Fin/Inv

A peculiar escalation developing in Chicago (what is it about that city) was today's development in the Citadel - Teza Technologies lawsuit.  As a reminder, Teza is the firm run by former Citadel head of HFT and quantitative trading, Misha Malyshev, who got unmasked when it was made clear that he had recruited Sergey Aleynikov from Goldman, and was preparing to launch a quant trading group despite his non-compete with Citadel (which may very well be the reason for the entire Aleynikov fiasco after all). What was surprising in today's hearing was the proclamation by Citadel lawyers that Teza is a "veritable pirate ship of illegal activity."

Whoa, big words there. And probably not half wrong (which i guess means half right, thus preventing someone from suing us for agreeing or disagreeing with what was said). Big enough, that apprently none other than head honcho Ken Griffin was among those present for today's hearing. And likely big enough, because if anyone should know it is Citadel: after all Malyshev made $1 billion for Citadel last year when the firm was down almost 55% (oh yeah, and all those amazing profits Citadel has had so far? Well, they kinda need 100%+ returns just to get above the high water mark... oops), and was the sole profitable group. Which should also answer some of those question regarding the profitability of High Frequency Trading groups.

Also, another reason why the case has gotten such prominence - the enforcability of non-compete lockups. From Crain's:

The case has also garnered attention because of the small window it has opened on the secretive, lucrative and fast-growing world of high-frequency trading.

Citadel's lawyers claim that Teza is a competitive enterprise that has been recruiting talent, building databases of historical and real-time market, constructing a super-fast trading engine and developing trading signals and strategies in an effort to be able to engage in high-frequency, low-latency trading.

Such trading, theoretically, would allow it to predict the price of a financial instrument one second in the future and profit from that.

Yet Zero Hedge's focus is mostly drawn on the wonderfully visual illegal activity pirate ship. Just what is it about this pirate ship that the firm's lawyers know? After all, Malyshev, together with Simons, are two of the foremost brains in the field of HFT, which for a while has been getting some peripheral blogger and lately mainstream, attention. Is there something rather big brewing in the quantitative arbitrage and ultra-low latency marketplace? Zero Hedge is procuring the transcripts from the recent depositions by Mr. Aleynikos and Malyshev and will provide these, together with out commentary, to our readers shortly.

h/t Jim Bianco

by Bruce Webb

Davis Obey asks some hard questions that should have been asked long ago. My eye was caught by question one which prompts the title of my post. Why insist that Health Care be budget neutral and come in below some arbitrary target? Why did we even allow these wars to be funded with Supplementals and never received a ten year score? Why not Score the War?

Chief House Appropriator Urges Obama to Change Course On Afghanistan

“There are some fundamental questions that I would ask of those who are suggesting that we follow a long term counterinsurgency strategy:

1. As an Appropriator I must ask, what will that policy cost and how will we pay for it? We are now in the middle of a fundamental debate over reforming our healthcare system. The President has indicated that it must cost less than $900 billion over ten years and be fully paid for. The Congressional Budget Office has had four committees twisting themselves into knots in order to fit healthcare reform into that limit. CBO is earnestly measuring the cost of each competing healthcare plan. Shouldn’t it be asked to do the same thing with respect to Afghanistan? If we add 40,000 troops and recognize the need for a sustained 10 year or longer commitment, as the architects of this plan tell us we do, the military costs alone would be over $800 billion. And unlike the demands that are being made of the healthcare alternatives that they be deficit neutral, we’ve heard no such demand with respect to Afghanistan. I would ask how much will this entire effort cost, when you add in civilian costs and costs in Pakistan? And how would that impact the budget?

2. Do we really believe that there is an international consensus for such a long-term endeavor, or will we in fact, with the exception of some tokenism, be going it alone? Are we really prepared to “go it alone”?

3. What policy is in fact achievable? We should be asking not what policy is theoretically the most intellectually coherent, but which policy is actually achievable given the only tools we have in the region; the Afghani and Pakistani governments. Is there sufficient leadership, popular support, and political will, not in the United States but in Afghanistan, necessary for effective governance to take hold?

4. What makes us think that a much more aggressive and expansive role for U.S. troops will not harden elements of the Taliban and make them a more potent force, forcing them to stand up to the “occupier”?

