Financial topics

[freddyv]

This market reminds of of a quote I heard somewhere, "The market can remain irrational longer than you can remain solvent..."

I agree.

The concept reminds me of my first try at gambling about 30 years ago. I had figured out a simple, sure-proof way to beat the casinos: Simply double-down each time I lost and when I finally won I would be back to even. WHOOPS!

As I found out later that was not a new system and hardly foolproof. In fact it proved to be fallible within the first hour and I was wiped out. Seems that a 1024 to 1 shot isn't really all that rare.

And BTW, this market is NOT irrational, it is much more rational than most of its "players".

--Fred

[freddyv]

More incompetence and fraud on Wall Street?

Ever heard of Birinyi Associates? They provide data for the Wall Street Journal, among others.
http://online.wsj.com/mdc/public/page/2 ... dc_h_usshl

And here's my favorite data link these days:
http://www2.standardandpoors.com/spf/xl ... EPSEST.XLS

Please look over all of that and then read this article from December 8, 2008:

If some market watchers are right and the bear market is over, this could be the strongest start to a bull run in over 75 years, Birinyi Associates said today.

The S&P 500 index has rallied about 20% since falling close to 750 on Nov. 20. Assuming that 750 marked bottom, as Birinyi argues, the index has shown its strongest advance for any 11-day start to a bull market since 1932, the firm said today.

Birinyi, which uses factors like money flows to gauge market psychology, did the research to discover what kind of bull market this may be, according to Jeffery Rubin, an analyst at the stock market research firm.

“Is it one like 1982, where the market went straight up, or more similar to 2002, where it took six months for the market to finally get firm footing?” Mr. Rubin wrote in a note today.

That the markets have turned bullish is beyond question, Mr. Rubin said in a follow-up interview, judging from factors including investors’s response to typically negative events such as lackluster earnings forecasts, as well as dismal economic data like Friday’s job report.

The S&P 500 rose 3.7% that day.

Of course, the fact that it’s a strong start doesn’t mean the upturn won’t last, Mr. Rubin said today. “We do think it’s durable, we do think it will last.”

Birinyi Associates, headed by founder Laszlo Birinyi, has been just one voice in a recent chorus of fund managers and market participants who are calling investors back to stocks.

http://www.financialweek.com/apps/pbcs. ... 1/1028/...

To reiterate,

That the markets have turned bullish is beyond question, Mr. Rubin said...

Now let's look once again at the data on that WSJ page:

http://online.wsj.com/mdc/public/page/2 ... dc_h_usshl

...hmmm....

Using Standard & Poor's data I have 12 month trailing earnings for the S&P 500 at $45.95 using Q3 earnings. That produces a P/E ratio of 17.8 given Friday's close of 815.94 yet the Wall Street Journal has the S&P 500 P/E at 12.43. It says right there under the P/E ratio that this is based on "Trailing 12 months" and "P/E data on as-reported basis from Birinyi Associates" so what gives?

There seem to be a couple of obvious possibilities:

1. A mistake was made...again.

2. The WSJ is trying to shill the market. Not likely since the P/E ratios for the Dow indexes looks more realistic.

3. Birinyi Associates is trying to shill the market.


By using OPERATING EARNINGS I come up with a P/E ratio of 12.58, which is very close to the WSJ P/E based on Birinyi Associates data. Of course that is using Q3 data, which is at least understandable since Q4 is only 99% complete and they probably have a rule of only using the correct, actual data.

But why would Birinyi Associates do this? Conflict of interest, of course. According to their website at
http://www.birinyi.com

Birinyi Associates is a stock market research and money management firm.

...and there is the conflict: they have money bet on the market going up and so they "accidently" provide bad data to major publishers who don't even check the data. I'm guessing they don't expect to actually change the market for good but just want a chance to exit a bad position during this nice little bear rally. But that's all speculation....

In truth it doesn't matter because I simply don't trust anybody in a position of power anymore. I rely on data that I can verify through several sources and trust only those people who have a long record of bucking the system. I suppose that all of this false data out there is in my favor since the majority of people still accept it and I don't. Still, I'm a bit tired of living in a country where we really don't seem to give a damn about the truth as long as there is profit to be made. I hope I am not alone.

--Fred

[aedens]

I hope I am not alone.

