For every semi-positive data point the bulls have emphasized since the market rally began, there's a counter-point that makes us question what all the fuss is about. The bulls will cite expanding US GDP in late 2011, while the bears can cite US food stamp participation reaching an all-time record of 46,514,238 in December 2011, up 227,922 participantsfrom the month before, and up 6% year-over-year. The bulls can praise February's 15.7% year-over-year increase in US auto sales, while the bears can cite Europe's 9.7% year-over-year decrease in auto sales, led by a 20.2% slump in France. The bulls can exclaim somewhat firmer housing starts in February (as if the US needs more new houses), while the bears can cite the unexpected 100bp drop in the March consumer confidence index five consecutive months of manufacturing contraction in China, and more recently, a 0.9% drop in US February existing home sales. Give us a half-baked bullish indicator and we can provide at least two bearish indicators of equal or greater significance. It has become fairly evident over the past several months that most new jobs created in the US tend to be low-paying, while the jobs lost are generally higher-paying. This seems to be confirmed by the monthly US Treasury Tax Receipts, which are lower so far this year despite the seeming improvement in unemployment. Take February 2012, for example, where the Treasury reported $103.4 billion in tax receipts, versus $110.6 billion in February 2011. BLS had unemployment running at 9% in February 2011, versus 8.3% in February 2012. Barring some major tax break we've missed, the only way these numbers balance out is if the new jobs created produce less income to tax, because they're lower paying, OR, if the unemployment numbers are wrong. The bulls won't dwell on these details, but they cannot be ignored.
Few men have a resume quite like Jon Corzine. Not only has Corzine served in the U.S. Senate and been governor of New Jersey, he has also been the CEO of Goldman Sachs and the recently imploded brokerage firm MF Global. The insider blood filtrated through cronyism and the endless squandering of the public dime flows heavily through his veins. When MF Global went belly up back in the fall, Corzine was finally revealed for the inept, overly connected bureaucrat he really is. Corruption seemingly follows the former Senator, Governor, and banker like shadows on a sunny day. Earlier this week, New Jersey was declared the least corruptible state in the union much to the surprise of, well, everyone. But as the great Jonathan Weil pointed out, the methodology in the study conducted by the Center for Public Integrity was horribly flawed.
Last week we learned two things: that Jamie Dimon specifically telegraphed he is now more powerful than the Fed, and that the US economy is back down to the same March 2009 optical exercises in financial strength gimmickry to stimulate rallies. Recall that on FOMC day, the market barely budged on Bernanke's ambivalent statement and in fact was in danger of backing off as the readthrough was that of no more QE... until JPM announced a major stock buyback and dividend boost. The catalyst: a successful passing of the latest and greatest Stress Test, which according to experts was "much more credible" than all those before it. Wrong. The test was merely yet another complete farce and a total joke. But as expected, the test had its intended effect: financial shares soared across the board, and banks promptly took advantage of investors and robot gullibility to sell equity into transitory strength. Bloomberg's Jonathan Weil explains.
While we have long-argued that the discussion over the use of Apple's cash pile is somewhat circular (lower cash equals higher risk, less ability to withstand any shock, and investor perception growth/value shift) in its 'value' for the company, Bloomberg's always-sharp Jonathan Weil has a slightly different tack on the mega-firm's accounting conventions and why it may not be so cheap. As he points out, analysts (and talking heads) persistently argue that the firm's value is cheap at 14.3x T12M earnings (in line with the S&P) in spite of far higher growth (revenues and earnings). Competitive threats are often cited, future uncertainty of the consumer comes up, and the use of the cash argument we already mentioned but as Weil highlights, it seems that Apple's less than conservative accounting methods (that they lobbied for and heaven forbid Obama would re-consider a tax-the-rich opportunity) with regard to booking the revenues of bundled products more quickly than it used to (which caused, for instance, 2009 revenue to jump 44%). So while there may indeed have been record demand for the i-everythings, record 'blow-out' earnings is as likely a symptom of accounting inflation as unpaid mortgage cash being put to work. It seems the market realizes this and so the next time we are told to 'buy-the-dip as Apple is cheap', remember there is a reason for that 'cheapness' - that, as Jonathan so eloquently points out "not all iEarnings are created equal" as economic and accounting realities diverge once again.
Wonder why all bank earnings over the past 3 years are fake? Wonder why few if any banks ever dare to take major write offs and represent the true nature of their financials? Wonder no longer: Bloomberg's Jonathan Weil explains.
Two months ago Bloomberg's Jonathan Weil brought up the very relevant topic of fair value divergences on bank balance sheets courtesy of SFAS 107 and lax accounting firm standards (some more lax than others). Zero Hedge immediately followed up on this theme and presented a comparative analysis of various bank asset shortfalls, speculating that certain accounting firms are doing their best to do an Arthur Andersen redux for Generation Bailout.
On October 15 we said: "Just what about the economic environment has given Citi auditors KPMG the flawed idea that the bank's loan can be easily offloaded with virtually no discount? And just how much managerial whispering has gone into this particular decision. If one assumes a comparable deterioration for the Citi loan book as for the other big 4 firms, and extrapolates the 2.8% getting worse by the average 1.5% decline, one would end up with a 4.2% Book-to-FV deterioration. On $602 billion of loan at Q2, this implies a major $25 billion haircut. Yet this much more realistic number is completely ignored courtesy of some very flexible interpretation of fair value accounting rules at KPMG. Maybe Citi and its accountants should take a hint from Regions Financial CEO Dowd Ritter who carries the FV of his $90.9 billion loan book value at a 25% discount." Today, finally, after a two month delay, these two articles seem to have finally made the inbox of the financial gurus at the Wall Street Journal, which, in an article named "Accounting for the bank's value gaps," says: "can investors count on consistency when it comes to bank accounting? As many banks struggle with piles of bad loans, it appears some auditors are being stricter than others when assessing their true value." Way to be on top of that ball WSJ/Mike Rapaport. Nonetheless, we are happy that this very critical topic, is finally starting to get the due and proper, if largely delayed and uncredited, attention it deserves.
Jonathan Weil takes on Goldman's doomsday machine.