Marc Faber identifies the rotten apples in the system

Sometimes, I like to go back in time, and listen to what was said now with the benefit of hindsight. For this exercise, Marc Faber is a fantastic use case.

On an interview, on the 7th of April 2009, at around 7min20 (YouTube link), he mentioned the market rebound, then a small 5 to 10% decline, followed by another rally upleg.

As an anecdote, this quote is fantastic:
[...] Tim Geithner wants to identify the bad and rotten apples in the system. Well, he should buy a mirror and stand in front the mirror himself with Mr Ben Bernanke and Mr Larry Summers. There you have the rotten apples.

Probably the most important lesson of all?

I just finished Robert Prechter's (and A.J. Frost's) Elliott Wave Principle which, even though is now really outdated in terms of the current markets, is still a must-read for those who would like to learn about the Elliott Wave method.

The following is a fantastic quotes from page 181 to 187 and probably the most important lesson any investor has to understand to be able to understand the markets:

While most financial news writers explain market action by current events, there is seldom any worthwhile connection. Most days contain a plethora of both good and bad news, which is usually selectively scrutinized to come up with a plausible explanation for the movement of the market. In Nature's Law, Elliott commented on the value of news as follows:

At best, news is the tardy recognition of forces that have already been at work for some time and is startling only those unaware of the trend. The futility in relying on anyone's ability to interpret the value of any single news item in terms of the stock market has long been recognized by experienced and successful traders. No single news item or series of developments can be regarded as the underlying cause of any sustained trend. In fact, over a long period of time, the same events have had widely different effects because trend conditions were dissimilar.[...]

[...] In periods of increasing optimism, the market's apparent reaction to an item of news is often different from what it would have been if the market were in a downtrend. [...]

[...] It is almost certain that in fact people's emotional states and trends, as reflected by market prices, cause them to behave in ways that ultimately affect economics statistics, i.e., produce "news". To sum up our view, then, the market, for forecasting purposing, is the news.

[...] attempts to forecast the market without listening to the market itself are doomed to fail. If anything, the market is a far more reliable predictor of the economy than vice versa.

Another post will come to follow up on this.

Related Posts & Links:

• 2009-08-19 Nearly everyone was proclaiming a new bull market
• Elliott Wave tutorial on EWI web site (free registration required)
• Daneric Elliott Wave primer (thanks Mike from Sovereign Speculator)
  

End the Fed

In support of Daily Paul:

Ron Paul’s new book, End the Fed will hit bookstores next month. Let’s send a message to Congress, the Fed, and the mainstream media by making sure debuts on the New York Times best seller list at #1!

How cool would that be?

Pre-orders at Amazon.com or Amazon.co.uk count toward opening day sales. Please get yours now and help spread the word.

Bernanke reappointed by Obama

Sadly yet unsurprisingly, Barack "Change-we-can-believe-in" Obama reappointed Ben Bernanke, and showing that there might be some changes from Bush's destructive policies, but only for the worse.

Contrary to what you can read on any mainstream media which are just parroting the propaganda of the Fed and the US Gov, Ben Bernanke has one of the most disastrous track records ever, which you can only compare to the disastrous state of the US economy.

Aug. 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke [...] will be nominated to a second term by President Barack Obama.

“As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another,” Obama said. “But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

Judge orders the Fed to disclose reports on emergency loans

Yet another major blow off against the Fed: Bloomberg and Fox won the case they filled against the Federal Reserve several months ago, back in January:

Aug. 24 (Bloomberg) -- The Federal Reserve must make public reports about recipients of emergency loans from U.S. taxpayers under programs created to address the financial crisis, a federal judge ruled.

Aug. 25 (Bloomberg) -- The Federal Reserve must for the first time identify the companies in its emergency lending programs after losing a Freedom of Information Act lawsuit.

Manhattan Chief U.S. District Judge Loretta Preska ruled against the central bank yesterday, rejecting the argument that loan records aren’t covered by the law because their disclosure would harm borrowers’ competitive positions.

The Fed has refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under 11 programs, most put in place during the deepest financial crisis since the Great Depression, saying that doing so might set off a run by depositors and unsettle shareholders. Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued on Nov. 7 on behalf of its Bloomberg News unit.

“The Federal Reserve has to be accountable for the decisions that it makes,” said Representative Alan Grayson, a Florida Democrat on the House Financial Services Committee, after Preska’s ruling. “It’s one thing to say that the Federal Reserve is an independent institution. It’s another thing to say that it can keep us all in the dark.”

The judge said the central bank “improperly withheld agency records” by “conducting an inadequate search” after Bloomberg News reporters filed a request under the information act. She gave the Fed five days to turn over documents it told the reporters it located, including 231 pages of reports, and said it must look for more at the Federal Reserve Bank of New York, which runs most of the loan programs.

The central bank “essentially speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed,” Preska wrote. “Conjecture, without evidence of imminent harm, simply fails to meet the Board’s burden” of proof.

David Skidmore, a Fed spokesman who said the board’s staff was reviewing the 47-page ruling, declined to comment on whether the central bank would appeal.

Bloomberg said in the suit that U.S. taxpayers need to know the terms of Fed lending because the public became an “involuntary investor” in the nation’s banks as the financial crisis deepened and the government began shoring up companies with capital injections and loans. Citigroup Inc. and American International Group Inc. are among those who have said they accepted Fed loans.

