The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty.”

-Steven Roth, professor of management at the Tuck School of Business at Dartmouth College, on Bank of America’s earnings fraud

>

We been discussing how many of the recent profits were not “real” — i.e., based on one time sleights of hands — losing a losing month, AIG flow throughs, bailout monies, etc.

Thus, it is gratifying to see on the front page of the NYT Business section, Andrew Ross Sorkin’s article with the provocative but accurate title, Bank Profits Appear Out of Thin Air.

The quote above comes via this same article. It refers to Bank of America’s fraudulent earnings scheme of booking a $2.2 billion gain that falsely increases value of the  Merrill Lynch’s assets recently acquired. BofA decided to give themselves a phony profit bump by raising the value of Merrill assets to prices significantly higher than Merrill kept them.

The banksters who have emptied the US Treasury of its money continue the same games of accounting sleight of hand, finacial engineering, and other tricks of the trade that helped caudse the mewltdown in the first place.

Instead of recievership and liquidation, we rewarded these cretins with your grandchildren’s lunch money.It is idiocy on a grand scale, beyond my feeble imagination.

Excerpt:

“Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.

But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.”

But it wasn’t only the banksters at BofA pulling this nonsense; All the cool kids were doing it:

• Goldman Sachs and the disappearing month of December
• JPMorgan’s profit was due to repricing the value of its falling bonds
• Citigroup also used the bond trick.

At least investors are no longer being fooled by these shenanigans. Bank of America’s stock plunged 24% yesterday in reaction to the fraud.

>

Source:
Bank Profits Appear Out of Thin Air
ANDREW ROSS SORKIN
NYT, April 20, 2009

http://www.nytimes.com/2009/04/21/business/21sorkin.html

See also:
Citigroup’s Shareholders Wondering When Treasury Ousts Board
Ian Katz and Bradley Keoun
Bloomberg, April 21 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aID_zRZJmmqQ&

Last week’s sunny outlook at the start of earning season has since clouded over, as trepidation over the health of the banking sector crept into the market. Although Bank of America reported solid first-quarter profits, many traders believe that banks are enjoying a nice one-time bonanza thanks to the government’s bailout package, says Peter McKay.

Has stock market rally run its course?

I highlighted the short-term overbought nature of the stock market in my “Words from the Wise” review two days ago, saying:

“From a technical perspective, a primary bear market still exists as long as the major indices remain below the January highs and the 200-day moving averages. Many of the rally’s leaders (indices and sectors) seem to be running into major resistance at these levels and look susceptible to retrace at least a portion of the gains since the March low. Further evidence of a short-term top in the making comes from a chart showing the percentage of S&P 500 stocks [90%] trading above their 50-day moving averages.”

Not surprisingly, investors’ lingering worries about the financial sector resurfaced yesterday, pulling the S&P 500 Index down by 4.3% and the Dow Jones Industrial Average by 3.6% – the worst losses since early March and in all likelihood a so-called 90% down-day.

While the short-term movements play themselves out, it is important to remember that the longer-term charts have not yet signalled a secular uptrend. Using monthly data, the graph below shows the multi-year trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (or momentum) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the level of the indicator is grossly oversold, as confirmed by the RSI indicator (blue line).

Read the rest of this entry »

UPDATES:

2:16pm: Weekend is now working — I will do a test post

~~~

11:27am: Weird . . . Digital Media is now showing up under Weekends.

~~~

10:30am: Let me remind you to CLEAR YOUR CACHE

~~~

10:00am: Weekend posts are showing on the main page. I want to get that to show only under the weekend tab.

~~~

9:15am Macro Notes are not updating — need to get the coders to fix that.

~~~

8:30am OK, we are set with the new site –a few glitches remain

~~~

7:06am: CLEAR YOUR CACHE

If you see the site name in giant letters, but no graphics — You need to clear your cache.

~~~

6:51am Individual posts restored

~~~

6:41am:

Ack !

As we roll out the upgrade, some of the individual posts have disappeared. And as you see, the front end has become a disaster.

This is (hopefully) temporary.

All should be restored later this morning . . .

Good Evening;   In what could described as a less than fairly tale ending, the six week rally in both financial shares and the U.S. stock market came to a halt today.  Another dose of economic reality didn’t help, but it seemed that the proximate causes were some so-called “earnings” from Bank of America and a less than flattering appraisal of Citigroup’s recent report.  It’s also quite possible that the rally since March 6 was simply in need of a breather, but today’s 15% drop in the KBW bank index reminded me of the boy who shouted, “But he has nothing on!” while viewing his Emperor’s invisible new clothes.

