FN: On the way down there is volume. On the way up, there is less... waaaay less (especially for this time of the year).
Can you say algos?
"The unemployment assumptions used in both scenarios have in fact already been exceeded." -Oversight Panel
FN: The $301 billion federal guarantee on Citigroup's (C) crappy loan book is expected to cost taxpayers $43.9 billion in losses... IF the unemployment rate peeks at 9.5%. Doh. We're at 10.2% now and 13% is now being thrown around as a possible high.
Citigroup Asset Guarantees May Cost U.S. Taxpayers, Panel Says: " U.S. taxpayers may have to share in the losses on $301 billion of Citigroup Inc. loans and securities covered by federal guarantees after unemployment reached a 26-year high, according to the Congressional panel overseeing bank-bailout programs.
The Federal Reserve Bank of New York projected a year ago that the Treasury Department might have to pay $3.96 billion on the guarantees if unemployment hit 9.5 percent, the panel said in a Nov. 6 report. The jobless rate rose to 10.2 percent in October, the Labor Department said last week.
The government hashed out the guarantees over a weekend in November 2008 to help shore up confidence in New York-based Citigroup and head off a run on the bank’s deposits. The New York Fed analysis, which wasn’t previously disclosed, raises questions about whether the Treasury Department and regulators were tough enough in the negotiations, said Joshua Rosner, an analyst at investment research firm Graham Fisher & Co.
“It looks like Citigroup got the better end of that deal,” Rosner said.
FN: Citigroup one, taxpayers minus one.
The New York Fed estimated that losses on the assets would reach $34.6 billion under a “moderately adverse” economic scenario with unemployment at 8.2 percent in the fourth quarter of 2009, the oversight panel said in its report.
Under the “severely adverse scenario” of 9.5 percent, the losses would rise to $43.9 billion as more people became unable to pay the mortgages, auto loans and other obligations included in the guaranteed pool, the reserve bank projected. At that point, Citi would have exhausted its deductible, forcing taxpayers to begin paying out.
FN: Those fake stress tests coming back to haunt the administration. But now for the really fun part...
"The bank’s employees are benefiting from the rescue. Citigroup plans to give 19 top executives annual salaries of about $500,000 along with more than $100 million in stock awards, according to an Oct. 22 report by the Treasury Department’s special paymaster, Kenneth Feinberg."
FN: So with an unemployment rate greater than 10% these asshats get to take your hard earned tax dollars and award themselves great bonuses for their complete lack of ability.
Thats right, guess who gets the bread? The really fat big bird.
“This is going to be the mother of all jobless recoveries.” -David Rosenberg
U.S. Joblessness May Reach 13 Percent, Rosenberg Says (Update1): "The U.S. unemployment rate may rise to a post-World War II high of 13 percent in the aftermath of the recession, said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto."
FN: This is no ordinary recession. This is a balance sheet recession where banks, business and individuals are all forced to reduce leverage even as they suffer huge losses.
"Rosenberg said the recession, the deepest since the Great Depression, “is truly secular in nature” and said the economy is “in a post-bubble credit collapse.”
A 13 percent unemployment rate would be the highest since monthly records began in January 1948, according to Labor Department data. The previous postwar high was 10.8 percent in December 1982. Yearly records, which began in 1929, show joblessness climbed to almost 25 percent in 1933 during the Great Depression."
FN: Sounds like Japan v2.0 to me...
The recent change in U.S. and U.K. monetary policy is very similar now to what the Japanese tried, where Quantitative Easing (QE) was forced onto a captive debt market. The full consequences of which will only know become obvious: De-facto sovereign default.
It is Japan we should be worrying about, not America: "Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return."
Some angry ninja quotes from about the same time last year:
I Give You The Stupidity Trap... Errr... Liquidity Trap (11/10/08):
"Awesome. Just awesome. What could possibly go wrong in a zero rate world? Oh wait, all those under funded pension plans can’t earn the yields they need to fund the outrageous promises that were made to indignant, arrogant Baby Boomers during this Age of Entitlement."
Japan v2.0: GLOBAL Liquidity Trap (09/18/08):
"We are heading for a Liquidity Trap. Believe it. I see Japan v2.0… on a GLOBAL scale."
Japan v2.0 (09/18/09):
"Think ZERO percent interest rates and think DEFLATION. Think LOST DECADE. Think DEPRESSION. Now make all that GLOBAL.
That is what we have to look forward to."
FN: Upon closer inspection, yesterday's rally was not nearly as impressive as it first seemed. Four up days in a row could not re-capture one down day. Volume on the way up has continued to decrease. Breadth was not strong either. There was no Major Accumulation day. The two Major Distribution Days still stand.
Yesterday I wrote that we were Passing Thru the Eye of the Storm.
Evidence that the sky is darkening once again with financial storm clouds is the sudden increase in bailouts. While a bailout is in itself disheartening and just the absolute wrong policy choice in general, what really hurts is that they are done so poorly. Failed bailed out companies are coming back for second and third rounds and the government is throwing additional good money after bad.