“When an unprecedented amount of taxpayer dollars were lent to financial institutions in unprecedented ways and the Federal Reserve refused to make public any of the details of its extraordinary lending, Bloomberg News asked the court why U.S. citizens don’t have the right to know,” said Matthew Winkler, the editor-in-chief of Bloomberg News. “We’re gratified the court is defending the public’s right to know what is being done in the public interest.” [...]

The U.S. House may vote as soon as next month on a bill to require the Fed to submit to audits by the Government Accountability Office, said Representative Scott Garrett, a New Jersey Republican on the Financial Services Committee.

The judge’s ruling “is strikingly good news,” Garrett said. “This is what the American people have been asking for.”

The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg suit, filed in New York, didn’t seek money damages. [...]

More info available from Reuters:

NEW YORK (Reuters) - A federal judge on Monday ruled against an effort by the U.S. Federal Reserve to block disclosure of companies that participated in and securities covered by a series of emergency funding programs as the global credit crisis began to intensify.

In a 47-page opinion, Chief District Judge Loretta Preska of the federal court in Manhattan said the central bank failed to show that disclosure would cause borrowers in the Federal Reserve System to suffer "imminent competitive harm," by stigmatizing them for using Fed lending programs.

"The board essentially speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed," she wrote. "Conjecture, without evidence of imminent harm, simply fails to meet the board's burden." [...]

The case arose when two Bloomberg News reporters submitted requests under the federal Freedom of Information Act (FOIA) about actions the Fed took to shore up the financial system in 2007 and early 2008, including an expansion of lending programs and the sale of Bear Stearns Cos to JPMorgan Chase & Co (JPM.N).

After the Fed resisted the request, Bloomberg sued to compel disclosure.

Preska concluded the Fed "improperly withheld agency records in response to a FOIA request by conducting an inadequate search," she wrote.

FOIA obliges federal agencies to make government documents available to the public, subject to various exemptions.

Apogee of exuberance, paroxysm of irrationality. Sign of a top?

The action on the stock market today seems to me like the apogee of exuberance and the paroxysm of irrationality: Freddie Mac and Fannie Mae are up between 40 to 50%.

While the fact that the Federal Reserve bought $5.6 billion of Fannie, Freddie and Federal Home Loan Bank debt is obviously bullish for these companies shares (free money given to any company increases its value), this reaction shows that people are now fully believe that the real estate bubble will reflate.

Too bad, because it won't.

The bad news ignored by the markets are numerous, but again, nothing in this rebound has to do with fundamentals. It is lead by mass hysteria.

I think we might have touched a top...

As Hussman wrote: As John Mauldin recently pointed out, a June survey of 1500 real-estate agents by Mortgage Finance found that only 36% of all existing home sales involved “non-distressed” properties, and of those, only 31% were described as unforced or optional, the remainder being sales prompted by personal financial difficulty such as unemployment or changes in family circumstances, but without a delinquent or foreclosed mortgage. As John wrote, “Think about that for a minute. Two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage. And only a third of the remaining one-third – roughly 10% of overall sales – comes from something we could call a normal selling process.”

Bob Farrell’s 10 Market Rules

I was reading David Rosenberg's daily letter (outdated, but I'm still playing catch up here...) when he mentioned Bob Farrell and his ten rules:

For those who are not familiar with Bob Farrell, he was the dean of Merrill Lynch research for four decades, I was fortunate to have had him as a mentor, and his 10 market rules to remember are now 30 years old and they have been a cornerstone of my strategy since I first joined Merrill in 2000 and I still abide by these rules today; they have not gone out of fashion.

Since I didn't know about them, I just HAD to find more.

So here are the 10 rules as found via Google:

1. Markets tend to return to the mean over time.
2. Excesses in one direction will lead to an opposite excess in the other direction.
3. There are no new eras — excesses are never permanent.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
5. The public buys the most at the top and the least at the bottom.
6. Fear and greed are stronger than long-term resolve.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.
8. Bear markets have three stages — sharp down — reflexive rebound —a drawn-out fundamental downtrend.
9. When all the experts and forecasts agree – something else is going to happen...
10. Bull markets are more fun than bear markets...

Bernanke's propaganda machine running at full throttle.

Well, Bernanke's term is ending soon, and Obama will have to choose between reappointing him, or not. So, unsurprisingly, Bernanke is himself crediting himself of saving the world, and the US Propaganda machine is now running full throttle explaining how great a job Bernanke has done, and avoiding any kind of criticism. Ignoring even the fact the House has passed a bill asking, following Ron Paul's push to "audit and end the Fed".

This reminds me of Alan Greenspan, who was called the Maestro, the saver of world, just to be discredited and humiliated a few months after his term at the Fed.

Now, let's just remember that Bernanke's actions dwarf everything Greenspan has ever done:

• Bernanke lowered the interest rates to ZERO where Greenspan only took them to 1%.
• Bernanke filled the Fed's balance sheet with toxic assets and sold most of the treasuries.
• Bernanke made a huge power grab and many illegal acts.
• Bernanke started Quantitative Easing (printing hundreds of billions of dollars)
• Bernanke tripled the Fed's balance sheet, moving it from about $800 billion to $2.4 trillion in just about a year.
• Bernanke took the equity markets to a PER of 140 while Greenspan never managed to beat 60.
  

So since his actions dwarf Greenspan's, logically, the bust/collapse resulting from them are also going to dwarf the collapse followed by Greenspan's bubbles.

Yet, the lemmings applause him and want more...

