Financial topics

[mannfm11]

I love some of this stuff. I was talking on the phone today with a gold bug friend of mine who I met on the Prudent bear board back in 2001. He can't seem to figure out how banks work, though I have told him over and over again. Should the Fed buy all the bonds and mortgages from a bank and all they have is the credit the Fed has put on their books and it not be enough to satisfy the liabilities of the bank, then how much money can they lend? None is the answer because this money don't exist outside of banks. The bank would have its depositors and the assets backing the deposits would be the same, basically the bonds and mortgages on deposit at the Fed. If the bank took one cent of that money and loaned it to another customer as banks traditionally do, it wouldn't have enough money to satisfy the depositors. It is going to take some thinking for most of you guys to follow this, because the entire world is ignorant as to how banks really work and I am not talking about the bullcrap they taught us in money and banking, which is kind of how they used to work when people actually dealt in cash. My point is that the Fed isn't buying these mortgages so banks can go out and make more mortgages. They are buying the mortgages so the banks can pay off their cash liabilities, most notably Citicorp and Bank of America, but most likely the other big NY banks as well.

Banks don't loan money, they create credit and act as surety for those that need credit. The money a bank would get for its bonds or mortgages is already loaned out, as their depositors hold that position either in fact or in some fashion, because that is what bank loans are, deposits. All the Fed credit received from these sales is already owed and it isn't this asset that constitutes money, but instead the capacity of the bank to act as surety on further loans. If the bank could act as surety on more loans, it wouldn't need to sell the assets on its books, because having cash has very little to do with modern banking. Being able to absorb its losses and balance its books with other banks is more the case as to whether a bank can lend more money than reselling its assets. In the summer of 2006, I saw that both Citi and Bank of America had in exess of $200 billion in Fed funds liabilities, I believe $400 billion in the case of Citi. This is why the backstop of the US government on the mortgages held by these 2 firms, not the credit worthiness. Both of these banks over-extended themselves and the government didnt' want us to know, the reason for the secret, take the money or else meeting with Paulson. Paulson wanted to hide the fact they were all broke by attempting to shed light that they didn't really need the money but were merely taking it to set an example for those that did.

We are watching the world economic picture fall apart and yet some people just can't seem to figure out that those of us that have seen this coming for a good decade or more might know a little more about what is going on than those that run the just think positive and the balance sheet will magically defy physics and other math and correct itself to our mutual benefits. This will be worse than 1933 because the inflation was more and there were more coins in the fusebox this time. There was at least a limit to the excess. There is so much speculation that default bets that most likely could never be paid are being made against the credit of the US in euros. My bet, from what I am now reading is that the Euro won't last many more years and that to get paid in them for any winning bet will be a pyrrhic victory at best.

There are comparisons with Japan, but this isn't Japan. In fact, I believe we would have another story with Japan had the US not blown the bubbles it has while Japan was deflating. The US has a balance of payments deficit and the rest of the world is addicted to the cashflow. It isn't going to be easy for the US to recover by flooding the world with consumption from an overburden and unemployed debtor. The entire equation is busted and can't be fixed.

I have been writing on this subject for years and ever since I heard a guy in the mid 1990's say that it was going to implode because there isn't a mathematical solution, I have been developing my ideas and reading. Much of what I have learned came from a guy named Doug Noland, who works for the Prudent Bear fund. Doug was writing on the FNMA and FHLMC mess in 2000 and clued me in on what was really creating these bubbles, money extracted from home equity. The 19 to 1 leverage in this game is unwinding faster than it can be replaced. This is not self liquidating debt.

[freddyv]

CNBC hasn't updated their earnings yet this week so I went straight to the Thomson Rueters site and got this:

... corporate profits are expected to drop 28.1 percent during this earnings season, ThomsonReuters data shows, with seven of the S&P 10 sectors expected to see double-digit declines.

The page is dated 1/23/09.

--Fred

[StilesBC]

CNBC hasn't updated their earnings yet this week so I went straight to the Thomson Rueters site and got this:

... corporate profits are expected to drop 28.1 percent during this earnings season, ThomsonReuters data shows, with seven of the S&P 10 sectors expected to see double-digit declines.

The page is dated 1/23/09.

