SocGen: S&P500 Further Losses In Store?

Fabien Manach, the technical analyst at Societe Generale, had a nice technical analysis chart last week, click to enlarge!


Be careful and consider as a probability!

Is Pervert Banking Mythology Finally Peaking?

I have written about the anger surrounding the banking and respective bailouts recently. Well, this is obviously not enough, and I list here some opinions from yesterday:

Willem Buiter with "The Fed' s moral hazard maximising strategy"
Simon Johnson with "We Cannot Afford To Wait To Recapitalise US Banks (Letter To The FT)"
Yves Smith with "Quelle Surprise! Who Gained From AIG Rescues? Goldman (and Deutsche) Tops the List (and Willem Buiter is REALLY Angry!)"
Paul Krugman with "What's the matter with Kansas?"

However, that all is really minor issue! The post at CNBC.com "UPDATE: Stocks Could Skyrocket After March 12th" contains the very very pervert message:

On that date, a House financial services subcommittee plans a hearing on mark-to-market accounting rules, which have been blamed for forcing banks to report billions of dollars in write-downs.
Karen Finerman has long been an advocate of putting these rules on hiatus for a while and “letting the banks breathe.”
If that meeting results in the government relaxing mark-to-market rules, option Monster Jon Najarian thinks the stock market could explode.

Interestingly! How suddenly it creates more value? Less transparency via mark-to-bankers-myth means more value for shareholders? The credit markets should be partying!

Let' s see how rational markets may be!

ECRI: US Recession Has NOT Yet Hit Bottom

No comment, take it dry ... my emphasis!

Reported by Reuters, March 06, 2009:

(Reuters) - A measure of future U.S. economic growth dipped to a fresh 14-year low in the latest week while its annualized growth rate was unchanged, both still indicating the recession has yet to hit a trough, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 105.2 for the week ending Feb. 27 from 105.5 in the previous week, initially reported as 105.6.

The reading was the lowest since the week to March 10, 1995, when it stood at 104.7 according to ECRI data.

The index's annualized growth rate was unchanged at negative 24.1 percent.

"The WLI has now slipped to another new cycle low, suggesting that the end of this recession has yet to start taking shape," said Lakshman Achuthan, managing director at ECRI.

The weekly index fell due to higher interest rates and to lower stock prices and housing, with the decline partly offset by higher commodity prices, Achuthan said.

Edwards: Have We Really Learnt Nothing?

Edwards is not the one of these .... He sees the world different and writes about the US equities today:

Another 25%+ downside beckons.

The respectful Albert Edwards, the global strategist at Societe Generale, has been an ueber-bear for years. The key message today:

One of the most worrying things about the last few years has been the seemingly neverending ability of investors to kid themselves. Over the years I have conducted a soul destroying battle for investors to acknowledge the dark side. But ultimately investors are like moths, fluttering towards the light. This is natural. If we give up hope, what is left? Capitulation and revulsion will present major opportunities in the next year. Embrace investors’ despair.

Over many years I have always been bemused at investors’ ability to reassure themselves that disaster was not around the corner. Niggling doubts and worries are soothed away by the siren voices of policy makers and other happy-clappy market cheer leaders.

Was it Sir Alan Greenspan who justified the S&P forward PE at 24x in 1999 because equity analysts’ high long-term earnings expectations correctly reflected the New Paradigm? Was it Sir Alan who reassured us that there was no US national housing bubble? Was it Ben Bernanke who reassured us that high debt loads were perfectly sensible in “The Great Moderation”? And was it also Ben Bernanke who claimed that the gaping US current account deficit and low bond yields were due to surplus savings in Asia? Investors lapped this self-serving nonsense up because they wanted to believe.

One of the most touching acts of market faith I see at the moment is that the Chinese authorities are in control of events and will be able to turn their economy around from the Q4 contraction. Commodities and Chinese equity prices lurched up in anticipation of more easing measures being announced. As ever, the bulls’ argument is dangerously plausible and appealing. Meanwhile, in a world of competitive devaluation the Chinese Yuan has overtaken the Yen as the region’s strongest currency (see chart below). And the FT reports that output of Chinese steel mills has gone off a cliff after a buoyant December– link. All I can do is bring my long experience of dealing with these situations. My considered riposte to the bullish consensus is “rhubarb, poppycock, bilge, balderdash and piffle!”

