Archive for June, 2011

DJIA-drops again???

DJIA Closes Below 12,000 — Again. What’s Going On?  Better results come from directly observing market behavior, not reading Fed statements

Stocks extended their losses again this week. On Wednesday, June 22, the Federal Reserve Bank released its latest interest rates policy statement (no change). Afterward the Fed Chairman Ben Bernanke held a press conference, followed by a Q&A period.

The financial media paid lots of attention to what Bernanke said. Our own Steve Hochberg — editor of the Monday-Wednesday-Friday Short Term Update — had this to say about Bernanke’s press conference (excerpt):

Short Term Update for Wednesday, June 22, 2011; 5:15 PM, EDT:

“I think what the Fed is trying to say is that the economic ‘recovery’ has lost its upside momentum, but you didn’t have to wait until today to try and decipher this seemingly impenetrable Fed-speak to realize this fact. … In our May [Elliott Wave Financial Forecast], we published another ‘key economic indicator’ that we’re quite sure the Fed has never looked at: the share price performance of a major help wanted advertiser [Monster] relative to U.S. Q-o-Q GDP.

“Long before today’s Fed’s statement, the market has been signaling that economic conditions are deteriorating rapidly.

You can almost always read it first in The Elliott Wave Theorist or The Elliott Wave Financial Forecast and stay ahead of the trends that you will eventually read in the newspaper, or hear the Fed discuss. There are never absolutes when studying the human condition, only probabilities. But our experience has led us to conclude that observing actual behavior, as gauged minute by minute in the financial markets, is the far better and more successful way to forecast than reading a Fed statement.

“[Bottom Line]: With no follow-through to yesterday’s rally, stocks appear poised to fall further. …”

Categories: Economic Update

Double Dip Recession???

Top White House Economist:
“Double Dip Is Not in the Cards”
June 22, 2011
A slumping stock market, slower job and manufacturing growth, higher gas prices than last year and worries of a debt crisis in Europe — it’s enough to get the bears roaring and raise fears of another recession.
Last week’s WSJ/NBC Poll showed more than 40% of Americans fear the country is headed for a double dip recession.
In an interview with The Daily Ticker’s Aaron Task, outgoing director of the National Economic Council Austan Goolsbee admits the U.S. is “dealing with stiff headwinds,” but “a double dip is not in the cards.”
His predecessor as President Obama’s top economic adviser, Larry Summers, isn’t as confident. In an op-ed published in The Washington Post and Financial Times, Summers argued that the United States is at risk of falling into a “lost decade” of prolonged weak economic growth and high unemployment unless more stimulus is injected into the economy.
“We averted Depression in 2008/2009 by acting decisively. Now we can avert a lost decade by recognizing economic reality,” he wrote.
Goolsbee didn’t address the need for more stimulus in the interview. Instead, he focused on the progress the Obama administration has made during its time in the White House. “We’ve come a long way from where we were two years ago,” he says. We’ve gone from “losing 750,000 jobs per month to gaining 1 million in the last six months.”
Some would say the White House hasn’t done enough, but Goolsbee’s strategy — to stay positive — seems to be working. In that same WSJ/NBC poll, a majority of Americans said they don’t blame Obama for the current economic troubles.
Until next time:
James B. Driscoll

Categories: Economic Update

Driving for a Debt-Ceiling Deal: 6/22/11

Good Vibes Follow Obama-Boehner Golf Outing

Despite tough rhetoric by Republicans in recent months over their unwillingness to raise the country’s $14.3 trillion debt ceiling without drastic budget cuts, it looks like a deal may finally be in the making.
Not only did President Barack Obama and House Speaker John Boehner come together to discuss the matter over 18-holes and a couple of cold ones on Saturday, but House Majority Leader Eric Cantor (R-Va.) and Senate Minority Leader Mitch McConnell (R-Ky.) outright signaled that hope may be on the horizon for averting a U.S. default: an event many have said would be “catastrophic” for the U.S. economy.