NYTimes: Bernanke, a Hero to His Own, Can't Shake Critics

WASHINGTON — Ben S. Bernanke, chairman of the Federal Reserve, no longer looks sleep-deprived. He still works seven days a week, but earlier this month he took two days off — for the first time in two years — to attend his son’s wedding. [Me: well, maybe he could do the world a favor, and simply take a 20 year sabbatical so that his destructive actions are put to a halt] And he often gets home for dinner and even out to baseball games every few weeks.

As central bankers and economists from around the world gather on Thursday for the Fed’s annual retreat in Jackson Hole, Wyo., most are likely to welcome Mr. Bernanke as a conquering hero. In Washington and on Wall Street, it would be a surprise if President Obama did not nominate Mr. Bernanke for a second term, even though he is a Republican and was appointed by President George W. Bush.

But the White House has remained silent. And despite Mr. Bernanke’s credibility in financial circles [Me: who? Even Keynesian fools like Roubini or Krugman are not fully supporting him.], both he and the Fed as an institution have come under political fire from lawmakers in both parties over the handling of particular bailouts and the scope of the Fed’s power. [...]

Fellow economists, however, are heaping praise on Mr. Bernanke for his bold actions and steady hand in pulling the economy out of its worst crisis since the 1930s. [Me: we're not done yet, are we?] Tossing out the Fed’s standard playbook, Mr. Bernanke orchestrated a long list of colossal rescue programs: Wall Street bailouts, shotgun weddings, emergency loan programs, vast amounts of newly printed money and the lowest interest rates in American history.

Even one of his harshest critics now praises him. “He realized that the great recession could turn into the Great Depression 2.0, and he was very aggressive about taking the actions that needed to be taken,” said Nouriel Roubini, chairman of Roubini Global Economics, who had long criticized Fed officials for ignoring the dangers of the housing bubble. [Me: Now that Roubini wants a job at Washington, he's sucking up everybody he can...] [...]

On the political front, Mr. Bernanke is trying to defend the Fed’s power and independence as the White House and Congress debate plans to overhaul the system of financial regulation. [Me: Wouldn't it be the least a journalist could to, to explain at least why the Congress wants to do so?] [...]

We saved the world from disaster, Fed's Bernanke says

WASHINGTON (MarketWatch) -- The global economy is now beginning to emerge from its worst crisis in generations, but the downturn might have been much worse if central banks hadn't acted so forcefully last fall, Federal Reserve Chairman Ben Bernanke said Friday.

In a speech at the Kansas City Fed's annual retreat in Jackson Hole, Wyo., Bernanke summarized a hellish year and explained modestly how he and his central bank colleagues saved the world from a bigger disaster. Read his full remarks.

"The world has been through the most severe financial crisis since the Great Depression," he said. "As severe as the economic impact has been, however, the outcome could have been decidedly worse."

If the Fed, other central banks and other government leaders hadn't acted in a coordinated and aggressive way in September and October of 2008, "the resulting global downturn could have been extraordinarily deep and protracted," Bernanke said.

Bernanke spoke to a selected group of top policy makers and economists. His speech, however, was aimed at a much wider audience: The president, the Congress and a public that's angry and confused.

Bernanke's term as chairman of the Fed runs out in January, and the financial world is watching to see if President Barack Obama reappoints Bernanke or hands to job to someone else.

Past financial panics have exacted an "enormous toll in both human and economic terms," Bernanke said. "In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation."

The policy response "averted the imminent collapse of the global financial system, an outcome that seemed all too possible to the finance ministers and central bankers."

Among the actions taken by the Fed and other central banks:

1. The Fed lowered interest rates to close to zero. Other central banks lowered rates as well.
2. Congress approved the $700 billion Troubled Asset Relief Program to provide emergency financing to large banks. Other governments did the same with their banks.
3. Under the direction of the Group of Seven, government insurance for banks was expanded worldwide. Governments pledged to prevent the failure of systemically important banks, and they promised to provide adequate capital to the system.
4. The Fed created new facilities to "lend freely against sound collateral."
5. The Fed and other central banks began buying long-term debt issued by public and private institutions to inject liquidity to vital credit markets.
6. The Fed and the Treasury Department conducted a public "stress test" of large banks to determine their capital needs, which in turn was followed by significant increases in capital raised in private markets.
   

Bernanke's speech emphasized the policy response after the crisis erupted last September with the collapse of Lehman Bros. and the failure of other financial institutions, including Fannie Mae, Freddie Mac, American International Group, Merrill Lynch and Wachovia.

CBS 60min Propaganda on the Fed, last year, available on YouTube.

If you want to see how every single prediction made by Bernanke turned to be wrong, watch this video on YouTube.

[Note: I have just noticed that Mish has also wrote a post called Orwellian Madness: "Bernanke saved the world", and I highly recommend reading it.]

New historical record on the S&P 500 PER

I have been reporting record and totally unrealistic PER on the markets for the past several months, but those records keep on being beat by newer ones.

Is that the final equity bubble? Are we close to the end? Nobody can know for sure, but the odds are highly skewed toward a major collapse in the equity markets.

At the current PER (about 140) the value of the stock market would need to be divided by 20 — or decline by 95% — to reach a normal bottom on a bear market (that would mean the S&P 500 trading at about 50 !) or the total earnings of the 500 biggest US companies need to rise by 2,000%. Or anything in between.

For example you should have a decline of about 50% if the US companies increase their earnings 10 fold (i.e. by 1,000%). This is how realistic the current market is.

Click on the chart for to obtain a bigger picture.

