Japan Update: GDP Sinks, Record Trade Deficit, Fukushima Temperature Surpasses 752 Degrees, Pension Funds Nightmare Scenario

23 years into the depression following the Government and Central Bank sponsored the real estate and credit bubble in Japan, and with trillions of dollars wasted on Keynesian stimulus, there's still no end in sight, and things are actually getting worse and worse — depending on what the government will do, the end game is either going to be: massive multi-trillion default on the JGBs or hyper-inflation. Nice huh?

Here are main items from the past week or two:

Feb. 13 (Bloomberg) -- Japan’s economy shrank an annualized 2.3 percent in the fourth quarter, more than economists estimated, as slumping exports undermine a recovery from last year’s record earthquake. 

The contraction compared with the median forecast for a 1.3 percent decline in a Bloomberg News survey of 26 economists. Growth was a revised 7 percent in the previous quarter, the Cabinet Office said today in Tokyo.

Another report, another opportunity for the economists — usually referred to as "the useless bunch of highly overpaid ignorants" — to prove how useless they are and how little they understand about the economy.

Feb. 19 (Bloomberg) -- Japan posted a record trade deficit in January as the yen’s strength and weaker global demand eroded manufacturers’ profits and slowed the nation’s recovery from last year’s earthquake and tsunami. 

The gap widened to 1.48 trillion yen ($19 billion) and shipments dropped 9.3 percent from a year earlier as energy imports surged, a Ministry of Finance reported in Tokyo today.

[...] In Japan, the country’s trade deficit of 2.49 trillion yen in 2011 was the second largest since World War II. That also contributed to the nation’s current-account surplus sliding to a 15-year low in 2011.
[...]
“Clearly Japanese manufacturers are struggling,” Hiroshi Shiraishi, an economist at BNP Paribas SA in Tokyo, said before the report. “We aren’t really expecting a major pick-up in external demand because the U.S. and Europe are undergoing balance sheet adjustments.”
[...]
Japan’s exports to the EU, its third-largest export region, fell 39 percent from 2007 to last year, according to Ministry of Finance figures.
[...] 

With global demand for imports out of Japan dropping, and energy imports into Japan surging, I guess that the BoJ must be very clever to try to weaken the Yen, right?

 And in addition to the economic depression, the natural and human catastrophes are pilling in. Here's an update on Fukushima — an made in Japan, man made global disaster:

Feb. 13 (Bloomberg) -- Tokyo Electric Power Co. said the temperature in one of the damaged reactors at its Fukushima nuclear station rose to levels above safety limits even as it injected increased amounts of cooling water. 

One of three thermometers indicated the temperature at the bottom of the No. 2 reactor pressure vessel rose to 93.7 degrees Celsius (200.7 Fahrenheit) today, higher than the 80 degrees limit, Ai Tanaka, a spokeswoman for the utility known as Tepco, said by phone today. 

 But Zero Hedge claims:

But major Japanese news sources Yomiuri and Jiji note that the thermometer in reactor 2 has since climbed to 272.8 degrees Celsius, and then hit the upper limit of the thermometer at 400 degrees Celsius (752 degrees Fahrenheit).

Finally, pension funds are struggling in Japan with rates at record 0.5% for the past 2 decades or so, and equities not performing globally. Fraud and lies will not help solve the issues.

Feb. 23 (Bloomberg) -- Japan’s financial regulator ordered AIJ Investment Advisors Co. to halt its business after finding the asset manager’s clients funds of about 183.2 billion yen ($2.3 billion) may be “adversely affected” and started a probe into the 263 asset managers operating in the nation. 

“We’ve ordered AIJ to halt business for a month in order to safeguard investors, as it appears client assets have been adversely affected,” Financial Services Minister Shozaburo Jimi told reporters at a briefing in Tokyo. The regulator is still investigating the firm and can’t comment on losses. The suspension lasts from today until March 23, the regulator said. 

AIJ, a Tokyo-based asset-management firm, may have lost most of the 200 billion yen ($2.5 billion) it manages for companies’ pension plans, the Nikkei newspaper said today, citing unidentified securities investigators. Regulators have been investigating AIJ since the end of January and are unable to explain where some money went, the Nikkei reported. 

Japanese pension plans have been suffering from two decades of slumping markets and an aging population. Alternative investments were becoming one of the options for the retirement funds, which have traditionally invested mainly in bonds, as ways to maintain steady returns and fund retiree benefits in a country where more than one in five people are over 65. 

AIJ, led by Kazuhiko Asakawa, was established in April 1989, and had 120 clients including pension plans with 183.2 billion yen in assets as of the end of 2010, according to a statement from the Financial Services Agency, adding it has 12 employees. 

Only 12 employees?? Wow, you might start from here. How can a firm with 12 employees manage 120 clients and manage many billions of asset?

Few Random Thoughts Brought back from China

I just returned from China — landed at the Changi Singapore Airport around midnight from Beijing — and as usual it was a good fun, but it's also great to be back.

As I'm traveling for my side projects — which aren't progressing as much as I would like — there isn't much worth sharing with you here, except maybe the confirmation of most of what we've been hearing everywhere about

Here are just two things that I wanted to share — one of which is more than pleasant and the other one is simply terrifying.

So what I really enjoy in China, is the culture of food and the enormous variety of food. Something we, as westerners cannot grasp: when we go to a chinese restaurant in the US or in Europe, we get a localized version of not so good food, mostly coming from the Cantonese culture.

Food is really amazing in China — and yes, they do eat weird stuff like silk worms, jelly fish, duck heart salads and intestine and stomach dishes which I tried and I'm still alive to tell about it — with hundreds of varieties of food, very nice way to present it, and central to the idea of communities: you share your food.

Just to give a concrete idea about what I mean, many of the restaurant we went to have menus that are about 60 pages long, and one of the small ones we went, had about 10 of these 60 pages dedicated to just for their dumplings: I counted about 120 different kinds of them.

Now to the scary bit: China is a country where you live in constant fear or danger. You cannot trust anything. To begin with, you cannot drink the tap water, and you have to pay attention when you get drinking water: check the bottle wasn't opened before being hand over. Then, you cannot breath the air outside. The air is polluted in the areas I've been that sometimes you cannot see from your hotel room the other side of the road (ok, it's a large 6 carriage ways road, like most of the main roads there).

So I was surprised, when walking with one of my local friends in a large supermarket, I noticed a lot of food and packaging from abroad. I asked my friend, thinking that the Chinese where opening themselves to outside, but I was shocked by his answer: "people buy food from abroad because it's safer". So basically, you cannot trust the food neither, nor can you trust almost anything produced and sold locally.