“The discussions were very substantive and we’re all getting an idea of what the outline can be for some deal on the debt limit,” Cantor, one of the top GOP negotiators in the debt limit deal, told Barron’s after attending one of Vice President Joe Biden’s rigorous three-hour deal-making sessions last week. “I think it will happen….We want to show the people who sent us here that things have changed.”
Right now it seems that any deal to raise the debt ceiling rests upon an equivalent amount in spending cuts, basically: cut spending by $2 to $4 trillion and raise the country’s line of credit accordingly.
But as efforts to reign in the U.S. budget continue, so does the Republican’s refusal to agree to any tax hikes. “Tax hikes have been a red line in these meetings for me,” said Cantor in the same interview with Barron’s. “Everything is on the table, except for an increase in taxes.”

Meanwhile, even if a final deal cannot be reached by the August 2 deadline, Sen. Mitch McConnell (R-Ky.) said over the weekend that Congress would likely be able to find enough common ground to pass a measure to increase the debt ceiling for at least a few months. That way Congress could take the issue up again in the fall; or kick the can down the road yet again, as Aaron and Henry discuss above.

But, even with this ray of hope that Congress can avoid economic “Armageddon” by raising the debt ceiling in time, the country has got much bigger long-term problems and only one solution to date:

Rep. Paul Ryan’s “Path to Prosperity”.

Until next time.


Categories: Economic Update

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Categories: Economic Update

Shiller: Housing Could Fall Another 25% But Is Harder to Predict Than the Weather

Wed, Jun 15, 2011 7:21 AM EDT

The housing bubble of the early 2000s was “unprecedented” and the “biggest in U.S. history,” according to Yale professor Robert Shiller.

As a result, he says “it’s very hard to forecast” where housing goes from here, now that it has officially fallen into double-dip territory, based on the S&P Case-Shiller Index.
Housing “might fall [another] 10-25% in the next few years,” but forecasting housing today is harder than predicting the weather, Shiller says. “I don’t see how anyone can quantify a forecast because it’s such an unusual event.”

In his latest books, The Subprime Solution and Reforming U.S. Financial Markets, Shiller argues the path to recovery is paved with financial innovation; 11 million homeowners under water is proof “they weren’t protected and need a way to hedge their housing risk.”
But “the economy is sick right now [and] I don’t have any miracle cure,” he admits.
Best known for his earlier works, Animal Spirits and Irrational Exuberance, Shiller is arguably the world’s foremost authority on financial bubbles. So if he can’t predict with any certainty where housing is going, what hope is there for the rest of the punditry?
The American Dream: Myth vs. Reality
One reason Shiller is so renowned is his extensive work on the long-term history of financial markets. Typically, markets fall below their long-term average after bubbles burst, one reason why the bears see much more pain ahead for housing even if prices are now back to 2003 levels. But stocks didn’t ‘revert to the mean’ after the bursting of the 1990’s bubble and Shiller says there’s no “hard and fast rule.”

Speaking of rules, many Americans were raised to believe that housing was always the best investment. But on an inflation-adjusted basis, U.S. home prices were flat from 1890 to 1990, according to Shiller, meaning the whole concept of housing wealth was “a bill of goods.”
But the idea of the “American Dream” does have merit. “Home ownership pays a dividend in self respect,” he says. Indeed, the idea of owning your own home has personal and societal benefits; the problem was the widespread misconception that housing was the path to wealth and financial freedom. Until next time.