ChartOfTheDay.com comments:

From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the recent plunge in earnings and recent stock market rally, the PE ratio spiked and just peaked at 144 – a record high. Currently, with 97% of US corporations having reported for Q2 2009, the PE ratio now stands at a lofty 129.

Previous related posts here.

A better ETF to short the Long Bond launched today

Until a few days ago, if one wanted to short the far end of the Treasury curve, the only choice was the UltraShort 20+ Year Treasury ProShares (TBT) ETF which is a leveraged ETF (and hence evil, for many reasons). If you want to know why leveraged ETF are dangerous, Google is your friend.

Here's a short description of TBT:

The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index. The fund normally invests at least 80% of assets to investments that, in combination, have economic characteristics that are inverse to those of the index. It also typically invests in taking positions in financial instruments, including derivatives that should have similar daily return characteristics as twice the inverse of the index. The fund is non-diversified.

Index Universe Reports:

The ProShares Short 20+ Year Treasury (NYSEArca: TBF) is expected to charge an annual expense ratio of 0.95.

TBF seeks to provide 100% inverse exposure to the daily performance of its underlying Barclays Capital index.

Finally, another even more leveraged short long bond ETF I didn't know about, Direxion Daily 30 Yr Trs Bear 3X Shares (TMV):

The investment seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the NYSE Current 30-Year Treasury Index. The fund normally creates short positions by investing at least 80% of net assets in financial instruments that, in combination, provide leveraged and unleveraged exposure to the target index, and the remainder in money market instruments. It is nondiversified.

Porsche Raided on Suspicion of Market Manipulation

The soap opera style story of the love-hate relationship between Porsches and Volkswagen is definitely the hot story of this summer, with a new episode released yesterday:

Aug. 20 (Bloomberg) -- Porsche SE, the sports-car maker being bought by Volkswagen AG, was raided by German prosecutors in an investigation of possible violations of securities law and market manipulation.

Officials seized documents from the Stuttgart headquarters this morning, Porsche said in a statement.

Unfortunately, there isn't much info about the what/who/how yet.

Related posts:

• 2009-08-14 Porsches is now Volkswagen 11th brand
• 2009-07-21 Porsche's Volkwagen dream is now their worst nightmare
• 2009-05-29 Porsche: the car maker turned to hedge fund now in financial trouble
• 2008-10-29The best performing hedge fund this year?
• 2008-10-28The Biggest Short-Squeeze in History

Central Bank Gold Agreement 3

Last week, there was a news of major importance for all the people interested in gold: the Central Bank Gold Agreement, the third of it kind.

Interestingly enough, it didn't make any headline, not even on the gold bugs blogs or sites that I usually follow.

Aug. 7 (Bloomberg) -- European central banks agreed to a third five-year cap on gold sales and said planned disposals by the International Monetary Fund could be done within the accord.

The European Central Bank and 18 other banks agreed to sell no more than a combined 400 metric tons of the metal a year through September 2014. That’s less than the annual cap of 500 tons in the current agreement, which expires Sept. 26.

Gold sales haven’t been approved yet by the IMF’s board. [...]

The Swiss National Bank, one of the signatories to the new accord, in a statement today said it isn’t planning any gold sales in the near future, and that its gold is an important part of monetary reserves. Switzerland has 1,040 tons of gold, making it the seventh-largest holder.

All this is quite bullish for gold's fundamentals. Central banks are now starting to behave like greedy holders of gold and reducing or even stopping any sales.

The best analysis I have read has been made by Adam Hamilton, and I highly recommend reading his report (I am a big fan of Zeal anyway).

Here are some quotes that I find particularly smart and interesting [CB means Central Bank]:

Just like any investor at the end of a multi-decade bear, in 1999 CBs wanted to lighten their gold holdings. No one is excited about any asset after 20 years of price declines. In addition, the European central banks’ reserves portfolios were dominated by gold. With 70% to 90%+ of their foreign-exchange reserves in gold, they felt the need to diversify out of such a poor-performing asset. But each time one sold gold, it would further spook private investors. Few would buy with the ever-present threat of future CB sales.

Thus the European CBs, wanting to minimize the adverse price impact of their own gold selling on their own reserve gold, collectively decided to create a formal and transparent framework for gold sales. On September 26th, 1999, 15 European central banks signed the equivalent of a treaty then known as the Washington Agreement (they met in DC during the annual IMF meeting). They issued a simple press release outlining the principles of what would later be called the Central Bank Gold Agreement. [...]

In 2000 and 2001, the UK sold 24% and 27% of its total reserve gold! Incidentally the driving force behind these gold sales, Gordon Brown, is now the Prime Minister of the UK. The 415t he sold near multi-decade lows ($285 4-year average) cost the British people $9b compared to what that gold is worth today. Gordon Brown, and other guys running CBs, made the classic investor mistake of succumbing to fear and selling near secular lows. [...]

While individual CBs have different reasons for slowing their gold sales, a couple overarching themes probably apply to all. When gold was in the $200s, psychology was bearish and no one including the CBs wanted to hold it. But now with it up in the $900s, central banks are much more bullish on it and thus less inclined to diversify away from it. The CB fear is gradually morphing into greed, just like in all investors!

On top of this, most of the European CBs selling gold over the last decade were diversifying into the US dollar. But since July 2001, 3 months after gold’s secular bottom, the US Dollar Index has lost 41% of its international value in a nasty secular bear. If you ran a central bank, even if you felt you had too large of allocation to gold, would you want to sell it to buy US dollars when the former is growing stronger while the latter is growing weaker? Me either. Gold looks far more relatively attractive today, thus much harder to sell.[...]