5. Does it all add up? The so-called COIN, or counterinsurgency strategy, calls for a certain number of troops and police based on a country’s population. In Afghanistan that equates to 600,000 people in uniform. But the Afghani government has never maintained more than 200,000 before. Can they really sustain a three-fold increase?

6. Do we really have the tools to overcome language, culture, history and a 90% illiteracy rate to sufficiently transform such a country?

There are many things we could do to "provide for the common defense" and more that we could do to "promote the general welfare", and maybe this one is so vital that we have to do it come what may. But if the Generals tell us this is going to be a ten year war why not be adults and have an open discussion of what that means in dollars?

Note to Barack “Dithers” Obama:

Make up your damn mind already and bring the troops home from Trashcanistan. Start with any National Guard units that may be there; they might be needed for Operation Enforce Global Economy right here in the USA.

What is Operation Enforce Global Economy, you ask? The pillars of the global economy are our foolish free-trade agreements with low-wage nations which encourage American companies to move plants and jobs out of the country. Everything is going according to plan: millions of Americans have been, and continue to be, thrown out of work, while everybody raves over the fabulous economic growth of the developing nations. Of course they are doing well! We are giving them our economy!

But the question is: how much longer will Americans go along with this foolish policy? The citizens of Detroit are not an exception. The plants they used to work in are now located in Mexico and Asia. Cobo was not an anomaly. That scene could be repeated in any American city.

Just be glad nobody has figured out how they have been betrayed yet. You should immediately begin figuring out how to roll back our trade policy to pre-NAFTA standards. With a sufficient tariff level, factories would pour back into the USA sparking a huge economic revival. One thousand factories would come back from Mexico alone, and maybe five times as many from Asia.

Imagine that: thousands of new factories being built. Millions of Americans going back to work.

What a beautiful thing that would be. All those desperate people in Detroit and other cities with new jobs; happy and prosperous with a newly-revived American Dream. They would have to carve you into Mount Rushmore.

In the mean time, do not hold any more events like Cobo. It is definitely not a good idea to encourage the unemployed masses to congregate. Set up a website where they can fill out the forms online; at least until the troops are home.

From California State Controller John Chiang: Controller Releases September 2009 Cash Report

State Controller John Chiang today released his monthly report covering California’s cash balance, receipts and disbursements in September. For the first three months of the fiscal year, total General Fund revenue was nearly $1.1 billion below the recently amended 2009-10 Budget Act estimates.

“Revenues more than $1 billion under estimates and recent adverse court rulings are dealing a major blow to a budget that is barely 10-weeks old,” said Controller Chiang. “While there are encouraging signs that California’s economy is preparing for a comeback, the recession continues to drag State revenues down. I urge lawmakers and the Governor to prepare for more difficult decisions ahead.”
emphasis added

Here are the September 2009 financial statement and summary analysis.

Just add this to the pile of state budgets falling short ...

From Bloomberg: New York Income Tax Revenue Falls 36% in Year, Paterson Says

From Reuters: Massachusetts government to announce emergency budget cuts

Immer öfter werden Entscheidungen gefällt, die nicht von dieser Welt sind und dem zu Folge, wie aus einem Paralleluniversum erscheinen. So die Entscheidung des Nobelkomitees aus Oslo US-Präsident Barack Obama den Friedensnobelpreis zu verleihen. Es ist nicht so, dass die Querschüsse die wohlfeilen Reden und Absichtserklärungen des Präsidenten nicht wahrnehmen und inhaltlich begrüßen, aber die Grundlage der Beurteilung Obamas sollte immer die Faktenlage sein und diese steht seinen verbalen Äußerungen diametral gegenüber!

Stichworte für die Beschreibung der Realität sollten das nicht mit einem Rechtstaat vereinbare Gefangenenlager in Guantanamo Bay auf Kuba sein, der sinnlose Krieg in Afghanistan und der fragwürdige Krieg im Irak, dessen moraliche Legitimation spätestens in Abu-Ghuraib auf der Strecke blieb. Obama hat diese imperialen Fehlleistungen nicht im Ansatz korrigiert, sondern bis jetzt den herrschenden Status Quo gesichert.

