ItsJustMe

Don’t Worry About a Return to ‘70s Stagflation

Fiasco is right - inflation is not calculated the same way today that it was in 1975 and the other responders are correct that outsourcing our manufacturing may be a Godzilla that is about to come ashore.

The author does make one point that is pertinent: today's economy is not like 1975's economy. That means tomorrow's problems will be totally unlike yesterday's problems. We're about to find out if that is a good thing...

Consumer Confidence Plunges - A Buy Signal

The problem with this analysis is that you don't show a straight S&P chart. The YTY percentage change can be highly misleading. When consumer confidence plunged in early 1980, the market had already dropped 18% from the previous 6 months and that was off an already depressed market coming out of the 70's.

Now consumer confidence is reaching the same lows after a 6 year bull market that is only down 9.7% from its all-time high. I think I'll pass on rushing into the market on this "great news"...

Stock Valuations On the Rise

I wasn't aware of this development until today when I read a CNBC blurb where Cramer mentioned that the last time PE's got this high, the Dow crashed 1500 points and he advised his listeners to cash in their gains and get out of the market.

It doesn't surprise me however. When you watch a company take a $19 billion loss and its stock skyrockets, you begin to wonder about people's embrace of reality.

Yes, investors are more concerned with PE's going forward than they are current PE's, but anyone who thinks the financials are going to have future earnings that will support a 19.07 PE ratio are in for a rude (and very costly) awakening.

Not only have the banks taken billions in losses already, but they have billions in losses yet to come with the country slipping into recession and even after the recession, their VERY profitable days of no-money-down and "liar loans" are over.

I hate to agree with Cramer, but...looking at those PE ratios tells me that when investors wake up, it's going to get ugly...

Stocks Rally on Financial Writedowns: Overly Optimistic?

taxfreelife is correct that the banks cannot just write everything down to where they "think" the bottom might be. They have to evaluate where they are each quarter based on the present loan delinquencies, conditions and trends.

If the worldwide economy continues to sink into recession as it appears, the writedowns will continue each quarter. Many reputable economists (and the banks themselves) are predicting that $1 trillion will be the eventual worldwide writedown of mortgage, business and credit card debt so as you can imagine, $19 billion is just another baby step on the way down.

There are so many investors that know this and are shorting the banks that as soon as any positive development hits (I guess $19 billion is better than $20 billion), they get caught in a short squeeze and the banks skyrocket as they scramble to get out.

What they should do, is simply buy some 9 to 12 month puts and wait patiently as the banks replace their current profit equity with billions of new shares until their book value per share is finally diluted down to a fraction of what they're showing now.

Bear Stearns value of between $2 and $10 per share is about right for most of the banks but the Fed is keeping the other banks liquid long enough that they can reach that value in an orderly systematic manner which could take a year or two...

SPY: The Case for a Bottom Being in Place

There is pretty compelling evidence that the Fed/Treasury engineered that double-bottom on the 17th with massive buy orders at the 126 level. Quite frankly, they had to since the market had the potential to crash in a big way that day.

However, Fed engineered bottoms are usually short-term in nature so I wouldn't gamble my life savings on it being a good technical indicator. The Fed can't stop the market from going down. Their goal is to only try to control sudden plunges which can produce economic chaos.

And as for all of these "bearish signs" that the bottom is in, you had better remember that bearish news articles are pretty common all through every bear market and the market continues to fall.

Usually, the bottom of a bear market is in when it's gone on so long that EVERYONE including the strongest bulls have given up. The fact that you haven't given up is actually a "counter-sign to your counter-sign."

If this bear market turns now, it would mark one of the shortest bear markets in history at a time when the declining housing market is going to produce one of the longest economic downturns in history. Somehow I'm doubtful.

I notice from your bio that you want to be a CPA. I've been one for 25 years so I wish you luck and I'll give you some sage advice. When you've lost a bundle on every stock you've purchased and you've sold them all and you're scared to death to buy another one...that's when you'll see "the death of equities" cover story you're looking for...

Meredith Whitney Threatens Severe Deflation For Your Portfolio

Philip, I'm aware that the market is forward-looking. Citi isn't going back and adjusting prior years for the losses they're about to swallow and give refunds to prior investors.

I used the last 5 years for comparison purposes to show you the income pain that is about to occur for the NEXT 5 years. The losses began coming off last year and they will come off this year, next year and the years after.

Also, dividends are paid out of equity and have no part in calculating income or loss. And yes, when they report their losses for the next few years, they'll get tax refunds from their previously reported profits. However, tax refunds are usually an irritating consolation for the investors who weren't expecting the depth of the losses...

Meredith Whitney Threatens Severe Deflation For Your Portfolio

Also, I forgot to add that another way of valuing Citi is to look at the hit to their equity. As of 12/31/07, they had equity of $113 billion with 5 billion shares outstanding for a "book value" of $22.60.

If we subtract $80 billion in bad debts off their $2.1 trillion of assets, that leaves them with equity of $33 billion against 5 billion shares. In other words, a book value of $6.60 per share versus the current market value of $20.83.

Ignore total assets Philip. Banks love to measure themselves by total assets but the only things that really matter to a bank are equity, income and consumer trust. Citi is vastly over-valued on the first two and is desperately trying to salvage the third. And if they lose that battle, the first two numbers become irrelevant as Bear Stearns learned...