GMAC May Receive Third Government Bailout in November (Update3): "GMAC Inc., the lender that received two government bailouts totaling $13.5 billion, is negotiating with the Treasury Department for a possible third lifeline next month, people familiar with the matter said."
RBS, Lloyds Get $51 Billion in Second Bank Bailout (Update3): "Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc will receive 31.3 billion pounds ($51 billion) in a second bailout from the U.K. taxpayer as the two banks agreed to cap bonuses.
The Treasury will inject 25.5 billion pounds of capital into RBS, for a total of 45.5 billion pounds, making it the costliest bailout of any bank worldwide. The government will fund about a quarter of Lloyds’s 21 billion-pound fundraising. Both banks said they won’t pay cash bonuses to workers earning more than 39,000 pounds this year."
Eventually somebody will say something... somebody will do something and stop this madness... right?!
This can't go on. Right? How is all this supposed to work out later? This is some terrible math isn't it?
We've been in the eye of the storm for months now.Last Saturday afternoon I accidently crossed paths with a reporter... and managed to get myself into the news.
Rise of the Kitchen Trable Traders
“ This world is not for the casual guy who thinks he can beat Wall Street, because he can't. ”— Ben Bittrolff, CFO of Cyborg Trading Systems
Mrs. Ninja and I are expecting our first Ninja baby. As this is our first, things have been pretty hectic...
To complicate matters, I've been involved in a financial software technology startup. We've now gone from 3 to 7 employees and officially launched our product in September. Starting your own business means insanely long hours. (www.CyborgTrading.com)
Pregnant wife + Insanely long hours = No blog.
Hence my rather sudden disappearance.
However, I think I'm back. I've established some sort of "new normal"...
FN: The highlighted area is the "stupid zone". Over a three year period between 2006 and the end of 2008, copper went parabolic several times before finally breaking down. Copper has now rallied back to the underside of the "stupid zone". Resistance should be significant.
Note: Real Estate is one of the largest sources of demand for copper.
FN: I couldn't agree more. The Chinese economy is swamped with overcapacity. Overcapacity was already a problem in 2007 BEFORE the world economy imploded. Now with exports cut in half and not likely to recover for many many years, the number of idle factories, equipment and people are at critical levels.
China’s Market ‘Should Be 2000 or Less,’ Xie Says (Update1): "China’s economy isn’t “sustainable” and the Shanghai Composite Index, now at 2667.75, “should be 2000 or less,” former Morgan Stanley Asian economist Andy Xie said in an interview.
Xie, who correctly predicted in April 2007 China’s equities would tumble, told Bloomberg Television that the stock market remains “in bubble territory.”
China’s stocks plunged today, with the Shanghai index falling the most since June 2008 and entering a bear market, on concern a slowdown in lending growth may derail a recovery in the world’s third-largest economy.
The Shanghai gauge slumped 22 percent this month as banks reined in lending to avert asset bubbles and policy makers advised industries such as steel and cement to curb overcapacity.
The decline stopped a rally that had sent the measure up 103 percent from a November low on prospects the government’s 4 trillion yuan ($586 billion) stimulus program and a record amount of new loans will ensure the economy grows at least 8 percent this year."
FN: The Chinese growth miracle has morphed into an easy credit mirage. After both credit creation and stock prices went parabolic the last two months, Chinese authorities ordered their banks to "tighten". Since most of the credit was flowing straight into stocks, the bid disappeared.
China’s Stocks Slump Most Since June 2008, Cap Monthly Loss: "China’s stocks plunged, with the Shanghai Composite Index falling the most since June 2008 and entering a bear market, on concern a slowdown in lending growth may derail a recovery in the world’s third-largest economy.
The benchmark index tumbled 6.7 percent to 2,667.75, capping its biggest monthly loss since October. The gauge has slumped 23 percent from its 15-month high on Aug. 4 and is the worst performer this month among 89 benchmark indexes tracked by Bloomberg globally.
“The local market bears are convinced that tightening is already underway,” said Howard Wang, head of the Greater China team at JF Asset Management, which oversees $50 billion. Only “a very strong set of macro numbers in August” or “stronger statements from central authorities” would change this trend, Wang said.
At least 150 stocks on the 898-member index dropped by the daily 10 percent limit. Industrial Bank Co. and Aluminum Corp. of China Ltd. tumbled by the permitted cap after Caijing magazine reported new loan growth this month may be almost half that of July. Lower profits dragged Baoshan Iron & Steel Co., the nation’s biggest steelmaker, and China Southern Airlines Co. down at least 7 percent."
Related Posts:
China Trying to Talk Its Way out of a Bubble
China: Back in a Bear Market
Shanghai: Parabolic Moves Always End in Tears
FN: This is an update on the divergence of both semiconductors and energy from the rest of the market from the post Semiconductors and Energy: Major Divergence from Rest of Market.FN: The Chinese government has finally caught on to the fact that they've created a bubble and are trying to "talk it down". As long as the central bank and the rest of the banks continue to provide liquidity, Wen Jiabao is going to be as successful as Alan Greenspan was when he warned of "irrational exuberance" while having his foot placed firmly on the monetary accelerator.
