Financial Accounting Standards Board
Just like the hit series "House Of Cards," Wall Street earnings season has become rife with manipulation, deceit and obfuscation that could rival the dark corners of Washington, D.C. From time to time we do an analysis of the previous quarters earnings for the S&P 500 in order to reveal the "quality" of earnings rather than the "quantity" as focused on by Wall Street. One of the most interesting data points continues to the be the extremely low level of "top line" revenue growth as compared to an explosion of the bottom line earnings per share. This is something that we have dubbed "accounting magic" and is represented by the following chart which shows that since 2009 total revenue growth has grown by just 31% while profits have skyrocketed by 253%.
Is capital adequacy really the answer to the question?
It is always interesting that, following two major bear markets, investors have forgotten that it was these very same analysts that had them buying into the market peaks previously. As we know repeatedly from history, extrapolated projections rarely happen. Therefore, when analysts value the market as if current profits are representative of an indefinite future, they have likely insured investors will receive a very rude awakening at some point in the future. There is mounting evidence, from valuations being paid in M&A deals, junk bond yields, margin debt and price extensions from long term means, "exuberance" is once again returning to the financial markets.
Trust is gone and credit is going and debt is sitting between a rock and a hard place with its grubby hands pressed together, praying that it will be forgiven, forgotten, or overlooked a little while longer. By the way, the reason trust and credit are gone is because oil is no longer cheap and world economies can’t grow anymore. They can’t afford to run the day-to-day operations of a techno-industrial society. They can only pretend to afford it. The stock markets are mere scorecards for players who can only lie and cheat now to keep the game going. Somewhere beyond all the legerdemain and fraud, however, there remains a real world that is not going away. We just don’t know what it will look like when the smog of fraud clears.
The rock is reality. The squishy place is the illusion that pervasive racketeering is an okay replacement for an economy. The essence of racketeering is the use of dishonest schemes to get money, often (but not always) employing coercion to make it work. Some rackets can function on the sheer cluelessness of the victim(s).
A zombie government armed with accounting tricks has bailed out a zombie banking industry using even more financial phoniness. A few numbers pushed here and there, and the industry is earning record profits. But out in the real world where people live and work, things aren't so rosy. Zombies make negligent landlords and dangerous neighbors.
Despite the ongoing antics in Washington the market remains less than 5 points (at the time of this writing) from its all-time closing high. If the markets were concerned about economics, fundamentals or potential default; stock prices would be significantly lower. The reality is that as long as the Federal Reserve remains convicted to its accommodative policies the argument for rationality is trumped by the delusions of Mo' Money. We have seen these "Teflon" markets before - do we really need to remind you what happens to a Teflon pan when you finally scratch the surface? In the meantime here are 5 things to ponder as the week progresses...
- Hilsenrising interest rates Business Feels Pinch of Swift Rate Rise (WSJ)
- Yellen Betting Defies 100-Year Jinx of Fed No. 2 Never Elevated (BBG)
- No sign of cyber leaker Snowden on flight to Cuba (Reuters)
- Back to the Future 2 is finally coming: Honda Sees ‘Flying Sports Car’ Making Profit by Decade’s End (BBG)
- Europe’s Richest Person Kamprad to Move Back to Sweden (BBG)
- Li’s Shock Treatment to China Lenders Evokes Ex-Reformer (BBG)
- In India, Gold-Related Shares Melt Down (WSJ)
- Citigroup Opens in Iraq to Tap $1 Trillion of Oil Spending (BBG)
- France warned on budget deficit (FT)
Some have attributed the resurrection of the financial markets (or more appropriately the banks) from the March 2009 lows to the IASB/FASB changes to factual to fantasy accounting. The Telegraph reports today that from PIRC's and the Bank of England's Financial Policy Committee that while banker bonuses continue to rise (for now), 'hidden' losses among UK banks could total GBP60 Billion (USD 90 Billion). HSBC topped the list with GBP10.4 Billion in bad debts that have yet to be written off and while the 'accounting' bodies are suggesting they will address criticism of this farce, as one analyst notes, they "can still make unprofitable lending appear profitable." Regulators expect to hear plans from lenders on how they intend to fill these holes before the end of the month to coincide either with the FPC’s meeting on March 19 or a statement scheduled for March 27. While outright recaps are unlikely, banks are expected to restructure and set out plans to raise their capital levels over the next couple of years. More fantasy...