Noch schlimmer - unter Obama haben sich mit der abenteuerlichen Steigerung der Staatsverschuldung zur Bekämpfung der Finanz- und Wirtschaftskrise auch die Militärausgaben auf ein unverantwortliches Niveau gesteigert. Ein Friedensnobelpreisträger unter dessen Verantwortung zwei Quartale in Folge die Millitärausgaben neue Hochs erklommen!

> Im 2. Quartal 2009 stiegen die Ausgaben für den US-Verteidigungshaushalt auf ein Allzeithoch mit auf das Jahr hochgerechneten 776,2 Mrd. Dollar! <

Bereits im Jahr 2008 gingen 48% der weltweiten Rüstungsausgaben auf das Konto der USA. Die reale militärische Bedrohungslage für die USA ist ein aufgeblasener Popanz. Die Militärausgaben der USA betrugen 2008 das 5,8-fache Chinas, das 10,2-fache Russlands und gar das 98,6-fache der "Schurken" aus dem Iran. Dank intensivster Anstrengungen sogar das 55-fache der Gesamtausgaben aller sechs Schurkenstaaten zusammen, wie Cuba, Iran, Lybien, Nord Korea, Sudan und Syrien, die zusammen mit "bedrohlichen" 13 Milliarden Dollar gegen die US Aufrüstung gegenhielten.

In Wirklichkeit handelt sich bei den US-Verteidigungsausgaben nur um eine gigantische Fehlleitung von Kapital (Steuergelder) zum militärisch-industriellen Komplex!

> Steigende Rüstungsausgaben angesichts einer Finanz- und Wirtschaftkrise, die sich auch in dramatisch einbrechenden Steuereinnahmen des Staates äußern. Im 2. Quartal standen auf das Jahr hochgerechnete 2,2114 Billionen Dollar Steuereinnahmen 776,2 Mrd. Dollar Rüstungsausgaben gegenüber. Unglaubliche 35,1% der Steuereinnahmen fließen theoretisch (Neuverschuldung) in den Rüstungsetat - kein wirkliches Kennzeichen für einen Friedensengel. <

Durch eine weitere starke Fehlallokation zur Stabilisierung des US-Bankensystems explodieren zusätzlich die Staatsschulden (Federal Budget):

> Im am 30.09.2009 abgelaufenen Fiskaljahr 2008/2009 betrug das Defizit aus Einnahmen (2,106 Bio. Dollar) und Ausgaben (3,515 Bio. Dollar) 1,409 Billionen Dollar bzw. 9,9% des nominalen Bruttoinlandsprodukts (BIP) der USA. <

Noch schlimmer - die gesamten Staatschulden inkl. die der einzelnen Bundesstaaten betrug am 30.09.2009 gewaltige 11,9098 Billionen Dollar! Ein Anstieg von +1,8851 Billionen Dollar bzw. auf 13,4% des nom. BIPs:

> Die exponentielle Entwicklung der Staatsverschuldung auf Fiskaljahrbasis! <

Die Ausrichtung der US-Finanz- und Wirtschaftspolitik kommt de facto einem unerklärten ökonomischen Krieg gegen die unterprivilegierten Schichten der eigenen Bevölkerung gleich. Seit Januar 2008 kumuliert sich der Stellenabbau in der US-Wirtschaft auf gewaltige -7,205 Millionen verlorene Jobs! Die Arbeitslosenquote U-3 ist mit 9,8% auf dem höchsten Stand seit 26 Jahren! Die breiter gefasste Arbeitslosenquote U-6 mit gewaltigen 17% auf dem höchsten Stand seit Beginn der Datenerfassung im Januar 1994!

