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Smoke And Mirrors Everywhere

Tyler Durden's picture


From the latest Bert Dohmen Wellington Letter: Smoke and Mirrors Everywhere. Must read commentary with some notable highlights.


There are so many distortions in the markets today that traditional technical indicators are no longer as reliable as in the past. Trading volume in the markets used to be a most reliable indicator. But today, about 50-70% of daily trading volume is from the "high frequency" trading computers. Imagine! If it weren't for these, the stock market might have to shorten hours for lack of interest. But trading volume in the dollar term is at a record high. What's going on? Here is a great chart from our colleague, Alan Neuman's Crosscurrents (

It shows that although the total worth of listed stocks is now lower than in 1998, the dollar value of trading is about 3 times greater. That's the "high frequency" trading operations. They are in a trade only for minutes or a few hours. That's keeping the exchanges alive. They need that business.

Additionally, big volume has come from just four stocks: Fannie Mae, Freddie Mac, AIG, and Citigroup. On some days, these four stocks accounted for 40% of total volume. The first two firms are considered to be totally worthless by some analysts. To us that confirm that this rally has nothing to do with "investing," but more with computerized speculation.

On IPOs:

Have you noticed the number of IPO's and secondary offerings? The private equity firms are taking a bunch of their company’s public. These are firms they acquired during the boom, loaded them up with debt to pay themselves multi-billion dollar fees, and now they are scrambling to shed the over-indebted carcasses.

Other firms are going public as well. They can't get credit, so they sell stock. Is all this bullish or bearish? The media tells you its bullish. It shows that the markets are functioning again. That's true. However, we notice that many of this IPO's aren't working: the stocks quickly drop below the offering price within a few days. That means that the syndicate offering the stock couldn't or wouldn't support it. They didn't want to risk their own money.

Therefore, to us it looks more like an effort to exchange paper (stock) for good cash, much like was seen at the top in 2007. Remember, that was one of our important "canaries in the mine" in 2007, when a major P-E firm hastily went public, grabbing around $4.5 billion of the public's money. The stock imploded thereafter. Our reaction to IPO's that fail is, when Wall Street is eager to sell you something, pretend you're in a used car lot: be suspicious!

On earnings estimates and actual earnings:

In the financial media, you always hear the phrase that so many companies are reporting earnings "better than expectations or estimates." But you seldom hear how much down they were from the earnings a year ago. That is very deceptive.

The "estimated earnings" come from Wall Street. It behooves them to keep them low so that companies can easily beat them. That's what stimulates buying enthusiasm. It's a charade. So, let's see what the real earnings comparisons were. Second quarter earnings for the S&P 500 stocks were down a hefty 27% over the year ago numbers. For the third quarter, they are expected to show declines of 25%. And that's with all the easy cost cutting. What will the companies do next year, when they really have to cut into the muscles to get some cost reductions?

On a valuation basis, this is now a very expensive stock market. Valuations are at levels as high as or higher than what's normally seen at bull market tops. Another mini-bubble has been created by the Fed. They think that piling trillions of debt on top of the trillions existing in 2007 will resolve the crisis. That can only happen in fairy tales.

On valuations:

The S&P 500 Index is now selling at 26 times operating earnings. That's more expensive than at the bull market top in 2007. Are things really better than at the five-year bull market top in 2007? What about the trillions of dollars of bad assets still on the books of financial institutions around the world? Most analysts agree that the market is over valued. Yet they have to participate because the market is going up. They hope to be the first ones out of the exit when the plug is pulled. Do you think you can do that?

And overall market outlook:

On a valuation basis, this is now a very expensive stock market. Valuations are at levels as high as or higher than what's normally seen at bull market tops. Another mini-bubble has been created by the Fed. They think that piling trillions of debt on top of the trillions existing in 2007 will resolve the crisis. That can only happen in fairy tales.

So, if technicals are distorted, and the fundamentals are irrelevant in the markets, what can a trader or investor rely on? The speculators can do well to "go with the flow." That's a high risk proposition. The more prudent investor should go with his own analysis, ignoring all the stuff in the media. He will look at the facts, not the promotions in the media. Listen to the CEO's, who are much more cautious at this time.

We continue to repeat that the current rally has nothing to do with fundamentals. It has everything to do with hope, expectations, and liquidity which are not going into economic activity. The current Fed policy is ZIRP. That means Zero Interest Rate Policy. That's the driving factor, especially for the financial stocks.

Full report below.


h/t J.S.


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Thu, 10/22/2009 - 09:55 | 106697 Gubbmint Cheese
Gubbmint Cheese's picture

got gold?

Thu, 10/22/2009 - 09:57 | 106699 Anonymous
Anonymous's picture

Its intellectually dishonest to use improper numbers to justify your thesis. SP500 2009 consensus earnings estimates is 57.97 , which implies a PE of 18.6x. Off of 2010 estimates that number is 15.2x. These numbers are not horribly inconsistent with exit recessionary multiples. There's an argument to be had as to whether we are in that environment, but its understandable why the market has rallied the way it has

Thu, 10/22/2009 - 10:25 | 106732 Rainman
Rainman's picture

Speaking of honesty, is the 57.97 figure with or without the effect of hundreds of billions in mark-to-myth earnings puff within the financial sector ??

Just curious.

Thu, 10/22/2009 - 11:38 | 106845 deadhead
deadhead's picture

beautiful rainman.

i would add the off balance sheet crap coming soon to a theatre near you.

now, we know the fdic won't require capital raises for this gargantuan turdfest, but at least they will be on the balance sheet for all to see.


