thevoice@voicedup.com's  Instablog

The following are comments compiled by Wall Street economist Jan Hatzius of Goldman Sachs. Notable for his bearish forecasts, he was listed atop of 52 Wall Street economists in The Wall Street Journal′s economic-forecast rankings.

“Over the last year, policymakers have boosted the housing market by reducing foreclosures, slowing the pace of distressed sales, and stimulating demand for owner-occupied housing. The effects of these policies are evident in a swelling foreclosure pipeline, a surge in first-time home purchases, and abnormally low mortgage rates. We estimate these policies have reduced foreclosure supply by 450,000 and increased demand by 200,000. Taken together, these moves might have added 5% to home prices nationally. If this estimate is correct, it suggests most of the increase in home prices since the spring—which has totaled between 2% and 4% in seasonally adjusted terms—has been due to temporary factors.”

“In 2010, we expect some of these supports to fade. Fed and Treasury purchases of mortgage-backed securities will taper off, and the pause in foreclosures created by federal mortgage modification programs may end. The federal tax credit for first-time home buyers appears likely to be extended for at least a few months, but probably no longer than through the first half of 2010.”

“Our conclusion is that despite the better recent data—including stronger-than-expected report on existing home sales in September—the risk of renewed home price declines remains significant, and our working assumption is a further 5%-10% decline by mid-2010. However, the cloudy policy outlook adds to our already considerable uncertainty of where house prices will ultimately bottom.”

Last week Ron Paul’s “End The Fed” cracked Amazon’s Top 10 List of Bestsellers. Ron Paul is one of the biggest advocates of the free market and sound money philosophies and has been amassing legions of followers with his revolt against the Federal Reserve System. Paul is a member of the Liberty Caucus of Republican congressmen which aims to limit the size and scope of the federal government and serves on the House Foreign Affairs Committee, the Joint Economic Committee, and the Committee on Financial Services, where he has been an outspoken critic of American foreign and monetary policy.

His followers will say that the FED is one of the biggest scams in the Unites States history. Mainly since its conception was by private bankers and not the common man. Milton Friedman believes the FED is responsible for the environment that caused the great depression. Many believe the FED is responsible for the current crisis as well.

I have not yet read the book but from what I hear the Fed is reluctant to disclose other banks holdings in order to protect their solvency. Could it be that the FED is primarily concerned by protecting its own solvency? Could the FED be too big to fail? And if so does'nt the FED then pose a systemic risk that could be catastrophic? On a grander scale, wouldn't all countries have to embrace the gold standard for optimal performance? If not the risk of a 1907 repeat is bound to happen again. London and other European banks raised interest rates stemming outflows while the U.S. maintained the gold standard, leading to the creation of the FED.

The Keynesian school believes in printing money when necessary to improve economic fundamentals. I do not have a problem with this as long as the stimulus is spent wisely. Allocating these funds to a scrupulous group of banks that have obvious ties with the current FED does not seem optimal except to the selective pockets that gain.

 Tiger Management founder and chairman Julian Robertson told CNBC that the US is dependent on China and Japan too much.

“It’s almost Armageddon if the Japanese and Chinese don’t buy our debt,” Robertson said in an interview. “I don’t know where we could get the money. I think we’ve let ourselves get in a terrible situation and I think we ought to try and get out of it.”

“If the Chinese and Japanese stop buying our bonds, we could easily see [inflation] go to 15 to 20 percent,” he said. “It’s not a question of the economy. It’s a question of who will lend us the money if they don’t. Imagine us getting ourselves in a situation where we’re totally dependent on those two countries. It’s crazy.”

”“The U.S. has to quit spending, cut back, start saving, and scale backward,” Robertson said. “Until that happens, I don’t think we’re anywhere near out of the woods.”

“We’re in for some real rough sledding,” he said. “ I really do think the recession is at least temporarily over. But we haven’t addressed so many of our problems and we are borrowing so much money that we can’t possibly pay it back, unless the Chinese and Japanese buy our bonds.”

