Bearish News

The latest sentiment reading by Investors Intelligence shows a disturbing trend. Only 15.6% of financial newsletters are currently bearish on equities.

Last time the bearish indicator was this low was April 1987. A few months later (Black Monday) the DJIA dropped 21% in a single day:

In other words – when everything seems peachy — watch out. Turns out that peaks and troughs in investor sentiment are pretty good contra-indicators. Bullish sentiment tends to peak as bubbles are near their top, and vice versa.

From the revamped and newly Bloombergesque Business Week:

Pessimism about U.S. stocks among newsletter writers fell to the lowest level since April 1987, six months before the equity market crash known as Black Monday, following the biggest rally in the Standard & Poor’s 500 Index in seven decades.

The proportion of bearish publications among about 140 tracked by Investors Intelligence fell to 15.6 percent yesterday from 16.7 percent a week earlier. Sentiment has improved since October 2008, when the financial crisis drove the figure to a 14-year high of 54.4 percent. After plunging 38 percent in 2008, the S&P 500 has risen 25 percent this year.

This is not to say markets wont’ run again in 2010. Irrational bull markets can last much longer than you’d think. The momentum they build up is impossible to fight. Gotta wait for that to break before getting seriously short. Example – After the bearish-sentiment index bottomed in 1987, the market rallied another 14% before crashing.

Smart investors like Bill Fleckenstein have been highlighting the credit bubble since the mid-1990′s. And today markets are more irrational than ever. Government intervention is preventing market cycles from proceeding like never before.

Industries like housing, banking, and commercial real estate have become completely dependent on government support. Their future (and that of our currency) depend on whether our leaders will extend or end this support. It’s a ludicrous, manipulated market.

So far America’s leaders have repeatedly demonstrated that they have zero tolerance for economic pain. Their support for the financial markets seems unlimited, no matter the long-term cost. I don’t see that changing without something drastic hapenning – another huge round of bailouts, a shift in the political landscape, or something else.

Earnings Distorted, Bloated

Earnings, as officially reported, are less and less reflective of a company’s real income.. Today’s earnings are nothing less than a rosy version of what they “should of been, had not X happened.” X represents the bad stuff that constantly happens to businesses, but currently they are treated as one-time events, no matter how many quarters-in-a-row they occur. One-time transactions that are profitable, however, are included in “headline” earning numbers, of course.

This is a different breed of bubble. On top of creative income interpretation, asset losses are being swept under the rug with an impressive array of accounting gimmicks. Changes to rules that govern loan valuation, and the continued allowance of off-balance-sheet vehicles are examples.

Related:

• More Bailouts and Inflation Loom
• David Tice Sees S&P at 400

Link. I’m going to post some of the more interesting excerpts, plus my translation/commentary:

GROSS: So you don’t think the bailouts were too friendly to Wall Street?

GEITHNER: The idea that the strategy was unfair and has principally benefited a small number of institutions in New York is a mischaracterization of the design and result of the strategy. I thought people would have understood this after the failure of Lehman Bros. But when you do too little and you leave the system with real fear that everything is going to fall apart, like any financial crisis, it hurts the poorest most. A just and fair strategy, even if it is politically hardest to explain and justify, is to use well-designed but massive force to stabilize the system.

Translation: Ignore the fact that bailouts resulted in record bonuses in 2009. Think about all those poor people who would be without more credit (debt) had we not acted. Ignore the fact that they still don’t have credit, extending more debt to people is not sustainable, and unemployment is still on the rise.

A bloated financial sector subsidized by government is the lifeblood of our economy. I have this on good authority. My mentor, Bob R. (former Goldman CEO, slayer of Glass-Steagall), Lloyd, and Jamie all agree.

GROSS: The biggest downside surprise?

GEITHNER: The [high] level of unemployment rel­ative to what was happening in the economy as a whole. I’m not an economist, but almost all forecasters missed that. And that’s hugely consequential, because it’s the prism through which most people view basic economic health.

Translation: What’s the problem? The market is up. That means the economy is OK. So why is unemployment still an issue? We injected trillions of dollars here. Our projections show sunshine and rainbows into 2010 and beyond.

GROSS: There’s a perception that you regard your portfolio narrowly, as primarily focused on the health of Wall Street, with Main Street a distant second.

GEITHNER: My first and essential responsibility was to fix and reform the financial system. That was necessarily going to be the principal part of what people saw. About half my time from the beginning has been spent on the design of the broader economic strategy. The idea that we did not do much for the broader challenges facing the country is completely unjustified. The Recovery Act itself was not just a sweeping, essential force for growth but included a bunch of targeted investments in education, energy, environment, health care that will have huge long-term benefits.