Thu, 10/22/2009 - 10:49 | 106771 Steak
Steak's picture

Source data:

Aww how cute, using the operating earnings as the basis for your earnings multiples.  You must be one of those teenage redbull-addled traders that the quant shops use because trained monkeys fling too much poop around the trading room.  I guess no one ever explained the difference between operating earnings and as reported earnings.

2009 as reported earnings estimate: $39.75
2010 as reported earnings estimate: $45.50

But I guess your highschool intro-to-economcs teacher and quant shop recruiter said that writedowns and charge-offs don't matter.  Well here's a little tip to the wise.  If a non performing loan is written off or you have to pay severance to a fired employee, that money isn't available to your company anymore.

Thu, 10/22/2009 - 10:56 | 106779 Cursive
Cursive's picture

Are you Steve Liesman or just channeling Steve Liesman?  I would sooner believe in the Tooth Fairy than the fictitious numbers these sell-side analysts are pushing.  Give it up man, it's a sales industry.  I know they're selling stocks and not autos, but it's basically the same once you get past the so-called glitz and glamor of Wall Street.

Thu, 10/22/2009 - 10:56 | 106780 Cognitive Dissonance
Cognitive Dissonance's picture

Why is it that when a S&P 500 company has positive earnings, they are counted towards the S&P 500 collective "e" but when they have negative earnings they are not subtracted from the S&P 500's collective "e"?

Is it becuase intellectually it's so very difficult to prove a negative or is the "system" biased towards growth and positive outlook and thus it's OK to cook the books if everyone agrees to do so?

By the way, I'm a little tired of the so called "ex items", that wonderfully vile accounting trick that's supposed to be used for truly one time "surprise" or unexpected expenses.

If you pull up these reports it's amazing what they consider one time unexpected expenses.

Just askin'

Thu, 10/22/2009 - 11:07 | 106803 rootless cosmop...
rootless cosmopolitan's picture

Aren't they subtracted? S&P reported negative per share earnings summarized over all companies for Q4 2008. This couldn't be, if you were right about this, could it?



Thu, 10/22/2009 - 11:54 | 106864 Cognitive Dissonance
Cognitive Dissonance's picture

Lot's of games are played, including using projected forward earnings instead of actual earnings. Many analysis, rating agencies and economists don't consider negative earnings as real and thus back them out of the data.

S&P does the same thing. They also report the actual numbers. It's always instructive to read the actual hard data. Go to the S&P web site and download the actual spread sheets of data if you're interested in hard numbers.,3,2,2,0,0,0,0,0,0,5,0,0,0,0,0.html

Thu, 10/22/2009 - 11:58 | 106873 Green Sharts
Green Sharts's picture

Let's say 450 companies of the S&P 500 have positive earnings of $60 per share and 50 companies lose $30 per share, resulting in S&P 500 earnings of $30 per share. If you were going to apply a P/E multiple to the S&P 500, should you use $60 or $30 for the EPS number?

Thu, 10/22/2009 - 12:21 | 106897 Unscarred
Unscarred's picture

Green SHARTS?!


Thu, 10/22/2009 - 12:30 | 106906 Cognitive Dissonance
Cognitive Dissonance's picture

And that, my friend, is the crux of the question we are discussing. How does one "fairly" measure the P/E.

Do you look back or project forward. Considering how manipulated the numbers are getting, is any forward earnings projection based in reality? Do you back out negative earnings or not? And don't get me started on how they figure the multiple.

I will say one thing. Nearly every analysis report I've been reading lately (with notable exceptions, some of which have appeared here on ZH) appear to have started out with the desired P/E ratio and then worked backwards to create a fantasy to support it.

To answer your question, I think negative numbers/earnings should be subtracted if positive numbers/earnings are being added. But I'm biased because I'm not selling my advice to people who wish to hear only what can justify their bonuses or market calls.

Thu, 10/22/2009 - 12:42 | 106932 Green Sharts
Green Sharts's picture

In the example I gave, I think it makes more sense to use the $60 EPS number, backing out the impact of the 25 money losing companies on the index EPS because the stock of a money losing company can't be worth less than zero.

That's not to say I think the market is undervalued. I think it's considerably overvalued because it incorporates a normal economic recovery and 20%+ increases in EPS in both 2010 and 2011, a pipe dream in my opinion. And quality of earnings is a huge issue as well.

Thu, 10/22/2009 - 13:29 | 106990 Cognitive Dissonance
Cognitive Dissonance's picture

Green Sharts,

Your example makes sense. And I'm sure I could successfully argue the other side.

I do find it interesting that because we are discussing how to calculate the S&P P/E, we (the collective we) aren't talking about if the S&P ever hit a low enough number to represent true value.

Take a trip down memory lane and look at all the big market crashes. When we finally hit the "bottom" the P/E was usually in single digit territory, somewhere around 6-8, and rarely above 12 or 13 on smaller recession bottoms.

Did we ever get there this past March? If not, why not? Why are we constantly using yesterday's measuring stick to assess if today's market is fairly valued?

I'm not gonna pay a lot for that muffler.

Thu, 10/22/2009 - 13:42 | 106999 Cursive
Cursive's picture

"because the stock of a money losing company can't be worth less than zero."

Yes it can.  Your comment would be more appropriate if there had been no bailouts.  However, they've off-loaded it onto the taxpayer and the rising public debt will squash future economic growth.  We have plenty of this going on now.  The financials were over 20% of the S&P in 2007.  The S&P needs those earnings.  You can't ignore the loss of those earnings.  The TBTF banks are all worth less than zero, but continue to trade at high multiples.  I mean, even Fannie and Freddie are still trading.  I guess your reasoning is prevailing, though.

