely different purpose
than you have. You're a day trader with an evidently magically
ability to call all the market tops and bottoms, and I have no
disagreement with you that P/E1 is useless for those trading
purposes.

But I'm not a day trader, or any kind of trader. I'm a writer and
analyst who's incredibly pissed off at what's happened, and what's
continuing to happen.

Thus, when I see the Wall Street Journal lying about P/E1, I get
REALLY furious.

** Wall Street Journal and Birinyi Associates are lying about P/E ratios
** http://www.generationaldynamics.com/cgi ... 26#e090426

** Laszlo Birinyi provides insight on his fantasy price/earnings computations
** http://www.generationaldynamics.com/cgi ... 22#e090522

This morning I heard some jackass "analyst" say something like, "The
market has a P/E of about 12, and the historical average is 16."
Where the hell did those numbers come from? This stuff makes me
sick.

Once again, it has nothing to do with what you do. But for me it's
crucial.

The second reason that P/E1 is meaningful is because it's
historically valid. You say that P/E10 and P/PE will go down to 4-7
at the bottom, and I agree, but so will P/E1. And P/E1 is much
better understood than P/E10 or P/PE. In fact, when I talked about
P/E in the early days (2003-4), I actually used P/E10, following
Shiller's lead, but I switched to using P/E1 because it made the same
point, and because it's better understood.

So, just keep in mind that you and I have completely different
objectives.

Sincerely,

John

[aedens]

http://www.bea.gov/newsreleases/nationa ... dp109p.xls

A increase in production rate. Do not read anything into it.
Gives a chance to repair a few nusance items soon.
Key word is still gradualism "landing" and as posted adjustments
to human capital on target to ~2 percent additional
ensueing. Pipe line refill assumed to date ~52% from peak
rate.
http://calibre.mworld.com/m/m.w?lp=S&s= ... &P=2&GRT=0
Emptor
As conveyed of late, by a Bull Market participant will begin to question these “urban legends.” And when they do, they'll come to the rather shocking realization that these mega-bearish theories have very little merit. A “crisis of confidence” in the bearish consensus will induce a concomitant corrective impulse of “repentance” and will sustain the final phase of the countertrend rally. MV
They trade positions as we supply it material assembled by who? Of course we see the trends but are we not the ghost in the machine since my Company where I work is in the Dynamic Basic Material Sector Intellidex Index. Let us accustom ourselves, then, not to judge things solely by what is seen, but rather by what is not seen. The sophism on this point consists in showing the public what it pays to the middlemen for their services and in concealing what would have to be paid to the state. Once again we have the conflict between what strikes the eye and what is evidenced only to the mind, between what is seen and what is not seen. Austrian economists are in general agreement with the proposition that market forces must be traced back to the plans of market participants, particularly the plans of entrepreneurs. Analytical differences arise over whether emphasis is to be placed on the expectations and decisions in which plans originate (an ex ante perspective) or on the experience the testing of plans provides (an ex post perspective). It seems to me that both perspectives are necessary for the analysis of dynamic economic processes, and that neither should be allowed to eclipse the other permanently. * Profit is then seen as the reward not for superior foresight, as Mises viewed it, but for the discovery of a piece of knowledge which others lack.

http://science.nasa.gov/headlines/y2009 ... iction.htm
Earth trend to reality not Planet Gore Space cadets

[sadhic]

Guys , I am not a financial expert.infact i dont even understand 20% of the below article from this the following blog
http://www.anilselarka.com/

But definetly understood the bottom line of the article..

---------------------------------------------------------------------------------------


By Kalidas Ref: 0905-027 of 4-May-2009

So they did it again. The investors applauded. CNBC reported that the financial sector appears to have bottomed out, and the market is up 10% in just under 3 days. The market could not have been wrong. They say the market is ahead of the events by 6 months. If that was so, why did we lend into deepest recession in post-war history. Who remembers that? The people’s memory is like RAM (Random Access Memory) which remains so long is the power up and running. The moment the power is switched off, the memory is gone forever.