In todays world there is no other financial institution that can facilitate and implement the range of services with which Citi provides its clients. Below are ten highlights to keep in mind when analyzing its equity.

• At the end of the second quarter of 2009, the company’s Tier 1 Capital ratio, a key measure of financial strength, was 12.7%, among the highest in the industry.

• Citi’s Tier 1 Common increased by approximately $64 billion following its recent exchange offer. Its Tangible Common Equity (TCE) will increase by approximately $60 billion, resulting in approximately $100 billion of TCE and a Tier 1 Common ratio of over 9%.

• Structural liquidity at the end of the second quarter of 2009 was 71% compared to 55% at the end of the third quarter of 2007.

• Citi has reduced key risk exposures by 37% year over year to approximately $97 billion (e.g. year over year, direct

• sub-prime exposure is down 57% and highly leveraged finance commitments are down 65%); anmore than 50% since the end of 2007.

• Citi has reduced quarterly expenses by 23% since the fourth quarter of 2007 while continuing to invest in innovation and serving customers well.

• Since the beginning of 2007, Citi has worked successfully with approximately 625,000 homeowners to avoid potential foreclosure on combined mortgages totaling more than $67 billion.

• Regional Consumer Banking deposits grew in every region versus the prior quarter, with particular strength in North America, where deposits grew 6%. Total deposits were $805 billion, up 6% sequentially and flat with prior year levels.

• Citi has sold more than 20 businesses since the end of 2007, redirecting its focus on core businesses.

• Since the begginging of 2008, Citi has reduced assets within Citi Holdings by approximately $250 billion.

• Last quarter, Institutional Clients Group had net income of $2.8 billion, up 17% from prior year levels on record net income from Transaction Services and strong results in Securities and Banking.

"Disclosure: Long C"

Bulls have led the major indexes 50% higher since March. Next up, September, the worst performing month in the history of Wall Street.

The optimism that began in March has failed to continue in another major market, the Shanghai. For the month of August, Hong Kong’s index has dropped over 20% after gaining nearly 100% for the year. The Hang Seng has lost nearly 5% for August and it seems as though the US markets are next up for a correction. The recent beat and “meeting earnings estimates” for companies to me is a non-event. The majority of meeting analyst expectations was due to expense reductions and not profits. With consumers bank accounts dwindling the coming months will prove much more difficult once companies realize they can not slash costs further and new sources of growth must emerge. More importantly the rally in China was largely due to the half a trillion stimulus package unleashed, similar to the stimulus package released by the Obama administration. There is no real earnings power driving the rally but sort of a bonus check to citizens that is slowly winding down. The stimulus impact should be over by the beginning of 2010.

Many analysts view a peak formation in the current market. Some expect a 10-20% turnaround from current levels and witnessing the correction overseas, a pullback is not hard to fathom. Although one never wants to bet against a rally, now looks like a great time to begin hedging any gains realized over the past seven months.

Unemployment is still at 10%. Bank failures this year have reached 84, the fastest pace of bank closure in 17 years – reported by Bloomberg. With this in mind lets not forget the wise words of Warren Buffet, “Be fearful when others are greedy, and be greedy when others are fearful.”

Following the recent earnings call, Priceline (PCLN – $153) surprised analysts by earning $2.02 a share up 30% from a consensus estimate of $1.75. Sales were up 17.5% to $603.7, analysts were expecting $574 million.

CEO Jeffery Boyd said, “Despite a difficult economic climate, leisure travel demand for the summer peak season has been stronger than expected, driven in part by the availability of compelling discounts.”

More recently Citigroup slapped a price target of $185 and Barclays followed with $180. Year to date PCLN is up 108.36% from a low of 73.65 and is currently trading at an all time high of $153. Where was Citigroup and Barclays when Priceline hit its low in November? It is quite easy to upgrade and initiate coverage once momentum has built up on a stock rather than making a call when the outlook seems bleak. Should an investor choose to follow these calls a return of 20% and 17% will be garnered should the price targets be reached.

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