--Fred

Ouch, I had a feeling that the number was going to be horrible. When I saw it unposted on CNBC I was sure. If that number holds (which I don't imagine it will), I get total 2008 earnings of $43.81, giving a trailing P/E1 of 18.96. Did I get that right?

[StilesBC]

I'm not of the mind that there is any magic pill to fix the economy. We all know the imbalances that need to be unwound. And they will be unwound - one way or another. But I do believe there are ways in which this can be done better from a moral perspective, and provide us with a strong economy to lead the world into a 1st turning, rather than lag behind. A recent article on my blog highlights some fairly revolutionary ideas that I feel will ensure that happens:

I often take flak from readers in the comments section of my blog or in personal e-mails about being unfair in my criticism of modern day monetary policy and of policy makers in general. Often, the critics suggest that if I feel what is being done is so idiotic, perhaps I should put forth my own solutions. Kind of like a heckled baseball player suggesting the fans try and hit that pitcher's four-seam.

Well, no. Not really. That's a bad analogy. Bad, because the game I'm playing is different from those currently making decisions. I don't believe government can conceivably "fix" the economy because I don't believe in centrally planned economies. I don't believe a government can actually "create" anything - it can only displace "creation" from somewhere else or borrow it from the future.

Therein lies the problem. The entire structure of our economy was unsustainable. It was based on a belief that we could borrow infinitely from the future, yet not expect to one day bear the consequences. Yet thus far, all proposed solutions offer nothing that rejects this most unrealistic paradigm, and attempts to replace it with something else. All proposed solutions offer only the "hope" that we can return to this unrealistic paradigm. Separate from my belief that a return to this paradigm is undesirable, is my belief that it is unobtainable. Unobtainable because of the irreparable damage done to the collective psychologies of those involved in carrying it out. Also unobtainable because of a demographic situation in offending economies that will be seeing a smaller generation (Millenials) needing to take over from the productivity of a much larger generation (Boomers).

If a resuscitation of this old paradigm were to occur, two things would need to happen: a) younger generations would need to be re-convinced of the merits of going into debt (ie. a materialist "gotta have it now" mentality); and b) they would need to take on an even higher proportion of debt than their parents as a function of their smaller size.

Neither of those things are even remotely possible.

A legitimate solution needs to address the inconvenient truth that the old paradigm is not coming back. For the 97% (or thereabouts) of people who have been left with the short end of the stick throughout this giant experiment, this should bring no anguish. However, most people's major source of information (mass media, corporate advertising, politicians) happen to be among the 3% that benefited greatly from the common person's plight. Hence, any notions that the old paradigm be replaced are met with the fiercest of fear-mongering propaganda one could imagine. I suppose if I had a way of legally stealing from others, I would defend it also. But alas, I don't.

Read more at:
http://futronomics.blogspot.com/2009/01 ... shift.html

[John]

-- Accelerating downward

Confirming the story that Fred referenced in his posting a couple of
days ago, here's the latest summary from CNBC Earnings Central:

> Earnings Central Stats

> As of Friday, January 23rd:

> The blended earnings growth rate for the S&P 500 for Q4 2008,
> combining actual numbers for companies that have reported, and
> estimates for companies yet to report, fell to -28.1% from -20.2%
> from -15.1% due in part to downward estimate revisions for
> Financials.

> On July 1st, the estimated growth rate for Q4 was 59.3%, and by
> October 1st, the estimated growth rate had fallen to 46.7%. (Data
> provided by Thomson Reuters)

Did CNBC hold off posting this data because it was so bad? It
wouldn't surprise me, but it may simply be that the guy who does the
updating took Friday off.

It wasn't so long ago that CNBC and other media refused to even
mention the word "depression," for fear that even using that word
would trigger one. That's really hilarious.

I remember one day when CNBC cut off a Q&A session by Bernanke
because one of the economists in the room asked a question about how
he would compare today's economy to the Great Depression. What a
bunch of clowns. And I was really pissed off at CNBC for that,
because I really wanted to hear Bernanke's answer.

One day last year (on May 27, to be exact), CNBC's "Aflac question of
the day," which they pose just before the 7:15 am commercial, was "How
long did it take the Dow Industrials to recover after the 1929
crash?"

