Financial topics

[John]

Hartford Insurance (actually, Hartford Financial Services Group Inc.)
is going to pay $10 million to purchase Sanford, a Florida-based
Federal Trust Bank.

Why?

Because then it will qualify for a $1.1 billion to $3.4 billion in
the Fed's bailout program.
http://www.bloomberg.com/apps/news?pid= ... refer=home

John

[John]

-- Third Quarter Earnings reports

As regular web site readers know, I've been tracking corporate
earnings growth estimates for several quarters now, showing how
estimates are very high at the beginning of each quarter, but fall
precipitously as the quarter proceeds, and then as the quarter ends
and actuals come in.

For the third quarter, reported earnings growth estimates fell off a
cliff on October 28. However, this must have been a reporting error,
since there was a recovery a few days later.

Ignoring this glitch, the earnings estimates have been following the
same general pattern in the previous few quarters: Estimates of large
earnings growth at the beginning of the quarter, but the quarter
ending with a fall of 20% or so.


Date 3Q Earnings growth estimate as of that date
------- -------------------------------------------
Mar 3: 25.0%
Apr 1: 17.3% Start of previous (2nd) quarter
Jul 1: 12.6% Start of quarter
Sep 5: 0.8%
Sep 12: -1.6%
Sep 19: -0.3%
Sep 26: -1.7% End of quarter
Oct 3: -4.8%
Oct 10: -7.8%
Oct 15: -9.8% Wednesday
Oct 16: -10.3% Thursday
Oct 17: -9.1% Friday
------- -------------------------------------------
Oct 20: -9.6% Monday
Oct 21: -9.9% Tuesday
Oct 22: -10.0% Wednesday
Oct 23: -10.9% Thursday
Oct 24: -11.0% Friday
------- -------------------------------------------
Oct 27: -11.3% Monday
Oct 28: -23.8% Tuesday
Oct 29: -23.9% Wednesday
Oct 30: -23.8% Thursday
------- -------------------------------------------
Nov 3: -11.7% Monday
Nov 4: -11.2% Tuesday
Nov 6: -13.7% Thursday
Nov 7: -13.9% Friday
------- -------------------------------------------
Nov 14: -18.4% Friday


http://www.cnbc.com/id/15839135/site/14081545/

If you look at the chart at the bottom of this web site's home page,
you'll see that P/E ratios have settled at around 18 again, their
level for several years until March of this year.

We're still waiting for the Law of Mean Reversion to kick in, as it
must. When it does, P/E ratios will start falling well below 10, and
will reach 5 or so by 2012.

John

[scared_sh+tless]

What do you think about the prospect of the US (and possibly other
countries) devaluing their currency in order to reflate the
economy?

http://www.moneyandmarkets.com/the-g-20 ... tion-27996

Is it just wishful thinking on the part of the gold bugs or is it a
real possibility at some point in time?

[mannfm11]

devalue against what? Tney devalue currencies by interest rates more than anything. One of the reasons the dollar tanked a year ago was the fact that Bernanke threw in the towel so fast to attempt to foil this mess. Inflation is created by borrowing to spend. TRhere is no private capacity to borrow to spend. If a person with money borrows, in reality his cash balances merely cancel out the debt. They are his to spend, not the defunct or broke consumers that are exiting the stage. When FDR came into office, he first collateralized the FRN's with bonds then later devalued the dollar against gold by 35% on the international market. John has posted a link on his page to a book called the bubble that broke the world. It is a highly informative read and blow holes in the stories we have heard about why the great depression was so bad, like Smoot-Hawley. France tried to get the gold out of the US despite owing the US a fortune and exports from the US were financed by Wall Street. Now imports have been financed through Wall Street activities and the fact the dollar was the reserve currency of the world. Wall Street finance is broken and it appears that The Chinese are about done lending the US money to consume their products. I believe American money is coming home.

There is a real problem here. It isn't only unemployment, but what would occur if we did patch this mess. What would happen is first the US would get even broker. Second, the world doesn't have the mineral resources to push forward, so the next gas price increase would be worse than this one. Third, we would still have a credit bubble. The most important credit asset in the US was the housing. It appears the entire world went on a housing boom to attempt to create more credit. What does the average guy put up to gain more credit but the equity in his house? Foreign demand for American goods has more to do with the flow of US credit oveseas. There isn't a mathematical solution to bank credit, as there is more due back to the banks than is loaned and once the deposits become so relatively large, only 2 things eventually happen, asset bubbles and imbalances in bank liabilities and assets to the point that the assets are owed by a different group of people than have the liabilities (remember the banks books are reverse of yours and the entire game is a double entry system of accounting).