Meredith Whitney Threatens Severe Deflation For Your Portfolio

Okay Philip, now I see where your analysis is getting screwed up. You point out that even if Citi's share of the mortgage losses is $46 billion, that is still only a tiny fraction of their $2.1 trillion in assets.

That is correct. However, it is a HUGE percentage of their bottom line profits for many years to come. Did i mention the word HUGE? Over the last 5 years (2003 to 2007), Citi has reported net income of $83 billion dollars.

Now take your $46 billion in mortgage writedowns and add in an additional $20 to $30 billion in commercial and consumer writedowns due to the resulting recession and you have a bank that realistically hasn't made a profit in 5 years and is trying desperately to delay confessing that catastrophe to investors.

I happen to agree with you that our country isn't in a doomsday scenario because the overall banking system will survive a trillion dollar writedown. However, certain institutions like Citi and the investment banks own a much bigger share of that problem than other banks like Wells Fargo.

Quite frankly, I happen to disagree with Meredith Whitney that the troubled banks should just confess their losses all at once. I agree with both them and the Fed that it could spark a worldwide panic that would do much greater harm than good.

I see what Citi and the investment banks are doing with their long, drawn-out "disparage and then beat" income strategy and I would do the same thing in their shoes. Playing for time while they swallow their medicine is their only chance at survival and I'm sure the "Plunge Protection Team" is blessing it.

Ms Whitney is a thorn in their sides and heeding her advice could be catastrophic. But that doesn't mean her analysis is incorrect. Ignore her at your peril...

Meredith Whitney Threatens Severe Deflation For Your Portfolio

Philip, as I mentioned above, Citi's quarterly financials in 2 weeks will tell us nothing. Last week, I was long on Citi, this week I went short and I'll switch to long again before they report.

The reason? All of the rating agencies - not just Oppenheimer - are giving earnings warnings on Citi and with mark to market, Citi can pick a few more of their assets to write down and still easily beat expectations.

However, it's all a game. Long term, Citi is struggling for survival. I'm not sure where you're getting your worst-case debt scenarios, but GS just estimated home mortgage write-offs alone to be $460 billion (only a quarter of that has been written down so far) and other analysts I respect because they've proven right so far have projected that commercial debt writeoffs and credit card writeoffs will gradually push the total credit catastrophe to well over $1 trillion over the next 2 years.

Citi has a very unhealthy chunk of that slow-grinding catastrophe and advising your clients to go long on Citi because you think they've hit bottom only 8 months into a real estate collapse which will take years to unfold is a real good way to lose your clients...

Meredith Whitney Threatens Severe Deflation For Your Portfolio

By the time the banks confess to all of the losses sitting on their balance sheets, Citi's profit for the last 3 years will be completely wiped out. I believe that would make Ms Whitney's 2004 statements accurate.

Warren Buffet warned years ago to be wary of investing in banks because they can easily hide huge problems. As a CPA who is somewhat familiar with bank accounting, I can tell you that he was accurate (as he usually is).

Right now, the financial industry is playing a game with their income statements in order to make their price collapse occur in slow motion over a couple of years rather than in a single panic-inducing drop which Ms Whitney is suggesting.

They are sending out earnings warnings on each other to slowly drive their price down and then producing income statements which "beat" those reduced expectations in order to prevent a total collapse.

All companies play this "lower the expectations and then beat them" game, but with mark-to-market accounting where "market" is a guessing game, the banks can pretty much name their bottom line to be whatever they need it to be. If their stock price is falling too rapidly, the banks will reduce their write-offs and beat the expectations.

That is why the Fed - and the banks - were desperate to prevent Bear Stearns from going bankrupt and having to sell their assets on the open market. Everyone in the industry knew they were worth significantly less than what Bear was showing (see Chase's market valuation of BSC) and a sale would have produced a KNOWN market value for mortgage backed securities rather than the INFLATED value all of the banks are carrying them on their balance sheets...

The Fed is Deflating: 10 Reasons Why

"The Euro is given second thought as China will roughly equal U.S. GDP in 2011 (or near there)..."

Jim, you're losing me here. Just off the top of my head, I believe that China's GDP was roughly 3 trillion last year and growing at 11% annually compared to the US's 12 trillion which is growing at 3% annually.

Yet, you're saying China's GDP will catch the US in 3 years? Based on my math, even if the US economy stops growing completely, it would still take China 13 years to catch our economy at their present rate of growth.

Most economists are predicting 30 to 40 years for China to catch up because the US isn't going to stop growing and like Japan and Korea learned, 11% growth isn't sustainable over long periods of time - especially when you're dealing with several hundred million uneducated peasants that China in particular will have to feed.

I still remember the 1980's when everyone (including the Japanese) were predicting that Japan's economy would overtake the US by the turn of the century. Japan doesn't have near the intrinsic problems the Chinese have and we're still waiting on that prediction...

Will Credit Market Flight to Safety Boost Stock Prices?

Most people who are flocking to Treasuries right now have no concern at all about the return they're getting. None. That is why they're still buying at .5%.

They are worried about preservation of capital. Buying stocks during a recession probably doesn't rank high on the "preservation of capital" strategy list.

However, I will grant you that some folks will get frustrated with zero returns and move some money into stocks on every upturn but as soon as the market turns slightly against them, the fear factor will strike again and they'll flock back to treasuries which will exacerbate the stock declines.

I think that is a big reason you're seeing all the volatility now and it will likely be with us for some time...

Tuesday Outlook: Market Manipulation?

What about that consumer price index last week that stated we had no inflation worries because energy costs were flat?