The Credit Foundation is Still in Question

UAE officials try to counter concern regarding Dubai World. The United Arab Emirates' central bank said it "stands behind" the country's banks as they face losses from a possible default by Dubai World. The central bank eased credit to banks with an emergency liquidity facility and aimed to curtail potential capital flight. "This is a timely pre-emptive move from the central bank," said Goldman Sachs economist Ahmet Akarli. Financial Times (tiered subscription model) (29 Nov.), Bloomberg (30 Nov.)

Analysis: $1 trillion in U.S. bank reserves raise concern. U.S. bank reserves exceed the minimum required by the Federal Reserve by $1 trillion, raising questions and concern about inflation and banks' willingness to lend. Banks could activate the funds to support new loans, which could spur demand and inflation. Or the excessive reserves could indicate that bankers remain nervous about making new loans and would rather hang onto the funds. "If they don't make a loan, they can't make a bad one," said Pennsylvania State University associate professor John Mason. Others said the excess is to be expected. The Wall Street Journal (30 Nov.)

Is The Bank Crisis Over?

U.S. bank lending posts biggest decline in 25 years. Banks in the U.S. cut back the amount of money loaned to customers by $210.4 billion in the third quarter, the Federal Deposit Insurance Corp. said. The 2.8% reduction marks the sharpest drop since at least 1984. The biggest banks, which received billions of dollars in taxpayer bailouts, accounted for a disproportionately large part of the drop. "We need to see banks making more loans to their business customers," said Sheila Bair, the FDIC's chairwoman. The Washington Post (25 Nov.)

What is the reason for the drop? Do banks need capital? Does this mean the banking crisis is over?

All great questions.

US Homes Underwater - Negative Equity Expected to Rise

Nearly a quarter of U.S. homeowners are "underwater". About 23% of U.S. homes have a higher mortgage balance than the property is worth, according to First American CoreLogic. The nearly 10.7 million households with negative equity present a huge obstacle to residential-housing recovery. Homeowners with an "underwater" mortgage are more likely to allow their property to go into foreclosure. The Wall Street Journal (24 Nov.)

In one of my previous post I wrote how this number is forecasted to be 50% by 2011. Which means for this to come true home values must continue to fall. Headlines lead readers to believe otherwise; but the headlines speak to the "second derivative" the rate of change slowing not the general direction. Which is continuing to decline.

Precursor to the Second Stimulus Package?

Obama warns of double dip. The U.S. is flirting with a double-dip recession if it doesn't act to contain rising U.S. deficits, President Barack Obama warned Wednesday in an interview with Fox TV. The government is challenged in trying to boost the economy and spur job creation while setting a path toward long-term deficit reduction. Obama said the administration is considering tax measures to spur companies to hire.

The Fed Governors Don't All Agree.

Fed officials disagree on recovery. Top Fed officials gave different points-of-view on Tuesday about the pace of recovery. Inflation hawk Jeffrey Lacker, president of the Richmond Fed, said that recovery is solidly under way, and he expects the economy to grow at a reasonable pace next year, though there could be "patches of lingering weakness." Cleveland Fed President Sandra Pianalto and San Francisco Fed chief Janet Yellen disagreed, saying that the economic recovery will be sluggish. Yellen warned that the Fed could not maintain its loose money stance for too long, regardless of the pace of recovery. "It is a core responsibility of the Federal Reserve to preserve price stability," she said.

Fed Chairman Comments on the Econmy, Market....

Bernanke gives mixed signals. The recent pickup in the economy "reflects more than purely temporary factors" and continued moderate growth is likely, Fed Chairman Ben Bernanke said in a speech Monday, though constrained lending and weak labor market remain headwinds to robust growth. Inflation expectations haven't responded to upward or downward pressures, he said, noting plenty of resource slack. Bernanke pledged that low-interest, loose monetary policies would continue for an extended period. In a follow-up Q&A, Bernanke said it's "not obvious" that asset prices are out of line, at least inside the U.S., and that "we can never say never" on using interest rates to deflate bubbles, adding we won't have a "real market-based financial system until it's safe to let a financial firm fail."

Fed’s Kohn sees no asset bubbles. Fed Vice Chairman Donald Kohn said in a speech Monday that there was no sign of an asset bubble being caused by the low interest-rate policies the central bank was pursuing. Kohn pointed out that the central bank's loose monetary policies were intended to help investors move into riskier assets.

Or should he say "force" them in to riskier assets????