Earning's will be metered out and market tested IMO

http://www.federalreserve.gov/releases/ ... 11_rev.htm

[aedens]

I did read Johns post, one of his best in awhile.
It is facinating when something like this occurs, when I am listening to something that entirely relates to something else that I am reading. When this mortgage mess started I didn't understand the concept of synthetic CDO's, which to my knowledge are merely Credit default swaps (CDS) and a few other items sold as if they are real debt instruments. They perform like the real thing, but they aren't paid as if they are actual mortgages. Instead, one person is paying another for a right or a guarantee. Thus, I could have bought a CDS and now turn around and buy the toxic waste out of a bank at very little risk at a fraction or I could demand to be paid. Being that the CDO's were being paid, it actually means they owe the counter party the loss, as strange as that may seem. So, if I pretended I had $1 billion in some subprime pool as in a synthetic CDO, someone is actually paying me the insurance premium on an imaginary sum and I am reaping this return on some imaginary sum. But, since the return is in the form of a default swap, the person paying the premium actually has the right to be paid the difference between the face value of the pool and the market value, which suddenly I can realize the form of the problem.

The problem was someone had to pay the buyer of the swap. Was it to be the buyer of the CDO, who also had a loss or was it the originator, like Bear Stearns or Lehman? Maybe this is how AIG ended up with so many of these swaps, the firms had to lay them off on someone once they sold the CDO. I have been thinking there had to be some kind of collusion for so much of the synthetic loss to end up at AIG when in fact it was GS, LEH, MER, BS and Citi that were manufacturing these things as fast as they could move them. Of course, they offered great leverage and promise to hedge funds run by guys whose interest was in making a one year killing gambling with the money of others.

This brings us to one of the great statements I have read anywhere, that now they are coming with regulations when they aren't needed. This is my contention, that this game isn't going to go to the next inning as far as the creative schemes to finance risk. John made note of some that write about interest rates going up when this rebounds. I have made note of this myself, not in the sense that I think we are going to get out of this, but in the sense that if we did get out of this, what then? If you put a floor under housing with 4% mortgages, how are they going to sell these houses with 7% rates, which is where they would normally be. I doubt we are going to see a 20% subsidy to keep rates at 4% so the housing industry doesn't collapse again. My point is the Fed is trying to inflate on its own and if they succeed, no amount of quantative easing is going to make private lending happen at 4% on risky instruments. The government can't backstop all of it. My other point is that without the old schemes and a new pool of virgin borrowers, lending won't return for a long time. What is left are people that still have jobs and mainly people that weren't so stupid as to borrow and spend every dime they could. They aren't going to make that mistake now. This is basically what John wrote from what I understand and I concur entirely. We are in a mess that we can only get through, not around.

http://generationaldynamics.com/forum/v ... +cdo#p1816
Wed Dec 17, 2008 12:11 pm
It’s presented as the bank’s product, and the sales staff pretend that the bank is fully behind it, but of course it’s actually a $2 Cayman Islands company with one or two unknowing charities as shareholders. It offers a highly-rated, investment-grade, fixed-interest product paying a 1 or 2 per cent premium. Those investors who bother to read the fine print will see that they will lose some or all of their money if seven, eight or nine of a long list of apparently strong global corporations go broke. In 2004-2006 it seemed money for jam. The companies listed would never go broke – it was unthinkable. Here are some of the companies that are on all of the synthetic CDO reference lists: the three Icelandic banks, Lehman Brothers, Bear Stearns, Freddie Mac, Fannie Mae, American Insurance Group, Ambac, MBIA, Countrywide Financial, Countrywide Home Loans, PMI, General Motors, Ford and a pretty full retinue of US home builders. In other words, the bankers who created the synthetic CDOs knew exactly what they were doing. These were not simply investment products created out of thin air and designed to give their sales people something from which to earn fees – although they were that too. They were specifically designed to protect the banks against default by the most leveraged companies in the world. And of course the banks knew better than anyone else who they were. As one part of the bank was furiously selling loans to these companies, another part was furiously selling insurance contracts against them defaulting, to unsuspecting investors who were actually a bit like “Lloyds Names” – the 1500 or so individuals who back the London reinsurance giant. Except in this case very few of the “names” knew what they were buying. And nobody has any idea how many were sold, or with what total face value.
It is known that some $2 billion was sold to charities and municipal councils in Australia, but that is just the tip of the iceberg in this country. And Australia, of course, is the tiniest tip of the global iceberg of synthetic CDOs. The total undoubtedly runs into trillions of dollars. All the banks did it, not just Lehman Brothers which had the largest market share, and many of them seem to have invested in the things as well
The Aussy Prime Minister was in town....