Thu, 10/22/2009 - 14:20 | 107066 Cognitive Dissonance
Cognitive Dissonance's picture

Cursive, you said....

I guess your reasoning is prevailing, though.

You have just described concensus group think. It doesn't need to make sense or be based upon logic or supportable reasoning, it just needs to be widely agreed upon and followed/acted upon.

The bailout money has elevated more than just the financials. The proof is simple. Remove it and see where the market goes. It (the bailout money/stimulus) by definition is an artificial influence on the market. The assumption is that once removed (and after the economy has repaired itself) the market will be self supporting. That is all that's being used to justify these (IMHO) high P/E rations.

I've always wondered about something. If a process of "reasoning" is actually illogical circular group think, is it really "reasoning" or simply a mass delusion. I'm not being dismissive. I've been burned too often by what I consider to be mass delusions.

But define for me momentum or "going with the flow" or any other term for a movement or actions of people supported by no reason other than they are moving.

Thu, 10/22/2009 - 14:42 | 107106 Miles Kendig
Miles Kendig's picture

The odd exception granted...

Thu, 10/22/2009 - 15:08 | 107150 Cognitive Dissonance
Cognitive Dissonance's picture


Remember this?

"I've seen the future. You know what it is? It's a 47 year old virgin sitting around in his beige pajamas drinking a banana broccoli shake singing I'm an Oscar Mayer wiener."

Thu, 10/22/2009 - 14:40 | 107100 Green Sharts
Green Sharts's picture

No, a common stock can't be worth less than zero. The maximum loss of an equity holder is the amount invested. The taxpayers can't send a bill to the shareholders of Fannie and Freddie and GM and AIG for the losses the taxpayers will ultimately incur.

With regard to lower future growth due to the financial meltdown and rising debt, I agree with you. That has to be factored into the multiple you're willing to put on individual companies and on the S&P 500. If you look at cyclical companies like banks, CAT, UPS, NUE, etc., the market is pricing them as if we'll have a typical post-recession recovery and revenues, profit margins and earnings will go back to at least in the neighborhood of what they were in 2006-07. I think there's virtually no chance of that happening in the next few years.

The CEO of Nucor, the largest steel producer in the U.S., apparently isn't seeing too many green shoots:

"While overall steel mill utilization increased from 46% in the second quarter to 69% in the third quarter, the increase was primarily due to the end of customer destocking. Our view remains that there has been little improvement in real demand and the uncertainty in our economy is still very high. We also continue to believe that real demand is in for a long, slow recovery."

Thu, 10/22/2009 - 14:56 | 107132 Steak
Steak's picture

My favorite "tell it how it is" CEOs are of NUE, EMR, and'll get no BS out of those folk.

Thu, 10/22/2009 - 15:50 | 107227 Green Sharts
Green Sharts's picture

Andrew Gould of Schlumberger (which reports tomorrow) is another CEO who is a straight shooter.

Thu, 10/22/2009 - 15:05 | 107137 Cognitive Dissonance
Cognitive Dissonance's picture

Green Sharts, you are clearly intelligent and I respect your views. Please forgive me because I'm gonna have some fun with your words.

The taxpayers can't send a bill to the shareholders of Fannie and Freddie and GM and AIG for the losses the taxpayers will ultimately incur.

Considering what the Obama Administration just did to the Chrysler bond holders, I wouldn't be so sure about that. In one fell swoop, all the rules of the game were put on notice that they're subject to change based upon the desperation level of the masters of the universe and their pet Ponzi.

We are about to enter The Twilight Zone where anything goes and nothing makes sense.

I pledge allegiance to the Banana Republic of the United States of America.

Thu, 10/22/2009 - 18:15 | 107437 Cursive
Cursive's picture

Green Sharts,

We basically agree.  I think I read you to agree that the bank losses and taxpayer bailouts will have a significant cost to our economy.  I was also trying to point out that these losses did not stop at the corporate shell; these losses have been borne by the taxpayer in an attempt to keep the banks solvent.  I agree that common stock can't be worth less than zero, at least from simple equity holder's point of view.  But let's not forget the effect that massive leverage can have on one's portfolio.  A speculator using leverage could lose multiples of their capital.  That is what we are seeing here and it should ultimately be reflected in the multiple assigned to the P/E, as you suggested.

Thu, 10/22/2009 - 13:06 | 106963 Anonymous
Anonymous's picture

The process is akin to filling out an income tax return. Start at the end and work backwards until everything lines up. What's the problem ?

Thu, 10/22/2009 - 14:25 | 107077 rootless cosmop...
rootless cosmopolitan's picture

I was actually referring to the hard numbers published by S&P in following spreadsheet:

These data show negative earnings summarized over all companies in Q4 2008 of -$0.09 and -$23.25 for operating and reported earnings, respectively. This is why I wonder. But I think now I might have misunderstood you and you were referring to projected future earnings.



Thu, 10/22/2009 - 10:54 | 106785 rootless cosmop...
rootless cosmopolitan's picture

But you only assume he is talking about 2009 estimated earnings, don't you? If he actually talks about the 12 month trailing operating earnings up to Q2 2009 a P/E ratio of 26 is about right, according to the data published by S&P. If we take the 12 month trailing reported earnings, instead of the made up operating earnings the P/E ratio is about 140, currently. Also, if we move a quarter forward in time, excluding Q3 2008, but including Q3 2009, the numbers are still about the same.



Thu, 10/22/2009 - 10:58 | 106788 I need more cowbell
I need more cowbell's picture

Just as a curiousity, how does it actually feel to have your balls crushed thrice?

EDIT: 5 times

Thu, 10/22/2009 - 11:21 | 106820 Anonymous
Anonymous's picture

You do not read, and if you do read, you do not understand. Sorry.