Die Löhne und Gehälter in der privaten US-Wirtschaft sind zuletzt im August 2009 um -7,1% zum Vorjahresmonat gefallen! 35,8 Millionen US-Bürger bezogen im Juli 2009 Lebensmittelmarken in Höhe von 133,31 Dollar im Monat, ein brutaler Anstieg von +6,791 Millionen Bedürftigen zum Vorjahresmonat! Die Anzahl der US-Bürger ohne Krankenversicherung liegt bei unglaublichen 46,3 Millionen bzw. bei einer Rate von 15,4%! Ein besonderer Skandal, darunter sind auch 7,3 Millionen Kinder ohne Krankenversicherung! Nach den offiziellen Daten des U.S. Census Bureau liegt die Armutsrate bei 13,2% bzw. 39,8 Millionen US-Bürgern! Nach Abzug der Inflation sind die Haushaltseinkommen der untersten 20% der Bevölkerung seit dem Jahr 1968 nur um skandalöse +1'861 Dollar auf ein durchschnittliches Jahreseinkommen in 2008 von nur 11'656 Dollar gestiegen! In den ersten 8 Monaten des Jahres 2009 wurden 2,6256 Millionen Anträge auf Zwangsversteigerungen gestellt!

Nun, die Realität ist finster und die Erwartungen sind wohl zu rosig, als dass sie Präsident Obama erfüllen wird!

Quelle Daten: Fed stlouisfed.org, Globalissues.org, PDF CBO.gov

Querschuesse-Forum

Kontakt: info.querschuss@yahoo.de

The long awaited return of Friday Night Jazz!

Last year, we took an eclectic look at some of the lesser known works of Miles Davis.

Tonight, I want to go in the opposite direction, and simply focus on one disc: Kind of Blue.

Why? Well, it is the 50th anniversary of the recording of Kind of Blue.

If that is not reason enough, then consider the simple fact that it is Davis’ best-selling album. Indeed, it may very well be the best known jazz record of any artist, of all time.

Even though it was released almost 50 years ago, it still sells over 5,000 copies per week today.

In addition to its commercial success, it has come to be described by many Jazz critics as the greatest jazz album of all time.

Writing in AllMusic, Stephen Thomas Erlewine noted:

“Kind of Blue isn’t merely an artistic highlight for Miles Davis, it’s an album that towers above its peers, a record generally considered as the definitive jazz album, a universally acknowledged standard of excellence. Why does Kind of Blue posses such a mystique? Perhaps because this music never flaunts its genius. It lures listeners in with the slow, luxurious bassline and gentle piano chords of “So What.” From that moment on, the record never really changes pace — each tune has a similar relaxed feel, as the music flows easily. Yet Kind of Blue is more than easy listening. It’s the pinnacle of modal jazz — tonality and solos build from the overall key, not chord changes, giving the music a subtly shifting quality.”

And Charles Gans of the Associated Press takes a look behind Davis’ masterpiece:

Today, the five tunes on “Kind of Blue” — particularly “So What” and “All Blues” — have become deeply embedded in the musical landscape. But at the March 2 and April 22, 1959, recording sessions, nearly all the tunes were new to the band members, who didn’t even have a chance to rehearse them. Davis gave the musicians written sketches of the scales and melodies, offering brief verbal instructions about the feeling he wanted on a particular tune.

Davis was moving away from bebop with its complex harmonies and improvisations structured around chord changes. The trumpeter asked his musicians to play in a modal style — a concept developed by pianist-composer George Russell — in which the musicians improvised on scales, with the soloists having more freedom to explore long melodic lines.”

The one jazz record to own even if you don’t listen to jazz — the band is extraordinary: John Coltrane, Julian “Cannonball” Adderley on saxophones, Wynton Kelly and Bill Evans on piano, Paul Chambers on bass, and Jimmy Cobb on drums. I recently received a remastered CD of kind the album, thus retiring my scratchy hiss and pop laden vinyl version. (And another intelligent CD pricing: $6.99 at Amazon)

For those of you looking for some , check out NPR: Kind of Blue (54 minutes)

videos after the jump . . .

Blue in Green

So What

Sources:
Miles Davis Official Site
http://www.milesdavis.com

Miles Davis: ‘Kind of Blue’
NPR
http://www.npr.org/templates/story/story.php?storyId=10862796

Kind of Blue
Wikipedia
http://en.wikipedia.org/wiki/Kind_of_Blue

All Music Review: Kind of Blue
All Music
http://www.allmusic.com/cg/amg.dll?p=amg&sql=10:hx68mpnd9f8o~T1

Thanks to an alert reader for passing along this note from Market Delta regarding changes in how the CME is reporting volume data. By unbundling trades and reporting multiple, smaller transactions where only one large trade was formerly reported, the exchange has made it more difficult to track the activity of large traders.