Translation: Banks come first. Speculation and mass-bonuses with government backing is crucial to America’s economy. But hey, we’re looking out for the lil’ guy too. After we took care of the really important stuff, we also pledged $787b for questionable pork-barrel projects. Those quilt-museums and $3m turtle highways will create some jobs.

GROSS: What portions of the financial meltdown will the government still be dealing with a year from now?

GEITHNER: This was the worst thing that’s happened in 70 years, and it’s going to have a tail. Unwinding our stakes in autos, in AIG, and in Fannie Mae and Freddie Mac is going to have a somewhat longer fuse. The transition away from this massive government intervention in the housing market is going to take some time. A year from now, the FDIC will still have a large stock of assets from institutions they’ve taken over.

Translation: Kiss those giveaways investments in Freddie, Fannie, and automakers goodbye. The FDIC is also taking on loads of overvalued crap from failed banks, so watch out for that too.

GROSS: What keeps you up at night? What do you worry about?

GEITHNER: Apart from whether my kids are going to be happy in life? What concerns me is whether we will be able to do well enough on the things that are most important. The hardest thing in governing is to make politically achievable the policies that are economically good, just, and sensible for the country. That’s a challenge, partly because of the damage done to the confidence in government and policy in the last two decades, partly because of the populism, and partly because we have to build broad consensus on the Hill in order to do anything meaningful. What countries need in crises the president delivered. He said, this is the plan, and he got it done. But on a range of things that really matter to the future, it requires a coalition to really make legislation happen.

So Tim, the reason it’s hard to make good economic decisions is due to populism? The nerve of those Main Street jackals, asking to be the primary concern of their government. It’s more clear than ever that Tim’s priority is Wall Street. And he doesn’t see anything wrong with that.

Maybe he should read up on Treasury’s mission statement. I don’t see anything in there about propping up a corrupt zombie-banking system.

King of the World, baby.

From the Financial Times:

Mr Blankfein has struggled to rebut the criticism effectively, shifting from insisting that it would probably have survived the crisis without help from the US Treasury, to apologising for its conduct, and finally (in a typically jaunty line at the end of an interview with the Sunday Times) asserting that it was “doing God’s work”.

Yet he has also steered Goldman adeptly through the crisis, betting correctly that the global investment banks would survive the turmoil (with government help) and not be dismantled by regulators. Instead, his bank has stuck to its strengths, unashamedly taken advantage of the low interest rates and diminished competition resulting from the crisis to make big trading profits.

For all of these reasons, both positive and negative, the Financial Times has chosen Lloyd Blankfein as its Person of the Year. His job and his personality have made him the public face of Wall Street during its most testing period since the 1930s.

This is not an unalloyed endorsement of either Mr Blankfein or Goldman, which the FT has sometimes criticised in the past year. Instead, it is a recognition that Mr Blankfein and his bank have taken the leading place in the world of finance, while others have fallen by the wayside.

So FT says they made the decision based on “both positive and negative” factors. Why consider negative qualities when selecting the “person of the year”?

Why not choose person of the year based on positive factors? Morals, ethics, and success in business/politics? It’s absolutely absurd that a respected publication like The Financial Times uses negative characteristics as part of their criteria. Did their ratings system weigh scammed the nation as a major positive?

Why not make Bernie Madoff Person of The Year? He made a hell of an big impact too. Who cares whether it was positive or negative? Not the Financial Times, apparently.

Top image via NY Magazine, bottom pic from naked capitalism.

Treasury is making a classic investing mistake. They are desperately waiting for that loser stock in their portfolio to catch a bounce.

The loser in this case is Citigroup (NYSE: C). And it actually did catch a bid Friday afternoon, closing at $3.40.

The government’s cost basis is $3.25. But if they were to dump $25b+ of common stock on the market, C shares would crumple into a pitiful heap. The govt owns fully 34% of Citigroup.

The result of dumping all those shares on the market would not be pretty. But we should do it anyway.

Look at the recent offering, which was priced at $3.15 (notably below the govt cost-basis of $3.25). Interest in the offering was tepid, even with undoubtedly intense pressure to keep the price  above gov cost.

The point is —if Geithner was to unload Treasury’s shares, the price they’d fetch would make the public “investment” a clear loser.

We should take that loss, ASAP. The sooner we get rid of every scrap of involvement with the zombie banks, the sooner they’ll be forced to act like real businesses (which means failure for many). We should dump it all. If investors think Citi has a future, they’ll buy.

The administration is doing everything they can to avoid a paper loss. For example, so as to not scare away the suckers new Citi investors, Treasury announced it won’t start selling their 34% stake for at least 3 months. From the WSJ:

Faced with a potential paper loss of $770 million on its Citigroup stake, the Treasury said it had decided to hold off selling any of its shares until next year. Bowing to pressure from institutional investors, officials agreed not to sell the government’s shares for at least 90 days.