Based on this long history of CB gold-trading action, it is illogical and naive to actually fear central banks today.

This secular gold bull, driven by growing global investment demand, will continue powering higher no matter what the CBs do with their gold hoards. Every tonne of gold the CBs sell lowers their current market share and future influence in the global gold market. And outside of Europe and the US, most of the rest of the world’s CBs have too little of their reserves portfolios in gold so they’ll probably become big buyers.

Nearly everyone was proclaiming a new bull market

I am currently reading Robert Prechter's (and A.J. Frost's) Elliott Wave Principle and discovering the principle. While still considering like some sort of voodoo or art, it is making sense to me, as I understanding the foundations of it.

That said, I simply wanted to share this quote from Robert Rhea in The Story of the Averages (1934) which you can find at page 79 of the Elliott Wave Principle. I think it is summarizing very well the current market conditions.

Talking about the upward correction of 1930:

...many observers took it to be a bull market signal. I can remember having shorted stocks early in December 1929 after having completed a satisfactory short position in October. When the slow but steady advance of January and February carried above the previous high, I became panicky and covered at a considerable loss. [...] I forgot that the rally might normally be expected to retrace possibly 66 percent or more of the 1929 downstring. Nearly everyone was proclaiming a new bull market. Services were extremely bullish, and the upside volume was running than at the peak in 1929.

In France, when real estate prices go down, they stop publishing price indices

Since the start of the real estate collapse, the notaries, who are the real holder of the real estate prices because every single transaction goes through them, conveniently stopped publishing prices.

Notaries are like the land registry office of the UK, where you can find about the real sale prices instead of just using the asking prices of the ads.

One cannot buy a house in France without going through them.
But hey, it's communist France, and Notaries are doing whatever pleases them. Why shouldn't they anyway? They have a state monopoly, so it's their legal right to use it (and abuse it).

Last time they published anything was in May 2009 but as you can see, they stopped publishing the monthly data way back, in July 2008, which I believe was just after the peak.

Let's hope they prove me wrong though and publish fresh and recent data shortly.

'Monthly' publications:

Real estate stats (main page):

Next bailouts: FDIC and Social Security

A lot more bailout are on the way, along with more money down the toilet...

Just some links of interest:

• Social Security crunch coming fast (Bill Fleckenstein Chronicle)
• As of Friday August 14, 2009, FDIC is Bankrupt (Mish)
• Loss Rates for FDIC higher than during S&L Crisis (WSJ via CalculatedRisk)
• The next great bailout: Social Security (Fortune Magazine)
  

In the meantime, the official PE (price earning ratio) of the S&P 500 is P/E 144 (as of 31st of July), the highest in history and analysts/pundits are more and more confident that the recovery is here. These kinds of valuation are found at the very top of very speculative bubbles (this is a historic high on the S&P anyway) and not at the start of new bull markets.

Building literally collapses in Dubai

Just a couple of hours after I published the previous post on Dubai, reports about the actual collapse of a building in Dubai emerge. There are currently not a lot of information flying around, but it seems like a building still under construction collapsed today:

16 August 2009 An eight storey building under construction in Deira, Dubai has collapsed destroying more than ten cars, a police officer said.

Half of the building collapsed while the rest remained standing, the official said. At the time of the accident no work seemed to be taking place on the building which had appeared ready for residents to move in.

DUBAI, Aug 16 (Reuters) - A building under construction collapsed in Dubai on Sunday, but there were no reports of injuries, police sources said.

"A building on al-Ittihad road collapsed, police are investigating, but so far there are no injuries," a source said.

While this piece of news is not very important, I just mentioned it for the many many visitors who are arriving on my blog search fall "Dubai collapse". Obviously, the other posts deal with "economic/building collapse", not the actual, physical collapse of the building.

Dubai collapses to uncharted territory

About six months after my initial post about the Dubai (2009-02-06 Dubai on the brink of collapse - The Skyscraper Curse - oddly enough, reaching in the top 3 more read posts of my blog), I thought it would be interesting to provide a follow up on the situation in the middle east, and more specifically, the bubble-deserts (Dubai and Qatar mainly).

(WSJ - 4th of August 2009) DUBAI -- Home values in Dubai have fallen by about half from their peak late last year in the wake of the global real-estate slowdown, a widely watched index of Dubai property prices showed Monday. [...]

[The report is mainly bullish, still trying to revive the idea that buying homes in a desert make you rich, but there's one bearish statement in the whole report:]

Saud Masud, a real-estate analyst at UBS, said a decelerating price fall doesn't necessarily point to market recovery. "The underlying trends are not supportive of a recovery in the market anytime soon," he said.

(AFP - 16th of August 2009) DUBAI — Just one year ago, property prices in Dubai were surging to record peaks undeterred by a real estate slump in major markets, but they have since gone into free fall and have yet to find the bottom.

Market watchers in the former Gulf boomtown differ slightly on the magnitude of the decline so far, but all seem to agree that the prices of Dubai property, which was selling unchecked over the past three years, should drop further.

"The decline in prices still has a little bit to go before bottoming out," said Sana Kapadia, vice president of equity research at the regional investment bank EFG-Hermes. "We expect a total drop in Dubai of between 50 to 60 percent from peak prices in 2008. We have seen a cumulative decline of 45 to 50 percent so far in Dubai," she told AFP.
[...]
It would be a terrible mistake to believe that we are out of the woods," said Jeremy Mayhew-Sanders, head of investments and development at Sherwoods Property, referring to such few recovery signs.