Finally, to dismiss one of the myth of the Chinese workers working 24 hours a day, 7 days a week and being so efficient: the Chinese government prohibits by law the workers to work more than 32 hours overtime of their normal 9 to 5 day. In addition to that, most restaurants and shops close at around 8:30 or 9:00 PM, which supports the idea that you cannot leave the office late and hope to find food or go for drinks...

Henry Paulson Gave Hedge Funds Advance Word of Fannie Mae Rescue

Nothing surprising:

Nov. 29 (Bloomberg) — [...] At the Eton Park meeting, he sent a different message, according to a fund manager who attended. 

Over sandwiches and pasta salad, he delivered that information to a group of men capable of profiting from any disclosure. 

Around the conference room table were a dozen or so hedge- fund managers and other Wall Street executives -- at least five of them alumni of Goldman Sachs Group Inc., of which Paulson was chief executive officer and chairman from 1999 to 2006. In addition to Eton Park founder Eric Mindich, they included such boldface names as Lone Pine Capital LLC founder Stephen Mandel, Dinakar Singh of TPG-Axon Capital Management LP and Daniel Och of Och-Ziff Capital Management Group LLC. 

After a perfunctory discussion of the market turmoil, the fund manager says, the discussion turned to Fannie Mae and Freddie Mac. Paulson said he had erred by not punishing Bear Stearns shareholders more severely. 

The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship” -- a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets.  

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said. The fund manager says he was shocked that Paulson would furnish such specific information — to his mind, leaving little doubt that the Treasury Department would carry out the plan.

Where are the criminal charges?

A Great Shortcut To The End of the Euro and the UE

There are way too many questions remaining to be answered and it looks like markets are ignoring them, looking for further reasons to rebound and suck as many people in before correcting again.

Here's my personal list:

• 400€ billion leveraged X times doesn't equal to 1.0€ trillion. It remains 400€ billion X times leveraged. This means that they can still only allow themselves to take 400€ billion losses, and believe me, they will. But, it won't be as big as they think, and leverage will kill them sooner than they think too. How long will it take for people to realize this?
• Where will the money come from? 800€ billion is quite a massive amount, not too far from Spain's GDP or half of France's GDP. Who will they borrow it from? Certainly not the banks which are so capital impaired.
• Will the rating agencies finally decide to provide the much deserved downgrade to France and Germany?
• Will CDS holders just accept to take their losses and not react? This is highly unlikely. You can expect a lot of noise and reactions. The data publicly available shows that the notional outstanding for the CDS on Greece is $5 billion net notional. An amount probably worth probably fight for in courts. And who know how much CDS are traded OTC?
• What will be the impact of the ISDA decision on the CDS market? Does it make the instrument completely useless? What will the unintended consequence be? Investors who were trying to protect themselves because they were holding Greek debt will now take losses. Will this also drive the borrowing costs of all sovereigns higher?
• Greek banks shareholders will be most likely be wiped out. That would be another 3.6€ billion loss that someone will have to take. What is the amount of debt they have outstanding? Are there CDS contract on them?
• “The Greeks, who are seen to be behaving badly, get rewarded, whereas the Irish, the top boys in the class, get nothing.” When will the Irish, Portuguese, Spanish, Italian come and knock at the door?
• Forcing banks to reach 9% of capital reserves is a good step forward. It also shows how massively over-leveraged and insolvent the European banks are. If they could only force the banks to get to a ratio of 100% and get us rid of fractional reserve banking, it would be great! But in anyway, how much losses will the European banks impose to their shareholders by diluting them?
• Does it make sense for the Euro to rebound massively with such massively inflationary news flow?

I will be very interesting to find out what our corrupt politicians will come up with in order to move this crazy plan ahead. But rest reassure of one thing: Sarkozy and Merkel only want it to give them 6 extra months, so that they can put the general elections behind them.

While I am trying to find the answers to the previous quite important questions, the unintended consequences and secondary events are actually occurring:

• Euro Gyrates On Fitch Announcement Greek 50% Haircut To Be An Event Of Default
• Italian 10 Year Bond Auction Prices At Record, Over 6%
• German Constitutional Court Halts EFSF Approval, Issues Temporary Injunction On Further Bailout Decisions

Did the market give away the gains from the "news effect" of the bailout when the German Court halted the EFSF approval today? No. This confirms my point from the previous post today: markets bounced because they wanted to. Anything else is pure conjecture and rationalisation.

Here are some Bloomberg reports that I used as source.

Irish Spy Reward Opportunity in Greece’s Debt Hole

Oct. 27 (Bloomberg) -- Greece’s difficulty paying its debts may turn out to be Ireland’s opportunity.

Greece’s failure to cut spending and boost revenue by enough to meet targets set by the European Union and International Monetary Fund prompted bondholders to accept a 50 percent loss on its debt. While Ireland won’t seek debt discounts, the government might pursue other relief given to Greece, including cheaper interest payments on aid and longer to repay it, according to a person familiar with the matter who declined to be identified as no final decision has been taken.

[...]

“There’s a political problem for the government,” said Gavin Blessing, a bond analyst at Collins Stewart Plc in Dublin. “The Greeks, who are seen to be behaving badly, get rewarded, whereas the Irish, the top boys in the class, get nothing.”

[...]

While Irish bonds delivered the world’s best returns during the past three months, they have pared gains on concern slowing economic growth worldwide will derail the government’s efforts to revive the country’s fortunes through exports. The yield on debt due in 2020 rose 63 basis points in October to 8.26 percent yesterday, albeit down from 15.5 percent in July.

[...]

“Had a European bank resolution fund been in place, some of the resolution of Irish banks would have been part of that,” said Alan Ahearne, economics professor at Galway University, who acted as adviser to former Finance Minister Brian Lenihan. “The Irish government has a legitimate claim that there should be some sort of burden-sharing on a European level.”

Oct. 28 (Bloomberg) -- Owners of Greece’s banks may be wiped out over coming months as the government prepares to take over the lenders after bondholders agreed to 50 percent writedowns on the nation’s debt.

Greek Prime Minister George Papandreou said yesterday that the government will likely buy shares in some banks as a result of a planned writedown, without giving details. The 30 billion euros ($42 billion) already set aside for Greek bank aid should cover the lenders’ needs, the European Banking Authority said.
[...]
For shareholders in Greece’s publicly traded banks, led by National Bank of Greece SA and Alpha Bank SA, there may be little left once the companies end up in government control. The six biggest lenders, which have assets of 380.2 billion euros and a combined market value of about 3.6 billion euros, are unlikely to attract investors willing to bet on a turnaround.
[...]
“Greek banks never had choice on whether to buy Greek bonds, and they’re now being punished,” said Andreas Koutras an analyst at InTouch Capital Markets Ltd., a fixed-income adviser in London. “It is possible equity valuations will go to zero.”