China Stocks Decline as Wen Says Economy Faces ‘Uncertainties’: "Chinese stocks, the world’s worst performers this month, extended declines after Premier Wen Jiabao said the economy faces many “uncertainties” and China Construction Bank Corp. warned of asset bubbles."
Asian Stocks Fall on Lower China Earnings, U.S. Credit Concern: "Asian stocks dropped, led by mining and finance companies on lower profit at Chinese companies and amid speculation loan losses in the U.S. will increase."
FN: After losing a Freedom of Information Act lawsuit, the Federal Reserve must now reveal exactly where $2 trillion in emergency money went... Finally shining a light onto the rot in the financial system could prove to be interesting. The information must be revealed withing five days.
Court Orders Federal Reserve to Disclose Emergency Loan Details: "The Federal Reserve must for the first time identify the companies in its emergency lending programs after losing a Freedom of Information Act lawsuit.
Manhattan Chief U.S. District Judge Loretta Preska ruled against the central bank yesterday, rejecting the argument that loan records aren’t covered by the law because their disclosure would harm borrowers’ competitive positions.
The Fed has refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under 11 programs, most put in place during the deepest financial crisis since the Great Depression, saying that doing so might set off a run by depositors and unsettle shareholders. Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued on Nov. 7 on behalf of its Bloomberg News unit.
“The Federal Reserve has to be accountable for the decisions that it makes,” said Representative Alan Grayson, a Florida Democrat on the House Financial Services Committee, after Preska’s ruling. “It’s one thing to say that the Federal Reserve is an independent institution. It’s another thing to say that it can keep us all in the dark.”
The judge said the central bank “improperly withheld agency records” by “conducting an inadequate search” after Bloomberg News reporters filed a request under the information act. She gave the Fed five days to turn over documents it told the reporters it located, including 231 pages of reports, and said it must look for more at the Federal Reserve Bank of New York, which runs most of the loan programs. "
FN: Chinese stock hit that magical 20% peak to trough decline and are now in a "Bear Market"... again. Like I said yesterday: Parabolic Moves Always End in Tears.
Stocks Fall as China Slumps; Commodities Drop, Yen, Bonds Rise: "China’s stocks dropped, briefly dragging the benchmark index into a so-called bear market and triggering declines in equities and commodities worldwide. The yen and Treasuries rose as investors sought less risky assets.
The MSCI World Index of 23 developed nations sank 0.4 percent at 8:54 a.m. in New York and futures on the Standard & Poor’s 500 Index slid 1.1 percent. China’s Shanghai Composite Index slumped as much as 5.1 percent, extending its drop from a 2009 high to more than 20 percent, the common definition of a bear market. Copper fell 3.3 percent. The yen strengthened against all 16 of the most-traded currencies tracked by Bloomberg and the pound weakened. The 10-year Treasury yield dropped to its lowest level since July 14.
The U.S. and Chinese governments pledged more than $13 trillion to combat the worst financial crisis since the Great Depression, helping to fuel a nine-month rally in the Shanghai Composite that pushed the index’s price-to-earnings ratio to almost double the valuations for the S&P 500, according to data compiled by Bloomberg. Earnings for Chinese companies that reported since July 8 have trailed analysts’ estimates by 12 percent on average, Bloomberg data show."
FN: Markets are set to gap down pretty hard this morning. This would chunk the S&P 500 (SPX) below the rising 20 day EMA (blue line) at 985 in one move. It looks like the high of 1018 will stand for some time and a drop to the 950 area is the likely first stop.
Notice the data coming out of China is starting to look shaky...
FN: As these banks and more fail, and cash strapped FDIC is going to have to tap that $500 billion line of credit it setup with the Treasury. The question is, can the Treasury raise that kind of money when the time comes? Already serious signs of stress are evident in each bond auction as it becomes increasingly difficult to find enough buyers of US sovereign debt.
The KBW Regional Banking Index (KRX) is a good proxy for these troubled banks because it doesn't include the mega banks like Bank of America (BAC) and Citigroup (C) that tend to be treated especially favorably by the government.
Toxic Loans Topping 5% May Push 150 Banks to Point of No Return: "More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.
The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.
The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.
“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.
Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter."
FN: Of the 14.462 million people that officially count as unemployed (UNEMPLOY) 4.965 or 34% have been unemployed for more than 27 weeks (UEMP27OV).
The previous record of about 2.900 million unemployed for more than 27 weeks was reached in the early 1980's during a nasty economic period of stagflation.
The reason being unemployed for 27 weeks is so important is because normal unemployment benefits last 26 weeks (United States Department of Labor). After 26 weeks, the benefits stop.