He said that some prices had improved due to an artificial shortage of units on offer in some areas, as low prices had pushed some owners to pull their units from the market.
But a shortage of new housing units -- a major catalyst for the surge in prices and rents over the past few years -- should be the least worry for buyers as thousands of new units are being delivered this year, with more scheduled to be ready next year.
"Many under-construction projects are nearing delivery time, bringing more units into the market... There is a lot of supply that has to be absorbed," Kapadia said.
Landmark Properties projects some 22,700 residential units to be delivered by the end of this year, with 40,400 others to be delivered in 2010, although many projects have reportedly been put on hold for lack of cash and interest.

And the same story applies to Qatar. These bubble economies are bound to collapse, there is no other ending possible. And when depopulation becomes a major issue, you know the end is near...

Qatar is facing a significant oversupply of real estate in 2012 as its population falls, leaving swathes of property development empty, according to two new reports.
[...]
This could lead to a 'significant overhang' of real estate, they claim. 'While expatriates constitute 90% of the workforce, which is similar to Dubai, a much bigger portion of those are blue collar workers who are more likely to leave in 2012,' the bank report said.

The company is also warning about de-population. Al Mansoory said that the latest published figures show that it has already fallen from 1.9 million to 1.6 million. [That's 15-20% !]

Finally, looks like the new way of making profits of real estate in Dubai is legal claims:

The collapse of Dubai’s once-booming construction industry has created a backlog of legal claims totalling almost £3 billion.

Disputes over unfinished contracts and outstanding payments are stacking up in the emirate’s arbitration court, according to Building magazine.

This year, more than 180 claims have been filed, mostly by international contractors. British firms are estimated to be owed at least £400m on contracts in the United Arab Emirates, many of which relate to work for state-backed investment and development firms.

Atkins, the £700m support-services giant, is among the firms to have publicly admitted being owed money in Dubai. Forensic accountants and legal experts are starting to flood in. Price Waterhouse Coopers has moved a team of 20 investigators to the emirate in recent months.

Of course, even if legal claims and fees will add to GDP, they are destroying value, not creating wealth in the general sense for the population.

Still no actions against Henry Paulson's illegal actions

I am still catching up with the news and the blog, so apologies because this is old news. I just never had a chance to post about it and have also several other posts in queue... Mish also wrote about this, and you should read his long post as well (I am using some of his links here).

Basically, Paulson admitted that he unlawfully forced Ken Lewis to acquire Merrill Lynch, but he also wants us to believe that saving his $700,000,000 stake in Goldman, and stealing the USD-holder blind to bailout his friends "saved this nation from a great peril". There should limits to lies and perjure... And also, he believes that we should thank him for his unlawful actions. As if a $700,000,000 for himself and $870,000,000,000 for his friends were not a good enough reward already.

July 15, 2009 (AP) -- Defending the government's handling of the economic crisis last year, former Treasury Secretary Henry Paulson said Wednesday that the Bush administration's responses were not perfect but "saved this nation from great peril."
[...]
"Our responses were not perfect ... But, having had the benefit of some time to reflect, and to consider views expressed by others, I am confident that our responses were substantially correct and they saved this nation from great peril," Paulson wrote.

Paulson also defended himself against allegations that he and Federal Reserve Chairman Ben Bernanke pressured Bank of America Corp. into acquiring Merrill Lynch, despite mounting financial losses at Merrill that were ultimately absorbed by Bank of America stockholders.

Bernanke has denied threatening to oust Bank of America CEO Kenneth Lewis if he abandoned the takeover.

Paulson said he told Lewis that reneging on the promise to purchase Merrill would show "a colossal lack of judgment." He then pointed out to Lewis that the Fed could remove management at the bank if it saw fit, he said.

"By referring to the Federal Reserve's supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America's regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment," Paulson said.

Paulson said he believed his remarks to Lewis were "appropriate."

Here's another report:

On Thursday July 16 WASHINGTON (AP) Paulson, testifying for the first time since leaving office in January after putting in place a $700 billion bank bailout program, was defiant in his response and admitted no wrongdoing.

"No one was tougher than I was in trying to protect the American taxpayer," he told the House Oversight and Government Reform Committee.
[...]
"I know how terrible it is, I'm telling you it would have been worse" had the government not intervened, Paulson said.

Kaptur, who voted against the bailout program, responded: "If that's your best argument, that's not good enough."
[...]
Paulson said he believes his handling of the crisis, including the Merrill Lynch deal, was appropriate and saved the nation from "great peril." He told the panel that had the government not intervened and promised the cash cushion to banks, the economy would be much worse.

On the Bank of America bailout, Paulson said he would be "very optimistic that the taxpayer would get all that money back with a profit."

I suggest watching this 6min video clip of John Paulson's hearing (Dennis Kucinich questioning). Hank Paulson, who was CEO of Goldman Sachs and Secretary of the Treasury Department of the US is unable to answer simple questions (keeps on blablablablabla but he's not making any sense) and also doesn't know what is lawful and what isn't. He is obviously avoiding to answer the questions and keeps on lying when pushed. The blablablabla finishes at 4min45 where he states that he doesn't know what is legal and what isn't...

The US have become the most corrupt country on the planet. At least, in Iran, China or Russia, you know that free speech and rule of law do not exist whereas most people in the world do not know that it is the same in the US. That's what makes it even worse for the US citizens, who have been robbed blind in the past 20 years.