Hoenig - "Let The Fail" - Freemarkets Work

Hoenig on big banks: Let them fail. The U.S. economy still faces "significant weaknesses," KC Fed president Thomas Hoenig said Monday, "and coupled with a rapidly rising level debt and enormous moral hazard issues, we have a great deal of work ahead of us." Speaking at a central banking event in Abu Dhabi, Hoenig also urged policymakers to allow large financial institutions to fail if needed: "Our institutions must be allowed to fail no matter what their size or political influence."

Not a New Bull Market

We are still in a Multi-Year Bear Market that began in October 2007, led lower by financials.

The Bear Market Rally is based mainly on the Dollar Carry trade not on economic fundamentals. You can not have a New Bull Market when ValuEngine shows seven of eleven sectors overvalued.

Year to date the S&P 500 is up by 21.6% with community banks down 24.9% and regional banks flat. Where's the leadership?

Copy and paste the following to your browser:

http://seekingalpha.com/article/172980-not-a-new-bull-market-for-stocks?source

Retirement Risk Index

The Center for Retirement Research at Boston College just released an article pointing out that the recession has made retirement at age 65 more difficult. The article found that 51% of Americans have a high risk of not being able to maintain their current lifestyle in retirement, which is up from 44% in 2007. Americans at risk have two options - postpone retirement or lower their standard of living.

The article gives four reasons for the increased risk:

1) Housing Market Decline: which was considered the big factor for the increased risk.

2) Stock Market Slump: From 2007 to through Q2 2009 stock holdings declined by $7 Trillion.

3) Lower Interest Rates: Retirees will earn less on their investments

4) Reduced Social Security: Full SS benefits are no longer available at age 65 for those born after 1937. It is extended by months based on year of birth. For those born in 1960 or later full SS benefits occur at age 67. One can still get reduced benefits at age 62.

Link to the article: http://crr.bc.edu/images/stories/Briefs/ib_9-22.pdf

Wall Street Journal - Historical Quote On The Stock Market

Mr. Buffett's approach to investment often seems to parallel the Commodore's. Vanderbilt accepted no salary as an executive, but took only the dividends on his personal stock. (In his era, investors expected steady dividends, not rising share prices.)

To prosper, he had to make his corporations profitable, year after year. He bought lines with permanent advantages—those that ran through developed regions that provided local traffic, for example, and that had low grades, which reduced operating expenses. So, too, does Mr. Buffett look to the long term.

Will The Real GDP - Come On Down!

What was the real GDP for Q3 - 2009?

Economists say U.S. GDP is miscalculated
The calculation of U.S. GDP is not correct, a group of economists said. Imports priced at their point of origin at a certain amount are being accounted for at U.S. prices when GDP is calculated. The problem appears to have swelled GDP reporting, the economists said. While last quarter's GDP was reported at an annual growth rate of 3.5%, the number was actually 3.3%, they said. The New York Times (08 Nov.)

In addition to the above, Cash for Clunkers artificially added to GDP by 1.7%. Of which 3/4 of those buyers were going to buy anyway. If we reduce GDP by Cash for Clunkers and First Time Homer Buyer Credit it looks as though GDP was negative.

Oh the lies Washington tells.

Stock Price - Detachement From Reality

The current value of the stock market has detached from reality. Looking or listening to headlines one would conclude that companies are exceeding growth expectations. And so they are, because of overly conservative analyst estimates and easy comparison.

Of companies that have reported 74% have beat expectations, this percentage is unheard of. Of addition concern is the amount by which the earnings have beat expectation - 7.5%, the average is 3%. As we dig deeper one quickly realizes that the headlines are misleading. Of the companies that have reported, only 27% reported increased revenue. The earnings expansion was due to cost cutting which lead to margin expansion. The 15 year average margin is 6.6% versus the recent average of 7.8%. This highlights that margin expansion and cost cutting is leading too much of the bottom line growth, not revenue growth. Revenue growth is a must to recover.

Stock investors needs to be cautious.

Roubini Sounds the Alarm

Nouriel Roubini is back at it, delivering the latest battle call in his war against complacent optimism. This time, Dr Doom is concerned about "the mother of all carry trades", where investors are borrowing dollars at negative interest rates (due to low nominal rates, and an ever-depreciating dollar), and investing them in anything that is risky and from emerging markets. Hence the disparity between real economic growth and financial market growth.

This new carry trade is quite dangerous, as it is based on the assumption that the dollar will continue to plunge and emerging market investments will continue to pay off handsomely. Should it unwind, due to a rising dollar or emerging market crisis, markets would become dangerously volatile, which would then hamper the real economy (sound familiar?):

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fueling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades.

The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

In effect, it has become one big common trade- you short the dollar to buy any (Roubini's emphasis) global risky assets.

source: SeekingAlpha.com