As more and more people approached the cut off, the government implemented an Extended Benefits program, adding 13 additional weeks that can be topped off by individual states with an additional 7. (United States Department of Labor - Extended Benefits)
The unemployment data released today, showed a 'surprise' increase in Initial Claims from last week to 558 000. While initial claims are still trending in the wrong direction, more important is the number of unemployed on Extended Benefits and those claiming Emergency Unemployment Compensation:
"States reported 2,785,372 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending July 25, an increase of 30,981 from the prior week. There were 747,707 claimants in the comparable week in 2008. EUC weekly claims include both first and second tier activity."
So it would appear that of the 4.965 million who have been unemployed for longer than 27 weeks, only 2.785 million have been able to qualify for EUC extended benefits, or 56%. That leaves 2.18 million with absolutely ZERO income of any kind from anywhere.
FN: The economy has been weak for far longer than you might think. Things went wrong a quite a long time ago and nobody really noticed. The Average Duration of Unemployment (UEMPMEAN) was a quiet, unseen warning beacon that all was not well.
From the 1950's through to the 1970's, it could take you as little as 7.5 weeks to find a new job during the 'boom' periods of an economic cycle. Then something snapped somewhere in the system. From the 1970's onwards it began to take longer and longer to find a new job and a new rising trend was put in place. From recession to recession (grey bars) life became quite a bit tougher.
Between the first (1) and second (2) recessions in the 1970's the time it took to find a job increased a serious 33% from 7.5 weeks to 10 weeks during the BEST OF TIMES. By the time the first recession in the 1980's (3) hit, the average duration of unemployment had jumped about 10% from 10 weeks to about 11 weeks. Here the amplitude of each cycle high and low exploded, maxing out at an astonishing 20 weeks. Almost 10 years later, just prior to the 1990's recession (4) it took about 12 weeks to find a job, a 9% increase. Then by the time the Tech Bubble finally burst in early 2000, it took over 12.5 weeks to find a job.
However, the worst was yet to come.
During the credit and real estate bubble years that followed it took about 17.5 weeks to find a job during the best of times (6), a massive increase of 40%.
When the easy credit bubble finally burst the 20 week average duration that had held for 30 years was breached and a new record high was set of at least 25 weeks.
Now in a jobless world expecting a jobless recovery, new records in unemployment duration will be set even from these levels.
The economy was structurally unsound long before the financial crisis hit. The warning signs were papered over with easy money by the Federal Reserve Bank under Alan "The Maestro" Greenspan and a complicit Wallstreet that extended cheap credit in amounts that grew exponentially.
The credit bubble has irrevocably burst and that is bad enough. Worse still is the timing. A veritable demographic tsunami is rapidly approaching the economic shore. Over leveraged and aging Baby Boomers are just about to realize they've gambled away their entire retirements in a high stakes game of consumer consumption and real estate leverage.
Each crisis on its own is a serious enough challenge to the system. Together, simultaneously like this, there is no feasible solution but time... and a long long time it will be. Almost certainly several lost decades.
I've argued this before in Age Wave Theory: Expect a Long Economic Winter.
“What was a V-shaped recovery now seems to be experiencing a little gravitational pull.” -Stephen Green, Standard Charted Bank in Shanghai
FN: The sneaking suspicion out there is that China has pretty much completed their commodity re-stocking. The Baltic Dry Index (BDI) has been down nine of the last ten trading days and has now breached the rising trendline from the December 2008 low of 663. The price is now also below the 20, 50 and 200 day EMAs (blue, red and green lines).
In the post Baltic Dry, Chinese Hoarding, Commodities and the Fake Recovery I highlighted:
"As the global economy continues to falter and Chinese exports plummet, there is growing concern that the stockpiling may soon come to a halt, leading to further, painful drops in commodity prices."
Asian Stocks Drop as Weaker Earnings Fuel Valuation Concerns: "Asian stocks fell for the first time in three days and Chinese shares entered a so-called correction, amid concern a rally in equities had outpaced earnings prospects.
China May Delay Tightening as Exports, New Loans Drop (Update1): "The People’s Bank of China may delay tightening monetary policy until the fourth quarter after exports dropped in July, lending declined and investment growth slowed, economists said.
Exports fell 23 percent from a year earlier, the government said yesterday. Urban fixed-asset investment rose a less-than- estimated 32.9 percent in the first seven months from a year earlier. New loans plunged to 355.9 billion yuan ($52 billion), less than a quarter of advances in June.
China’s economy, which avoided following the U.S. and Europe into recession, is yet to cement a recovery as factories have too much capacity and shipments abroad are weakening, officials said this month. The nation’s $4 trillion yuan ($585 billion) stimulus package can’t completely offset slumping export demand, the commerce ministry said in Beijing today."
Related Posts:
World Trade, Baltic Dry and "Green Shoots"
FN: Your tax dollars being wasted as quickly as humanly possible! To properly calculate the true cost of bailing out GM and Chrylser you'd have to include the costs of bailing out GMAC and that awful "cash for clunkers" program.