James B. Driscoll

Stocks Rally But “Be Careful Here,” Todd

Stocks Rally But “Be Careful Here,” Todd Harrison Says: “This Is the Best Chance for the Bears”
Jun 10, 2011 7:59 AM EDT
Stocks rallied Thursday, ending a 6-day losing streak, but finished well off the session highs, another sign of the negative tone that’s been in place since early May.
“When you look at what’s going on underneath the headlines, you’re seeing lower highs across the indices: the market is telling you to be careful here,” says Todd Harrison, CEO of “You’re seeing the leadership — the former generals [like] JPMorgan, Google, even Apple…Goldman Sachs of course — these stocks all act like death. Without generals the troops tend to get lost sometimes.”
Like most traders, Harrison views the recent break of the S&P’s April low of 1294.70 as technically significant and is now eyeing the March lows of 1249 being the next important level of support with 1300 now upside resistance. (See: Stocks in Retreat: Pause to Refresh or End of the Rally?)
“The easy trade” is that the market will test those March lows, which also coincide with the S&P’s 200-day moving average, he says, suggesting there’s “room” for a decline to S&P 1150 if the financials continue to falter. “This is the best chance for the bears this year to make a dent.”
To be clear, Harrison isn’t betting aggressively on a market swoon and expects the bulls to make a stand near S&P 1250. He’s also clearly aware of the bull case, which is predicated mainly on the strength of corporate balance sheets and continued strength in the corporate credit market. “As a trader you try to look at the path we take vs. the destination we arrive at,” he says. “That’s why a stair-step right now is 1250-1300, you can set your stops on either side and [employ] discipline over conviction.”
Speaking of conviction, faithful viewers will recall Harrison put his long-term holdings in 100% cash back in 2008, before the market crashed. (See: 100 Percent Cash: Is Todd Harrison Raving Mad, or Just Foxy?)
As you’ll see in the accompanying video, he’s still 100% cash in his long-term portfolio. Despite the market’s big rally off the 2009 lows and the dollar’s steep decline, he’s still focused on capital preservation vs. appreciation in his long-term account.

Categories: Economic Update

Are US Banks Safe=FDIC insured???

Risks in Banking
Excerpted from Bob Prechter’s Conquer the Crash n the United States closed their doors. President Roosevelt shut down all banks for a short time after his inauguration. In December 2001, the government of Argentina froze virtually all bank deposits, barring customers from withdrawing the money they thought they had. Sometimes such restrictions happen naturally, when banks fail; sometimes they are imposed. Sometimes the restrictions are temporary; sometimes they remain for a long time.

Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money. If a large portion of those loans is tied up or becomes worthless, your money claim is compromised. A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.

Because U.S. banks are no longer required to hold any of their deposits in reserve (see Chapter 10), many banks keep on hand just the bare minimum amount of cash needed for everyday transactions. Others keep a bit more. According to the latest Fed figures, the net loan-to-deposit ratio at U.S. commercial banks is 90 percent. This figure omits loans considered “securities” such as corporate, municipal and mortgage-backed bonds, which from my point of view are just as dangerous as everyday bank loans. The true loan-to-deposit ratio, then, is 125 percent and rising. Banks are not just lent to the hilt; they’re past it. Some bank loans, at least in the current benign environment, could be liquidated quickly, but in a fearful market, liquidity even on these so-called “securities” will dry up. If just a few more depositors than normal were to withdraw money, banks would have to sell some of these assets, depressing prices and depleting the value of the securities remaining in their portfolios. If enough depositors were to attempt simultaneous withdrawals, banks would have to refuse. Banks with the lowest liquidity ratios will be particularly susceptible to runs in a depression. They may not be technically broke, but you still couldn’t get your money, at least until the banks’ loans were paid off.

You would think that banks would learn to behave differently with centuries of history to guide them, but for the most part, they don’t. The pressure to show good earnings to stockholders and to offer competitive interest rates to depositors induces them to make risky loans. The Federal Reserve’s monopoly powers have allowed U.S. banks to lend aggressively, so far without repercussion. For bankers to educate depositors about safety would be to disturb their main source of profits. The U.S. government’s Federal Deposit Insurance Corporation guarantees to refund depositors’ losses up to $100,000, which seems to make safety a moot point. Actually, this guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise. This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs. If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. The FDIC calls its sticker “a symbol of confidence,” and that’s exactly what it is.

Some states in the U.S., in a fit of deadly “compassion,” have made it illegal for a bank to seize the home of someone who has declared bankruptcy. In such situations, the bank and its depositors are on the hook indefinitely for a borrower’s unthrift. Other states have made it illegal for a bank attempting to recover the value of a loan to seize any of a defaulting mortgage holder’s assets other than the mortgaged property. In such situations, the bank assumes the price risk in the real estate market. These states’ banks are vulnerable to severe losses in their mortgage portfolios and are at far greater risk of failure.