I waited with breathless astonishment for the commercials to end so
that I could see them answer the question (1953). But to my even
greater astonishment, they simply skipped over it after the
commercials. I can just imagine the chaos in the control room that
morning, as someone screamed, "WHAT??? YOU CAN'T ASK THAT
QUESTION!!!" What a bunch of clowns.

Well, I digress.

Here's the updated fourth quarter earnings growth estimate table:


Date 4Q Earnings growth estimate as of that date
------- -------------------------------------------
Feb 6: 50.0%
Jul 1: 59.3% Start of previous (3rd) quarter
Oct 1: 46.7% Start of quarter
Dec 5: 10.0%
Dec 12: 5.9%
Dec 19: 0.5%
Dec 26: -0.9% End of quarter
Jan 2: -1.2%
Jan 9: -15.1%
Jan 16: -20.2%
Jan 23: -28.1%


Estimates appear to be falling far more rapidly than in previous
quarters.

And don't forget something important: These percentage changes are
based on the fourth quarter of 2007, and that quarter ended 21% down
from the previous quarter.

So even if the growth rate stays at -28%, that's actually down a total
of (79%*72% = 57%) 43% from two years ago. And it's doubtful that
the -28% will hold; -40% looks more likely, which would total -68%
from two years ago.

I listened to the Caterpillar analyst phone call this morning,
because Bloomberg televised it, and it was really depressing. The
CEO was talking about one massive layoff after another, reduced
hours, office closings, and so forth.

And that's only one of numerous layoff announcements today. I would
call this day Black Monday, just from the layoffs.

Here are the current "What's New" stories on the WSJ.com site:

What’s News — Business & Finance
> American Express Earnings Drop 79%
> TI Cuts Work Force by 12%
> Stocks Make Modest Gains What’s News —
> Davos: Sovereign Funds Are Wary
> IBM Moves to Cut 2,800 Jobs
> Caterpillar Plans Deep Job Cuts
> Thain Defends Tenure
> Halliburton to Settle Bribery Probe
> Pfizer, Wyeth Unveil Deal
> Barclays Seeks to Soothe Investors
> Sprint Nextel to Cut 8,000 Jobs
> GM to Lay Off 2,000 More Workers

What a depressing list of headlines. Amusingly, the only one that
the pundits think is "good news" is "Pfizer, Wyeth Unveil Deal,"
because that reminds them of the good ol' days, when huge leveraged
buyout deals would grow the credit bubble.

Sincerely,

John

[freddyv]

-- Accelerating downward

Here are the current "What's New" stories on the WSJ.com site:

What’s News — Business & Finance
> American Express Earnings Drop 79%
> TI Cuts Work Force by 12%
> Stocks Make Modest Gains What’s News —
> Davos: Sovereign Funds Are Wary
> IBM Moves to Cut 2,800 Jobs
> Caterpillar Plans Deep Job Cuts
> Thain Defends Tenure
> Halliburton to Settle Bribery Probe
> Pfizer, Wyeth Unveil Deal
> Barclays Seeks to Soothe Investors
> Sprint Nextel to Cut 8,000 Jobs
> GM to Lay Off 2,000 More Workers

What a depressing list of headlines. Amusingly, the only one that
the pundits think is "good news" is "Pfizer, Wyeth Unveil Deal,"
because that reminds them of the good ol' days, when huge leveraged
buyout deals would grow the credit bubble.

Sincerely,

John

I actually have a feeling that we may see an upturn here. The bad news has been so bad that it really isn't having any effect of stocks at this point and history tells us that the market, and the economy, don't go straight down.

--Fred

[John]

Dear Fred,

> I actually have a feeling that we may see an upturn here. The bad
> news has been so bad that it really isn't having any effect of
> stocks at this point and history tells us that the market, and the
> economy, don't go straight down.

I wish I could agree with you, but I see the world economy on
spiraling faster and faster downhill. If by "upturn" you mean a
stock market rally, then sure -- as Gordo likes to point out, there
are brief bear market rallies at the worst of times, and we both know
how investors are.

But for the economy as a whole, the direction is downhill, and going
faster and faster. When was the last time you heard any significant
good news? There'll be upward blips here and there, but I just don't
see any upturn.

Sincerely,

John

[Higgenbotham]

I actually have a feeling that we may see an upturn here. The bad news has been so bad that it really isn't having any effect of stocks at this point and history tells us that the market, and the economy, don't go straight down.