Fed in hiring spree as assets soar

Ironically...

(Finacial Times) Published: August 11 2009 03:00
The Federal Reserve Bank of New York is aggressively hiring traders as its seeks to manage its burgeoning securities holdings, making the central bank one of Wall Street's most active recruiters of financial talent.

The New York Fed - the arm of the US central bank that implements its monetary policy - plans to increase the staff in its markets group to 400 by the end of the year - up from 240 at the end of 2007.
[...]
The Fed's need for more traders is a direct consequence of the central bank's efforts to keep credit flowing through the US economy. The Fed has been buying fixed-income securities at such a rate that its assets have more than doubled to $2,000bn in the past year, leading the central bank to conclude that it needs more people to monitor the markets and to manage its credit risks.

Porsches is now Volkswagen 11th brand

It is now official, after years of speculation, mismanagement, but yet huge profits thanks to the bubble economy, Porsche got hit hard after trying to swallow a target much bigger than itself. Obviously, the CEO and CFO resigned.

Aug. 14 (Bloomberg) -- Volkswagen AG, Europe’s largest carmaker, will pay about 3.3 billion euros ($4.7 billion) for a 42 percent stake in Porsche SE’s automotive unit as it executes a gradual merger of the two manufacturers.

Volkswagen will fully integrate the maker of the 911 sports car in 2011 as long as all merger requirements are met, the companies said yesterday in separate statements. Volkswagen plans to issue new preferred shares in the first half of next year to help pay for the purchase, which values Stuttgart, Germany-based Porsche’s car division at 12.4 billion euros.
[...]
Porsche CEO Wendelin Wiedeking and CFO Holger Haerter stepped down on July 23 and the company named Michael Macht, its personnel chief, to succeed Wiedeking as the head of the automotive business, called Porsche AG, which will remain based in Stuttgart. Macht will represent the Porsche brand at Volkswagen as the companies combine, Porsche said.

Related posts:

• 2009-07-21 Porsche's Volkwagen dream is now their worst nightmare
• 2009-05-29 Porsche: the car maker turned to hedge fund now in financial trouble
• 2008-10-29The best performing hedge fund this year?
• 2008-10-28The Biggest Short-Squeeze in History

Robert Prechter's Conquer the Crash II (new 2009 edition)

As I mentioned yesterday on my post, I am currently reading Robert Prechter's Conquer the Crash and I am very much enjoying it.

For those of you who haven't bought it yet, or those who would like to read an updated edition, there is some good news: Robert Prechter is updating the book and the new edition should be available in late 2009, according to the Amazon pre-order information.

I am obviously looking forward to read the new edition specially since I would like to see what changes and updates it will bring (if any) in Prechter's forecasts/opinions, 4 years after and the biggest credit bubble in history.

I will try to find some time to write a review of the book (and possibly of others) when I get a chance.

You can pre-order the book on Amazon. UK-based readers might be better off ordering on Amazon.com, even if it means they have to pay for shipping charges.

US	UK

What kind of recovery is the market pricing -or- just how much is the market overvalued?

Here are some very reasonable comments made by John Hussman on their weekly market update:

[...]
The U.S. economy lost a quarter of a million jobs in July. Meanwhile, over 400,000 workers abandoned the labor force (and are therefore no longer counted among the unemployed), which prompted a slight decline in the unemployment rate despite the job losses. In the context of an economy still strained by high levels of consumer debt and still record delinquency and foreclosure rates, labor market conditions are still troublesome. Still, the pace of job losses and new unemployment claims has clearly softened from the pace we observed early in the year.
[...]
Moreover, it might be enticing to look at a chart of the S&P 500 and envision a quick return to 2007 highs and beyond, but it is important to recognize that those highs were based on profit margins about 50% above historical norms, combined with an elevated P/E multiple of about 19 against those earnings. Even if the economy is poised for a sustained recovery here, the belief that those joint outliers will be quickly re-established goes against historical precedent.
[...]
Based on our standard methodology, which considers normalized earnings (not the far more depressed level of current earnings) the S&P 500 is now priced to deliver 10-year total returns in the area of 6.9% annually. This is a figure that has historically been associated with bull market peaks, including 1969 and 1987. In most instances, such valuations turned out badly in reasonably short order. It is, however, true that prospective returns were even worse prior to the 1929 crash, and during the bulk of the period since 1996, so there have been some historical periods where speculators have driven valuations to higher levels, and during these times, it has not been particularly effective to stand in front of speculators saying "no, stop, don't."

And just to show how irrational the market has become, and current fantasy world recovery it is expecting, they published this chart:

Major real estate related collapses happily ignored by the markets

I have started to read Robert Prechter's Conquer the Crash. I had bought it a while ago but following Mike's advice from Sovereign Speculator, I decided to start it immediately. I will write about this book in a separate post. I just want to emphasize that I'm quite convinced now that the sentiment argument weights very much on short term movements.

While catching up since coming back from holidays, I have noticed that the current euphoria and major market bounce would have been predicted by Robert Prechter's methodology.

Following are some major bad news that have been happily discarded by the market, but which are none the less showing the extent of the current crisis and that now improvement is in sight (information gathered across many posts from Calculated Risk)

July 27 (Bloomberg) -- Almost $165 billion in U.S. commercial real estate loans will mature this year and need to be sold or refinanced as rents and occupancies fall, according to First American CoreLogic.