It will take a long time and a lot of taxes to recoup these vas sums. Our poor children. (Poor, as in they won't have any money.)
GMAC Posts Wider Quarterly Loss as Loan Defaults Rise (Update1): "GMAC Inc., the lender that received $13.5 billion in government bailout funds, reported a $3.9 billion second-quarter loss tied to rising loan defaults and said it may sell part of its insurance operations.
The loss, GMAC’s seventh in the past eight quarters, rose from $2.48 billion a year earlier. Results included a $1.2 billion tax charge caused by converting to a corporation, the Detroit-based company said today in a statement. The auto- finance unit’s loss increased to $727 million from $717 million, while the deficit from mortgage operations shrank to $1.84 billion from $1.9 billion, GMAC said. Excluding one-time charges, GMAC’s quarterly loss was about $400 million.
GMAC said the recession drove up defaults on home and auto loans, and the company will trim operations to save $1 billion annually by 2010. The U.S. took a 35 percent stake earlier this year, enabling GMAC to keep lending to customers of General Motors Corp. and Chrysler Group LLC after the automakers entered bankruptcy. While government incentives boosted car sales and GMAC’s revenue, losses on older loans are hobbling profit."
FN: The post Further On GDP and Stocks over at Sudden Debt breaks down the components of GDP and explains their effect on the economy putting real hard numbers on the points I argued in my two posts, Employment: Not a Lagging Indicator at these Levels and Watch the Divergence Between Earnings and Revenues.
U.S. Incomes Fall 1.3%, Biggest Drop in Four Years (Update1): " U.S. personal incomes tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, signaling that consumer spending will take time to recover."
FN: This ain't gonna be pretty. The deflationary feedback loop is in full force now and almost certainly cannot be broken. The ammunition has already been spent.
FN: The full article is mind boggling.
Wall Street Analysts Keep Telling Big Earnings Lie: David Pauly: "At a time when the financial industry’s credibility is at an all-time low, you would think Wall Street’s finest would break their necks providing transparency.
Not so. Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know.
Instead, their earnings estimates ignore often huge expenditures that can’t help but affect a company’s health.
In analystspeak, Intel Corp. wasn’t hit with a $1.45 billion fine from the European Union in the second quarter for anticompetitive practices.
After setting aside funds to cover the fine, which Intel is appealing, the semiconductor-maker had a quarterly loss of $398 million, or 7 cents a share. Disregarding the fine altogether, analysts maintain the company earned 18 cents a share, beating their average estimate of 8 cents.
As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn’t cost its shareholders $293 million.
Google, according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options."
FN: You can see the rate of change increasing... as the move higher becomes parabolic. Yesterday, the first crack appeared. Intraday the drop hit 7%, and day closed with a 5% loss.
FN: Energy (XLE) stocks have not made it back to the previous swing high around $54. Volume has completely vanished. Meanwhile the broader market, the S&P 500 (SPX) has exceeded the previous swing high. This negative divergence in something so cyclical does not exactly scream of "green shoots".
FN: It may be nothing... but volatility (VIX) was up 5% on a quiet day. VIX is deeply oversold and scraping along the bottom of the 10 day MA envelope. A bounce is certainly due and equities are stretched.
For all things VIX related check out VIX and More. Volatility and the volality of volatility is far more complicated than you may know.
“The real theme is the divergence between earnings and revenues." -Steven Ricchuito, Mizuho Securities
FN: There is a dirty little secret to earnings season. In all the excitement over bottom line beats, nobody really noticed the top line misses.
Analysts, after being complete wrong all of 2007 and 2008 have finally collapsed their estimates, lowering the bar to the point where even a mortally wounded company can stumble over it. That was to be expected, and isn't really important. Most of the bottom line beats were the result of draconian cost cutting. Bonuses and merit raises first, big budget items second and finally people. Lots and lots of people. They all beat because they cut people faster than anybody expected. These kind of cuts can't be repeated and companies won't be able to pull the same miraculous bottom line beat next quarter.
Far more important and ominous are the top line misses. Revenues have collapsed and continue to do so. Big economic bellwethers all reported revenue declines of about 30%. Revenue at 143 companies fell on average of 10%. This is the true state of the economy and it is still in a 'controlled' free fall.
Something to really think about is the feedback loop. When companies attempt to shrink themselves to profitability on a grand scale, what do you suppose happens in the months afterwards? The former employees are faced with insurmountable problems. First, they cannot easily find a job precisely because companies in general are pursuing these massive cost cutting strategies. They are therefore unemployed for much longer periods of time than would otherwise be the case. Second, they cannot continue to live as they did before being let go. Drastic reductions in personal consumption must be made. This is particularly bad, and we've already seen the savings rate go parabolic to reflect this change in behavior, after a gigantic, prolonged credit bubble.
So if this were a turned based simulation with the following conditions:
- The economy employs 1000 workers.
- The mean income for each employee is 100 per round.
- The mean expenditure for each employee is 100 per turn, or 100%.
Round 1.