Thu, 10/22/2009 - 11:22 | 106823 Anonymous
Anonymous's picture

Over the past 100 years, during every recession or depression the PE has only been ~4-6.

Thu, 10/22/2009 - 09:57 | 106701 Anonymous
Anonymous's picture

The goal of any portfolio manager is performance. S&P 666 to 1096 cannot be ignored. The bear case, thanks to ZH, is well known. Regardless of what anyone believes about the markets, the armaggedon scenario is off the table. I believe the days of "cliff diving" are behind us.

Thu, 10/22/2009 - 10:27 | 106736 geminiRX
geminiRX's picture

Yup - this confirms it, time to sell....



Thu, 10/22/2009 - 10:34 | 106748 Anonymous
Anonymous's picture

That's what makes a horse race.

Thu, 10/22/2009 - 10:45 | 106763 Cursive
Cursive's picture

Agreed, geminiRX.  Thank you to Anon for ringing the bell at the top.  Uh, there will be plenty of cliff diving to come, I only wish we could have avoided the collateral damage.

Thu, 10/22/2009 - 11:36 | 106842 Anonymous
Anonymous's picture

Too bad you gomers were saying this at Dow 8200. I'll write from the Fire Island beach house I just bought.

Thu, 10/22/2009 - 13:50 | 107015 Cursive
Cursive's picture

Oh, great.  More yahoo board flaming.  You can't substantiate your argument so you resort to sounding superior because of some a posteriori stock picking prowess.  Let me be the first to tell you that your fantasy of buying a Fire Island beach house is roughly equivalent to the fantasyland of this stock market.  Please, whatever you may do going forward, buy and hold.

Thu, 10/22/2009 - 14:11 | 107052 Anonymous
Anonymous's picture

Hey you highbrow take your attitude and your thesaurus and join the legions of ZH fans who continue to delude themselves.
Maybe you should consider joining a cult or at least get out more.

Thu, 10/22/2009 - 10:30 | 106742 mdtrader
mdtrader's picture

They simply transferred the debt problem from the private sector to the public sector. If this causes a crisis with the currency and or in the bond market, it will make the banking and credit crisis look like Disney World.

Thu, 10/22/2009 - 10:41 | 106759 Cognitive Dissonance
Cognitive Dissonance's picture

"I believe the days of "cliff diving" are behind us."

Please define "cliff" and "diving" for me.

A 10 minute google search will undoubtedly bring up thousands of quotes of official and professional pronouncements that the worst is behind us.

These assurances are usually uttered immediately after the "recovery" from the last "cliff diving" episode. My question is, how did that work out each time?

Thu, 10/22/2009 - 11:01 | 106793 Anonymous
Anonymous's picture

The most common sentiment expressed on this blog is skepticism of the marketplace. I am entitled to my opinion,as is anyone. I think the S&P's are ok here and that is that. The markets are subjective. I get what I need from them as should you.

Thu, 10/22/2009 - 11:44 | 106852 Anonymous
Anonymous's picture

P.S. Stop googling and watch the tape. Traders trade.

Thu, 10/22/2009 - 12:38 | 106928 Cognitive Dissonance
Cognitive Dissonance's picture

Who the hell is Broccolini and where do you think you are? :>))

The most common sentiment expressed on this blog is skepticism of the marketplace.

That is by far the greatest understatement I've read on this blog in a few weeks.

I am entitled to my opinion, as is anyone.

I wholeheartedly agree that you are entitled to your opinion. I'm asking you to explain it, not surrender it.

The markets are subjective. I get what I need from them as should you.

And that's the beauty of the markets. There are always two sides to the trade and you my friend, if you've been a bull, have been on the correct side to date. Cheers.

Thu, 10/22/2009 - 12:58 | 106954 Anonymous
Anonymous's picture

One in a row for me. Enjoy the weekend.

Thu, 10/22/2009 - 13:03 | 106959 Anonymous
Anonymous's picture

Broccolini is a term of endearment.

Thu, 10/22/2009 - 13:48 | 107011 cougar_w
cougar_w's picture

[correct side of the trade]

Let me just remind some of you that if this tanks as badly as it seems set to, then in 10 years hence they won't be marveling that someone was on the correct side of the last trade. They'll be pointing out who imploded the global economy, leaving 500 million former-middle-class penniless, and driving 2 billion others back into the Stone Age for perhaps the remaining duration of human existence on Earth.

I know, who cares. It just seems sad is all. I'll be quiet now.


Thu, 10/22/2009 - 10:03 | 106702 Divided States ...
Divided States of America's picture

If this really turns out to be smokes and mirrors and I lost money via shorting the stock market based on my own perception in the face of the Government, Banks and Media spreading propaganda to depict an economic picture thats more sanguine (green shoots) than reality, is there a way I can start something to gather enough support and recoup some of my losses back? Kinda like those people who made money in the Madoff case having to give back some or all of their gains to those who lost it all. I mean we are basically talking the same thing here, a big ponzi scheme, just on a much larger scale.

Thu, 10/22/2009 - 10:01 | 106703 casino capitalism
casino capitalism's picture

All the right points. I particularly like the comment about comparing earnings to "estimates" instead of yoy.  I have been irritated about that for a while - blatant manipulation.

Thu, 10/22/2009 - 10:01 | 106704 Anonymous
Anonymous's picture

The plug has been pulled, Tyler. Monday was the high. It won't be seen again until sometime in spring when we actually do get the recently hyped melt-up.

Thu, 10/22/2009 - 10:03 | 106706 Rainman
Rainman's picture

Excellent report. A Good read. The dollar trading volume chart is a real eye opener.