Oct. 27 (Bloomberg) -- European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis-fighting package intended to shield the euro area.
[...]
Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.
[...]
“It’s long on words, short on detail,” said Peter Dixon, an economist at Commerzbank AG in London.

Sarkozy said the bankers were escorted in “not to negotiate, but to inform them on decisions taken by the 17 and then they themselves went on to think and work on it.” Luxembourg Prime Minister Jean-Claude Juncker said the banks’ resistance was broken by a threat “to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks.”
[...]
The resulting “voluntary” losses by bondholders were the key plank in a second bailout for Greece, which was awarded 110 billion euros in May 2010 at the outbreak of the crisis. The new program includes 130 billion euros of official aid, up from 109 billion euros envisioned in July.
[...]
The Washington-based IMF, meanwhile, said it is ready to disburse its 2.2 billion-euro share of the next installment of Greece’s original bailout. The release of the euro zone’s 5.8 billion-euro share was approved last week
[...]
Leaders tiptoed around the politically independent ECB’s broader role in keeping the euro sound, making no mention of its bond-purchase program in a 15-page statement. The Frankfurt- based central bank has bought 169.5 billion euros in bonds so far, starting with Greece, Ireland and Portugal last year, then extending the coverage to Italy and Spain in August.

While Trichet didn’t mention the controversial purchases either, his successor, Mario Draghi of Italy, indicated that the policy will continue. Speaking in Rome yesterday, Draghi said the ECB remains “determined to avoid a poor functioning of monetary and financial markets.”
[...]
“It will be important to detail further the modalities of how this enhanced EFSF will operate and deliver the scale of support envisaged,” IMF Managing Director Christine Lagarde said.
[...]
Europe also struck a bank-recapitalization accord, setting a June 30, 2012, deadline for lenders to reach core capital reserves of 9 percent after writing down their sovereign-debt holdings. Banks below that target would face “constraints” on paying dividends and awarding bonuses, a statement said.

Greece Default Swaps Failure to Trigger Casts Doubt on Market

Oct. 27 (Bloomberg) -- The European Union’s ability to write down 50 percent of banks’ Greek bond holdings without triggering $3.7 billion in debt-insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs.

As part of today’s accord aimed at resolving the euro region’s sovereign debt crisis, politicians and central bankers said they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new securities. If the International Swaps & Derivatives Association agrees the exchange isn’t compulsory, credit-default swaps tied to the nation’s debt shouldn’t pay out.

“It will raise some very serious question marks over the value of CDS contracts,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “For euro sovereigns in particular, the CDS market is likely to remain wary.”

Politicians and central bankers came to a last-minute agreement after banks, the biggest private holders of Greece’s government bonds, were threatened with a full default on their debt, according to Luxembourg Prime Minister Jean-Claude Juncker. David Geen, ISDA’s general counsel in London, said that his organization considered the agreement to be voluntary, even if there may have been “a lot of arm twisting.”

William Black and Harry Markopolos interviews about massive frauds in the US government

William Black was interviewed back on the 14th of September on the Financial Sense Newshour.  He explains to Jim why no one has gone to jail four years after the beginning of the historic Credit Crisis. Professor Black believes that the level of corruption and fraud is so pervasive that very few of the guilty will ever be brought to justice. (the link to the MP3 file)

More recently, on the 8th of October, Harry Markopolos was interviewed on King World News. It was, for once, an interview that didn't make my teeth cringe too much.


Harry Markopolos the Whistleblower who brought down Bernie Madoff’s $65 billion Ponzi scheme reached out to KWN with the latest fraud he and his team have uncovered. Markopolos stated, “The Bank of New York is going to go down, Eric. Between Bank of New York Mellon and State Street, these two institutions have stolen between $6 to $10 billion from tens of millions of Americans retirement savings accounts. It’s been a hell of a crime spree for the bank, but now they are being brought to justice.” (link to the MP3 file)


These are interesting interviews and allow the listener to get a sense of the enormous amount of fraud and excess during the bubble, and also how much the government is corrupt in the US (and everywhere else, to be honest).

Unfortunately, both whistleblowers, in the face of massive failure of government regulation, are advocating as a solution better and less corrupt government regulation and fail to realize that not only this is impossible, but also that during the bubble, 99% of people didn't see this coming, so what might be considered today as a fraud might not have been such a blatant fraud back then.

ISDA Says Greek 50% Writedown Not A Credit Event

ISDA says Greek 50% write down is not a credit event, and hence will not trigger CDS payments. The massive fraud perpetrated by the ISDA is simply unbelievable.

Needless to say, this is yet another massive transfer of wealth from people whose forecasts were right to those who are plain and simply losers.

What is going to be interesting is to find out whether there will be litigations around this decision, and even more importantly, whether the CDS market and instrument will survive in face of such a blatant fraud and theft.

Oct. 27 (Bloomberg) -- The European Union’s agreement with investors for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered, according to the International Swaps & Derivatives Association’s rules. 

ISDA will decide if the credit-default swaps should pay out depending on whether it judges losses to be voluntary or compulsory. European leaders said in today’s agreement they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new debt. 

A last minute agreement was reached after banks, the biggest private holders of Greece’s government bonds, were threatened with a costly full default, according to Luxembourg Prime Minister Jean-Claude Juncker. The involvement of the Institute of International Finance, which represents lenders, also helped progress toward an accord that the EU could portray as non-mandatory.

“As long as the agreement is voluntary, then CDS aren’t triggered,” said Cagdas Aksu, an analyst at Barclays Capital in London. “Provided it’s voluntary, CDS wouldn’t be triggered unless the Greeks missed a payment.” 

David Geen, ISDA’s general counsel in London, didn’t immediately respond to e-mailed questions.

Groupon IPO — The Biggest Scam, Fraud and Lies Ever

Stay away from Groupon and its IPO. Not only is the company itself a big scam and a value destructive venture, but the IPO will be likewise. Even BubbleVision didn't find any bullish comments to make, see
for yourself on CNBC:

 

 And the transcript:

this is a company that essentially has a liquidity and funding crisis that it needs to address short-term. and really, the last thing you want to file an ipo for is to try to serve a short-term funding need. i think we learned from solyndra last year that ipo is not a short-term funding solution. so what are the red flags you've seen that lead you to this conclusion? 

we cover private companies all the time and look at ipo filings every day. i can't remember the last time since solyndra i've seen this many red flags at a private company ipo filing. we have business deterioration, all the numbers are going the absolute wrong direction. 

number two we have insiders that have already massively cashed out that essentially don't have their skin in the game anymore.

as far as business deterioration, sorry, number three, clearly the balance sheet shows this company is technically insolvent and has an eminent financing need. if we move on to the next screen, we'll see as far as the business metrics deteriorating i think can be represented by the fact that yes, the company is growing registered users dramatically, but you can see the actual spending per user has fallen off the cliff. 