Click on chart to enlarge, courtesy of Societe Generale.

Consider as a probability!

Yves Smith: Should We Hope US "Making Homes Affordable Program" Doesn't Work?

Yves Smith at NakedCapitalism.com is one of my favourite bloggers, often covering issues I do not have capacity myself ...


Today Yves has an opinion about the US Treasury' s "Making Home Affordable Program". Read the full post here, but I excerpt here the key message:

In other words, if the program succeeds, we may not be so happy with where we wind up in a few years.

But I have my doubts that it will work. First, despite the bribes to servicers, I don't see strong reasons for them to play ball. These mods will be costly, I am not certain the comp is adequate, and mortgage securities holders may sue.

Second, the redefault rate on mortgage mods that do not have significant principal reduction in the first six months now is high. The New York Times reports that payment reductions are expected to be "hundreds of dollars" a month. Is that really going to make a difference with most borrowers, particularly since the interest portion is tax deductible and these mortgages are recent (ie, the interest component is a high proportion of the total payment).

Third, the program qualifies people based on mortgage payments relative to total income. Some consumers are so up to their eyeballs in debt that a mortgage mod is merely rearranging the deck chairs on the Titanic. So in this version of the program, borrowers with high levels of overall debt (55%= to income) get debt counseling! Let me tell you, someone in that fix is probably beyond hope. In the old days of easier credit, someone paying 29% on credit cards could get a somewhat less punitive rate via debt consolidation. I doubt there is much of that sort of credit on offer right now.

Fourth, second mortgage holders don't have reason to play ball. From the guidelines:
While eligible loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program, in order to reduce the overall indebtedness of the borrower and improve loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid junior liens (according to a schedule to be specified by the Treasury Department, depending in part on combined loan to value). Servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.

Fifth, these mods are voluntary. There is enough pressure being applied to banks now on government life support that they will be expected to make a good show of it, but the government has designed the template, and it is not obvious how much latitude banks have in participant selection (and whether they have the skills to make informed choices even if they were motivated to). However, there is limited protection against "mods for the sake of mods". The servicer gets no incentive payment if the borrower defaults within three months.

The possible real effect of the program may be revealed here:
Servicers will receive incentives to take alternatives to foreclosures, like short sales or taking of deeds in lieu of foreclosure. For those borrowers unable to maintain homeownership, even under the affordable terms offered, the plan will provide incentives to encourage families and servicers to avoid the costly foreclosure process and minimize the damage that foreclosure imposes on financial institutions, borrowers and communities alike. Servicers will be eligible for a payment of $500 and can make reimbursable payments up to $1000 to extinguish other liens, and borrowers are eligible for a payment of $1500 in relocation expenses in order to effectuate short sales and deeds-in-lieu of foreclosure.

Dean Baker has a point on media reporting here!

Nasing Spesal: But Where's Nouriel?

Paul Krugman has a funny picture at his NYT (The New York Times) blog ...

Morgan Stanley: Too Soon For An Inflection Point?

I do focus myself on the ECRI Weekly Leading Indicators, with the latest post here...

The confirmed bears on economy, the economists from Morgan Stanley, had a short message yesterday. Richard Berner, the co-head of Morgan Stanley' s Strategy Forum, among others, wrote:

Investors should not rush in. From a market perspective, we know that pessimism is rampant and that good news should help risky assets. Investors are right to look for signs of relief, especially when talk of depression is now fashionable and many are giving up hope. But we’ve been here before: In February, the twin mantras seemed to be that “the market is short” and “the pain trade is higher.” Now that equities stand at 14-year lows and 55% below their October 2007 highs, they do reflect a lot of bad news − but maybe not quite enough. The further slide in production that we expect suggests that the near-term risks for earnings point down, and a rapid turnaround seems unlikely.

Consider as a probability!