It was carefully planned conmen’s game. The crooks are always suggestive so that the target does exactly what is required of them.

Look at the past events, only 2 months back. Note the following:

1. Citigroup was in dire trouble. The President and Senate were obliged to release $ 45 billions in cash in the form of Preferred Perpetual Shares with 10% coupon. It was Paulson’s brilliant idea. He may have told the President, Senators and American tax payers that they would earn 10% income by way of dividend, in addition to rights to subscribe to Citigroup’s shares under warrants attached.

a. Everyone believed them. Wow, we are getting 10% return when we are getting only 1% while lending to various banks. Excellent. And we will make money in equity too. What a fantastic idea.

b. No one asked them how Citi is going to earn when dividend servicing cost of this deal alone will be $ 4.5 billions annually. This is in addition to similar servicing costs payable to other large Middle East investors.

c. Money was released in the name of TARP. As soon as this purpose was achieved and the money was already in the kitty, these guys allowed a few days to pass. They observed that direct injection of cash was not helping them. The losses will have to be written off in the books of the bank and any money they receive from the Fed or Treasury will straight away go to write off that debit. No money will go to the market by way of lending.

d. The trio thought that this was a problem. We do not want to write off the amount from the Citigroup’s books. It also needs another does of $ 300 billions. The President and Senate will not simply release more funds if Citi goes on showing more and more losses.

e. The devil’s mind started working. Target: to get $ 300 billions; Aim: Not to show any losses in the books of Citigroup, otherwise it will be officially bankrupted. What to do?


f. IDEA - a Great Idea - Paulson appears to have screamed in the sound proof cabin.

i. Hey, Pandit - you do the following:

1. We will not give you cash, because it is impossible.

2. We have given you $ 45 billions. You better give the treasury $ 7 billions of guarantee premium and we (US government) will guarantee your obligations falling due.

3. Those junk assets when backed by the AAA rating of US government will soar. Those holders can discount those bonds with their bankers because they are backed by the guarantee and full faith of the US government.

4. Since these bonds have become realizable assets, you do not have to make any provision in your books. Although it is your bad assets, it will not be bad assets any more. They are now fully insured by the US government.

5. So you will not write off these bad assets in your books. They will now be US government’s troubled babies.

6. When you get the demand for payment under these bonds, simply redirect them to US government and ask them to pay under the guarantee for which you paid guarantee premium of $ 7 billions.

7. Pandit: Wow, great. You gave us the brilliant idea; we no longer have to write off any more bad assets. But US government will have to write them off one day in their books.

8. Paulson : Yeah, one day. By then, you will not be there, I will not be there, and perhaps this Bernie too may not be there. And who cares?

9. Pandit: Excellent. But what do I do for $ 45 billions already borrowed. I do not have money to pay even 10% dividend, forget the principal.

10. Do not worry… Bernanke will take care of it. Hey, Ben, you better convert those PPS (Perpetual Preferred shares) into common equity immediately so that Pandit does not have to bother about the dividend servicing.

11. DONE. I will take care of that. Said the Bernanke

12. Now Pandit, since you do not have to make any provision for $ 306 billions and you do not have make any payment of dividend on preference shares, you can write a memo to your staff that you have the best quarter since 2007. Your stock will soar.

13. Did you buy any? Pandit asked.

14. I have the right to remain silent, said the other guy.

This is what appears to have happened a day before.

When the Citi lost $ 45 billions and Fed gave them $ 45 billions as capital, following entries could have been passed.