[aedens]

D) No we sued them and got Stock Warrants in said New Bank that assumed the assets of the other one who commited the fraud.
Yes they are open stock warrants so we Call when we are ready as settlement. And maybe in 3 to 5 years I will exercise them since they are to be
included in the Family Trust Fund. Common stock has inclusive rights only to its issue. My point is yes they will offer less than par and fudge the
numbers to pay the lawyers but we refused and got face value. We stuck to dicipline over conviction on that matter and the lawyers did make there margin.

John,

I read with interest your article about complicity of politicians et al in the financial system failure.

What is your view of people who now hold common stock in banks?

A) They get wiped out?

B) They increase their net worth, because the government is now a major shareholder (AKA fascism)

or

C) Other

My view is current holders of bank common stock get wiped out, then the banks issue new shares and start over....

Mark

see
link http://www.theatlantic.com/doc/200905/imf-advice/4

see page 4 of link for what former IMF official says about what could happen to banks common stock shareholders

[The Grey Badger]

That the markets have turned bullish is beyond question, Mr. Rubin said...

Mr. Rubin has misspelled "bullish." It should read "bullshi....."

[aedens]

For all you bulls out there that think we are at the bottom, look at the following link - lots of great information that puts things into a realistic perspective. If I could figure out how to paste some of these charts here I would...
http://www.financialsense.com/Market/pa ... /0326.html

Please be carefull on this Dead Cat
It is difficult to predict when this strong “no-insurance” undercurrent will emerge, and be acknowledged, as a dominating factor in determining the status of the global economy. But, quite clearly, the ongoing dramatic reduction in the size of the risk insurance business will start to erode the quality of credit (higher yield spreads and higher upfront fees) within the first half of 2009; that erosion will, in turn, result in depressed asset values (even from this juncture), and in historical business contractions in the US and elsewhere. The basic ingredient (i.e. the end of non-actuarial risk underwriting) of another Great Depression is firmly in place.
http://seekingalpha.com/article/111208- ... sb_popular

Loan portfolios are fallen far faster than deposit rates. Between what the Federal Reserve has done to distort the yield curve, the TARP, and the likely reforms to mark-to-market accounting, the regulators and the accountants are effectively "begging" banks to sell anything with a gain. While in the short run, this will generate capital, future net-interest margins will only be pressured more (as banks can only deploy the sale proceeds at lower rates). Worse still, banks are responding to margin pressure by raising borrowing costs (absolute-rate floors) in many floating-rate commercial. Net-interest margins - not credit losses may be the most important indicator of sustainable financial-system strength. Net-interest margins represent systemic capacity and the ability of the system to exist. Until margins expand, bank’s ability to withstand losses on their own is severely limited. Banks are about to trade immediate capital for long-term earnings is the thought of the moment but that is only what they want you see. As conveyed, The most exposed countries to fallout in Eastern Europe are Austria, France, Italy, Belgium, Germany, and Sweden. Austria alone made loans of $297 billion to Eastern Europe, according to Josef Pröll, the Finance Minister in Vienna. This is the equivalent of 70% of the country's GDP.
Needless to say we see that we know who is bring there A game to the table. What I am saying is Volume and Volatility is what they need and not the market as such for there market to date and most will survive the customer's demands.

One (fundamental) interpretation is that The Great Pump-Up, which lasted over thirty years, is finished and the Age of De-Leverage is fast upon us. Though I don't expect the latter to last as long as the former (economic declines being swifter than expansions), I nevertheless think that the de-leveraging process will last more than most people believe. And this, despite the (un)heroic efforts by Fed and Treasury to rapidly pump trillions of fresh debt into the system. All they are achieving so far is to replace a portion of the debt going terribly bad (eg sub-prime mortgages and speculative trading leverage) with government debt. Banks are very simple businesses: borrow - lend - repeat. The crucial word being repeat, because if the cycle stops banks almost immediately start losing money. When principal is repaid (or defaulted) and is not re-lent net interest margins (NIM) decline and high fixed costs hit the bottom line hard. Therefore, as banks go into capital conservation mode and shut lending down they create a negative boomerang effect for their own earnings. In more ways than one, banks are like sharks: they have to keep swimming in order not to sink.