I'll be looking into this in the near future. Depending upon the unbundling scheme, it may be possible to still monitor large traders simply by lowering the threshhold for what qualifies as a large trade. If the trades are unbundled into one and two lots, of course, this would be impossible. In that event, it would be necessary to aggregate the trade data over short time periods to infer the presence and activity of large participants.

More to come.
.

While we wait for the FDIC, from Rolfe Winkler at Reuters: TARP deadbeats

Thirty-three TARP recipients missed a scheduled dividend payment to taxpayers last month, according to the Treasury Department, including 18 banks that missed a payment for the first time.
...
The 33 banks that missed dividend payments in August have received $4.5 billion of TARP money. The biggest is CIT. Previously it paid $44 million of dividends, but with a bankruptcy filing looking likely, Treasury’s $2.3 billion investment seems headed toward zero.

Market update:

The second graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

Blonde, Bold, Brainy, British and Beautiful: Whats not to love about her?

Lara Logan, Chief Foreign Affairs Correspondent for CBS News

If video does no load, click here

CBS Official Bio
http://www.cbsnews.com/stories/2002/12/02/60II/main531421.shtml

“We’re doing extremely badly”
Tonight Show with Jay Leno, broadcast on October 15, 2007

• Lowest volume day of the year? Check
• Pattern matching and heatmapping? Check
• Time to ramp market to YTD highs? Check
• Does anyone care or trade anymore with Mr. Simons soon to be derelict cores? Not so much...

And here is what 3 computers chasing every.single. offer. into the close looks like. Cause you know today is the last day to buy stocks.

When the HMMWV emerged out of the Gulf War, it struck a chord with America’s fascination with size and power.  Pretty soon, everyone (yes, even Arnold and Sly) had to have one.  Big?  Yes.  Ridiculous?  Yeah.  But when gas was $1.35 a gallon, it made sense.  And it sold well.  Very well.  Until gas was no longer $1.35 a gallon.  Let alone $2.50 a gallon.     

 

Chinese heavy equipment maker Tengzhong Heavy Industrial Machinery Corp. signed the much hoped-for deal today.  Tengzhong will get an 80% stake in Hummer, while a Hong Kong investor Suolang Duoji, will get the remaining 20%.  Both investors will get the brand, and the nationwide dealership network, which at one time, aside from Cadillac, was the only GM franchise worth a damn.

 

Official sale numbers have not yet been disclosed, but it’s whispered to have brought GM $150,000,000.  During GM’s bankruptcy filings this summer, GM had hoped Hummer could bring over $500,000,000. 

 

The current Hummer management team will remain, or until they quit, like a number of GM and Chrysler brand CEOs just have…  The headquarters will remain in the Michigan vicinity. 

 

James Taylor, the division’s CEO was quoted as saying "We are fortunate to have a partner who understands and recognizes the importance of continuing investment in Hummer's heritage as a U.S.-based and branded company with a view toward capitalizing on global opportunities…” What global opportunities that wait, I’m sure the automotive press will have a field day with.

 

Hummer’s smallest model, the H3, gets a combined city/highway EPA of around 16 miles per gallon.  China, perhaps the world’s largest expanding automotive market since America 60 years ago, I doubt has any need or use for an SUV that gets such horrid mileage, but the Chinese, who love Buicks of all American cars best, hope to change all this.

 

Now backed by a solvent parent, Hummer will focus on fuel efficiency, alternative fuels, and fitting in on a global scale. 

 

The Shreveport Louisiana plant will continue to build Hummers on a contract basis till June 2012.  A plant once employing some 3,000 workers but has been reduced to just over 700. 

 

The original company that spawned the Hummer, AM General, has nothing to do with the Hummer brand sale. 

 

It will be interesting to see in time, who's getting a good deal and who's just getting blown...  Or a Hummer, if you will... 

From Constance Ash's discussion of Capitalism: A Love Story:

There are some scenes that that must have been shot around the period when enraged screwed-over people gathered at the New York Stock Exchange yelling, "Jump! Jump! Jump!" Moore has said in an interview, that while at the NYSE the NY cops came up to him and the crew. He told them "Hey guys, we’re just here to film a little comedy and we won’t be long," thinking they were going to run him and crew off. The cops responded, "Mike, these bastards took a billion and a half dollars out of our police retirement fund so you just take your time." [emphasis mine]

The real damage is known, and yet to come. Can we start us the term "jobless, pensionless recovery," or do we have to wait until Justin Fox realizes it?