Other than some typical, post-expiration blahs, I didn’t see any early news that put our stock index futures on the defensive this morning.  Soon afterward, however, Bank of America announced it had tripled its earnings in Q1 versus those it had reported a year ago (see below).  Poorly performing loans rose sharply, and since the numbers were laced with one time gains, including $2.2 billion for a drop in the value of some Merrill debt, analysts and investors alike were unimpressed.  Nancy Bush put it thusly:  “It was a quarter with extremely low quality earnings and climbing credit costs,” said Nancy Bush, an independent bank analyst. “It’s not a healthy picture.” (source: Bloomberg article below).  BAC dropped 25% in today’s trading, finishing on its low tick.

Fanning these early flames among financial names was a report from Goldman Sachs about the equally alarming rise in credit losses at Citigroup.  Citi reported $1.6 billion in “earnings”, but according to Goldman Sachs analyst, Richard Ramsden, C actually suffered an underlying loss of 38 cents per share when the report is stripped bare.  Trading north of $4 on Friday, Citigroup finished Monday with a 2 handle.  With these two financial giants exposed, market participants ran for cover.  Leading indicators, at -0.3%, were a tenth worse than had been hoped, and a rise in the dollar sent energy and materials names to the dungeon.  Just like that — last week’s voracious risk appetites were suddenly sated.

Opening 2% lower, the major averages never once mounted a rally worthy of the name.  Slipping more with each passing hour, most of them closed right on their session lows.   BAC-MER economist, David Rosenberg, makes a fundamental case why the rally into last Friday may have gone too far (see below).  And, after today, the technical picture isn’t exactly a bright one, either.  The 4.3% loss in the S&P 500 was bracketed by a 3.6% drop in the Dow and a 5.6% shellacking in the Russell 2000.  As one might expect during a day when risk is shunned, Treasurys performed quite well.  Yields dropped between 6 and 12 bps across a flattening yield curve.  As mentioned above, the dollar was also sought; it rose nearly 1% against the other fiat currencies.  The currency no central bank can print (gold) also benefited from today’s return to risk aversion, but the rest of the commodity complex fell out of their collective chairs.  A 9% plunge in crude oil was a headline-grabbing factor in today’s 4% fall in the CRB index.

One of Hans Christian Andersen’s more beloved fairy tales is “The Emperor’s New Clothes”.  For those who only remember that “no” could be substituted for “new” in the story, here’s a refresher from the latest Wikipedia entry:

“An emperor of a prosperous city who cares more about clothes than military pursuits or entertainment hires two swindlers who promise him the finest suit of clothes from the most beautiful cloth. This cloth, they tell him, is invisible to anyone who was either stupid or unfit for his position. The Emperor cannot see the (non-existent) cloth, but pretends that he can for fear of appearing stupid; his ministers do the same. When the swindlers report that the suit is finished, they dress him in mime. The Emperor then goes on a procession through the capital showing off his new “clothes”. During the course of the procession, a small child cries out, “But he has nothing on!” The crowd realizes the child is telling the truth. The Emperor, however, holds his head high and continues the procession.” (source: Wikipedia)

This timeless tale comes to mind when viewing the many financial stocks that had until this morning been parading around, hoping not to be seen as similarly draped in fictitious finery.  Each outfitted with the best TARP your taxes can buy, and stitched together with the thread of all but invisible mark-to-fantasy accounting, our nation’s banks have been prancing about to rave reviews ever since the early March memo proclaiming Citigroup’s “profitability” during the first two months of 2009.  Phase one of the resulting liftoff in bank shares was further fueled when other institutions came out and claimed their companies were also profitable using what I then called ”EBITDAW” accounting — Earnings Before Interest Taxes Depreciation Amortization and Write-downs. 
The KBW bank index then entered the booster phase of this rally on April 9 when Wells Fargo “pre-announced” stunningly positive earnings.  It helped usher the KBW Bank index to a level that just more than doubled the March 6 nadir.  Now that Citigroup and Bank of America have finally reported, the rally in financial names has ended where it began, with C and BAC.  The actual results are seeing the light of day, and analysts and investors are seeing less to like with each new accounting disclosure.  Whether the sell off we saw during Monday’s session is just some quick profit taking or the start of something more sinister, only time will tell.  Today just happened to be the day someone at Goldman Sachs finally shouted, “hey, these banks really aren’t making any money!”.