Banks striving to preserve capital (i.e. to maintain capital adequacy ratios) are in effect winding down their core business and we know why. This is another reason - beyond loan defaults and trading losses- that banking stocks have been pounded into the dust. The KBW banking index is down a whopping 80% in two years. They know this game so we can Hedge this by A. Taxpayer.

The technical term that economists use for the third option is rent-dissipation. It describes what happens when possible investment capital is invested in the political class rather than on customers as we see unabated. When this happens, the wealth creation process is hampered considerably. So can we agree to disagree on the current path but observe how we can and could (and probably should) bounce. It might even be worth a trade, getting long this afternoon into the selling mania. But you better have an exit plan and the discipline to stick with it or you will remember why the above all apply’s.
"Revenue neutrality" has turned fiscal policy into, at best, a pointless exercise; at worst, a deeply dishonest shell game. We cheer when they propose a low tax, but look at the fine print. It's accompanied by higher taxes elsewhere to date unfettered. The real agenda of the G20 should be helping save Europe from itself, for example by encouraging the creation of a €2-trillion European emergency economic stabilizations fund, funded primarily by richer Eurozone countries, and a major relaxation of Eurozone monetary policy. Without such measures, we are likely on the path to a bigger slowdown in global growth and a more difficult recovery. Simon Johnson, former chief economist of the International Monetary Fund
The financial sector globally is shrinking, and this will lead to significant job losses in countries like the UK and Switzerland. It gets worse. The US has banks that can plausibly claim they are Too Big To Fail, and this is bad enough because it lets them get big bailouts. But Europe has banks that may be Too Big to Rescue, ask Iceland or, more recently, Ireland. Far from being able to afford government expansion, European economies with big banks see the prospect of budget cutbacks – to persuade the financial markets that their governments are still good credit risks. European countries face two types of future. On the one hand, countries that still control their own currencies can engage in creative monetary measures, pushing down the exchange rate and raising inflation; the Bank of England leads the way in this regard. Inflation will reduce debt burdens but of course comes with other costs. Think of it as the worst of all possible policy choices, apart from the alternatives. And those most unpleasant alternatives are faced by Eurozone countries. Their economies are slowing dramatically as is ours

http://www.federalreserve.gov/releases/ ... 11_rev.htm

Their banks are impaired, their budgets are constrained, and their monetary policy is in the hands of the European Central Bank (ECB). These countries face the prospect of falling wages and prices. Most central bankers would recoil in horror as this deflation threatens further defaults and a deeper recession, but Jean-Claude Trichet, head of the ECB, is actually welcoming this development in Ireland and elsewhere. Back in the 1990s, much of east central Europe put itself on a high risk debt-fuelled growth path, egged on by Brussels. European Union accession countries were told that they could afford to import far more than they export – and that this difference would be financed by capital coming in from Western Europe. This was true, for a while, but now the crash in Eastern Europe threatens to bring down banks in Austria, Greece, Italy and other places that bet big on Hungary and its neighbours getting rich quick. As Eastern Europe has plummeted into crisis, the West European response has been further bad advice. Countries with fixed exchange rates, such as Latvia, are told to cut wages and prices by 20-30pc, rather than devalue their currency. Never mind that this is political suicide and bad economics. Brussels considers it better for the West European banks with capital at risk. Almost all of Eastern Europe is in trouble and will need to borrow from the IMF; the massive over-representation of Western Europe on the IMF's board suggests that this will end badly. http://www.g20.org/

Mises observed:
When pushed hard by economists, welfare propagandists and socialists admit that impairment of the average standard of living can only be avoided by the maintenance of capital already accumulated and that economic improvement depends on accumulation of additional capital. History does not provide any example of capital accumulation brought about by a government. The consumers are merciless. The corruption of the regulatory bodies does not shake his blind confidence in the infallibility and perfection of the state; it merely fills him with moral aversion to entrepreneurs and capitalists. No one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion. The final outcome of the credit expansion is general impoverishment.