--Fred

Agree. I started making negative posts in early January but the last 2-3 days are looking more like a test of the November lows. S&P futures had a chance to punch through 800 4 times and couldn't. Some of that was overnight trading. The news today indicated that pessimism has reached a temporary climax with no followthrough. I will remain mostly in short term t-bills and 0% C of I's. This is cutting a lot faster into the real economy than would have seemed likely merely 3 months ago, but the stock market seems to want to go higher for now. So I probably go back into hibernation and hopefully read some interesting posts.

[mannfm11]

I was holding PFE this morning along with BMY and a retail stock I got stuck on. PFE came out with the merger and cut its dividend and went down $1.60 a share before I could blink. It took me 30 minutes to find the data as to what they cut their dividend to (the news just said slashed their dividend) and when I saw it was about 4% of the price, it was time to sell and never look back. I am hearing predictions of a rally. I sold everything, as I have been killed as the stocks I had that had chart structures to launch a good move either laid there or declined while the market went sideways. There has been a lot of technical damage done in the past 3 weeks. Tonight the futures are up double digit, but I look and the fair value isn't that great. I screwed this last market move up so much I closed my account and asked for my check. Stocks are tickets on ponies to me and the word investment and stock rarely ever are congruent with each other. Bernard Madoff wasn't the only ponzi scheme in this market and the data is warped by liars like the NAR and their record low home sales of November. Prior to 1997, Novembers record low home resales were 110% of the all time record. I read stuff like Bloomberg saying something is a record low, yet they only go back to 1994. People don't realize that a 3% dividend on the S&P is an all time low dividend, not an all time high and that 15 to 17 times trailing earnings is peak prices for stocks in economic sweetspots like the mid 1950's or mid 1960's not rock bottom prices. My mentioned PFE problem is a sign of the times. What would normally be good news was warped by something unusual, trying to make up for giving up over $40 billion in cash. I venture that anyone that tries to hold PFE through this depression is going to get zero in the end, as that was a fatal deal they made yesterday. You might note the price of Wyeth, which reflects an $11 price roughly for PFE, as there is supposed to be about $33 a share in cash included. Some of you are familiar with the Shiller stock data you can download off the net. A PV of 20 points paid for dividends on the SPX never happened until the late 1990's and 10 first happened in 1907. During the past 5 or so years, dividends exploded in the SPX to a PV of 28 based on what Shiller posts. The last time we saw a move that strong was going into the late 1920's. The air is coming out of that very fast. I dumped PFE because the dividend was 4%. In a developed company, 4% is going to be a minimum dividend. Those that don't pay dividends will fall to close to nothing, as the idea of growth companies will be a foreign idea in a couple of years.

[freddyv]

Dear Fred,

> I actually have a feeling that we may see an upturn here. The bad
> news has been so bad that it really isn't having any effect of
> stocks at this point and history tells us that the market, and the
> economy, don't go straight down.

I wish I could agree with you, but I see the world economy on
spiraling faster and faster downhill. If by "upturn" you mean a
stock market rally, then sure -- as Gordo likes to point out, there
are brief bear market rallies at the worst of times, and we both know
how investors are.

But for the economy as a whole, the direction is downhill, and going
faster and faster. When was the last time you heard any significant
good news? There'll be upward blips here and there, but I just don't
see any upturn.

Sincerely,

John

Yes, I stick with my forecast for the year of the Dow at or below 5,000. That would be a 40% drop.

But...I think that people need to get faked out and tempted by the market. I heard on Bloomberg this am that only one of the analysts they polled expected the S&P to be down for the year. That is just unimaginable and a clear sign to me that we are not done with the downside as I believe that the main objective of the generational correction is to adjust the perspective of investors. If that doesn't happen this year it will happen the next or within a few years at best. Given the state of the economy however, it is likely to happen sooner rather than later. I just think that a headfake, and a fairly substantial one, is on the way.

...which means the market is likley to go into freefall any moment now, now that I have a bit of a long position?

I believe the main area you and I disagree, John, is that I do not think a sudden, huge drop is needed to achieve the objective that must be achieved. In fact I think that we are in for year after year and then decade after decade of disappointments in the market, much like Japan has seen over the past two decades. As you said, we'll have to wait and see.

--Fred