Dissecting The “Rosy” Q3 GDP Data

Markets are cheering the advance GDP data today. But when you break down the numbers, things are still pretty ugly. Government spending remains the only thing propping up the markets.

Auto Sales

1.66%, or almost half, of the 3.5 increase in GDP can be attributed to Cash for Clunkers. CfC is over now, so expect a major hangover in Q4. Besides, this type of government spending is clearly unsustainable in the long run. According to the BLS release:

Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.

Government Spending

Increased Gov expenditures also boosted GDP significantly. Considering the fact that in 2009 it is estimated that 40% of gov spending will depend on debt, this is clearly not sustainable either. From the initial BLS report:

Real federal government consumption expenditures and gross investment increased 7.9 percent in the third quarter, compared with an increase of 11.4 percent in the second. National defense increased 8.4 percent, compared with an increase of 14.0 percent. Nondefense increased 6.8 percent, compared with an increase of 6.1 percent. Real state and local government consumption expenditures and gross investment decreased 1.1 percent, in contrast to an increase of 3.9 percent.

Ugly Income Data

As Karl Denninger points out, the ugliest data is probaby the decrease in income and disposable income. BLS:

Personal outlays increased $148.2 billion (5.8 percent) in the third quarter, compared with an increase of $8.2 billion (0.3 percent) in the second. Personal saving — disposable personal income less personal outlays — was $364.6 billion in the third quarter, compared with $533.1 billion in the second. The personal saving rate — saving as a percentage of disposable personal income — was 3.3 percent in the third quarter, compared with 4.9 percent in the second.

Denninger’s commentary on the income data:

Forward the big problem is the deterioration in personal income.  You can’t spend what you don’t have without credit creation, and that’s fallen off a cliff.  The Fed’s credit reports continue to come in with huge contractions – this should not surprise, as demanding that banks lend to people who are seeing their income shrink is into the realm of pure idiocy.

In other news, the homebuyer tax credit was extended and expanded, as predicted. Gold is off to the races again today, as fears that the government plans to deficit-spend our way to prosperity are being shored-up again.

VIX Jumps 35% From Lows

VIX is spiking. Rally might actually be done (yes, it’s been said before). I sold most of my remaining AAPL today, from a lucky grab @81.86 here. Also shorted WFC on Monday @28.59.


chart via ZH

Citron Research Nails it Again

Since January of ’09, Citron Research has been warning about the questionable business practices of Apollo Group (owner of University of Phoenix):

Count on the Obama administration to take a fresh, critical look — as the largest single recipient of Student loans in this country is a for-profit institution whose insiders have sold hundreds of millions of dollars of stock while collecting over 75% of their revenue from government guaranteed loan funds, while delivering an education of questionable value amid a history of unsavory business practices.

Well, after-hours today the WSJ reports that the SEC is investigating some of Apollo’s revenue-recognition practices. The result? APOL down 17% after hours.

Apollo Group Inc. said the Securities and Exchange Commission has launched an informal inquiry into its revenue-recognition practices.

Apollo, whose University of Phoenix is the country’s largest private college and has benefited from the economic downturn, reported fiscal fourth-quarter results Tuesday that beat Wall Street estimates. But news of the probe, its second this year, sent its shares tumbling in late trading.

Finance Chief Brian Swartz said in a conference call with investors Tuesday that the company believes “that our revenue recognition policies are appropriate and in accordance with GAAP.” He added that it didn’t have “any further insight” into the probe.

For-profit colleges have come under fire numerous times for their methods of recognizing revenue, most of which is derived from government loans. Apollo received a letter from the SEC’s Division of Corporate Finance related to its revenue recognition in February and said in its conference call that, “to our knowledge,” it answered all of that division’s questions. The current probe comes from the SEC’s Division of Enforcement.

Apollo said that it took an $80.5 million charge in its fourth fiscal quarter to cover the costs of a possible settlement of a whistleblower’s suit pending in U.S. District Court in Sacramento, Calif. The suit alleged that Apollo owed the government refunds on billions in financial aid funds because it allegedly paid recruiter incentives based on the number of students they enroll. Federal education law bars such incentive payments.

Disclosure: Short APOL

Janet Tavakoli: Goldman CFO May Have Lied About AIG

Janet Tavakoli, a leading expert in derivatives, is quoted in this must-read Bloomberg piece: New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal.

There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.

Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.

Janet sent me this additional note:

It is a strong statement to say that a CFO lied to the public, and in my opinion, David Viniar, Goldman Sach’s CFO lied about Goldman’s exposure to AIG while the AIG bailout was in progress in September 2008.  Viniar spoke about risk management, but that is a separate issue from whether or not Goldman Sachs would have money at risk due to its direct business with AIG.  Goldman Sachs would have been out billions of dollars in collateral had a bankruptcy-like settlement been negotiated with AIG, and that is material.

This is what David Vinear said during his Sept 16, 2008 investor conference call:

David Viniar – The Goldman Sachs Group, Inc. – EVP, CFO Sure. Without giving exact numbers, let me just tell you how we think about this. AIG and Lehman, big important financial institution counterparties to Goldman Sachs. We did and we do a lot of business with both of them, as we do with all other major financial institutions. The way we do business with financial institutions is by having appropriate daily margin terms. That is how we are able to do the volume of business with each other that we do. And that goes for AIG, Lehman, and also Morgan Stanley, and JPMorgan, and Citi, and UBS, and Credit Suisse. That is how we manage our risk. In addition to the margin terms, we augment our risk management with appropriate hedging strategies. You heard at the beginning of my remarks that we believe one of the biggest challenges we have is to avoid large concentrated exposures; and we took that very much into account in managing our credit exposures to Lehman and to AIG, as well as we do with any other financial institution. Given that, what I would tell you is given the outcome at Lehman and whatever the outcome at AIG, I would expect the direct impact of our credit exposure to both of them to be immaterial to our results.

Thanks Janet, interesting stuff as always.

Coincidentally, I read this piece in the NY Post just yesterday, which raises questions about Goldman’s “immaterial” exposure to Lehman as well. Apparently they made initial claims of $4.5 billion in Lehman’s bankruptcy case. They’ve since changed it to around $2.5b, which is odd enough by itself. Whether it’s $2.5 or $4.5, neither sounds immaterial to me.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors.  Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business.  Author of: Credit Derivatives & Synthetic StructuresCollateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (1998, 2001), (John Wiley & Sons, September 2008).  Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

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