Many major national and international banks around the world have huge portfolios of “emerging market” debt, mortgage debt, consumer debt and weak corporate debt. I cannot understand how a bank trusted with the custody of your money could ever even think of buying bonds issued by Russia or Argentina or any other unstable or spendthrift government. As At the Crest of the Tidal Wave put it in 1995, “Today’s emerging markets will soon be submerging markets.” That metamorphosis began two years later. The fact that banks and other investment companies can repeatedly ride such “investments” all the way down to write-offs is outrageous.

Many banks today also have a shockingly large exposure to leveraged derivatives such as futures, options and even more exotic instruments. The underlying value of assets represented by such financial derivatives at quite a few big banks is greater than the total value of all their deposits. The estimated representative value of all derivatives in the world today is $90 trillion, over half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he’s wrong.

Relying upon, or worse, speculating in, leveraged derivatives poses one of the greatest risks to banks that have succumbed to the lure. Leverage almost always causes massive losses eventually because of the psychological stress that owning them induces. You have already read of the tremendous debacles at Barings Bank, Long-Term [sic] Capital Management, Enron and other institutions due to speculating in leveraged derivatives. It is traditional to discount the representative value of derivatives because traders will presumably get out of losing positions well before they cost as much as what they represent. Well, maybe. It is at least as common a human reaction for speculators to double their bets when the market goes against a big position. At least, that’s what bankers might do with your money.

Today’s bank analysts assure us, as a headline from The Atlanta Journal-Constitution put it on December 29, 2001, that “Banks [Are] Well-Capitalized.” Banks today are indeed generally considered well capitalized compared to their situation in the 1980s. Unfortunately, that condition is mostly thanks to the great asset mania of the 1990s, which, as explained in Book One, is probably over. Much of the record amount of credit that banks have extended, such as that lent for productive enterprise or directly to strong governments, is relatively safe. Much of what has been lent to weak governments, real estate developers, government-sponsored enterprises, stock market speculators, venture capitalists, consumers (via credit cards and consumer-debt “investment” packages), and so on, is not. One expert advises, “The larger, more diversified banks at this point are the safer place to be.” That assertion will surely be severely tested in the coming depression.

There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks’ debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients’ potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.

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Financial companies are enjoying big advances in the current stock market rally. Depositors today trust their banks more than they trust government or business in general. For example, a recent poll asked web surfers which among a list of seven types of institutions they would most trust to operate a secure identity service. Banks got nearly 50 percent of the vote. General bank trustworthiness is yet another faith that will be shattered in a depression.

Well before a worldwide depression dominates our daily lives, you will need to deposit your capital into safe institutions. I suggest using two or more to spread the risk even further. They must be far better than the ones that today are too optimistically deemed “liquid” and “safe” by both rating services and banking officials.

Safe Banking in the United States
Excerpted from Bob Prechter’s Conquer the Crash

If you must bank in the U.S., or if you prefer it, choose the best bank(s) available. I believe that even in a deflationary crash, many of the safest U.S. banks have a good shot at survival and even prosperity. The reason is that relatively safe banks, if they have the sense to inform the public of their safety advantage, are likely to become even safer during difficult times. Why? Because depositors in a developing financial crisis will move funds out of the weakest banks into the strongest ones, making the weak ones weaker and the strong ones stronger. One of the great ironies of banking is that the more liquid a bank, the less likely it is that depositors will conduct a run on it in the first place.

The Ratings, Inc., formerly Weiss Ratings, Inc., provides one of the most reliable bank-rating services in America. (See Chapter 18 of the last section of this book for contact information.) CEO Martin Weiss has graciously consented to provide a practical guide for this book. Table 19-1 lists what his researchers consider the two strongest banks in each state in the union. … For our purposes, I see little point in listing the weakest banks, but if you want to know which ones they are, you can find them listed in the brand-new Ultimate Safe Money Guide, by Martin Weiss (John Wiley & Sons, 2002). Weiss’ book is a good complement to this one for many reasons. Aside from banks and insurance companies (see Chapter 24), his firm also rates mutual funds, brokerage firms, HMOs and corporations with common stock.


Categories: Economic Update