Thanx, Tyler.

Thu, 10/22/2009 - 10:09 | 106715 Marvin the Mind...
Marvin the Mindreader's picture

The country's going to hell faster than when Roosevelt was in charge!

Too much cheap money sloshing around the world.

Thu, 10/22/2009 - 10:15 | 106720 Rainman
Rainman's picture

And free money is always cheaper than cheap money.

Thu, 10/22/2009 - 12:40 | 106797 Cognitive Dissonance
Cognitive Dissonance's picture

Rainman, you got there ahead of me. I've always marveled at the term "cheap money".

I understand the literal meaning but it's still a strange term for those of us who live in the real world and are essentially wage slaves.

I wonder if I'm considered cheap labor or if I can be bought with cheap money? Can I be a cheap skate by using cheap money?

Can my girl friend be even more of a cheap date if I use my left over cheap money to take her to the $2 dollar midnight matinee? Especially if she buys the popcorn?

Make sure you get extra butter and a cup of ice water honey.

Thu, 10/22/2009 - 12:37 | 106922 ghostfaceinvestah
ghostfaceinvestah's picture

It took a war against the evils of German Fascism to get this country to turn away from FDR's Fascism.

What will it take to get the country to turn away from today's Fascism?

Thu, 10/22/2009 - 14:08 | 107046 cougar_w
cougar_w's picture

[what will it take]

Perhaps you are implying that it will fall the way it did last time, and we're just waiting for that war to start. Others have hinted darkly at such a turn.

I'm not as sure.

The operation of warfare has changed in the last 40 years. It was one thing for the colonial powers of the day to rattle sabers and run out their dreadnoughts. It's another matter all together when nearly every two-bit comb-over dictator has enough nukes to ruin a hemisphere.

I don't think there are any lessons from the past to inform us regrading what comes next.

My guess is that nothing comes next. Because we're trapped. We have few options and no easy way to break out of the cage. I don't know what that means for the future. Did the Romans in 476AD have a Plan-B? They did not, and no great event came to galvanize them. They had to stand by to a man and take the hit, and 400 years of darkness fell over Europe.

Now we are all (6 billion+) in the same boat as the Roman citizen of 470AD. Maybe there is nothing left, no Plan-B, no deus-ex-machina intervention to turn this ship around. If so, then the wars that in the last crisis pulled industry and labor together toward a production goal are simply not going to do that this time. A war too small will just sap our will and strength, tear apart families, empty the Treasury all the faster. And a war large enough to increase production will probably go nuclear in the first month.

There will be no rescue, at least nothing that will seem heroic. The heros are all dead. It's just vampires and the undead now, striping the flesh off the bones. And 400 years of that sort of thing does not appeal.



Thu, 10/22/2009 - 15:20 | 107171 Cognitive Dissonance
Cognitive Dissonance's picture

Cougar, you're just a pussy cat at heart, aren't you?

Very thoughtful post. I could talk with you for hours about this subject. Ironically I just posted under another ZH article that it was time to break out my old copy of the "Decline and Fall of the Roman Empire."

If the path we are following, the depletion if not out right destruction of our one and only mother earth (through whatever means or methods, be it war or economic or poison) isn't enough to snap us out of our trance, what exactly will?

How bad does it need to get? At what point will everyone sort of turn to each other and say "Duh, we need to do something to stop this madness"? At what level of self inflicted pain does one wake from the depths of denial?

Thu, 10/22/2009 - 10:15 | 106721 crzyhun
crzyhun's picture

To quote another blog, EL, there is too much friction, fear, frustration and thus we have to be flexible.

Friction from the collectiviest admin; fear of missing out and general fear of a second leg down; frustration that we are way too far out on the limb; and the need for seeing each day as a new day, with little correlation to the previous means we have to be flexible. Good luck.

Thu, 10/22/2009 - 10:16 | 106722 dumbquant
dumbquant's picture

One of my favorite statistics people point to is the fact that the majority of companies are beating earnings estimates.  Last quarter, they singing from the highest mountain that 75% of companies beat their estimates.  I used to run a long/short book which traded soley on earnings surprises/disappointments, & I analyzed this data from every angle.  I can tell you that statistically speaking over the last 6 years, 65% to 70% of companies ALWAYS beat earnings estimates(that is pro forma of course, the infamous 'ex-items').  So that fact that the majority of companies beat their earnings is nothing new.  Now 75% last quarter is def better than the usual range, but its hardly extraordinary.  So take w/ a grain of salt when people bang the table on the proportion of companies beating their earnings on already low balled estimates.

Thu, 10/22/2009 - 14:18 | 107063 cougar_w
cougar_w's picture

Proof -- if one needed any -- that companies and ratings agencies set expectations so that they *will* be exceeded. It's a conspiracy so that CEOs can go back to the Board with something to justify their next bonus. A meaningless exercise prone to deliberate manipulations.

But it's not like companies don't lie about other (even more important) things. The well of lies and deceits is bottomless.

Thu, 10/22/2009 - 15:36 | 107197 Cognitive Dissonance
Cognitive Dissonance's picture


May I add something to your thought on it being a "conspiracy" because that's a red meat trigger word for many people.

We sometimes don't realize that a conspiracy can be, and often is, unspoken. But it's still just as effective and most everyone is in full agreement as to who, what, where, when, why etc.

It's called a culture and it exists anywhere groups of people gather together for a common goal. Before other ZH members beat me down on this idea, give it some honest and careful thought.

I've gone to work for companies where in the space of a week I've recognized that the culture was not one of ethical behavior. There were no memos posted for all to read, no meetings in the board room to discuss the next thieving activities. It was simply understood and acknowledged by most of the workers. At most, cooperation was accomplished with a few grunts, some disapproving looks and a few quick words.