The next thing to happen is the collapse of credit of the US government. The US government cannot fake money for long. This is a Keynesian end game that was proposed when Keynes was asked what happened in the long run and he said we were all dead in the long run. Well he is, but the rest of us are going to have to go through the roughest economy in close to 300 years.

[mannfm11]

John, I believe they are just running it back and forth. Like I read today that there was only 1.5 billion volume and that was average. I can recall that if you ran the market down 300 like it was this morning, then up about 100 above the open then down to -300 again, the volume would be massive. I believe a selling climax would collapse Wall Street. The bid asks are so wide that they must be making a massive amount on trades. They used to get 1/8th anyhow and it appears they are back to that amount. I have never read a trade book that advised you to use limit orders, but get in and out at market. In a market this fast, you can't afford to miss the bus. There were 2 rallies Thursday and Friday that tallied 1300 points between them to the upside. They are moving the market to make money on the trade in and out and little else. I don't believe for a minute that it is massive demand moving this market. Down 300 and the piercing of 8000 was a perfect signal. I had such a signal wipe me out one day back in 98, when Rubin said that's it after a news conference and 2 minutes later the SPX went from about 973 to 998. I was long and I stopped out by 1/4 point on a trade on the open. They pulled it back then reversed with force. I dont' believe the market had ever moved 700 points in a day in history prior to late September and now it seems to do it on a daily basis. We don't have the volume to confirm the moves.

[John]

> What do you think about the prospect of the US (and possibly
> other countries) devaluing their currency in order to reflate the
> economy?

This is mathematically impossible the way you state it. Currency can
only be devalued with respect to other currencies, so that if one
currency is devalued down, then other currencies are revalued up.

The deflationary spiral is affecting the dollar in particular, since
the vast preponderance of the securities involved in the credit
bubble were denominated in dollars, and so the leaking of the credit
bubble is causing dollars to become increasingly scarce, causing them
to become more valuable, and causing the dollar to strengthen.

At this point, nobody has any control over this process whatsoever --
not the Americans, not the Europeans, not the Chinese. Whatever is
going to happen is going to happen, irrespective of what the
politicians do.

> http://www.moneyandmarkets.com/the-g-20 ... tion-27996

> Is it just wishful thinking on the part of the gold bugs or is it
> a real possibility at some point in time?

This guy, Larry Edelson, appears to me to be a nut case.

Sincerely,

John

[mark]

Over the past few days, I have heard rumors from co-workers and relatives that they have heard the government is going to confiscate individual 401k's, and substitue some kind of government program.

Has anyone else heard this, and does it have any credibility?

It seems to me that if this were true, there would follow a market crash, with everyone trying to cash in at once, before the confiscation could take effect, regardless of any penalties for early withdrawal.

[John]

Dear Mark,

Over the past few days, I have heard rumors from co-workers and relatives that they have heard the government is going to confiscate individual 401k's, and substitue some kind of government program.

Has anyone else heard this, and does it have any credibility?

It seems to me that if this were true, there would follow a market crash, with everyone trying to cash in at once, before the confiscation could take effect, regardless of any penalties for early withdrawal.

No, this does not have any credibility at this time, or in the foreseeable future.

That doesn't mean that your 401k is safe, however.


** Are your 401K funds safe?
** http://www.generationaldynamics.com/cgi ... b#e081003b


Sincerely,

John

[John]

-- Discussing the Depression

Discussion on CNBC this morning, discussing the layoff of tens of
thousands of jobs from Citibank:

> Joe: If you lose your job, where do you go?

> Becky: You can't. We were talking about tis before the show
> started. This is an entire industry. Wall Street is going to be
> drastically changed. I can't see it going back to its former
> glory for 5 or 10 years at this point.

> Joe: Where do you go - to a manufacturing firm? Madison Ave?
> What do you do? What skills do you have to go bring home a
> paycheck? Do you go to a job fair or something? It's
> frightening.