- There are 1000 workers employed, making $100 000, and spending $100 000, or 100%.
Round 2
- Companies fire 10% of the workers, or 100 workers.
- The economy employs 900 workers, making $90 000, and spending $90 000, or 100%.
Round 3
- Workers grow concerned over job security and decide to save money. They now spend only 90%.
- The economy employs 900 workers, making $90 000, and spending $81 000, or 90%.
Round 4
- Companies grow concerned over growth forecasts and decide to cut costs, firing another 100 workers.
- The economy employs 800 workers, making $80 000, and spending $72 000, or 90%.
Round 5
- Workers freak out! Dual income households are down to a single income. Everybody knows somebody that lost a job. Many are helping friends and family out. The savings rate increases again. Now only 80% of income is spent.
- The economy employs 800 workers, making $80 000, spending $64 000, 80%.
Round 6
- Companies freak out! They've been beating bottom line estimates by cutting jobs, but they can see their top lines getting hammered. With no end in sight, they cut another 100 people.
- The economy employs 700 workers, making $70 000, spending $56 000, or 80%.
Round 7
- Where and how this self fulfilling destructive cycle ends nobody can know for sure. It happened during The Great Depression and it was not pretty.
John Praveen at Prudential International Investments says, "Because of rising unemployment and rising household savings rate, the rebound will be anemic or weak."
In reality it is almost impossible to have a rebound with unemployment AND savings rising. In my example rising unemployment cut much deeper into consumer spending than you might expect. A 30% cut in jobs cut income by 30%, but spending by 44% or 46% more! Now imagine an model of an economy where spending was actually greater than 100% of income to start. Imagine and economy where consumers relied on home equity lines and rapidly appreciating assets to spend well beyond their means. Then imagine them going from being a net negative saver, to a saver.
You think maybe that's what's happening here today?
Sales Fail to Keep Pace With Profits as Economy Stays Sluggish: "Sales growth lagged behind profits as companies in the Standard & Poors’ 500 Index beat analysts’ estimates this week, a signal that economic recovery may be slow.
Second-quarter revenue at Caterpillar Inc. and Freeport- McMoRan Copper & Gold Inc. tumbled more than 30 percent from a year earlier, though earnings topped the average of analysts’ predictions. Amazon.com Inc.’s profit skidded and sales missed estimates. United Parcel Service Inc.’s sales slid 17 percent. Microsoft Corp. saw annual sales drop for the first time in 23 years as a public company.
“The economy is coming back but it is not going to come roaring back,” said Mark Zandi, chief economist at Moody’s Economy.com. Companies “are going to be reluctant to add investment and jobs until they get better sales.”
Revenue at 143 companies in the S&P 500 reporting this week, many of them bellwethers for the American economy, fell on average 10 percent from a year ago, according to Bloomberg data. Seventy managed to top the analysts’ consensus for sales, while 107 did so for earnings per share.
The economy probably declined 1.5 percent in the three months ended June 30, marking the fourth straight drop and the longest such streak since quarterly records started in 1947, according to the median of 66 economists in a Bloomberg survey."
[ HT TwoPintWitty ]
"This line jumped out as one that can't possibly be correct, and if it is.wow. The fact that family borrowing continued to increase at its historic pace of about 8 per cent a quarter reflects an increase in home buying - purchases that were encouraged by mortgage rates that fell to record lows as the Bank of Canada dropped its benchmark lending rate to an unprecedented 0.25 per cent and set up emergency cash auctions to ensure banks had access to enough money to continue lending.
8 percent a QUARTER? 8 percent a year in increased borrowing isn't sustainable. Wages have been increasing by what? Like 2-3% on avg?"
FN: How exactly is the BOC going to raise rates from 0.25 to a more normal level of NOT ZERO without making all these new mortgages instantly unaffordable? All the poor bastards buying houses with 1.75% variable rates would ingloriously implode at even just 3.50%... as that would double their mortgage payments overnight. When, NOT IF, inflation finally does rear its ugly head these rates could easily TRIPLE to a whopping 5.25%. The effect on house prices will be disastrous. Historically 5.25% is actually ridiculously low. Something between 7% and 9% isn't even astronomical if there are inflation pressures.
The recession is over. Cue the painful recovery: "The recession is over, but not the pain.
Canada's central bank predicted Thursday that the economy would expand this quarter, suggesting the economic contraction lasted for about nine months, considerably shorter than the previous two recessions in the early 1990s and the early 1980s.
The Bank of Canada's reassessment of the state of the economy is perhaps the clearest signal yet that the worst of the recession is over."
“At these levels in the market, there’s not a lot of room for error. Anything that deviates brings about a reevaluation by the market.” -Mark Freeman, Westwood Management Corp.
FN: Jobs are all that really matter now. Parabolic stock markets fueled by short squeezes don't do a whole heck of a lot for Joe Sixpack. They may briefly inspire some hope, but when the paychecks shrink or stop altogether, it really doesn't matter that stocks had another green day.