– Jack McHugh

U.S. Stocks Tumble as Financials, Commodity Shares Retreat

Oracle to Buy Sun for $7.4 Billion as IBM Talks End

Bank of America Shares Decline on More Bad Loans

Citigroup Credit Losses Rising Rapidly, Goldman Says

Reversible rally or reflexive rebound?

Vice Chairman Donald L. Kohn
At the Hutchinson Lecture, Newark, Delaware
April 20, 2009
The Economic Outlook

I’m pleased to be here and honored to be invited to deliver the Hutchinson Lecture. Although I never met Harry Hutchinson, I very much wish I had. Like Harry, I received a Ph.D. in economics from the University of Michigan, and my professional interests have centered on money and banking. Given Harry’s expertise and his keen interest in teaching, I’m sure he would have had valuable insights about the recent financial turmoil to share with all of us. In this talk, I will focus on the economic outlook, which, of course, has been significantly influenced by that turmoil. After a brief review of recent developments, I will discuss the factors that are likely to support a resumption of economic growth over coming quarters as well as the likely contour of that recovery.1

Recent Developments
The U.S. economy and financial markets have been through an extraordinarily difficult period. The downturn in economic activity that has been under way since late 2007 steepened considerably last fall as the strains in financial markets intensified, credit conditions tightened further, and asset values continued to slump. Partly in response to the financial turmoil, consumer and business confidence plummeted, and nearly all major sectors of the economy registered steep declines in activity. In all, real gross domestic product (GDP) dropped at an annual rate of 6-1/4 percent in the fourth quarter of 2008; the Commerce Department’s advance estimate for the first quarter of 2009–which will be released next week–is expected to show another sizable decrease. This recession seems likely to be among the deepest and longest in the post-World War II period.

Read the rest of this entry »

Ok, kids, the long awaited site upgrades are here: A near final version of the artwork is below, its 95% of what you will see soon.

Allow me to walk you through the highlights:

1. Flash Header is dead:  Yes, the way-cool but much-hated flash software header — an homage to Clockwork Orange/Robot Chicken — is no more. In its place is the simpler artwork you see below — much simpler and less colorful;

2. Header made smaller:  As so many of you had requested, the new header is much tighter and smaller — about 30% less vertical space; The 6 multi-colored wide spaced tabs have been replaced with 4 integrated tabs;

3. New content:  I am very jazzed about the new content — its all killer (no filler):

a) Macro Notes: Miller Tabak’s Market Strategist Peter Boockvar gets a special slot in the right hand column called Macro-Notes. This will be 5 to 10 short updates every day regarding the latest economic releases, market action, and other relevant observations.

This blog-within-the-blog addition will insure that breaking news and fresh content will always be on the front page. Peter does terrific work, and I am sure you will find his content intelligent and informative as I do.

b) Think Tank: The Cafe has been expanded — and I want to make sure that it is understood that this reflects a a variety of perspectives — including views I find interesting and provocative (though I may not always agree with); Look for 2 to 3 posts per day here form a short roster of my favorite analysts and strategists.

c) Weekend: All that fun stuff that “the book” pushed off the site? Its back, and on the tab called Weekend. Music, Gadgets, Films, Food &  Wine, Cars, Boats, Cigars, toys — essentially, the non work stuff you get enjoy on the weekends !

d) Category & Date Archive: As requested, archives by category and date have been added,  (lower portion, right hand column)

4.  Video Ranking:  I introduced a 5 star ranking for our video clips — I want to be able to have the crowd vote on the best stuff — eventually, the highest ranked videos will form an RSS feed.

5. Going Away: Jobs listings was a bust — that is retired. Digital media will be folded into Video and/or Weekend, depending upon the content.

~~~

Much of this redesign reflects your input. As always, share your feedback in comments!

>

>

Tom Toles

Source:
Will Bank “Stress Tests” Kill Market…or Government Credibility?
Henry Blodget
Tech Ticker, Apr 20, 2009 02:04pm

http://finance.yahoo.com/tech-ticker/article/234412/Will-Bank-%22Stress-Tests%22-Kill-Market…or-Government-Credibility

Once again, Ron Griess of The Chart Store:

>