Big Numbers

Well dear reader it was indeed a week of Big Numbers. Budget numbers, bailout numbers and negative GDP number were really big, not only as news but as a matter of fact. Before we go to these numbers let’s go to the overlook from www.prudentbear.com

For the week, the Dow dropped 4.1% (down 19.5% y-t-d), and the S&P500 fell 4.5% (down 18.6%). The Transports were hit for 7.4% (down 29.3%) and the Morgan Stanley Cyclicals 6.0% (down 30.3%). The Morgan Stanley Consumer index declined 5.8% (down 17.3%), and the Utilities lost 3.5% (down 12.6%). The S&P400 Mid-Cap index dropped 3.7% (down 16.5%), and the small cap Russell 2000 declined 5.3% (down 22.1%). the Nasdaq100 sank 4.8% (down 7.8%), and the Morgan Stanley High Tech index dipped 2.2% (down 6.3%). The Semiconductors gained 1.2% (down 5.9%), while the InteractiveWeek Internet index slipped 0.7% (down 1.0%). The Biotechs were hammered for 9.5% (down 7.8%). The Broker/Dealers dropped 4.5% (down 16.8%), while the Banks rallied 11.3% (down 45.5%). With Bullion down $48, the HUI Gold index sank 9.8%



my guess is tat the fellow below will be with us for some time



Big numbers

February 24 – Bloomberg (Mark Pittman and Bob Ivry): “…the U.S. government has pledged more than $11.6 trillion on behalf of American taxpayers over the past 19 months, according to data compiled by Bloomberg. Changes from the previous table, published Feb. 9, include a $787 billion economic stimulus package. The Federal Reserve has new lending commitments totaling $1.8 trillion. It expanded the Term Asset-Backed Lending Facility, or TALF, by $800 billion to $1 trillion and announced a $1 trillion Public-Private Investment Fund to buy troubled assets from banks. The U.S. Treasury also added $200 billion to its support commitment for Fannie Mae and Freddie Mac…”



Well dear reader, just in the last few days, the government has announced another $750 billion for bank bailouts.
Well the question is, where is all that money going to come from? In just a couple of months the official projected budget deficit increased from USD 800 billion to USD 900 billion, then $1.2 trillion and now it is at $1.75 trillion. This is certainly another big, if not huge number indeed.

USD 3.5 trillion
USD 3.5 trillion federal budget for 2010. Second only to USD 3.9 trillion spending plan this fiscal year!! Well and if that isn’t another big number what else?

Well dear reader I suppose that the following graphs do not need much explanation







Well dear reader do these bailouts really work? Let’s see.

GM
General Motors just reported a loss for the fourth quarter of nearly $10 billion. Well dear reader this is one of the prime examples to show us what good it does to bail out failing companies or how the money just goes down the drain. Remember, the government gave GM more than $13 billion



AIG
AIG is said to be nearing collapse despite the recent government bailout. If Goldman, who manages the treasury (you don’t believe me? Well I cannot prove it but it sure looks like and therefore I have no doubt at all that it is so) would not have had such a big counterparty risk with AIG”s CDS and therefore the risk to lose billions, AIG might not have been bailed out at all. At least Goldman’s competitor Lehman did not have that luck. So AIG was lucky to owe Goldman and therefore the Goldman boys got together with the government and decided to rescue AIG. But for how long does AIG stay alive?
AIG to report results Monday; could get more federal help
http://www.marketwatch.com/News/Story/aig-report-results-monday-could/story.aspx?guid={EE8CF7EC-92AF-4E7C-B143-E344784110AC}&siteid=msn




Fannie Mae
Fannie Mae loss prompts $15.2B infusion
Fannie Mae reported a $25.2 billion fourth-quarter loss Thursday evening and said its net worth dipped below zero, prompting the troubled mortgage giant to seek a $15.2 billion capital infusion from the Treasury Department.
http://atlanta.bizjournals.com/atlanta/stories/2009/02/23/daily104.html?ana=yfcpc



Well dear reader what do you believe that the coming news headlines regarding Bank of America, Citibank, GE and so on will be similar to the ones of te examples mentioned before? Well I suppose you know already what I believe.


Making matters worse, the U.S. economy shrank more than initially reported in the last quarter of 2008, the Commerce Dept. announced today. GDP fell at an annual rate of 6.2% in the fourth quarter, just a shade off of the goverments estimate last month of a 3.8% contraction.

John Williams from www.shadowstats.com comments
Annualized Real GDP Still Weakest Since First-Quarter 1982. The Bureau of Economic Analysis’s (BEA) "preliminary" estimate revision of real annualized growth in the fourth-quarter 2008 GDP was a statistically-significant decline of 6.25% +/- 3% (95% confidence interval), following an initial estimate of a 3.80% contraction. Such was against a 0.51% downturn reported in the third quarter. In terms of year-to-year change, the fourth quarter contraction deepened in revision, down by 0.82%, versus initial reporting of a 0.18% contraction and versus the third quarter’s annual gain of 0.75%.