[...] 

the s.e.c. has required -- this is the first time i've seen the s.e.c. require a company that slashes revenue less than half. essentially, groupon was recognizing the entire amount sold to consumers as revenue. and the s.e.c. made them just take their 40% cut as revenue. 

so literally, within a matter of a couple of weeks, half their revenue vanished. every time this company amends its ipo, it looks worse. 

sam, i haven't read the amendments, but when you talk about insiders, are the insiders not selling any stock? they're out completely already? they're not out completely. but this company has raised $1.1 billion in venture capital that is a lot of venture capital for a private company to raise. and they raised that in january. what the ipo filing revealed is that of the $1.1 billion they've raised, they've spent $940 million of to it cash out insiders. and that's unheard of to have 84% of a company's venture capital funding go right out the door in just 16% to a company. a company that is losing money and needs the cash.

H/T to my friend Mr. H. for the link. 

30 Year Old Boutique Hedge Fund Manager Makes Fortunes Uncovering US Listed Chinese Scams Companies

My friend Mr. H forwarded me a Washington Post report titled Gaining by betting against flimsy Chinese firms which is proving right my previous forecasts about the scams going on in China and how many of their exchange companies would go to zero.

I find this story fascinating because it shows just how a small amount of research and very clever tactics can bring down these scammers and make you rich in the process, while big Wall Street firms are completely unable to come up with any useful information, even after paying their analysts hundreds of thousands of dollars a year.

Did you know there is about $20 billion worth of small- to medium-size Chinese companies listed on U.S. exchanges ? That makes the potential losses for western investors quite high.

Here's the story, with my emphasis.

Sahm Adrangi works with six other people in a small room on Madison Avenue with a view of an adjacent brick building. 

He doesn’t speak Chinese. He’s never set foot in China. At 30, he claims no special insight into the sources or durability of the Chinese economic miracle. Yet he has managed to dig up enough information to wreck the fortunes of several Chinese companies — while building up his own. 

Two years ago, Adrangi, a 2003 Yale graduate, left an investment banking job and set up a small hedge fund, largely with money from himself and his parents, as well as a few other supporters. Since then, his red-hot fund has increased sixfold, partly a fortuitous accident of market timing but mostly a product of his ability to spot flimsy Chinese companies listed on U.S. markets — which he bets against by short-selling them. 

The firm is tiny by hedge fund standards, with $20 million under management. But Adrangi has promoted his bets through newsletters and online postings that savage U.S.-listed Chinese companies he views as “scams.” In doing so and doing well, he has grabbed the attention of eager U.S. investors and fearful Chinese executives — not to mention U.S. regulators who are trying to keep track of about $20 billion worth of small- to medium-size Chinese companies listed on U.S. exchanges. 

Here are a few samples of Adrangi’s scathing assessments: 

China Education Alliance “is mostly a hoax,” he wrote of a Chinese for-profit education firm, which then had a $150 million market value on the New York Stock Exchange and is now worth less than $25 million. 

The company’s Harbin “training center” — which CEA said had “17 modern classrooms” for 1,200 students — had no desks and was all but empty, Adrangi said. It boasted of online revenue, but its Web site didn’t work. 

China Biotics claimed to have more than 100 outlets for its nutritional supplements; Adrangi said he hired researchers who checked all the company’s business addresses and found only four outlets. Later, on June 22, the company’s auditors resigned, citing “irregularities” that might “constitute illegal acts” and for which the board had “not taken timely and appropriate remedial actions.” The company is contesting a shareholder suit in Washington that makes the same allegations. 

China Marine, a maker of snacks and an algae drink, reported revenue to China’s State Administration of Industry and Commerce that was 85 percent lower than what it reported in U.S. filings, Adrangi said. The company reaffirmed its U.S. reporting, but on Aug. 8 (considered an auspicious day in China), it announced just $1 million in quarterly profits, down 85 percent from a year earlier. 

Noting extremely high profit margins claimed by one of China’s battery manufacturers, Adrangi wrote that he believed the firm was “fabricating its SEC financial statements.” He added that the company’s battery plant “is either the world’s most spectacular battery manufacturing facility or the company’s financial statements are fiction. We believe it’s the latter.” The companies have disputed Adrangi’s assessments, insisting that they are not misleading U.S. investors or regulators. 

[...] All of their targets are drawn from the more than 300 Chinese companies that since 2004 have taken advantage of a technique known as the reverse merger. It is a sort of backdoor way into the prized U.S. capital markets. It works like this: A Chinese company seeking access to U.S. capital markets swaps its shares with the shares of a U.S.-listed company that has fallen on hard times and has been reduced to nothing more than a shell. Usually the U.S.-listed company takes on a new name, appoints new directors, reports glowing results from its new Chinese operations and raises millions of dollars by issuing stock and luring new investors. And it does this without having to go through the regulatory steps that would be required for a newly listed company, especially one based in China. 

[...] Adrangi has taken an accidental route to the China investment field. Born in Iran, his parents moved to California when he was 5 and then to Vancouver. His father, an engineer in Iran, bought a fencing company. Adrangi attended a prestigious boys’ school and then went to Yale. When he arrived, he was an activist.[...] But he wasn’t able to turn those internships into a full-time job. So he moved to New York and went to work for Deutsche Bank. He applied to law schools and deferred three of them. He never went. Instead, he moved to Long acre Management, selling distressed assets of bankrupt companies. Then he went out on his own. 

Initially the fund wasn’t focused on Chinese companies. Even today it has invested in about 100 non-Chinese companies, including wireless companies in Africa, a Costco-like retailer in central America and an Internet bank in the United States. But then Adrangi read about Bird and called him for advice. Bird told him that looking at the books of Chinese reverse merger firms was like listening to someone claim they drove 300 mph to arrive on time for dinner. “The sales were outstanding, but it didn’t make sense,” Adrangi said. 

Adrangi’s first forays into attack mode were anonymous because he feared retaliation or lawsuits. He created a Web site and posted brief items pointing to companies he believed to be hyped. The SEC forbids hedge funds from soliciting customers on the Web, so Adrangi made no mention of his firm, Kerrisdale Capital, or his fund. Then he read signed reports about Chinese reverse merger companies and he began to do the same. He took aim at China Education Alliance. The company went public in 2004 through a reverse merger. [...] The company said it distributed educational materials online, but Adrangi found through researchers that the Web sites didn’t work, payment mechanisms didn’t function [...] , he sent researchers to the company’s training center. They took photos and video of the virtually empty building, which he posted. CEA said it had more than $12 million of revenue from the center. Since Adrangi first posted his attack on CEA, the company’s stock has plunged from $4.50 a share on Nov. 26, 2010, to 76 cents on Aug. 22 — even though the CEA chairman has bought $1 million in shares to bolster the price, chief financial officer Rogers says. 