1. Debit : $ 45 billions -Cash account (being sum received from the Fed)
2. Credit : $ 45 billions -Perpetual Preferred Share Capital (to US government @10% div CPN)

3. Debit : Profit & Less Account $ 45 billions (Amount written off)
4. Credit : Toxic Assets (Toxic debt assets - also contra of Toxic liability)

5. Debit : $45 Billions - Toxic Liability to Customers (could be X? We do not know)
6. Credit : $45 billions - Cash withdrawn to make the payment to the creditors

7. Debit : $45 Billions - Perpetual Preferred Shares (to US Government) to convert to common.
8. Credit : $45 Billions - Common Stocks issued to US government

9. Debit : $45 Billions - Common Stocks Issued to US Government (Capital written off)
10 Credit : $45 Billions - Profit & Loss Account (Under Item 3)

Final result - TARP fund issued by US government for issue of Perpetual Preferred Shares is finally written off by first converting into Common stock and then by way of reduction of capital of common stock to write off the debits in profit & loss account (now intangible assets)

Under above scenario, the losses are written off in the books of Citigroup because the TARP fund issued for PPS capital were required to be shown in the books of Citigroup. Also note that there was no need to convert Perpetual Preferred Shares into Common Stock in the name of boosting capital of Citigroup because both were Capital - one was Preference shares and other common stock. (Equity). Under the law, both were acceptable form of the capital, ranking subordinated to debt. What was the motive? Here is the possible answer.

While seeking approval of $ 700 billions under Paulson’s Plan, the Senators and President were told that they were going to give the funds to Citigroup with 10% dividend coupon. That is, US government was to earn 10% from Citigroup, that is, $ 4.5 billions per year (on $45 billions lent). By transferring to common stock, the dividend coupon was compromised, and the US government’s priority for preferential treatment of asset distribution in the event of insolvency was also compromised or watered down.

So first, these guys tell the Senators and President that US government or Tax Payers will earn 10% on amount lent to obtain their approval under TARP funds. Then, these guys convert PPS to common stock to forego 10% dividend, and then reduce the Equity capital to write off the debit in the Profit & Loss Account. In short, US government loses $45 billions within 6 months.

Now, see the interesting part for guarantee of $ 306 billions issued by US government for toxic debt held by the Citigroup. In this case, the guarantee was designed in such a way that the losses are not written off in the books of the Citigroup. As result, the Citigroup would not be showing any losses for next 4 quarters. The losses would be ultimately written off in the books of Federal Reserve as under:

Current Position in the books of Citigroup:

11. Debit : Toxic debt of $306 billions held by the bank (market value Zero)
12. Credit : Toxic liability of $ 306 billions payable to other creditors (could include X)

The item under 11 will need to be written off to the debit of Profit and Loss account if direct funds were received from US government under TARP.

To avoid the writing off such huge amount in the books of Citigroup, Paulson/Bernanke designed the guarantee route. They showed to US government that Citigroup would give $ 7 billions as guarantee premium to US government for arranging its guarantee. The US government is led to believe that it is just getting the income without letting out actual funds, because the guarantee does not involve movement of funds until it is invoked.

It is like we pay insurance premium to insurance company to obtain their guarantee for insured act. If the insured act materializes into real liability, then only the insurance company would be required to pay.

So these guys Paulson and Bernanke showed “moon” to the US government that they will get a premium income of $ 7 billions without telling them what it was getting into - massive deferred liability of $ 306 billions in near future.

As soon as the Toxic debt is guaranteed, the worthless junk securities are elevated to AAA credit due to the guarantee of US government.

When the Citigroup faces the claim from creditors for $306 billions,

It will hand over the corresponding toxic debt now guaranteed by US government to the creditors.
It will pass the contra entry in its own books as under:
a. Debit : $306 billions Creditors Account in discharge of obligations

b. Credit : $306 billions of Toxic debt transferred to the creditors.

c. In short, the Citigroup balance sheet size is reduced by $ 306 billions (both assets and liability of equal amount are reduced)

The creditors have two options -
a. either to demand the repayment of the Citigroup’s liability

b. OR sell the Toxic debt to the market.