In the overall context of time who learned the lessons? Needless to say is it not in today’s terms from Capital Hill. John's post is relavent and history will bear this out.

[aedens]

Perception is not Reality

Looking at things from the other end of the European Union I see a somewhat more nuanced and less alarming picture. Granted, the economic problems that the countries in central Europe face are real. But so are those faced by Ireland, Spain or for that matter the UK. Estonia for instance has enjoyed tremendous growth over the past years and a contraction now will only set it back to the situation of a few years' ago - a far cry from the beginning of the 1990s. Also the growth in unemployment in Estonia deserves to be put into perspective: although it has grown at a tremendous pace it still only amounts to 5,5%, which is not huge by anyone's standards. Finally, the Czech government's fall, although unwelcome, should not be connected to the financial crisis, but rather to the outcome of the Czech elections a few years back that essentially produced a hung parliament. Mr. Topolanek had already survived several motions of non confidence and simply didn't make it this time. Not fantastic, but not anyone's domino either. The economic and financial crises are undoubtedly real across Europe, but it serves no purpose to talk the crisis up, either.
Sincerely yours,
Toivo Klaar
Head of the European Commission Representation
Toivo Klaar on March 25, Toivo Klaar
on March 25, 2009
at 10:10 AM

"Czech industrial output fell 23pc in January as car plants moth-balled production lines."
The UK's industrial production fell 0.5%
But hey, dont accept you have a crisis unfolding, not my problem.
DominicJ on March 25, 2009 at 10:25 AM

"Austrian banks have lent the equivalent of 70pc of Austrian gross domestic product."
At the same time the Austrian bank with the highest exposure to Eastern Europe, the Raiffeisen International group, today announces a net profit of one billion euros for 2008 despite all the recent market turmoil. These are numbers the much bigger banks of the UK could not even dream of given the absolutely devastating situation of the economy in the UK. If distressed but bold consumers are still considering to buy a car in these stormy days, this car is very likely to come out of Eastern Europe. Eastern Europe is living trough a heavy recession after 15 years of strong growth. The UK, however, is facing the end of its unproductive "business model" based soleley on rising house prizes and the selling of nuclear financial weapons that we will not see again in a lifetime.
The people of Eastern Europe can stand a downturn although many will be hit hard. The residents of the UK and USA respectively still do not yet have a clue what is in for them once the ongoing recession will have turned into a full fleged depression. If you produce nothing else than paperwork and a still growing sector of ridiculously overpaid civil servants there can be no question about the final outcome. Eastern Europe has big
problems at the moment, the UK, however, is entering a phase of economic disaster.
Carl Grabner
on March 26, 2009
at 03:14 PM

========================================================================================
Government Aid
Seen and the Unseen

Raiffeisen International will receive some of these funds, Stepic said. “How much we get will depend on the development of non-performing loans,” he said. The bank’s non-performing loan ratio increased to 3.1 percent in 2008 from 2.1 percent a year earlier, and will increase further this year, the bank said.
“In the current situation no surprises can be considered good news,” said Alois Woegerbauer, who manages 4 billion euros at 3-Banken Generali Investment in Linz, Austria, and holds shares in Raiffeisen International and Erste Group Bank AG. “After the bank’s shares rallied in the last days, investors have started buying again.” Shares will remain volatile, Woegerbauer said. Fourth-quarter net income was 120.5 million euros, compared with 215.6 million euros a year earlier, the lender said. The decline of the Ukrainian hryvnia cost the bank 88 million euros. The bank announced preliminary results on Feb. 19. Eastern Europe is set to slide into a recession, the International Monetary Fund said on Jan. 29. Romania, Hungary, Ukraine, Belarus, Latvia and Serbia have already been allocated more than $60 billion from the IMF to prevent defaults and aid banks.


http://www.pszaf.hu/hirek_ujdonsagok/sa ... 90326.html
A Felügyelet a vizsgált magyarországi részvénytranzakciók mögött részvényswap ügyletet tárt fel, amelynek megbízói oldalán a Soros Fund Management LLC állt. 2008. október 9-én a Soros Fund Management LLC 390.000 darab OTP részvényt kért kölcsön egy londoni székhelyű befektetési szolgáltató értékpapírkölcsönzési részlegétől, majd röviddel ezután egy swap ügylet keretében valamennyi kölcsönkért részvényre short kitettség létrehozását kérte. A piacon elfogadott gyakorlatnak megfelelően a swap ügylet végrehajtásához, illetve abból eredő kockázatainak csökkentése céljából a londoni székhelyű befektetési szolgáltató befektetési szolgáltató közreműködésével a swap ügyletnek megfelelő short eladási ajánlatokat regisztrált BÉT-en a swap tárgyát képező OTP részvényekre.

