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As Markets Surge, Jim Bianco Urges Caution: “Expect More Losses to Come”

In one of the most dovish interviews of a Fed member that I’ve ever seen, voting member Charles Evans “would favor more accommodation.” He believes that we would be worse off without QE2 and Fed policy isn’t why commodity inflation took off, he thinks it was solely the demand side. He expressed his full support for the Aug 9th FOMC statement that stated an explicit time frame for keeping interest rates ‘exceptionally low.’ While he said that it’s not certain what the next step the Fed will take, we can be sure that as long as his thought process is still shared by his fellow doves of Bernanke, Yellen and Dudley, this Fed won’t stop with their attempts at easing if the US economy doesn’t improve soon. I want to emphasize ‘soon’ because this Fed has shown ZERO patience with the lag of the economic cycle, an economic cycle that needs time to work without the constant distortion and influence of Fed contraband. Be sure that if Friday’s Payroll figure is very disappointing, we will hear non stop QE3 talk until the Sept 20-21 FOMC meeting. I fully understand the concept of ‘if at first you don’t succeed, try, try again’ but if by the 3rd or 4th time you keep failing by doing the same exact thing (creating cheap money and US$ debasement), isn’t it prudent to take a step back with some introspection and self assessment? Gold is at the highs of the day no coincidence.

My Tuesday morning reading:

• Dissecting the Mind of the Fed (NYT) see also The Bernanke Rally? Not Exactly (Telegraph)
• BofA’s woes making life difficult for Merrill advisers (Investment News)
• Shiller: Yes, We Can Do Stimulus Without Adding Debt. Here’s How. (New Republic)
• Dividend Stocks: It’s Payback Time! (WSJ)
• The Biggest Lie About U.S. Companies (Yahoo Finance)
• Multigenerational Homes Surge in U.S. (Bloomberg)
• Why Michael Lewis is a great writer but a terrible journalist (Scott Locklin)
• Fed Psychology: Bernanke and Buffett try the feel-better approach (LA Times) see also Bernanke Turns Timid in Krugman’s View (Bloomberg)
• How WikiLeaks has changed the role of journalism (Social Media)
• Solar May Produce Most of World’s Power by 2060, IEA Says (Bloomberg)

What are you reading?

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Wow! Just came across this piece from the FT about the concerns of the International Accounting Standards Board (IASB) of how European financial institutions have not reserved enough against potential credit losses on their Greece sovereign bond holdings.  Are these guys reading the Global Macro Monitor?   Recall our piece posted on Friday,

…all of the bailouts have been a de facto attempt to recapitalize European banks, who would have taken massive hits in the event of defaults in the periphery and thus collapsing the European financial system. The problem is, as far as we can see, the European banks continue to report decent earnings failing to take sufficient reserves against their sovereign exposure, which would be painful, but necessary,  and result in reporting losses. European banks are relatively thinly capitalized to begin with…Where is the European Banking Authority?  Every euro the banks receive in backdoor bailout money as the periphery bonds mature and get paid by the European taxpayer should go into loan loss reserves. It appears some banks have just begun to take the hits and to allocate specific reserves against their sovereign exposure to the periphery.

This is what today’s FT piece had to say,

In a private letter sent to the European Securities and Markets Authority, the European Union’s market regulator, the International Accounting Standards Board criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt. “This is a matter of great concern to us,” Hans Hoogervorst, IASB chairman, said in the letter, which was seen by the Financial Times.

People familiar with the IASB’s letter said the intervention was unprecedented and reflected its belief that some European companies had not been making enough provisions for Greek sovereign debt losses.

Makes you go  hmmmmmm!    Others are reaching the same (and correct, in our opinion) conclusion after assessing the situation.   Judge Robert Bork used the following analogy to explain what appeared to be collusion between several parties,

If you pull up to an intersection and five people sitting at the bus stop all simultaneously raise their umbrellas, it doesn’t necessarily follow they have colluded to do so.  It could be they were all reacting to the same external force – rain!

This is important stuff.   Breaking the destabilizing feedback loop between sovereign debt and the European banking system is a necessary condition for a sustainable market rally and global recovery.  The problem is that most of Europe is still in denial though the IMF’s Christine Lagarde, the former French FinMin, gets it.   Be sure to read the full FT piece and review our Friday’s post.