When the ultimate market beneficiary of the guaranteed toxic debt needs payment, it will approach the Citigroup for payment. Citigroup, instead of making payment, will direct the claimant to the US government to demand the payment under its guarantee.
In short, Citigroup will no longer need to write off the massive loss of $306 billions from its own book. There will be no longer losses every month. It will begin to show the profit showing the world that recovery process has started working for Citigroup which is a myth.
The US government when facing the claim of $ 306 billions under the guarantee, will need to write off the amount in Fed’s balance sheet. In short, the debit-able losses of Citigroup will be finally written off in the Fed’s balance sheet, not Citigroup’s balance sheet.
Supposing a top Investment Bank (X) is owed by Citigroup by, say, $ 30 billions. Citigroup will hand over the US government guaranteed debt to X. X has two choices:
a. To seek the payment of $30 billions from Fed under its own name. However, it will expose its name for scrutiny later in the event of any enquiry.

b. To sell the securities of $30 billions to the market players say, A, B, C, D. These market players will ultimately demand the payment from Fed under their own respective names. Even if there is any enquiry, the name of the penultimate holder, that is, X, will not be disclosed. It can therefore avoid any scrutiny.

c. The name of X as one of the creditors or counterparty of Citigroup is strongly suspected because the Treasury Secretary Mr. Paulson belonged to that group earlier in highest executive capacity.

d. In short, Citigroup (and possibly X or its associates) were saved by the above exercise of “US government guarantee of Toxic debt held by Citigroup”. But the final victim would be the US government or American Tax Payers. They were obviously defrauded by the antics of Bernanke, Paulson and Pandit without the knowledge of the Senators, the President of the United States of America. Or American Tax Payers.

e. When the $306 billions become finally payable, no further approval of Senate or the President would be required because the deal was already approved earlier for guarantee. US government, Senators or the American Tax Payers would not know what had hit them when they have to ooze out $ 306 billions at that time. It may happen 6 to 9 months from now on depending on the maturity profile of guaranteed debt.

It will be observed that good quarterly numbers of Citigroup or JPMC or BOA are not necessarily due to easing of credit crisis or recovery of the economy. These are the acts of window dressing. The balance sheets of most of the large banks are being white washed to look them better and more palatable to the investors. The credit crisis is in fact worsening.

It is therefore not too much to say that the “Citi is saved, the nation is destroyed”. It is a fact.

Kalidas, Hong Kong

4-May-2009 Ref: 0905-027

[freddyv]

It is sometimes said that to be an intelligent investor, you must be unemotional. That isn't true; instead, you should be inversely emotional.

Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events.

I agree with the part about training oneself to "be worried" about such events and to recognize it but being inversly emotional may be just as wrong as being in the same emotional state as everyone else.

In 1981 or 1982 I started to invest in the stock market because I could see how down everyone was on it and how much value there was. I didn't know much about the economy but I always had a feel for these societal shifts and I knew that the fearful mood had created a vacuum of buyers and so I jumped in.

Just a few years later in 1985 I made the single biggest mistake of my investing life by taking all my money out of the market because I felt that everyone was getting too exuberant. What I learned is that you need to put everything in perspective. I should have done more research into how to spot market turning points, how to gauge momentum and how demographics and other factors influence various investments. 30 years later I make sure I am honest with myself about what I don't know and look to wiser people for their perspective as often as I can.

I know you didn't mean that you just do the opposite of what everyone else is doing but I think it is important to have a clear understanding of HOW to use that knowledge, or any knowledge, for that matter. I listen to a number of crusty old guys who share the same view while coming at it from different perspectives: the market is no bargain and this bear has farther to run. Just about anyone I have heard with any sense, and as much as you irritate me, Gordo, I think you have more sense than the typical pundit on CNBC, says that we are not out of the woods, while all of the fools (Larry Kudlow is the perfect example) are ready to call a bottom at the drop of a hat.

As for P/E 1, I agree with John's comment; it's the lies and the shifting of one metric to a more convienient one that bothers me. Bitching about it is a way to keep from being seduced by it. I have no problem with peak earnings or operating earnings or even forward earnings as long as the media is honest about what they are using and The Wall Street Journal and Birinyi Associates and Bloomberg are upfront about what they are doing. They have not been and it will never change if they are not called out. I have this vision that 10 years from now we will be back to using trailing 12 month, as-reported earnings and anyone using anything else without full disclosure will be severly reprimanded by the very media that now lies to us as a matter of course.

-Fred