Adrangi also made money shorting China MediaExpress, a firm that operates television advertising on inter-city express buses. A darling of China investors, the company’s auditors resigned, the stock price collapsed and in time trading in the shares was halted. 

And Adrangi profited from the collapse of Rino, a Dalian-based maker of industrial pollution control equipment. The stock, which once traded as high as $35 a share, has since been taken off the exchange. 

[...] In 2010, its 81.5 percent return (before fees) crushed the Standard & Poor’s 500-stock index’s 15.1 percent gain. Aside from its bets on a few U.S.-listed Chinese companies, its portfolio “roughly tracked the market,” Adrangi said in a letter to investors, warning that “we do not have a magic formula” for “generating outsized returns.” Three months later, more Chinese reverse merger companies “imploded,” Adrangi told investors, and his firm Kerrisdale Capital rang up more big gains. Its top five investments were all shorts of U.S.-listed Chinese firms. The run continued in the second quarter, when the fund returned 54 percent (before fees) against 0.1 percent for the S&P 500. 

[...] Although Adrangi has skewered many Chinese companies listed in the United States, he has little sympathy for investors who lose money on them. “The responsibility belongs with investors who make these investments,” he said. “No one should be relying on the SEC or underwriters to protect them.” He said that if investors “end up holding the bag, that’s just the way capital markets work.” But he conceded it can be hard to see through the stories the companies spin. “Historically, stock scams are promoters promoting stories. The actual numbers will tell a more truthful story,” he said. “If it’s a mining company and there is nothing in ground . . . the numbers don’t lie. The people do. The trick here is that the numbers are made up.”

Fed's Audit Report Reveals $16 Trillions in Secret Loans

Senator Sanders writes:

The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression.
[...]
"As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders. "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."

To read the GAO report, click here.


I don't have anything else to add, really.

William Black on The Daily Ticker

William Black was interviewed on the Daily Ticker where he talks about the frauds perpetrated by the financial sector in the US and the rating agencies involvement in this fraud.

This a great interview, although you can ignore the non-sense about the impossibility of the US to default and the Keynesian propaganda about how great government deficits are...

• Part 1
• Part 2

Accounting fraud allows Citigroup to post phantom profit for Q1 2011

After JPMorgan and Bank of America, yesterday was Citigroup's turn to use accounting fraud to post phantom profits.

Basically, the company is reporting a profit of $3 billion in profits when at the same time, reducing the loan loss reserves by $3.3 billion... Nothing new under the sun, that has been going on for all the banks for the past 3 years, and analysts cheer on the news, accounting firms approve the numbers, scandals are left for the next year or two.

April 18 (Bloomberg) -- Citigroup Inc. rose in New York trading, the only U.S. lender among the top 10 by assets to advance, after reporting profit that beat analysts’ estimates and cutting provisions for future loan losses by $3.3 billion.

[...] First-quarter net income fell 32 percent to $3 billion, or 10 cents a share, exceeding by a penny the average per-share estimate of 21 analysts surveyed by Bloomberg.

Chief Executive Officer Vikram Pandit, 54, relied on the reduction in reserves to report the New York-based bank’s fifth profitable quarter in a row. Losses on troubled loans declined 25 percent as fewer customers missed payments compared with the same period last year. Profit at Citigroup’s trading and investment-banking businesses fell by almost half. Revenue declined in five of the six business units.

“The company is showing just an incredible turn in the quality of its loan portfolio, which I don’t think was expected,” said Lutz, Florida-based Richard Bove, an analyst with Rochdale Securities LLC. “I don’t see any bank having that type of rapid improvement.”

[...] Citigroup’s revenue declined 22 percent to $19.7 billion. Revenue for the Citicorp division, which contains the bank’s trading, consumer and investment-banking units, fell to $16.5 billion from $18.5 billion in last year’s first quarter. The Citi Holdings division, which contains unwanted businesses and assets, had revenue of $3.28 billion, down from $6.55 billion.

Losses from bad loans declined to $6.27 billion from $8.38 billion. The $3.3 billion reduction in the provision for losses on future soured loans amounted to about 80 percent of the bank’s pretax profit.

“These guys have put up a fairly respectable record of turning this institution around,” said David Knutson, a credit analyst with Legal & General Investment Management, which manages Citigroup bonds worth about $85 million. “It’s another question whether they should be releasing reserves as aggressively as they are.”

Total trading revenue declined to $4.87 billion from $6.59 billion in the same period last year, a period that Oppenheimer & Co. analyst Chris Kotowski called “the best quarter in history” in a note last month. New York-based Kotowski had predicted a drop to $5.01 billion.

Trading and investment banking are run from Citigroup’s institutional-clients group, which Pandit overhauled in January when he appointed ICG head John Havens to chief operating officer. James Forese now runs securities and banking, reporting to Havens.

Stock-trading revenue fell to $1.07 billion from $1.21 billion a year earlier, and compared with $596 million in the fourth quarter. Fixed-income trading revenue declined to $3.8 billion from $5.38 billion in the same period last year.

“This was a very solid quarter outside of trading and a strong quarter inside trading,” said Moshe Orenbuch, an analyst with Credit Suisse Group AG who had predicted that fixed-income trading revenue would fall to $2.73 billion.

The earthquake in Japan forced the bank to set aside about $100 million for possible losses on mortgages and private-equity investments, Chief Financial Officer John Gerspach told analysts on a conference call. The bank recovered initial trading losses “within a week or so” after the quake, Gerspach said.

Citigroup’s regional consumer-banking business reported earnings rose 58 percent to $1.55 billion. Profit at the U.S. bank increased to $551 million from $15 million. Latin American earnings rose to $486 million from $372 million last year. In Asia, the consumer bank’s profit fell to $461 million from $567 million.

Citigroup may invest as much as $4 billion in consumer banking in the next three years, mainly in emerging markets, Manuel Medina-Mora, head of consumer banking for the Americas, told reporters in Santiago in March.

Citigroup’s investment-banking business, which includes advising on mergers and acquisitions as well as managing sales of equities and bonds, reported revenue slid to $851 million from $1.06 billion in the same quarter last year. The bank dropped to seventh from third among advisers on completed global mergers and acquisitions during the quarter.

Transaction Services

Profit at the transaction-services business fell to $841 million from $930 million last year in the first quarter. The unit, which made about one-third of Citigroup’s $10.6 billion profit in 2010, lost top executive Paul Simpson to Bank of America during the quarter. Pandit has yet to appoint a permanent replacement.