I'm sure at some point somewhere there was probably a meeting of a few principals and some open discussion. But even during these meetings, it's often more important what's not said than what is said. What's that they say about 75% of communication is non verbal?

Thu, 10/22/2009 - 10:18 | 106725 Anonymous
Anonymous's picture

And according to the latest numbers from ICI another 5+ billion was withdrawn from domestic equity funds..

I know!!!..more cash on the's bullish!!

Thu, 10/22/2009 - 10:24 | 106730 Clampit
Clampit's picture

I believe Benny and the Inkjets are printing money at a furious pace, and it is their primary dealers that account for a majority of the trading action; what's not to understand here?

Thu, 10/22/2009 - 12:44 | 106934 ghostfaceinvestah
ghostfaceinvestah's picture

Yeah, a lot of people just don't seem to get the relationship between liquidity pumps and stock market bubbles.

The market is in a liquidity driven bubble today IMHO, and could inflate even higher, since Bernanke is showing no signs of taking his foot off the gas.

No coincidence the market has been gyrating like a cheap stripper for the past 10 years, while gold has increased 4X.

Thu, 10/22/2009 - 10:28 | 106737 Anonymous
Anonymous's picture

To the guy who is talking about p\e ratio,and since he believs in those ratios and current valuation,why did the fed has to go through all the headache that is upsetting people left and right and calls for audits?. If those valuations are so wonderful,then we wouldn't even be on this blog post to try and decipher all the heavy load that td keeps on throwing our way....

Thu, 10/22/2009 - 10:30 | 106741 Edna R. Rider
Edna R. Rider's picture

In 6 months there has been no penalty for buying the dips.  Until we see policy change, which is unlikely from this arrogant administration until there's a crisis in the other direction (too much money printing), stocks will be between 1000 and 1120 ($70 * 16).  Watch how the hedgie stocks trade:  FCX, AAPL, POT.  They NEVER EVER go down for more than an hour.  It seems exciting to see red, but I know of no one who doesn't still have LOADS of cash sitting around, ready to slam the SPY on a 9-10 pt drop (note, today).  By the end of next year it will be clear the economy has flatlined for a long time.  Only then will stocks start to fizzle.

Thu, 10/22/2009 - 14:24 | 107074 cougar_w
cougar_w's picture

Stock prices are no longer a measure of economic strength or weakness (as if they ever were.)

Stocks are just a form of gambling. And it's just like when a ship pulls into port and all the sailors get paid and go ashore, the cost of everything in sight goes through the roof until all their money is taken. Then they go back to ship and wonder what happened.

You are wondering what happened.

What happened is, you were seen coming from a distance and were easily taken.


Thu, 10/22/2009 - 10:32 | 106744 Anonymous
Anonymous's picture

Anon 8:57 (both of you): OK, you say the S&P P/E isn't so high as others say. Price is a known and verifiable number; not so the earnings component. Does your number come from the WSJ or IBD, or some similar source? Because if it does, it is based only on operating earnings and not on "one-time" write-downs. Guess what, if that's the case, then the E part of the equation is very, very off. First of all, it represents a real loss to all of the companies that did such a write-off. Second, in many cases the "one-time" write-offs occur again and again - meaning that they AREN'T one-time. Oh, each individual one is - but there are so many (some a second or third dip on the same underlying loss, just with additional losses recognized) that they just keep coming. Else why would there have been (and continue to be) the enormous subsidization of the banking system and Wall Street? That doesn't come from nothing, you know. The underlying economy SUCKS. I'm in South Texas, and unemployment here is pretty good relative to other parts of the country, "only" about 7% - yet all of my clients, in various industries, are telling me of top-line decreases for themselves and their customers of 15%-30%. Such figures WILL lead to more lay-offs in the future, as they have in harder-hit areas of the country, and unemployed people generally don't spend a lot of money on things other than food, utilities and gasoline, plus a mortgage or rent payment if they're able - not exactly a recipe for a recovery. The dollar is becoming less and less valuable every day, which might be good for our (rather limited) export industries, but it SUCKS if you buy fuel or anything produced with or shipped utilizing fuel.

Take away THIS fact, and see if you're still happy about the direction of the economy: We as a society have about $57 trillion of debt, with societal income (GDP) of about 11.5 trillion. That's a debt:income ratio of 4.95:1. With no sign that the additions to debt are going to slow very much (because the whole thing is unsustainable - we can't pay the interest, certainly not with 9.8% U3 unemployment or 17.0% U6 unemployment) and still invest in productive projects that will increase jobs and income. Especially not when the government's demand for funds is so high that it is crowding out private (read: "productive") investment out.

I don't know how either of you can be optimistic about the economy. Maybe it won't crash tomorrow, but we're circling the bowl - and it makes very little difference to me, as a father, if we get flushed next week, next year or in 5 years. Our current course is toward a depression that will make the last one look rather mild by comparison, because at least then the dollar was rock-solid, and those that were working did just fine. With a constantly depreciating currency, everyone's wealth disappears.

Thu, 10/22/2009 - 12:10 | 106890 Anonymous
Anonymous's picture

I understand your point of view and as the father of four children I share your concern for everyone's future. I am a trader, not an economist. All I can act upon is what I have now. I think that too much of the commentary here is over-intellectualized and frankly lacking in street smarts. We all must do whatever we can to get through the uncertainty and I do it one day at a time. The truth is we never had any visibility about the future, we just might have felt better about it at some time along the way. I am a veteran of Wall Street for many years surviving market cycles as well as terrorist attacks. I refuse to fall into the trap of negativity that seems rampant everywhere. Good luck to you and your family.