The U.S. South has the most maturing loans with 60,893 mortgages valued at $96 billion coming due on shops, offices, hotels, apartment buildings and land, Santa Ana, California- based First American said in a report. The West is second with 20,549 mortgages maturing for a value of $35 billion.

Commercial property owners are struggling to pay debt as the recession reduces demand and forces landlords to cut rent. U.S. apartment vacancies reached a 22-year high in the second quarter and office vacancies rose to the highest in four years, real estate data company Reis Inc. said earlier this month. Properties worth more than $108 billion were in default, foreclosure or bankruptcy as of July 8, according to data firm Real Capital Analytics Inc.

Aug. 11 (Bloomberg) -- Almost one-quarter of U.S. mortgage holders owed more than their homes were worth in the second quarter and that figure may rise to as much as 30 percent by mid-2010 as job losses and foreclosures climb, Zillow.com said. [...]

The percentage of people owing more than their properties are worth may increase to almost half of U.S. mortgage holders before the housing recession ends, Deutsche Bank AG said Aug. 5.

About 25 million homes, or 48 percent of mortgaged properties, will be underwater as prices drop through the first quarter of 2011

Colonial BancGroup is a target of criminal investigations:

On August 6, 2009, The Colonial BancGroup, Inc. was informed by the U.S. Department of Justice that it is the target of a federal criminal investigation relating to the Company’s mortgage warehouse lending division and related alleged accounting irregularities. The Company has been informed that the alleged accounting irregularities relate to more than one year’s audited financial statements and regulatory financial reporting [...]

Taylor Bean, the third largest FHA loan originator in May, 12th largest U.S. mortgage lender, to cease operations, won't fund mortgages in pipeline (CR):

OCALA, FLORIDA – TAYLOR, BEAN & WHITAKER MORTGAGE CORP. (“TBW”) RECEIVED NOTIFICATION ON AUGUST 4, 2009 FROM THE U.S DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, FREDDIE MAC AND GINNIE MAE (THE “AGENCIES”) THAT IT WAS BEING TERMINATED AND/OR SUSPENDED AS AN APPROVED SELLER AND/OR SERVICER FOR EACH OF THOSE RESPECTIVE FEDERAL AGENCIES. TBW HAS UNSUCCESSFULLY SOUGHT TO HAVE THE TERMINATION/SUSPENSION DECISIONS OF EACH OF THOSE AGENCIES REVERSED. AS A RESULT OF THESE ACTIONS, TBW MUST CEASE ALL ORIGINATION OPERATIONS EFFECTIVE IMMEDIATELY. REGRETTABLY, TBW WILL NOT BE ABLE TO CLOSE OR FUND ANY MORTGAGE LOANS CURRENTLY PENDING IN ITS PIPELINE. TBW IS COOPERATING WITH EACH OF THE AGENCIES WITH RESPECT TO ITS SERVICING OPERATIONS AND EXPECTS TO CONTINUE TO SERVICE MORTGAGE LOANS AS IT RESTRUCTURES ITS BUSINESS IN THE WAKE OF THESE EVENTS. WE UNDERSTAND THAT THIS COULD HAVE A SIGNIFICANT IMPACT ON OUR VALUED EMPLOYEES, CUSTOMERS AND COUNTERPARTIES, AND ARE VERY DISAPPOINTED THAT A LESS DRASTIC OPTION IS UNAVAILABLE.

Freddy Mac says losses will be significant:

Aug. 10 (Bloomberg) -- Freddie Mac, the mortgage-finance company under government control being supported by taxpayers, said the collapse of lender Taylor, Bean & Whitaker Mortgage Corp. may cause it “significant” losses.

Taylor Bean, the 12th-largest U.S. mortgage originator, shuttered its lending business last week after being suspended by U.S. agencies and Freddie Mac. The Federal Housing Administration cited possible financial-statement fraud.

The Ocala, Florida-based lender accounted for about 5.2 percent of Freddie Mac’s single-family mortgage purchases last year, according to a Securities and Exchange Commission filing by the McLean, Virginia-based company on Aug. 7. Freddie Mac can force lenders to repurchase defaulted loans that weren’t of the credit quality they represented [...]

Fannie Mae reported a loss of $14.8 billion in Q2 and requests $10.7 billion from Treasury:

Fannie Mae reported a loss of $14.8 billion [...] in the second quarter of 2009, compared with a loss of $23.2 billion [...] in the first quarter of 2009. Second-quarter results were driven primarily by $18.8 billion of credit-related expenses, reflecting the ongoing impact of adverse conditions in the housing market, as well as the economic recession and rising unemployment. [...]

Taking into account unrealized gains on available-for-sale securities during the second quarter and an adjustment to our deferred tax assets due to the new accounting guidance, the loss resulted in a net worth deficit of $10.6 billion as of June 30, 2009. As a result, on August 6, 2009, the Director of the Federal Housing Finance Agency (FHFA), which has been acting as our conservator since September 6, 2008, submitted a request for $10.7 billion from the U.S. Department of the Treasury on our behalf under the terms of the senior preferred stock purchase agreement between Fannie Mae and the Treasury in order to eliminate our net worth deficit. FHFA has requested that Treasury provide the funds on or prior to September 30, 2009.

Back from holidays

I was away last week and wasn't expecting to be completely disconnected.
Back now and I'm catching up. I will start posting as soon as I can.

Pedge Fund Performance 200907

Historical performance since October 2008 are available here.

Summary:
Pedge Fund USD
July performance: +6,53% (gross, approx)
Year to Date performance: +3,10% (gross, approx)