In Citi Holdings, the local consumer-lending division reported a $599 million loss, compared with $1.83 billion in the first quarter of last year. This unit, which contains the CitiFinancial business, also reduced its provision for future loan losses by $1.11 billion.

“Citi Holdings losses continued to decrease,” Pandit said in the statement. “We are investing in our core businesses in Citicorp, our capital strength improved and the mix of revenues reflects the diversity of our businesses and our depth in both the emerging and developed markets.”

Citigroup reclassified $12.7 billion of assets in its “special asset pool” business to trading from held-to- maturity, a move that paves the way for the sale of those assets, the bank said. The move reduced revenue by $709 million.

“Securities-related revenue was a positive surprise and the reserve release was better than expected,” David Trone, an analyst with JMP Securities LLC, said in a note. “On the negative side, like peers, there is no material momentum on the traditional banking side, which we view as key to getting the stock out of its range.”

Accounting fraud allows BofA to post phantom profit for Q1 2011

Just two days of the accounting fraud of JPMorgan, it is now Bank of America's turn to do the same to post a phantom profit.

Basically, the bank's profit were $2.05 billion while the reduction in loan loss reserves were $2.2 billion. So the bank is operating at a loss. Moreover, they reduced the reserves while the banks mortgage units losses are widening (from $2.1 billion a year ago, to $2.4 billion).

This is fraud, and the exuberant market and the regulators are happy to close their eyes on it — for now. When the mood sours, these frauds will all of the sudden make the headlines, and people will act surprised that such things could have happened with nobody noticing.

April 15 (Bloomberg) -- Bank of America Corp., the largest U.S. lender by assets, reported its first profit in three quarters and settled more claims tied to faulty mortgages as an improving economy helped borrowers keep up with debts.

First-quarter earnings fell 36 percent to $2.05 billion, or 17 cents a share, from $3.18 billion, or 28 cents, a year earlier, the Charlotte, North Carolina-based lender said today in a statement.  

Chief Executive Officer Brian T. Moynihan, 51, has sought to assure investors that the bank is on the path to recovery after last year’s $2.2 billion net loss. Moynihan said in an interview the bank had about $3 billion of one-time costs in the first quarter and is cutting about 3,500 jobs tied to mortgage lending. The company also resolved claims with Assured Guaranty Ltd., the mortgage-bond insurer, for about $1.6 billion.
[...]
Revenue for the first quarter declined 16 percent to $27.1 billion. Results were aided by $2.2 billion released from reserves, a sign that the bank expects defaults by borrowers to ease in future quarters.

The bank’s mortgage unit posted a $2.4 billion loss, widening from $2.1 billion a year earlier. The deposits unit had a $355 million profit, down by almost half from a year earlier, on lower fees because of U.S. overdraft regulations. The cards unit reported a $1.7 billion profit, 78 percent higher from a year earlier as credit costs declined.
[...]

Accounting fraud allows JPMorgan to post phantom profit for Q1 2011

Nothing new under the sun. Until mark-to-market is reinstated under GAAP by the FASB committee, banks will keep on hiding losses on their balance sheets and post phantom profits. Today was the case for JPMorgan, which Q1 were dismal if you know how to read official statements and know basic accounting.

Obviously, market participants do not do that. They just focus on the headline numbers, the same way that focused on the rating agencies ratings when investing in CDOs and CDO-squared:

April 13 (Bloomberg) — JPMorgan Chase & Co., the second- biggest U.S. bank by assets, said profit rose 67 percent to a second straight record as provisions for bad mortgages and credit-card loans tumbled.

First-quarter net income climbed to $5.56 billion, or $1.28 a share, from $3.33 billion, or 74 cents, in the same period a year earlier and from $4.83 billion, or $1.12, in the fourth quarter, the New York-based company said today in a statement. The results beat the average per-share estimate for adjusted earnings of $1.15 by 26 analysts surveyed by Bloomberg.

Provisions for credit losses dropped 83 percent to $1.17 billion as defaults and late payments declined. JPMorgan, led by Chief Executive Officer Jamie Dimon, posted a record $17.4 billion in earnings last year, in part by releasing about $7 billion of reserves against bad loans back into income as the U.S. economy improved. Dimon, 55, has said he doesn’t consider reserve releases as “quality” earnings because they don’t represent growth in the bank’s businesses.

“This is setting the bar very high for the others, and this major beat of the estimate is going to be tough for others to follow,” Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York, said in an interview with Tom Keene on Bloomberg Radio. [...]

April 13 (RTTNEws) — The company said its provision for credit losses for the second quarter was $3.36 billion, down 65% from prior-year's $9.70 billion, reflecting reduction in the allowance for credit losses as a result of improved delinquency trends and reduced net charge-offs.

For some reason, the numbers do not match from the two reports. But whichever is the right one, there's about $6 billion of phantom profits on loan loss reserves, on a net income of about $5.5 billion. That would make for an operating loss if reserves were not changed.

In addition, I would like to pass my nerves on Michael Holland, who seems to be a complete fool and incompetent. That wouldn't surprise anyone anyway...

The Banks have no cloths — cooking the books wasn't enough today

It looks like the markets are starting to realize that they have been scammed by the banks. Yesterday was JPMorgan's pathetic quarterly report release, and today was Citigroup's and Bank of America's even worse earning releases.

So what is going one? Ignorant journalists and market 'pundits' write:

Bank stocks fall despite positive earnings trends
(AP) -- Bank stocks tumbled Friday as investors mulled over bank earnings reports that showed improved second-quarter profit as loan losses fell, but trading revenue also dropped as result of the market's plunge this spring.

So, how come those positive earnings are not welcomed by the markets? What's different today? It looks like investors are finally seeing through the smoke and mirror games of mark-to-fantasy and cook-the-books until they're done.

Am I being too hard? Well, here are the proofs:
For Citigroup:

• Citigroup revenues were $22.1 billion, down $3.4 billion sequentially, on lower Securities and Banking and Special Asset Pool revenues.
• Citigroup’s total allowance for loan losses was $46.2 billion, or 6.72% of loans, down from $48.7 billion, or 6.80% of loans in the first quarter of 2010.
• Citigroup net income was $2.7 billion, down $1.7 billion, or 39%, from the prior quarter.

Q2 10 net income: $2,697
(in millions of dollars)               2Q'10 1Q'10 2Q'09  %I/(D)QoQ %I/(D)YoY
Diluted EPS from Continuing Operations $0.09 $0.14 $0.51    (36)%      (82)%
Diluted EPS from Net Income            $0.09 $0.15 $0.49    (40)%      (82)%

So, basically, Citigroup's profit was $2.7 billion, and Citigroup's allowance for loan losses decreased by $2.5 billion (equivalent to a profit of $2.5 billion). So basically, Citigroup didn't make any profit. It was just an accounting trick. Given that, you can also guess that in order to reach those results, they must have tweaked many other things, and that the company is actually operating at a loss.