Thu, 10/22/2009 - 12:49 | 106942 B9K9
B9K9's picture

Repeat after me: the $USD is nothing more than "little green pieces of paper". In a fiat world, the Fed believes it can make the dollar worth anything they want it to be worth.

Your quant notions remind me of previously discredited economists who postulated that the only true path to increasing a society's wealth was through increased levels of productivity. You know,  to paraphrase KD, "mine, make or grow".

Thankfully, the world we now inhabit has shed the constraints of these ancient ideals, truly relics of former, less "wealthy" ages. Embrace the new reality where wealth & productivity are measured by computers which calculate the value of those little green pieces of paper.


Thu, 10/22/2009 - 13:22 | 106983 Anonymous
Anonymous's picture

I was just pointing out how numbers are manipulated by people to make their case...both bull and bear. We are deluded with information on this website about how incorrect or illusory bullish indicators are, but the opposite is never pointed out (actually, quite opposite, its highlighted as fact). I am also sure the estimates are operating, no-one forecasts write-downs in estimates. I understand those are manipulated, but what I care about is prospective earnings power. As a side note, those numbers are top down estimates from FactSet; BB estimates are a tad higher for 2009 & 2010.

I don't necessarily disagree that the long-term prognosis is much worse than 24 months ago, but the reality is we are in the middle of the most powerful the S&P has had in over 70 yrs. What 2011 necessarily brings, I am unsure, but I can tell you that 4Q09 estimates are going to be crushed.

Thu, 10/22/2009 - 10:34 | 106749 rr_
rr_'s picture

Too many traders, including me,  are waiting for another fearful selloff rather than getting long at these high prices.  So sentiment favors the bulls.

Thu, 10/22/2009 - 10:39 | 106755 Grand Supercycle
Grand Supercycle's picture


DOW / SP500
Daily trend has gone bearish / neutral (some topping action)


USD bullish warnings continue.



Thu, 10/22/2009 - 10:39 | 106756 Anonymous
Anonymous's picture

Anonymous wrote:

"Monday was the high"

Do you live in an alternate universe where the stock market made its high then as opposed to yesterday?

Thu, 10/22/2009 - 10:40 | 106757 Cursive
Cursive's picture

WRT to HFT, Mr. Dohman's observations fit a thesis that I have. Most of the natural selling pressure is gone. For that matter, most of the natural buying pressure is absent as well. The big prop trading desks (looking at you, Goldman) may want to exit, but they don't have anyone for the other side. They may be trapped and are sitting on their hands. I'm calling this the mutually assured destruction (MAD) thesis. It may take an exogenous event to start the cascading fall, but I can't see what would push us up from here, either.

Thu, 10/22/2009 - 10:46 | 106766 jturner
jturner's picture

Apparently some whales agree with this assessment of the market, because I just saw that on there were large put purchases on the SPY and IWM at the open:

"SPY March 70 puts, bought 14,000 and SPY March 90 puts bought 2,500; IWM customer bought 10,000 Nov 59 puts at 1.51"

Thu, 10/22/2009 - 10:52 | 106778 Yossarian
Yossarian's picture 

Corporate cash flows have apparently been quite resilient in this Depression II.  Can someone please explain this...

Thu, 10/22/2009 - 11:02 | 106794 Cursive
Cursive's picture

Yes, accounting earnings are not necessarily cash.  The operating earnings that the FIRE industry has been reporting for the last 15 years was illusory.  It didn't exist.  The FIRE industry used these to support higher earnings multiples.  The accounting industry has been co-opted and is the FASB is complicit with the Ponzi scheme.  For example, why did the FASB agree to relax mark-to-market?  So, if you are thinking the cash flows haven't changed and that is a good thing, I am saying that they MAY (I've had no chance to confirm this data and I don't trust any FR bank) have not, but that is a bad thing.

Thu, 10/22/2009 - 11:47 | 106857 Yossarian
Yossarian's picture

Fair enough but the fact that S&P earnings may have further to go down doesn't mean that the real economy is equally sick if cash flows haven't suffered.  Also, the cash flows this time have been even more resilient than in past recessions.  I really don't get it and this is a big challenge to my bearish views...

Thu, 10/22/2009 - 12:41 | 106929 dumbquant
dumbquant's picture

cash flows will also lag earnings by the accrual concept of accounting.  Lets say you earned 100 million last year, & ur acct recv increased by 60 million, so u only got cash of 40 million on those earnings.  the next year u make 10 million in earnings & lets say that all of those earnings are cash.  ur customers then pay off their receivables from last year so ur CFO gets an extra 60 million bump as ur acct recv are reduced to 0 from 60.   Its a simplistic example, but demonstrates why cash flows have not decreased w/ earnings, & are due to..

Thu, 10/22/2009 - 15:19 | 107169 Yossarian
Yossarian's picture

Presumably those cash flows should even out across the corporate landscape.  I found this interesting as well, especially the charts on the third page:   

Thu, 10/22/2009 - 13:58 | 107033 Cursive
Cursive's picture

Again, I don't know if this data is even accurate.  Would be awesome if Reggie Middleton could look at it.  What I do know is that, although theoretically the two are only differentiated by timing differences, earnings have very little to do with cash flows.  Just because cash flows may not have fallen hard doesn't mean that the economy was not shrunk.  We also have a credit-based economy.  Do you know how many people owned things because their credit was good or because they pledged other assets to obtain those assets?  A lot of the economic activity we have witnessed was credit-based and credit has been steadily contracting.