No, American Banks DON'T Need to Be Big to Compete with Bigger Foreign Rivals
The 2011 changes by the FDIC to the safe harbor for "true sales" may have been the end of "Too Big To Fail."
When one thinks of the US banking system, the one thing few consider these days is the threat of a liquidity shortage. After all how can banks have any liquidity strain at a time when the Fed has dumped some $1.7 trillion in excess reserves into the banking system? Well, on one hand as we have shown previously, the bulk of the excess reserve cash is now solidly in the hands of foreign banks who have US-based operations. On the other, it is also safe to assume that with the biggest banks now nothing more than glorified hedge funds (courtesy of ZIRP crushing Net Interest Margin and thus the traditional bank carry trade), and with hedge funds now more net long, and thus levered, than ever according to at least one Goldman metric, banks have to match said levered bullishness to stay competitive with the hedge fund industry. Which is why the news that at noon the Fed reported that Primary Dealer borrowings from its SOMA portfolio, which amounted to $22.3 billion, just happened to be the highest such amount since 2011, may be taken by some as an indicator that suddenly the 21 Primary Dealers that face the Fed for the bulk of their liquidity needs are facing an all too real cash shortage.
Today's primetime popcorn event is about to begin: as reported earlier, the House Financial Services Committee will hold an oversight and investigations hearing on the collapse of MF Global, beginning at 3 pm. The hearing will focus on the decisions during the company's final days that led to the disappearance of up to $1.6 billion in customer funds. The party line is that "The investigation aims to "not only to find out where the money went but to identify what went wrong in order to prevent this from happening again," Subcommittee Chairman Rep. Randy Neugebauer (R-TX) said." What instead will happen is that a bunch of politicians will huff and puff, and nothing will happen once again, because to take down Corzine, would mean to start eating away at the entire rotten core of today's captured political system, which has and always will be run out of Wall Street. It will also be amusing to listen to Edith O’Brien plead the Fif
Today at 2 PM, the House Financial Services Committee will hold its third hearing (and the fifth overall) on the ever more confounding topic of MF Global, its bankruptcy, and its vaporized client funds, which amount to about $1.6 billion at last check. And while Jon Corzine will not be there, virtually everyone else from the firm who can promise that said vaporitzation of funds was merely a softward glitch and not the fault of anyone in particular, will be present, from the General Counsel, to the CFO, to the Deputy General Counsel of JPMorgan, all the way to Edith O'Brien, assistant treasurer of MF Global, who is expected to plead the Fifth. One wonders why if there is nothing to hide, but that is the topic of another discussion. And as exposed last week by the WSJ, this hearing will be particularly interesting as now it has been made clear that Corzine specifically gave the order to transfer funds to JPM's account. As NJ.com summarizes: "Per JC’s direct instructions." This line, contained in an email that an MF Global finance official sent to explain a $200 million transfer to JPMorgan Chase from an MF Global account containing customer funds, will be a focal point of a congressional hearing today into the futures firm’s collapse. The email, disclosed in a congressional memo circulated Friday, has raised questions about whether the former governor and CEO of MF Global knew customer money was being used to plug holes in the firm’s finances as it plunged into bankruptcy during the last week of October. As much as $1.6 billion of client funds has gone missing, according to a trustee liquidating the futures firm."
A warning by the SEC in mid-March 2011 regarding repo-to-maturity trades suggests otherwise.