> Joe: We were watching a movie - Kit Kitterige(?) -- happened in
> the Depression in Cincinnati - had to take in boarders. Weekend
> WSJ - did you happen to see that piece on talking to people who
> were 90 years old? It set your whole life up differently if you
> survived the Depression - about saving - you never, even feel
> secure.

> Becky: My grandfather hated when we left any food on the table
> because you never did that because he lived through the
> Depression.

> Becky: And you could say the same thing about Wall Street as you
> can say for Detroit auto makers right now. If those jobs go,
> where do you go? There's nowhere to pick up and move, especially
> if it means that the auto parts makers and everyone along those
> lines shut down. That's when you start talking about systemic
> changes, and system job losses wipe out not only industries, but
> entire regions of the country.

John

[Matt1989]

http://theautomaticearth.blogspot.com/2 ... -have.html

A 1930s style depression is not impossible by any means. If governments could avoid a depression merely by printing money, then one would never have happened. Unfortunately, depressions do happen, because ‘money printing’ (monetizing debt) doesn’t cause inflation (ie an increase in the effective money supply) during a hurricane of credit destruction. Traditional money supply measures don’t capture the full picture.

Credit functions as a money equivalent during the expansion phase, but loses the quality of ‘moneyness’ once expansion morphs into contraction. As the vast majority of the effective money supply is currently credit, the collapse of credit will crash the money supply. As is already happening, ‘printing’ merely send money into a giant black hole of credit destruction, thanks to the hoarding mentality that has taken hold amongst banks due to the collapse of trust. Banks know what toxic waste they hold in their own vaults, and certainly aren’t going to trust their colleagues who almost certainly hold the same.

Attempts to stimulate interbank lending are failing miserably, because you can’t ‘print’ trust. Once a deleveraging event has begun, it will proceed to its natural conclusion - the point where the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors. All governments can do is to make it worse in the meantime.

We are still in the very early stages of the deleveraging process, where toxic ‘assets’ are being shielded from the harsh light of day, so to speak. Eventually, there will be a mark-to-market event, however hard governments and central bankers try to avoid one, and that will precipitate a firesale of assets at pennies on the dollar.

Such an event cannot be avoided, at least partially due to the creation of perverse incentives in the derivatives market. For instance, allowing a third party to take out a credit default swap against a company they do not own is analogous to allowing me to take out fire insurance on your home, thereby giving me an incentive to burn it down for profit. We have yet to see the ‘burning down for profit’ phase, but it is coming, and when it does, the scale of counterparty risk in the CDS market will also be revealed.

A large percentage of companies will not be able to collect on winning bets, and will therefore not be able to pay out on losing ones in turn. This will turn into a cascade event in a $62 trillion market, the effect of which will dwarf the credit destruction we’ve seen so far.

This event is truly global - thanks to the tight coupling in global financial markets, contagion inevitably spreads. The use of derivatives intended to mitigate risk has in fact led to systemic risk. There’s a reason why Warren Buffet refers to derivatives as financial weapons of mass destruction.

If you follow the global media, rather than just the blinkered North American version, you will see how many countries are already teetering on the brink as a result of the credit crunch. Check out Iceland, or Pakistan, the Ukraine, Spain, the UK, Ireland, much of eastern Europe and many more. Many of those countries had far worse housing bubbles than the US and have much further to fall as a result.

To imagine Canada to be immune from such a conflagration is simply fanciful. Our real estate excesses have been less extreme, but our banking system is vulnerable, and our export economy will take an enormous hit.

Have you noticed the extent to which shipping is collapsing worldwide? Check out the Baltic Dry index for a leading indicator of the effect of the credit crunch on the real economy. The letters of credit that used to be routine are no longer available, so goods do not move. We live in a just-in-time economy and the paralysis of shipping will eventually lead to empty shelves.

This crisis is very much larger than merely real estate. Liquidity, the supply of which ultimately depends on trust, is the lubricant in the economic engine. Without a sufficient supply, that engine will seize up, just as it did in the 1930s.

With no means to connect buyers and sellers, people can starve amid plenty, as they did then. In the 1930s both resources and real skills were plentiful, expectations were nowhere near so inflated and we had none of the structural dependencies on cheap energy and credit that we have now. Without cheap energy and cheap credit, our highly complex socioeconomic system cannot function. A long and painful readjustment is not just likely, but inevitable.