Another he said/she said, this time via the Economist

• Please do feed the bears:
The financial world needs its pessimists

• The end is nigh (again) Pessimistic commentators remain anything but convinced by the stockmarket rally

The declining dollar will, I'm sure, be used as yet another justification for bizarrely premature Fed hawkishness.

The story first presented on Zero Hedge yesterday as "The Fed's 30's Minute Agency Monetization Window" is now mainstream, after making headline news on Bloomberg.

Oct. 9 (Bloomberg) -- The Federal Reserve bought $170 million of two-year notes sold yesterday by Fannie Mae, the quickest purchase after issuance of benchmark bonds from the company or similar institutions since the central bank began acquiring so-called agency debt.

The purchase was part of $2.6 billion of buying today, the New York Fed said on its Web site. The central bank listed the notes among ones it would accept bids for yesterday, about 90 minutes after Washington-based Fannie Mae announced the results of its $5 billion sale in a statement.

The Fed last month said it would begin buying “on-the- run” agency debt, or the most recently issued notes in different maturities. It has purchased $136.3 billion of Fannie Mae, Freddie Mac or Federal Home Loan Bank bonds since December, according to data complied by Bloomberg.

The $200 billion program was extended to March 31, from yearend, by the central bank last month. David Giradin, a spokesman for the New York Fed, didn’t immediately return a telephone message seeking additional comment.

We hope that as Bloomberg and other MSM conduits disseminate this and other relevant stories, that more and more people become familiar with the behind the scenes machinations that the Fed is doing, all in its single-minded pursuit of gobbling ever greater amounts of the securities it prints, all with the hidden agenda of destroying any residual value the US currency may have as any confidence that the dollar may be worth anything is promptly refuted by the most recent wave of dollar bills printed by the Chairman.

PS. It appears our observations riled up another bond expert, Accrued Interest (correction - not Accross the Curve, although John Jensen was pretty peeved when we discussed Fed Monetization on August 6, in his post: Monetizing the Debt - Disinformation in the Blogosphere) who claims that this is, as usual, nothing out of the ordinary, and also claims that he does not read Zero Hedge yet devotes numerous paragraphs to refuting just that. For his commentary see here: http://accruedint.blogspot.com/2009/10/ben-bernanke-only-you-could-be-so-bold.html

And for another commentary on the matter, here is Karl Denninger from earlier today.

h/t Mark Pittman and Jim Bianco

 

It has been awhile since we last looked at the technicals on the 10 year Treasury yield. However, today's 4% plus pop in the yield has my attention.

With the persistent weakness in the US$, a 4% rally this week in the CRB index, much better than expected job’s data from Australia and Canada, a rate hike from the RBA, and a weak 30 yr US bond auction, inflation expectations in the 5 year TIPS has risen 11 bps on the week to 1.5%, a 3 1/2 week high after a 5 bps move up today. Inflation expectations in the 10 yr TIPS is up by 7 bps today and 15 bps on the week to 1.85%, the most also in 3 1/2 weeks. Based on past commentary, the Fed has been more inclined to look at these market expectations in gauging inflation sentiment rather than other market indicators such as gold and thus the US$. The TIPS are still far from a level that would worry the Fed and they will certainly be more reactive than proactive in dealing with it if it rises much further.

The crowd is often right except at market turns. After the turn, the crowd tends to hold on until most previous gains vanish. In a secular bull market, such optimism works out acceptably well. In a secular bear market, rampant optimism is severely punished.

David Rosenberg is discussing the overly-optimistic consensus in a Special Report: A “V”-Shaped Recovery.

One Overvalued Market

There has been plenty of debate over whether equities are overvalued or not, and certainly we would assume that many investors know where we stand on the topic.

On an operating (“scrubbed”) basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x.

While we will not belabour the point, when all the write-downs are included, the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble.