Furthermore Williams opines:

Based on earlier reporting methodologies and removal of some reporting gimmicks, the SGS-Alternate GDP estimate for the fourth quarter was an annual (not annualized) contraction of roughly 4.1% versus a 3.3% contraction in the third quarter, against official respective estimates of a 0.8% decline and 0.7% gain. Against reporting of underlying economic series, the annualized quarterly contraction likely was in excess of 7% for the fourth quarter, but the revised 6.2% estimate is the closest to reality reported by the BEA in a long time.



Faced with a prospect of downgrading its lifestyle,” writes Peter Schiff“the U.S. government is instead borrowing trillions of dollars to artificially inflate our deflating bubble economy. The money is being used to both expand the size of government and finance additional consumer spending. Given our financial position, this is the exact opposite of what we should be doing.
”Our global creditors are now making the same mistakes made by subprime mortgage lenders. They are loaning us money that we will never be able to repay. In the process, they are enabling the largest expansion in the size of our government since the New Deal and crippling an economy already suffering from excess consumption.
”Although it may sound harsh, it would be far better for all involved if our foreign friends simply cut us off. Since their loans are merely fueling the growth of our government and artificially pumping up consumer spending, their savings will not only be lost, but their sacrifice will severely exacerbate our problems as well…
“If foreigners were to cut us off, there would be some immediate pain, but tough love is exactly what we need right now. Forcing Americans to live within their means, particularly the U.S. government, will be just as beneficial to the long-term health of our economy as similar restraint would have been had it been exercised by mortgage lenders. It's too bad so few of us seem capable of making this connection, or learning anything from the mistakes of the past -- even when the ink in the history books has barely dried.”




Banks and Banksters

Citi announced an agreement with the U.S. government that will give Uncle Sam a 36% ownership of the once-mighty bank.
The deal will convert the government’s $25 billion in preferred shares to lowly common stock. That 8% coupon that would have yielded $2 billion in dividends, the rights to convert down the road -- really, the entire advantage the American public had in owning this toxic stock… poof, gone… like it never happened
The bank will also essentially wipe out all its preferred shareholders… they’ve has decided to simply stop distributing dividends to preferred holders



I feel sorry for the holders of the preferred shares. Well to be honest I do not see why anybody should at all be invested in any kind of Citi or any other financial institution.


The FDIC’s “problem list” now contains 252 banks, the most since 1994. The regulators announced yesterday that their infamous list grew 47% in the last three months of 2008. As usual, the FDIC doesn’t name the banks… that would actually be useful. Just know your role: Remain fearful and compliant. (How long until the FDIC gets its own color-coded “threat level” system?)




Crisis / Doom

The Spectacular, Sudden Crash of the Global Economy
The worldwide economic meltdown has sent the wheels spinning off the project of building a single, business-friendly global economy.
Worldwide, industrial production has ground to a halt. Goods are stacking up, but nobody's buying; the Washington Post reports that "the world is suddenly awash in almost everything: flat-panel televisions, bulldozers, Barbie dolls, strip malls, Burberry stores." A Hong Kong-based shipping broker told The Telegraph that his firm had "seen trade activity fall off a cliff. Asia-Europe is an unmit­igated disaster." The Economist noted that one can now ship a container from China to Europe for free -- you only need to pick up the fuel and handling costs -- but half-empty freighters are the norm along the world's busiest shipping routes. Global airfreight dropped by almost a quarter in December alone; Giovanni Bisignani, who heads a shipping industry trade group, called the "free fall" in global cargo "unprecedented and shocking."
http://www.alternet.org/story/128412/the_spectacular%2C_sudden_crash_of_the_global_economy/?page=entire


Britain faces summer of rage - police
Middle-class anger at economic crisis could erupt into violence on streets
Police are preparing for a "summer of rage" as victims of the economic downturn take to the streets to demonstrate against financial institutions, the Guardian has learned.
http://www.guardian.co.uk/uk/2009/feb/23/police-civil-unrest-recession

Fresh evidence points to paralysis of global economy
Data from US and Japan triggered fears that the downturn has turned into the worst slump since the 1930s
http://www.guardian.co.uk/business/2009/feb/27/us-economy-gdp-recession



Gold

Well dear reader the correction I have been expecting is still going on. Some savvy market timers believe that we could see 890 per ounce before we will move above the 1,000 mark. Well dear reader as mentioned in my last post, it might be the last time to accumulate at prices below 1,000. Should you wait in the hope to buy at 890? Well I would start buying as catching the lowest points is difficult.
An option to invest in Gold and Silver could be “Incrementum Fund uno” an investment fund managed by the writer of this blog. The fund is a fund for qualified investors, registered and administered in Liechtenstein (IFM as administrator and Liechtensteinische Landesbank as custody bank) and audited by Ernst & Young. The fund can invest in Precious Metals, and other commodities such as Oil, Natural Gas and so on. The fund will be long only and managed in a very conservative way. If you like to receive more details, please send an e mail to
musingsoffritz@web.de



Gold suppression

While central banks tradition ally have said they lease gold to earn a little money on a supposedly dead asset, in 1998 Federal Reserve Chairman Alan Greenspan told Congress that this was not true. Central banks lease gold, Greenspan admitted, to suppress its price:
http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm

For years prior to 2000, gold leasing fueled what was called the gold carry trade. Investment houses leased gold from central banks, paying the central banks a tiny annual interest rate, usually well below 1 percent of the value of the gold leased, and then sold the gold into the market and invested the proceeds in government bonds, earning perhaps 5 percent annually. The huge difference in interest rates meant a virtually free stream of income for the investment houses, income paid by central banks as interest on the government bonds purchased by the investment houses, secure as long as the investment houses could be protected against sudden rises in the price of gold.