The Soros fund attempted on Oct. 9 to “send out false or misleading signals about a security’s supply and demand or its share price” and short sold OTP shares, the regulator, known as PSZAF, said in a statement late yesterday. The short selling caused the shares to drop 14 percent in the final 30 minutes of trade, the regulator said. Short-sellers sell borrowed securities, hoping to profit by repurchasing them later at a lower price and then returning them to the owner. Budapest-based OTP is Hungary’s largest lender. OTP shares have lost 52 percent of their value since Oct. 8, compared with a 28 percent drop in the benchmark BUX index. The shares traded at 2,173 forint at 9:50 a.m., from 2,165 forint late yesterday. The plunge in OTP shares was part of a “significant and strong attack” against Hungarian money and capital markets, Prime Minister Ferenc Gyurcsany said on Oct. 10. The same month, the central bank raised the benchmark interest rate to the European Union’s highest to defend the forint and the country secured an International Monetary Fund-led loan to avert a default as investors sold local assets during the credit crunch.

The story will be it does not matter if the cat is black or white but which one catches the mouse.

[John]

Dear Fred,

> Using Standard & Poor's data I have 12 month trailing earnings for
> the S&P 500 at $45.95 using Q3 earnings. That produces a P/E ratio
> of 17.8 given Friday's close of 815.94 yet the Wall Street Journal
> has the S&P 500 P/E at 12.43. It says right there under the P/E
> ratio that this is based on "Trailing 12 months" and "P/E data on
> as-reported basis from Birinyi Associates" so what gives?

> There seem to be a couple of obvious possibilities:

> 1. A mistake was made...again.

> 2. The WSJ is trying to shill the market. Not likely since the P/E
> ratios for the Dow indexes looks more realistic.

> 3. Birinyi Associates is trying to shill the market.

> By using OPERATING EARNINGS I come up with a P/E ratio of 12.58,
> which is very close to the WSJ P/E based on Birinyi Associates
> data. Of course that is using Q3 data, which is at least
> understandable since Q4 is only 99% complete and they probably
> have a rule of only using the correct, actual data.

> But why would Birinyi Associates do this? Conflict of interest, of
> course. According to their website at http://www.birinyi.com

And don't forget to mention that the third quarter trailing earnings
P/E estimates have now risen to 258!!!!!

I actually don't think that there's a conscious effort to shill the
market going on here. I actually think that all of these people are
so stupid that they can't cope with what's going on, so they simply
grab whatever numbers give them results that they think make sense.

In one way I sympathize with them, because little of what's going on
in today's world makes any sense at all.

Sincerely,

John

[John]

-- Art Cashin, Friday morning, March 27, 2009

Before the market opened on Friday morning, market guru Art Cashin
made some interesting remarks. At that time, the market rally had
been going strong for several days, and Cashin was thought to be
expressing skepticism about the rally.

He was asked: "Is the rally window dressing?"

> Well, not window dressing in the usual sense. I think a lot of
> fund managers have seen a very sharp rally that's catching
> headlines, and maybe attempting to buy some of the winners in
> this rally so that they show up in the portfolio in the quarterly
> report.

> So that people look and say, "My goodness, he was bright enough
> to own that? That had a big rally recently."

> Of course you would never know when they bought it. Most of them
> bought near the high.

> I think that impact will become evident or not over the next
> couple of days. In fact, today may be the last important day,
> because they want it to be in the portfolio, and they gotta buy it
> before the last day, to make sure it's there.

In other words, Cashin explains the rally through the usual duplicity
of financial managers, who are willing to screw their clients in
order to collect more in commissions.

Sincerely,

John