PE Expansion



It is interesting to hear market bulls talk about how distorted it is to be using trailing multiples that include ‘recession earnings’ (even though using ‘forward’ earnings means relying on consensus forecasts on the future and these are rarely, if ever, correct). It is also interesting that the last time the multiple was this high was back in March 2002, again after a huge countertrend rally that deployed ‘recession earnings’ from the 2001 downturn. If memory serves us correctly, this was right around the time that the bear market rally started to roll over and in fact, six months later, the S&P 500 was hitting new lows and 34% lower than it was when the multiple had expanded to … today’s level!

Even On A Forward Basis, The Market Is Overvalued

Bullish analysts like to dismiss the actual earnings because they are “depressed” and include too many writeoffs, which, of course, will never occur again.

The consensus is usually overly-optimistic, which is why so many analysts love to do their analysis on “forward” earnings since the market almost always looks “attractively priced” on that basis. The reality is that the forward P/E multiple is now at 16.2x after bottoming at 11.7x at the market lows. The multiple has not been this high since February 2005 when the economic expansion was already nearly four-years old! Today’s stock market, on this basis, is now being priced as if we are late in the cycle — forget this mid-cycle valuation stuff.

At the October 2007 market highs, the forward P/E multiple was 15x compared to 16.2x today, so you can understand why it is that:
1. We think investors are paying too high a price to participate, and;
2. We think that valuations are closer to levels more befitting an economy in its more mature stages of expansion than in its infancy.

Valuation may not be the best timing device, but it still pays to know whether you are getting into the market at acceptable prices. If the S&P 500 was in a 700-750 range, de facto pricing in zero to 1% GDP growth, we would certainly be interested in boosting our allocations towards equities. But at 1,070 and over 4% GDP growth effectively being discounted, we will be spectators as opposed to participants, understanding that the key to success is to NOT buy at the peaks. So the strategy is to sit on the sidelines, be selective in our equity choices, and wait for the correction to come or for the fundamentals to catch up with this overvalued, overbought, overextended market. Remember, the reason why the tortoise won the race was because the hare got tired.

S&P 500 Is Way Ahead Of Itself

What do we know from 60 years of historical data? We know that the market typically faces serious valuation constraints once it breaches the 25x P/E multiple threshold. The average total return a year out for the S&P 500 is -0.3% and the median is -6.2%. The total return is negative a year later 60% of the time, so when we say that there is too much growth and too much risk embedded in the equity market right now, we like to think that we have history on our side.

There is much more in the article so it's well worth a look.

This rally has the same look and feel as the 1930 DOW rally. Is there more left? No one knows. What we do know is that on average it does not pay to play for it.

Moreover, forward earning estimates are ridiculously high and loan loss reserves on commercial real estate, credit cards, walk-aways, foreclosures, etc. are grossly inadequate.

Assets At Banks Where ALLL Exceeds Nonperforming Loans



ALLL stands for allowances for loan and lease losses.

Allowances for loan losses will decrease as charge offs increase. However, the above charts are in relation to non-performing loans.

Because provisions for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings have been wildly over-stated. That is one indication of optimistic forward earnings.

Another indication of optimistic forward earnings is that banks have not yet gone to a mark-to-market model on assets. Factor both together and financial earning estimates are wildly optimist.

Kroger, Walmart, Costco Blame Deflation For Poor Earnings

In regards to non-financials, bear in mind that Kroger, Walmart, Costco are blaming deflation for a drop in earnings. Please see Deflation Threat? What Deflation Threat? for an analysis.

Certainly that is an indication that forward estimates are too high. Moreover, with the unemployment rate close to 10% and expected to rise for another 12-18 months, in light of the fact that consumer spending is 70% of the economy, bulls are extremely hard pressed to state where this miraculous growth in earnings will come from.

The only possible answer, and one typically only presented by the gold bulls and hyperinflationists is a complete collapse of the US dollar. While possible, I doubt it at this time.

For more on the US dollar vs. the Yuan, please see Competitive Currency Debasement - A Look at Rampant Monetary Expansion In China.

For more on global imbalances and the US dollar vs. other currencies please see Gold And The Watched Pot Theory.