Thu, 10/22/2009 - 11:03 | 106795 Steak
Steak's picture

Fire everyone and burn off inventories...the economy doesn't need you :-)

Thu, 10/22/2009 - 11:05 | 106798 Anonymous
Anonymous's picture

Speaking of smoke and mirrors look at the Priceline:PCLN chart. You would think that the world is having a travel party in the off season.. Anyone know what/who props that up and why?

Thu, 10/22/2009 - 11:17 | 106815 AR
AR's picture

VIDEO:  For those who missed it, here is the link to Frontline's recent segment entitled "The WARNING"

It is worthwhile watching . The main point being that for decades Washington via Wall Street has enabled and promoted a massive Ponzie Scheme, whereby each bubble, crisis, and crash is recycled, then covered up by yet another larger one. Time is running out. When looking out longer term, those with real money and assets - whose goal should be to protect and preserve their money - the future is dim. No society can sustain real prosperity by continually issuing more debt to pay for its' previous debt. Watching the video, one quickly discovers our problems run much deeper than worrying about daily hot topics like "dark pools, HFT's, Bernanke, Obama, or the like." Structurally, the underlying problems are truly disasterous. How we all can band together to change this course, and solve these problems (or even begin to) is the question? We here, often feel helpless, a feeling we share with many others today. At some point, we all need to start putting forth "actionable ideas" (one by one) to help influence future solutions, of which voting is only a small start.


Thu, 10/22/2009 - 11:38 | 106844 Anonymous
Anonymous's picture

Well, I'm trying to provide some inspiration. I call it the Namke Debt Consolidation Idea and I posted it on my blog.

I would consider it an honor if Zero Hedge would rip the idea apart in public. The ripping apart may inspire some actionable ideas supported by the brainpower of the traders.

Think of the idea as something for the traders to chew on. I think it will be the traders who eventually put GS in their place.

Yes, I'm crazy - but at least I try and be nice about it.

Namke von Federlein

Thu, 10/22/2009 - 11:33 | 106827 Unscarred
Unscarred's picture

So here I am, in the middle of Rust Belt, America (Cleveland), and the local sports talk radio station has MATT TAIBBI from Rolling Stone on their show to discuss an article that he wrote about Cleveland Browns coach Eric Mangini.

Anyone who follows the NFL knows that the Browns are probably the worst run organization in the league.  TAIBBI was less than kind in his depiction of both the team, but also Mangini.  When asked why he was so brutal in his story, TAIBBI says, "Listen, it's just a story.  I may have been a little over the top, and I may have exaggerated a little bit, but I'm sure that Eric Mangini has more to worry about than some jerk writing a story about him."

A response to a Cleveland sports blogger:

Have some more on Goldman coming out soon, apologize for the long absence, have been on some other stuff. Among other things dealing with a lot of disgruntled Cleveland Browns fans who are pissed that I compared Eric Mangini to Augustus Gloop, the pudgy kid who was drinking from the chocolate river without permission in Charlie and the Chocolate Factory. I thought Browns fans would find this funny, but apparently not. I got one letter from someone who expressed the feeling that if I were ever to have kids, he hoped “they would be born with Achondroplasia.” So I’m sitting there scratching my head, wondering what Achondroplasia is, and right on cue, two minutes later, he sends me a link to an X-ray picture of someone with the disease. I have to admit, I burst out laughing when I saw the picture — not because the disease is funny (it isn’t, not at all), but just because someone was feeling so crappy about their football team that they felt compelled to dig that horrifying thing up to send to some writer bashing their team. I mean, I totally understand the guy.

Anyway, more on the real world later.

I found his about face interesting during the interview both interesting and revealing.  Nothing better than a reporter who recants his story before it even goes to print.  Wonder how much of his Goldman escapades were filled with smoke and mirrors, too...

Thu, 10/22/2009 - 11:54 | 106866 E pluribus unum
E pluribus unum's picture

Thanks for your post, Lloyd. Give my regards to your sweet wife

Thu, 10/22/2009 - 12:36 | 106920 Unscarred
Unscarred's picture

Yes.  Lloyd Blankfein.  I made $60M in 2007, and I vacation at The Mistake By The Lake.

Thu, 10/22/2009 - 12:03 | 106878 McGriffen
McGriffen's picture

finance journalists could use a few more Taibbi's writing columns.  At best, he is asking tough questions that no one on FOX or CNBC would dare ask.

My only issue with MT is his occasional ability for going over the top with descriptors.  "the great derangement" was a funny read.

Thu, 10/22/2009 - 12:32 | 106912 Unscarred
Unscarred's picture

During his interview, he all but acknowledged that he's a sensationalist.  But hey, if you writing for Rolling Stone, you're not going to keep your job by offering objective and hard-hitting criticisms of the looters in Congress and the White House right now.

I agree, he does offer tough questions that the sheep at CNBC, et al, would never dare ask.  But he destroys his credibility through silly outbursts of childish metaphors...  IMHO.

Thu, 10/22/2009 - 14:03 | 107041 Cursive
Cursive's picture


Thanks for the story.  Looks like you are taking a few hits from others, but I appreciate the background.  While I have no doubt that Taibbi is a sensationalist (many popular journalists are) I will file this story away...

Thu, 10/22/2009 - 17:57 | 107401 Unscarred
Unscarred's picture

I was just surprised to have the opportunity to listen to a candid interview with this newly minted "folk hero" where his guard was down.  He had no idea that we was offering insight into his approach towards dramatizing his subjects to maximize the entertainment valueof his stories, and thus endearing him with the current mainstream readership.

He honestly sounded a bit uneasy discussing his critique of the Browns head coach with a Cleveland media member, which I found completely contradictory.  If you're going to put something in national print, why not play it up?



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