Square, the iPhone Credit Card Machine, Goes Mainstream:

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via The Atlantic

I’d love to see the counter arguments to this:

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Via HolyKaw

Following the negative readings in the mfr’g regions of NY, Philly and Richmond, and slightly positive Kansas City area, the Dallas Fed mfr’g figure was -11.4, 2.4 pts worse than expected and the 4th month in a row of declines. New Orders fell from 16 to 4.8, Production dropped from 10.8 to 1.1, Backlogs fell almost 17 pts to -8.6 and Employment was down to 5.4 from 12.1. Prices Paid fell while Prices Received was unchanged. In terms of timeliness and sensitivity to the August goings on, this survey is helpful as it covers data collected from Aug 16th to the 24th. While the Dallas survey is never a market focus because the data point is only 7 yrs old and thus lacks any history, the trend in mfr’g nationally is becoming obvious. The Chicago region reports next on Wednesday and all will be reconciled on Thursday with the release of the national ISM.

I was somewhat surprised by a Bloomberg article discussing how cheap the S&P is (mentioned here this AM). Its not that Bloomie has suddenly become a cheerleader, but rather, this piece reflects the beliefs of a large chunk of classically trained value mutual fund managers.

Here’s a Bloomberg excerpt:

“At 1,176.80, the S&P 500 is trading at 10.8 times analysts’ forecast for profits in the next 12 months of $109.12 a share. For the P/E ratio to reach its five-decade average of 16.4 without shares appreciating, earnings would have to fall to about $71.76 a share, 22 percent below the last 12 months, data compiled by Bloomberg show.

Should companies meet analysts’ profit estimates, the S&P 500 must advance to about 1,790 to trade at the average multiple of 16.4 since 1954, according to data compiled by Bloomberg. That’s more than 50 percent above its last close. Futures on the S&P 500 expiring next month gained 1 percent to 1,185.9 at 7:48 a.m. in London today.” (emphasis added)

Of course, left unsaid is what if analysts estimates are too high; Historically, the fundie community has overestimated earnings growth by a factor of 2X.

Also unsaid was the impact of recession on earnings. A 22% drop during a recession is hardly a Great Depression collapse; its not even a Great Recession drop. Indeed, that line of thinking ignores the overhang of housing, the deleveraging consumer, and tight credit conditions — all of which could easily persist for years to come.

Bottom line: The Reagan Recession came at the end of a 16 year bear market, plus benefited from Volcker breaking the back of inflation. The threat today is a Japan like deflationary spiral, including falling asset prices and an unwillingness for investors to buy up for a dollar of earnings.

In other words, a falling P/E could be evidence of an ongoing deflationary phase, and not proof that markets are cheap.

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Source:
S&P 500 Falls to Reagan Recession Values
Inyoung Hwang
Bloomberg Aug 29, 2011 2:49 AM
http://www.bloomberg.com/news/2011-08-29/s-p-500-trading-at-reagan-recession-valuations-after-losing-2-3-trillion.html

Hey, I have electricity in the office! A welcome change from what the weekend storm damage wrought.  If I actually had electrical power, this is what I would be reading:

• This curious title requires a closer look: S&P 500 at Reagan Recession Values After $2.3 Trillion Drop (Businessweek)
• Robust Profits Face Hurdles (WSJ) see also Consumer fears put economy on the brink (Washington Post)
• Europe’s Big Mistake (New Yorker)
• Hussman’s Unhedged Recession Call: A Reprieve from Misguided Recklessness (Hussman Funds)
• Alan Krueger to chair CEA (WSJ) was called an “excellent choice” by George W Bush’s CEA Chair (Greg Mankiw)
• The Rescue That Missed Main Street (NYT) see also A how-to guide for fixing America’s banks (Washington Post)
• Dollar Cheap in Purchasing Power as Investors See Shelter (Businessweek)
• Recovering From a Balance-Sheet Recession (Economix)
• Tim Cook: Apple’s New CEO and the Most Powerful Gay Man in America (Gawker) see also Don’t ignore Tim Cook’s sexuality (Salmon)
• How Hard Is It To Get a Cartoon Into The New Yorker? (Slate)

What are you reading?

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via Gaping Void