Greater Fools' Game In Progress

What this all boils down to is the overly-optimistic crowd is playing the Greater Fools' Game once again. Some players realize it. Most don't. One thing is for certain, not everyone can leave the Greater Fool's Train at the same time once it starts heading in reverse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Whether or not the rapid move in curve steepening is driven by a flight from long-dated bonds (and yesterday someone very demonstratively puked on the 30 year, both before and especially after the auction), or inflation is starting to finally be a concern for the bond community (unlikely, as it would be a first: every previous time equity and credit have disagreed about inflation, it was always credit which was proven right), the 2s10s has steepened by a whopping 14 bps in less than 24 hours. The flipside: more cash for the banks. Is it enough? Or, more importantly, will it be enough 2 years from now when the bank CRE whole loan holdings start rolling (hopefully). At least Bernanke has a head start on the $3.5 trillion problem which is contained.

Huge info graphic, via Visual Economics:

click for ginormous chart

Hat tip Flowing Data

Note how we are trading within yesterday's range in the ES futures (top chart), with the NYSE TICK relatively evenly distributed around the blue zero line (bottom chart). We can see the diminished volume in the ES futures, a nice tell that market movement is diminishing as the Columbus Day weekend approaches.
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I recently mentioned D-Squared's four-part review (evisceration?) of Freakonomics.

I had forgotten he wasn't finished.

Part Five is now posted. And the conceit of the pieces—"that there is something terribly, horribly wrong with the state of modern economics"—that dates back to 2003(!) is all the more validated.

John Quiggin should include all five parts as an Appendix to his forthcoming Zombie Economics book. Just sayin'.

Stone Fox Capital has been adamant that we expected the market to continue to melt up the rest of the year. From both a technical and fundamental view, it appears that the market needs to hit at least 1,200 to brush off the huge falloff from last year. Now when we get to that level it doesn't mean that we'll rush off to new highs above 1,550. Heck we won't even be close to the old highs and that

You gotta love the hard core ideologues: Its almost cute they way they stick to their theories, facts be damned. Cute, except for the amount of damage they caused.

(Hmmm, this Kool aid is delicious!)

Case in point: The latest work of fantasy from the CATO Institute. They are now insisting that a stricter fed policy wouldn’t have helped, nor regulation, nor less leverage:

“Many commentators have argued that if the Federal Reserve had followed a stricter monetary policy earlier this decade when the housing bubble was forming, and if Congress had not deregulated banking but had imposed tighter financial standards, the housing boom and bust—and the subsequent financial crisis and recession—would have been averted. In this paper, we investigate those claims and dispute them . . .”

Their name may be CATO — but that’s only because OUR UNIVERSE IS NOTHING BUT COGNITIVE DISSONANCE UNFETTERED BY REALITY wont fit on their letterhead!

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Hat tip Paul!

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Source:
Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis?
by Jagadeesh Gokhale and Peter Van Doren
CATO, October 8, 2009
http://www.cato.org/pubs/pas/pa648.pdf

The congressional candidate is the latest to chime in on perspectives of where gold is going. This ties in with our expectations that the Fed's generous excess liquidity, coupled with a declining dollar, will likely see gold as the primary focus on new capital flows. If gold does really hit $5,000 expect a military coup by the various governors of the Fed.

As to Schiff's contention that a plunge in the dollar will be accompanied by Chinese dumping of Treasuries, we are not so sure it is that simple. Bernanke is well aware of the game of poker (where courtesy of the reserve currency he can raise into infinity, even on blind), and this is the only bluff he would be unable to respond to. Which is why the tacit assumption that China will keep USTs in exchange for Geithner backing off from allegations of renminbi manipulation, seems very sensible.

Either way, if Peter Schiff ultimately does get elected into Congress, it will be amusing to watch the Grayson-Schiff financially astute tag team take on the rest of their underedcuated associates, and hopefully, the administration and its flawed economic policies. 

h/t Shanky

Nach Berichten im britischen Independent, einer ziemlich serioesen Zeitung, bemuehen sich wichtige oelimportierende und -exportierende Laender, den Dollar als Waehrung fuer den oelhandel durch ein Buendel verschiedener Waehrungen zu ersetzen. Dabei soll es sich um die arabischen Golflaender, um China, Russland, Japan, Brasilien und Frankreich handeln.