Please read on
http://gata.org/node/7208

Public evidence persuaded ex-treasury official of gold suppression
http://www.gata.org/node/7197


Equity

Earnings

Well dear reader a couple of months ago some people told me that stocks are cheap. The reason why saying so was that the P/E ratio was below 10 or closer to 10 than a just some time ago. Whenever somebody told me that PE’s are now at an interesting level, asked “are you sure that the E is as estimated and that it will keep up?” Well as expected earnings are coming down and my guess is that we will see much lower earnings ahead. Therefore stocks still might be expensive.

Carl Swenlin (Decision Point): Earnings are crashing
“The real P/E for the S&P 500 is based on ‘as reported’ or GAAP earnings (calculated using Generally Accepted Accounting Principals), and it is the standard for historical earnings comparisons. The normal range for the GAAP P/E ratio is between 10 (undervalued) to 20 (overvalued). Market cheerleaders invariably use ‘pro forma’ or ‘operating earnings’, which exclude some expenses and are deceptively optimistic. They are useless and should be ignored.
“The following are the most recently reported and projected twelve-month trailing (TMT) earnings and price/earnings ratios (P/Es) according to Standard and Poors. I have highlighted GAAP earnings. Note that projected earnings for 2009 Q2 are $15.90. Keep in mind that the last earnings peak of $84.92 was for 2007 Q3. That’s a drop of over 80%!



“Based upon projected GAAP earnings the following would be the approximate S&P 500 values at the cardinal points of the normal historical value range. They are calculated simply by multiplying the GAAP EPS by 10, 15, and 20. I have highlighted the overvalued values. Note that the S&P would have to drop to 554 just to be overvalued based on 2008 Q4 earnings projections. The outlook by 2009 Q2 is much worse.




“Of course, the market doesn’t always follow these projections, but they are reasonable targets based upon the best fundamental estimates we have available.”
Source: Carl Swenlin, Decision Point, February 13, 2009


Well dear reader even after recent losses, most stocks are still selling for 15 times earnings - or more. When you get to the bottom, that multiple goes down to 5-8. And while stocks have lost 50% of their value it does not mean at all that we are close to the bottom. Why? Well if you look at 1932 or at Japan’s recent markets, you can clearly see that stocks went down more than 90% before touching the bottom.

Furthermore, as long as you hear people say that stocks are cheap and that prices are at a bargain we can be sure that we are not at all close to the bottom yet. Well guess what. In the news one can still read and hear a lot of positive comments. Haven’t you seen some news lately telling you that stocks are now at a great bargain with a high upside potential? Well all these news pieces tell me that we have not seen the bottom yet. When you will hear everybody telling you that she or he will never again in her/his live buy stocks you should start to look seriously into buying stocks.

if I am right, this bear market won't end until the Dow trades under 4,000 or even lower. As mentioned in previous posts, I am convinced that history will repeat itself and that we will see Gold/Dow relation at 1:1 or 1:2 at least.




Commodities

Gold dropped 4.9% this week to $945 (up 7% y-t-d), and silver sank 9.7% to $13.125 (up 16% y-t-d). April Crude rallied $4.34 to $44.37 (down 0.5% y-t-d). April Gasoline rose 14.6% (up 28% y-t-d), and April Natural Gas gained 4.0% (down 25% y-t-d). March Copper jumped 7.2% (up 9% y-t-d). March Wheat declined 3.0% (down 15% y-t-d), and Corn fell 3.6% (down 14% y-t-d). The CRB index gained 4.5% (down 7.8% y-t-d). The Goldman Sachs Commodities Index (GSCI) rallied 6.7% (down 3.7% y-t-d).

Oil
Dear reader on the following link you can find an excellent report about oil
http://www.lemetropolecafe.com/img2009/Misc/ErsteOilReport.pdf

'Next oil shock will be far worse than $147 a barrel'
Hong Kong: The world is breathing easy, now that oil prices are below $40 a barrel, down sharply from $147 a barrel in June. But, in fact, the current financial crisis and recession could accentuate the severe supply-side constraints that drove up prices last year to record highs, cautions Mikkal Herberg, research director of the energy security programme at the National Bureau of Asian Research in Washington and a veteran strategist in the oil industry.
http://www.dnaindia.com/report.asp?newsid=1234290