Look at the $38b tax break Citigroup just received, as reported by the Washington Post. The government is taking a $38b loss in tax revenue, on hopes that they can squeak out a much smaller paper-gain on the public investment. A pitiful PR coup — “See, we told you the bailouts would be profitable*“.

I say we sell now. Yeah, we’d take a hit.  But a 20% loss is preferable to a 100% loss. People need to realize that there is still a real chance Citigroup goes to zero.

If not for mark-to-imagination accounting, implicit government backing, and various accounting tricks, they’d probably be bankrupt already. See Worse Than Enron, by Nomi Prins (former director at Goldman Sachs), for more on these accounting schemes.

Stop-Loss

Seasoned investors know to cut their losses on bad investments. Hoping for a bounce (or trying to force one through proxies) isn’t an acceptable investment strategy. Especially when you’re dealing with other peoples’ money.

So far, thanks to Rubin and his disciples, Citigroup has been kept alive through herculean taxpayer-funded efforts, and changes to accounting rules. But how long can that last, really?

Citi is not a good long-term investment. Praying for a bright future does no one any good. Dump it, Geithner.

I suppose there is a (slim) chance of Citi having a bright future. If the V-shapers are right, and everything has been fixed (near zero probability of that) and banks are allowed to continue abusing their TBTF status, the US may be able to sell for a decent profit one day. But that’s a lot of ifs.

And the cost required to achieve these hypothetical profits are huge. The $38b tax-break Citi just got wipes out any “profits” the U.S. can reasonably hope for. It’s not like Citigroup is cheap, either. Despite their deceptively low ~$3 stock, the market cap is still $79b. More dilution is coming, too. At least $20b.

There’s no good reason Treasury should wait to sell Citi. It’s a $100b disaster waiting to happen. Most likely it’s technically insolvent already. We could lose a lot more if we hold off.

There are also the moral hazard implications, which are immeasurable. Memo from D.C. to bankers – Get too-big-to-fail, get lobbyists = get rich, forever.

Disclosure – No position in C.

From FDIC.gov:

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved a $4.0 billion Corporate Operating Budget for 2010. The Board also revised the current 2009 budget to $2.6 billion.

‘The 2010 budget is a prudent and measured response to current conditions in the banking industry,’ said FDIC Chairman Sheila Bair. ‘It will ensure that we are prepared to handle an even-larger number of bank failures next year, if that becomes necessary, and to provide regulatory oversight for an even larger number of troubled institutions.’

The 2010 operating budget will increase more than $1.4 billion (55%) from 2009, primarily due to the cyclical nature of bank failures. The receivership funding component of the 2010 budget, the vast majority of which is funded by receiverships, will be $2.5 billion, up from $1.3 billion in 2009. This includes funding for the continuing work associated with bank failures that have occurred over the past two years. The budget also contains contingency funding for the possible continuation of an elevated number of bank failures in 2010. The 2010 budget increase also is partially attributable to increased supervisory activity related to the rising number of troubled banks which the FDIC oversees.

In conjunction with its approval of the 2010 operating budget, the Board also approved an authorized 2010 staffing level of 8,653 employees, up from 7,010 in 2009. Almost all the additional staff will be hired on a temporary basis. They will be hired primarily to assist with bank closings; to perform follow-on work related to the management and sale of failed bank assets; and to conduct bank examinations and perform other bank supervisory activities.

Lots of bank failures next year could cripple the FDIC’s wounded reserve fund. As the chart below shows (via Rolfe Winkler), their reserves aren’t pretty. Don’t worry about bank runs, though. The real concern is them having to borrow money from Treasury, and the consequences that would have. They’d have to drop that whole “fully funded by our banks” line, for one…

The term must-read gets thrown around a lot. I’m guilty of overusing it at times.

But I appreciated Obama’s Big Sellout so much, I bought a 2-year subscription to Rolling Stone right after reading it. That will bring the total number of magazines I subscribe to two.

Matt Taibbi’s latest is an important piece. It goes beyond partisan politics, pointing out how guilty both parties are. He lays out the web of connections between Wall Street and D.C.

He explains how they are responsible for past bubbles, and are in the process of blowing new ones. I’ll post the intro, but read the whole thing if you have time (and pass it along):

Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

But then he got elected.

Read the rest here. A good piece to forward to die-hard Obama fans still clinging to Hope. Hey, I voted for the guy too. But it’s time to abandon ship. His administration is a complete disaster. It’s a continuation of rampant corruption and kick-the-can economics.

It would send a nice message if everybody bought a newsstand copy. Or a subscription to RS. Let them know we want more of this kind of reporting. Matt Taibbi’s last piece, The Great American Bubble Machine, woke millions up to Wall Street’s looting. If we don’t support the few groundbreaking outlets left, they’re all gonna go the way of Portfolio.