If the consumer is not going to be the leader of the recovery, what will? Bear in mind, overcapacity is rampant. EVERYWHERE and in EVERYTHING.
U.S. Economy: Consumer Sentiment Falls on Concern Over Jobs: "Confidence among U.S. consumers fell in July for the first time in five months as mounting unemployment and stagnant wages shook households.
The Reuters/University of Michigan final index of consumer sentiment decreased to 66, in line with forecasts, from 70.8 in June. A preliminary report for July showed a reading of 64.6.
The biggest employment slump of any recession in the last eight decades is making Americans less secure, which is likely to restrain spending and lift savings. Amazon.com Inc. cut prices last quarter to boost sales and American Express Co. said more cardholders fell behind on payments, resulting in lower- than-anticipated earnings that hurt stocks today.
“The consumer isn’t going to be a leader in this recovery,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, who accurately forecast the drop in sentiment. “Consumers are aware that the labor market is still pretty bleak. Any recovery in consumer spending will be very, very modest.”"
FN: While companies are reporting bottom line beats, the real story are the top line misses. Revenues continue to drop... and rapidly. The earnings beats are all the result of massive cost cutting measures such as head count cuts, salary reductions and bonus eliminations. Obviously this does not help the consumer at all... which also means the economy be able to rebound. The consumer is still over leveraged and the debt burden has not yet been worked off.
U.S. Stocks Drop as Microsoft, American Express, Amazon Retreat: "U.S. stocks fell from the highest levels of the year as Microsoft Corp., American Express Co. and Amazon.com Inc. posted disappointing quarterly results and consumer confidence fell for the first time in five months.
Microsoft declined 9.4 percent, the most since January, on lower profit and sales than analysts estimated. American Express slipped 1.6 percent after saying earnings decreased as the recession made it harder for cardholders to keep up with payments. Amazon.com slumped 7.7 percent following price cuts that caused the online retailer’s revenue to miss projections."
FN: Despite yesterday's impressive rally in equities the US Dollar Index (USD) held firm at support. US dollar strength could be foreshadowing the end of this move higher in equities.
FN: Yesterday's rally was impressive to be sure. Volume pickd up to match and important levels were broken to the upside. However, yesterday was NOT a "Major Accumulation Day". Not even close. The ratio of up volume to down volume was 5:1.
FN: After being up 6 of the last 7 trading days and now knocking on the underside of resistance, it's probably time for the Bulls to take a break. Losses from the financials who are not Goldman Sachs should inspire some profit taking and a more sober assessment of reality.
Morgan Stanley Loss Misses Estimates on Debt Costs (Update1): "Morgan Stanley reported a bigger second-quarter loss than analysts expected as costs to repay the U.S. government and charges from an improvement in the firm’s own debt overwhelmed revenue.
The loss from continuing operations was $159 million, or $1.37 a share, compared with earnings of $689 million, or 61 cents, in the same period a year earlier, the New York-based company said today in a statement. The average estimate of 19 analysts surveyed by Bloomberg was for a 54-cent loss. The results include a $2.3 billion accounting charge related to tighter credit spreads.
Chief Executive Officer John Mack raised $6.9 billion by selling stock in the quarter, paid $10 billion and an $850 million dividend to the U.S. government and took control of Citigroup Inc.’s Smith Barney brokerage division. All three of Morgan Stanley’s divisions lost money, while rising stock and bond markets fueled profits at competitors, including record earnings of $3.4 billion at Goldman Sachs Group Inc."
Wells Fargo Says Bad Loans Rise in Second Quarter; Shares Drop: "Wells Fargo & Co., the biggest U.S. home lender this year, said bad loans jumped in the second quarter as the recession made it harder for borrowers to keep up with payments. The shares dropped 5 percent in early trading.
Assets no longer collecting interest climbed 45 percent to $18.3 billion as of June 30 from the first quarter, the San Francisco-based bank said today in a statement. The increase was disclosed as Wells Fargo reported second-quarter net income soared 81 percent to a record $3.17 billion.
Wells Fargo added to credit reserves amid a 26-year high in unemployment and rising commercial real estate delinquencies. While the acquisition of Wachovia Corp. in January bolstered deposits and home lending, the bank must stanch losses from defaults in California and a portfolio of option adjustable-rate mortgages, ranked among the riskiest loans issued during the housing boom."
FN: So there was a 45% increase in assets no longer collecting interest! Holy shit! That is a serious deterioration in their balance sheet. $18.3 billion isn't exactly pocket change. Whatever happened to all them "green shoots"? The whacky world of accounting allows this bank to sit on $18.3 billion of defaulted debt while recording "second-quarter net income soared 81 percent to a record $3.17 billion". Uh huh. That makes perfect sense.
[ HT Displaced EMA ]
FN: Goldman Sachs (GS) could be using Dark Pools to front run order flow.