And here's for BofA:

Bank of posted second-quarter net income of $3.12 billion, or 27 cents a share, down from $3.22 billion, or 33 cents a share, from the same period last year […]

Net income applicable to common shareholders was $2.78 billion, up from $2.42 billion.

The company's provision for credit losses fell to $8.11 billion from $13.38 billion in the year-ago quarter. Net charge-offs rose to $9.56 billion from $8.7 billion.

BofA is basically the same story. Notice how they try to fool the investors by announcing a net income that is not one. It's an operating income. To get the actual net income, you have to go to net income applicable to common shareholders!

So how much is it? $3.12b? And by how much the provisions for credit losses fell? 13.38 - 8.11 = 5.27.
So BofA is actually bleeding cash: an actual loss of 5.27-3.12 = $2.15 billion excluding all the other mark to fantasy and accounting tricks...

The banking sector remains a massive short opportunity... even though I don't have any position at it...

Freddie Mac loses $8billion in Q1, asks for $10.6billion more

Here's the latest financial result of one of the biggest financial black hole in history, from AP:

WASHINGTON (AP) -- Freddie Mac is asking for $10.6 billion in additional federal aid after posting a big loss in the first three months of the year. It's another sign that the taxpayer bill for stabilizing the housing market will keep mounting.

The McLean, Va.-based mortgage finance company has been effectively owned by the government after nearly collapsing in September 2008. The new request will bring the total tab for rescuing Freddie Mac to $61.3 billion.

Freddie Mac said Wednesday it lost $8 billion, or $2.45 a share, in the January-March period. That takes into account $1.3 billion in dividends paid to the Treasury Department. It compares with a loss of $10.4 billion, or $3.18 a share, in the first quarter last year.

The company, however, cautioned that new accounting standards make it difficult to compare the most recent quarter with the year-ago period. In the first quarter of this year, Freddie Mac was forced to bring $1.5 trillion in assets and liabilities onto its balance sheet, causing the company's net worth to plunge by $11.7 billion.

A few very easy conclusions:

• Even at $1.40, Freddie Mac's share price seems highly overvalued (market cap of close to $1 billion)
• $1.5 trillion off-balance sheet. Isn't that fraud?
• We're far from done with the housing bust and the banking collapse that will come with it
• Greece is tiny compared to Freddie and Fannie. Freddie's balance sheet is many times Greece's GDP (about $300 billion)
• I'm looking forward Fannie Mae quarterly, on the 11th of May

On the Goldman Sachs fraud

I don't have time to write about the the Goldman Sachs story, and a lot of people have been following and written analysis very well worth reading. So I'll just provide a list of links, all of them worth following:

• SEC Charges Goldman Sachs With Fraud, John Paulson Implicated - ZeroHedge
• The full Abacus pitchbook - ZeroHedge
• What will Buffett say, now that GS ethics are exposed? - YouTube
• Jim Cramer had to be long GS, of course, and his ridiculed by CNBC guest - YouTube/ZeroHedge
• "Rotten to the core" - Yahoo TechTicker (see embedded video below)
• Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed

Jim Chanos on Charlie Rose about Chinese economy and real estate bubble

James Chanos, host on Charlie Rose, shares a lot of knowledge and wisdom about real estate bubbles, China, short selling.

The interview is about 30min long is definitely worth watching if you are interested in China.

Talking about Lehman Brothers, he mentions that there has been fraud, violation of Sarbanes-Oxley and that criminal indictment should follow.

Click on the picture to access the interview.

The Brewing Lehman-Barclays Scandal

ZeroHedge posts a very interesting report and shows potential fraud and collusion amouting to more than $5 billion disappearing from the pockets of the Lehman Brothers Holdings in favor of Barclays. In a second part, they point that the Fed accepted, among other very risky (some worthless) securities, 5,136 shares of bankrupt retailer Shaper Image as collateral (Audit the Fed then End it!).

Here are some relevant quotes:

[...]
It is becoming increasingly likely that Barclays will have to pay a cool $5 billion (at least) in additional consideration to the Lehman estate, after the Official Committee of Unsecured Creditors came out yesterday with a hefty joinder piece to the debtor's motion that Barclays materially misrepresented and, in essence, stole $5 billion or more from under the noses of both Lehman Brothers Holdings and its Creditors
[...]
Unbeknownst to the Court or the Committee, early in the negotiations, Barclays and the Lehman Sellers agreed to give Barclays a $5 billion discount from the transferred assets' book value. Indeed, evidence suggests the $70 billion figure contained in the Asset Purchase Agreement ("APA") was not the value on the Lehman Sellers' books at all. Instead, it was a "negotiated" number with an embedded $5 billion discount. This discount was not disclosed in any of the transaction documents given to the Court.
[...]
he Fed Repurchase Agreement contained an approximately $4.4 to $5 billion cushion or haircut in valuing the assets in relation to the liabilities. Barclays agreed to provide $45.0 billion in funding, which LBI would secure with assets worth at least $50 billion. After executing and filing the APA, the parties ultimately decided to transform the Barclays-LBI Repurchase Agreement into an asset sale, with Barclays keeping all of the collateral pledged under the Fed Repurchase Agreement (the "Fed Portfolio") — which contained not less than $5 billion additional collateral beyond the $45.0 billion that Barclays was required to advance, i.e., the haircut.
[...]
The evidence also reveals that Lehman and Barclays intentionally overstated the Cure and Compensation Liabilities to foster the impression that Barclays was assuming greater liabilities. The APA Scheduled these amounts at $2.25 billion and $2.0 billion respectively. In reality, the estimates of the liabilities were only approximately $1.3-$1.7 billion.
[...]
The Lehman Sellers' teams negotiating on behalf of the estates were steeped in personal conflicts of interest. Several of the negotiators for the Lehman Sellers either negotiated their employment agreements in the midst of the Sale Transaction negotiations or at least knew that they would be transferred to Barclays.
[...]
The transfer of these eight individuals to Barclays apparently became a condition of the Sale Transaction closing -- a fact disclosed during the Sale Hearing. McDade also worked for Barclays after the sale transaction. However, the significant bonuses paid to these employees after the Sale Transaction closed was not disclosed to the Court. As Alex Kirk explained, "[s]everal of my colleagues. . . who had signed employment agreements were resigning from [Barclays] and receiving large payouts upon their leaving the firm."

Where does CitiGroup profit come from?