Latvia Names New Government

Reuters reports:

RIGA, March 4 (Reuters) - The former finance minister nominated to form a new Latvian government named his cabinet on Wednesday, but disagreements immediately emerged with a key coalition partner over who should join the administration.
Valdis Dombrovskis, 37, of the centre-right opposition party New Era, is forming a government after the old one collapsed last month, a victim of the global financial crisis.
He also faces the task of making more budget cuts to meet the terms of a 7.5 billion euro ($9.49 billion) IMF-led rescue.
"On the one hand this government line-up brings new faces into the cabinet of ministers and on the other also ensures a certain continuity (from the old government)," Dombrovskis told a news conference as he presented his government.
Among key appointments, former prime minister and New Era party ally Einars Repse has been nominated for the finance ministry post, as expected. Foreign Minister Maris Riekstins will remain in his post.
The coalition includes five parties, Dombrovskis said. This would be New Era, three of the four parties from the outgoing government and a smaller centre-right party, Civic Union. The coalition would have 64 votes in the 100-seat parliament.
But differences immediately emerged with the People's Party, the largest party in the new and old coalition. It said it wanted another party, that of outgoing prime minister Ivars Godmanis, to be in the new government too.
"We always said that the coalition should be wide," said People's Party parliamentary group leader Maris Kucinskis.
Excluding Godmanis's party meant a loss of 10 votes in parliament, he said. He hoped Dombrovskis would still hold talks on having Godmanis in the cabinet. Dombrovskis has to win a parliament confidence vote, which is expected to take place on March 12. He has said the parties of the new government need to agree on tough budget cuts
amounting to about 700 million lats ($1.25 billion), about 5 percent of gross domestic product (GDP), to meet a budget deficit goal set under the agreement with the IMF.
The extra cuts are needed as the economy is forecast to drop 12 percent this year, double that expected when the rescue was negotiated with the International Monetary Fund (IMF) last year.

I do not know, but it feels to me, that the People' s Party will mess it up again ...

Tuesday Wrap-Up

There is another - different in kind - model ...

Serious people are accumulating anger. Paul Krugman sees the nightmare of "zombie financial ideas" and Willem Buiter says: "It is not much, but knowing that you know nothing is the beginning of wisdom". All in all, desperation is close, as Paul Krugman is ready to go off-shore ...

It really looks like the wise men that are supposed not to make the mistakes, are making their own mistakes. As Samuel Brittan writes, almost all the measures are wrong, as demand matters . But Blankfeins cash-in...

The real economy is finding little or no footing so far ...

This was my best pick last year among hedge funds (I am still long), but do not dream and lower your expectations (the guy may be 100% right!).

Well, expect strong economic and equity market correlation in the years to come? It is not the time to play the hero ...

These days even "Oracle of Omaha" is swimming naked!

Saut: I Will Get More "Hate Mail" ...

Jeff Saut, the respectful strategist at Raymond James has posted his weekly missive, see the latest version here. Last week Jeff suggested this.

His call for this week (but read the full missive):

I am certain I will get more “hate mail” this week for trying to stay somewhat constructive on stocks and because I am leaving again to give a keynote address at Raymond James’ national conference, making it difficult to script anymore strategy “calls” for the week. That said, I will indeed try and do a call on Thursday morning. Nevertheless, we suggested last Tuesday that if the markets could get a pornographic plunge” type of hour, with a concurrent “look” below 7000 on the DJIA, it might be sufficient to lock in a tradeable low provided we are not in crash mode. Regrettably, we never got that “I think I am going to be sick” type of hour. So we begin this week with the same strategy. And this morning the pre-opening futures are down hard again on negative comments from Warren Buffet, another AIG Gotcha (AIG/$0.42), and more HSBC horrors (HBC/$34.80). Meanwhile, there is a TD Sequential Buy Setup (aka, Tom DeMark) on a daily, weekly, and now monthly basis, which is interesting because the DeMark indicator measures”trend exhaustion.” Consequently, we are attempting to focus on what could go right for the equity markets and the economy.

Click on chart to enlarge!

Consider as a probability!

I hope people have been evacuated from emergency areas?! It is not the time to play the hero, yet ...