FN: This is the third failure in two weeks. The government will now spring into action and apply some heavy handed solutions... but the point remains: It is becoming more and more difficult to raise massive amounts of debt. It is simple really. Every country in the world is raising record amounts of debt. That just can't work out. The math won't allow it. The savings aren't there and where they are, they are already deployed. This means they have to be pulled from such things as equities... eventually... to finance this debt.
Worse yet, if the Chinese can't secure funding internally for their debt they will eventually have to convert some of their dollar holdings back into Yuan. That means they'll have to sell US Treasuries first, and then sell US dollars to buy Yuan.
China Fails to Complete 20 Bln Yuan of Bill Sales, Traders Say: "China’s finance ministry failed to meet its debt-sale target for a third time in two weeks at a 182- day bill sale, according to traders at Galaxy Securities Co. and China Citic Bank in Beijing. The ministry had tried to sell 20 billion yuan of bills and only sold 18.51 billion yuan, traders said. The average yield for the bills sold was 1.6011 percent, they said.
The average yield was 21 basis points higher than the 1.39 percent in secondary market trading yesterday, based on rates compiled by Chinabond, the nation’s biggest debt-clearing house. The government last sold similar-maturity bills on June 19 at 0.85 percent. A basis point is 0.01 percentage point."
FN: Big gaps between advacning issues (blue line) and up volume (red line) resulted in big drops in equities (grey area).
FN: The Banks (BKX) stopped participating in the rally on Thursday, putting in two consecutive down days even as the broader indices pushed higher. This rally has pushed everything into overbought terrority and weakness in the financials indicates the rally is coming to an end.
FN: Nobody seems to care, but it really is all about deflation. Deflation first, inflation later. That is how this mess will play out. There is no other way, despite Ben "Helicopter" Bernanke's best efforts to inspire inflation and skip the whole deflation part. The Master Plan really is to inflate, but the math simply doesn't add up.
What kind of "urgent action" can be taken to "reduce high levels of excess capacity"? No amount of additional debt will put that idle capacity to work. Other than taking dynamite to idle factories, the only other "effective" measure would be to start a war. Wars have the added benefit of putting the unemployed to work even as infrastructure is blown up.
World Bank warns of deflation spiral: "The World Bank has given warning that global economy will fall into a "deflationary spiral" unless urgent action is taken to reduce high levels of excess capacity in industry.
Justin Lin, the bank’s chief economist, said factories running idle around world threaten to trap economies in a vicious cycle, risking further spasms of financial stress, requiring yet more rescue packages.
"Significant excess capacity has been built up and unless this issue is addressed, we will face a deflationary spiral and the crisis will become protracted," he told an audience in Cape Town.
Mr Lin said capacity use had fallen to 72pc in Germany, 69pc in the US, 65pc in Japan, and as low as 50pc in some developing countries, mostly touching lows not seen in modern times.
The traditional cure for countries caught in slumps is to claw their way back to health through devaluation, but this cannot be done today because the crisis is global. "No country can count on currency depreciation and exports as a way out of recession. Unless we deal with excess capacity, it will wreak havoc on all countries. There is urgent need for global, co-ordinated fiscal stimulus," he said.
Investments should be focused on infrastructure in poor countries that are bearing the brunt of the crisis. The downturn is already likely to trap over 50m more people in extreme poverty this year.
Mr Lin said some $30 trillion has been wiped off global stock markets and a further $4 trillion off US house prices, creating powerful deflationary headwinds. While emergency measures have eased the financial crisis, they have not stopped it turning into a deeper "real economy" crisis entailing mass lay-offs.
The comments came as the Bank of Japan agreed to extend its quantitative easing (QE) policies – mostly the purchase of corporate debt – and warned that business investment is "declining sharply". Headline inflation has dropped to minus 1.1pc.
Michael Taylor at Lombard Street Research said Japan has been too timid, repeating the error of its Lost Decade when it failed to carry out QE on a sufficient scale.
"Japan is already back in deflation, and it is here to stay. This year the economy will shrink by around 7pc, dramatically increasing the output gap and intensifying deflationary pressures. Cash earnings are down 3pc in the last year,"
The Bank of Japan downgraded its growth forecast, predicting that the economy will contract 3.4pc in the fiscal year to next March. This follows a catastrophic fall in output at a 14.2pc an annual rate in the first quarter, the worst ever recorded.
While industrial output has bounced over the summer, there are concerns that it may have been flattered by an "inventory rebound" as companies rebuild stocks.
Eurostat confirmed on Wednesday that the eurozone has slipped into deflation. Prices fell 0.1pc in June."
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Deflation returns as Japan's jobless rate hits four-year high
Bank of Japan governor says US must tackle household debt
CCM becomes Spain's first bank rescue as property bust worsens
Germany considers direct lending
FN: A really monstrous "Major Accumulation Day" occurred yesterday. Everything that could move up, did move up. Volume was decent as well. This puts the markets right at resistance around 6000 and the declining 200 day EMA (green line) for the NYSE Composite (NYA), but the same goes for the S&P 500 (SPX). Equities are now extremely stretched after this huge three day sprint.
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