Hard to see how consumer spending will rebound with PI looking like this. Note the difference between now and the last recession.
Combine this with record levels of consumer debt, and you get an ugly picture. It seems obvious that any “recovery” fueled by unsustainable public debt, loose new accounting standards, and which is jobless, is no recovery at all. But hope springs eternal, don’t it?
Sweeping losses under the rug is nothing new on Wall St, but it’s getting worse. S&P 500 P/Es range from 16 – 134, depending on which earnings methodology you use. The first number is based on “operating earnings”, and the second is based on the real bottom line. If you need background on the difference between operating and non-GAAP, go here or here.
This graph shows the difference between S&P 500′s GAAP and operating earnings, in billions of dollars. The trend line is telling. Click to enlarge:
The data is from this spreadsheet (S&P). Go to the “Divisors and Aggregates” tab to see table used.
If you’re not familiar with the terms:
Guess which one is exclusively-used by bulls and analysts(redundant)? Operating earnings, of course.
Some might say, “but wait, look at Q1 2009! Looks like they’ve cleaned up their act” Nope. That is the result of mark-to-imagination accounting. This change by the FASB “eased” mark-to-market rules just in time to make Q1 bank earnings palatable. The change boosted Citi alone’s bottom-line by $3b. Why again, are we so dismissive about Chinese accounting? Yes, they’re up to some tricks of their own. But you know what they say about glass houses. Well, we’re in one.
Q4 2008, for example. True losses were $201b, but on an operating basis the S&P lost less than $1b. That’s pretty shocking. I’m working on chart showing % change, which should account better for inflation. But my Excel skills are lacking, and the negative numbers combined with the 24,000% change in Q4 08 keep throwing my charts off. Any chart-gurus out there want to take a crack at it? The data is here for any so inclined.
Updated 8/18/09 for long-windedness and clarity.
Guest post by Naufal Sanaullah of Shadow Capitalism.
Confused about the market? Caught short this summer? Confused when to lock in recent gains after seeing your IRA get cut in half? Why not follow the big boys who were right both on the way down and back up?
Charles Nenner, former Goldman Sachs market timing analyst, uses cycles, technical analysis, and a macro approach to time myriad markets. He called for a 2007 market top at around Dow 14,300. In 2008, he warned of a 30%+ decline in equities and in February of this year, he called for a large rally to take us to S&P 1000.
Robert Prechter, founder of Elliott Wave International, uses Elliott Wave Principles, cycle theory, and investor sentiment to gauge market turning points. Less than three months before the all-time stock market top, Prechter issued a short recommendation and didn’t cover until February 23 of this year, days before the March lows, as he predicted a large bear bounce to S&P 950ish.
Bob Janjuah, RBS chief credit strategist, issued a “stock crash alert” in June of last year, predicting a market crash and credit event in September 2008. He then predicted a large “relief rally” early this summer.
So what do all these people have in common? Besides their past predictions?
Their current predictions.
Charles Nenner believes we have topped out and will be retesting lows. Prechter prognosticates a market top in August, beginning the next wave down of this bear market that he believes will cause the S&P to end up below 400. Janjuah predicts a sharp move down starting late August, possibly culminating in an S&P under 600.
Called the massive equities decline in 2008? Check.
Called the bear bounce in spring-summer 2009? Check.
Calling for another massive move down this fall? Check.
I called July 4 of last year the top of crude oil, May 20 a short trigger in equities, September 15 a crash trigger, and January 5 of this year a short trigger. I called for a bounce at Dow 6500, expecting a large sell off in mid-late April to continue the decline. I missed most of this rally, besides a few long positions here and there, so I don’t have the track record as the bears above. But you can bet their analysis provides confluence to mine. I called early August around 1015 to be the top. We will see how that plays out.
Naufal Sanaullah of ShadowCapitalism.com put together this excellent 22-page report on why the widely-accepted recovery of 2009 is bunk. The idea of a debt-fueled, jobless recovery is laughable. Naufal, along with co-authors Tyler DeBoer and Qasim Khan, do a good job explaining why. Bearish News even gets a mention on page 2, for our post debunking Q2 2009 earnings.
Keep an eye on this guy. He’s smart and prolific, a rare and dangerous combo. And only 19 years old! His bio page says he is a math major at University of Michigan.
Update: It’s official, Colonial is no more. Estimated FDIC loss will be $2.8b, link.
Looks like Colonial Bank will get the Old Yeller treatment from FDIC tonight. It will be the biggest bank failure of 2009, with $25b in assets. Could be an interesting evening for the FDIC, we’re due for a fail-spree at some point. CNB is just one of 4 big banks widely viewed as doomed-to-fail. FDIC usually makes these announcements Fridays from 7:00-10:00 pm EST.
BB&T is set to take over Colonial’s assets. There was concern over whether a buyer would be found for Colonial, so BB&T is probably getting a sweetheart deal (hence the 8% jump today) for taking on a share of their horrific assets. But most of the toxic mess will be absorbed by FDIC (which will likely be taxpayer-funded by EOY).
One interesting side effect of Colonial’s failure will be to mortgage availability. They are one of the last big facilitators of loans through independent mortgage brokers (which played a big role in the collapse). CNN explains in “If Colonial fails, mortgages get more scare”. Snippet:
The Southern regional bank, based in Montgomery, Ala., is the largest remaining player in warehouse lending, which provides short-term financing to independent mortgage bankers. At one time, these mortgage bankers originated half of all U.S. home loans using these funds.
Yesterday Harry Markopolos (the guy who handed Madoff to the SEC on a silver platter, but was shooed away) warned of an impending CDS disaster that will, in his words, make Madoff’s $50b ponzi scheme look “small-time”. He continued,
To put it in simple terms, it is like buying fire insurance policies from five different insurance companies on your neighbor’s house and then burning down the house
The CDS warning came during a speech at his SouthHampton church, and was reported in the NY Post. Can he really not get a bigger pulpit to speak from? He should be on 60 Minutes, FrontLine, bubblevision, Bloomberg talking about this. Give the man some respect. Better yet, ask him to head the SEC. Not likely, I know. Maybe mainstream outlets are waiting for the Post piece to get confirmed, or something. It was on Page Six of the NY Post… Will keep this post updated.