While all the bank are now marking their books to their fantasies and most of the announced profits are just going to vanish in the coming months/years (Zombie banks...), CitiGroup is taking it a step further as points out this post on ZeroHedge:

Yet what caught our attention is the FV action at the big 4 banks: Citi, BofA, Wells and JPM. What is most notable is that while the three firms ex Citi have taken a decent haircut to their Book-to-FV margin, Citi is now down to a mere 0.2% difference between loan Carrying Value at Q2 ($602.6 billion) and loan Fair Value ($601.3 billion). What is more notable is that on average the margin has increased over the past 2 quarters: while the average FV-to-Book spread was 3.2% at year end 2008 for the non-Citi banks, it grew by 1.5% to 4.7% at Q2 (non weighted). And in this environment where banks have been getting more cautious and applying an increasing discount to their loan book values, Citi has collapsed the differential from 2.8% to 0.2%!

Just what about the economic environment has given Citi auditors KPMG the flawed idea that the bank's loan can be easily offloaded with virtually no discount? And just how much managerial whispering has gone into this particular decision.

If one assumes a comparable deterioration for the Citi loan book as for the other big 4 firms, and extrapolates the 2.8% getting worse by the average 1.5% decline, one would end up with a 4.2% Book-to-FV deterioration. On $602 billion of loan at Q2, this implies a major $25 billion haircut. Yet this much more realistic number is completely ignored courtesy of some very flexible interpretation of fair value accounting rules at KPMG. Maybe Citi and its accountants should take a hint from Regions Financial CEO Dowd Ritter who carries the FV of his $90.9 billion loan book value at a 25% discount. [...]

And as usual the SEC is completely out of yet another regulatory picture. What is very frightening if Ritter is the correct one of all bank execs: if a 25% discount to the combined carrying loan value at just the Big 4 banks is truly appropriate, it would mean that the nearly $3 trillion in loans on the "asset" side of the big banks deserves a whopping $734 billion haircut!

Irrational exuburance and extreme markets valuation - when will it end?

While the markets have rallied by about 40% since the low just 3 months ago, it's probably time to stop and think a bit. Why this rally? Because the consensus is now that:

1. We will have a V shaped recovery, and that the recovery is now and will be quick.
2. Banks are now posting profits, they are recovering as shows the payback of the TARP funds.
3. Unemployment rise is slowing (even though unemployment is still rising).
4. "Green shoots" have sprouted and blossomed.

So where are we?
V-Shaped recovery
The only sign of V shaped recovery is the stock markets, nowhere else do we seen any recovery. Which other signs of recovery have we seen? What I have seen is manipulated data from the government, showing that the decline is slowing. But nothing stating that we are recovering.

Bank are posting profits and repaying the TARP
I already mentioned that the sole reason for banks to post profits is that a change in the accounting rules is legalizing "mark to fantasy", which banks are now using instead of the "mark to market" accounting rules. This is fraud.

We also know that repaying the TARP is yet another way for the government to make a wealth transfer to the banks from the tax-payer payer, their children and grand-children, and the USD-barer to the banks.

Banks won't be sound as long as their total borrowing does not return to normal (see chart below, from the Fed itself, click for bigger view).

Unemployment rise slowing?
First of all, this is seen as "Unemployment is declining" which is obviously wrong.
Second of all, according to the official figures of the BLS, both U-3 and U-6 have seen their increase accelerate (higher rate of increase) up to the latest data point available:
Jan. Feb. Mar. Apr. May
2009 2009 2009 2009 2009
U-3 7.6 8.1 8.5 8.9 9.4
U-6 13.9 14.8 15.6 15.8 16.4

U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)
U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

And according to ShadowStats, the real rate of unemployment is now slightly above 20% already.

Finally, Yahoo Finance is reporting Jobless benefit rolls post first dip since January (copied from Mish).

The number of people receiving unemployment aid fell by 148,000 to 6.69 million in the week that ended June 6 -- the largest drop in more than seven years. The decline broke a string of 21 straight increases in the number of people claiming benefits for more than a week, the last 19 of which were records. (A dip in continuing claims several weeks ago was later revised higher.)

On the surface, the government seemed to signal Thursday that more Americans are finding jobs: The number of people receiving unemployment aid fell for the first time since early January.

But that doesn't necessarily mean more companies are hiring.

Fewer people are receiving jobless aid largely because more of them have exhausted their standard unemployment benefits, which typically last 26 weeks. Government figures, in fact, show the proportion of recipients who used up their jobless benefits in May topped 49 percent, a monthly record.

Where are the green shoots? I can't see them, and it seems that I am not the only one:
June 19 (Bloomberg) -- General Electric Co. Vice Chairman John Rice said he isn’t seeing an increase in orders even as U.S. economic statistics suggest the world’s largest economy may soon shift to a recovery.

“I am not particularly of the green shoots group yet,” Rice said today to the Atlanta Press Club, referring to a phrase used by Federal Reserve Chairman Ben S. Bernanke that described signs of a nascent recovery. “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet.”

GE is the world’s biggest maker of jet engines, power-plant turbines, locomotives, medical imaging equipment. Rice oversees the Fairfield, Connecticut-based company’s industrial businesses.

“We see a world where good companies and good consumers can’t get all the credit we would like,” Rice said. “Companies with lots of cash on their balance sheet are worried about whether they will get what they need for working capital” and are cutting spending.

“Until that changes I don’t think you will see a significant rebound,” Rice said. “We are preparing for 12 or 18 months of tough sledding.”

Are the markets cheap?
The Russell 2000 is loosing money, and hence has no PER. Yet, it has rallied 50% since the bottom.
The S&P 500 has a current PER of 35. Which makes it very expensive by historical standards AND absolute values.

Here is the chart of the S&P 500 historical PER, one series is the historical average since inception, the other is the quarterly values (click for bigger values).


Last but not the least, Sovereign Speculator has an interesting thread on the overvaluation of the markets:

the P/E ratio is subjected to all kinds of perversions to deflate it to levels that can be passed off as reflecting value. At the very least, most bubbleheads try to make it less scary than its current level of 133 for the S&P 500. [...]
Q1 2009 earnings were about $7.53, and Q2 and Q3 are expected (analysts tend not to be that far off for quarters directly ahead) to be more or less the same, so we are on pace for about $30 in annualized earnings. A glace at the historical data shows that this is about the same level as in 2001-2003, after a peak of $48-54 for a few quarters in 1999 and 2000. You have to go back to 1994-1995 to again see the $30 level, with the $20 level about the norm from 1988-1993. Assuming that the $30 is sustained, you could say that the current P/E is 30. That’s not value in anyone’s book.[...]
To say that stocks are anything other than dangerously overpriced with a P/E of over 130 and a yield of 2.5% on unsustainable dividends is either farcical or fraudulent.

It's time to remove your pink-colored shades and put on your reality lenses!