Really? You think?

From Bloomberg:

Roubini said more than half of the 5.7 percent expansion reported yesterday by the government was related to a replenishing of inventories and that consumption depended on monetary and fiscal stimulus. As these forces ebb, growth will slow to just 1.5 percent in the second half of 2010, he said.

“The headline number will look large and big, but actually when you dissect it, it’s very dismal and poor,” Roubini told Bloomberg Television in an interview at the World Economic Forum’s annual meeting in Davos, Switzerland. “I think we are in trouble.”

Roubini said while the world’s largest economy won’t relapse into recession, unemployment will rise from the current 10 percent, posing social and political challenges.

All on needs to do is look past the headlines, do a little personal research, in order to come to the conclusion that the economic recovery is not a recovery at all.

Over the last several weeks a number of economic events have taken place that really concern me. For some time I’ve held the view that the economic recovery being reported by the media and government is anything but.

With port traffic down year over year close to 18%, hotel rentals down roughly 14%, car sales down from 20% to 40% (post stimulus), unemployment rising and consumer confidence falling, it is clear the average consumer isn’t coming back to the purchasing table. As the consumer accounts for roughly 65% of the economic activity in the U.S. this is a problem if we are to believe in a recovery. In conjunction with the above, a number of other things have taken place that only go to create the possible trigger for the next economic meltdown.

The Capmark and CIT bankruptcies

Capmark, the former GMAC commercial real estate mortgage lender, declared bankruptcy on October 25th. This mortgage lender happens to be one of the largest in the United States but what does this event really dictate?  The weakness in retail sales is being felt on all levels and is expected to carry on to other CRE lenders.  Translation – the Capmark bankruptcy was the first in a number of coming CRE lenders going bust.

CIT, one of the largest commercial and consumer financing companies, also declared bankruptcy. CIT is to small business credit what Lehman was to the derivatives market.  While the sudden impacts of a CIT bankruptcy may not be noticeable to the consumer, small business will feel the impact shortly as the company is only expected to provide roughly 20% of the loans they issued last year.

Such a situation will mean that small business will need to find other credit sources or go without.  With credit already in contraction that will mean the requirements are going to be higher in order to obtain credit and/or the interest rates will be significantly higher.  All of this points to a small business market with limited or no credit.

Much like the residential real estate market collapsed so will the Commercial Real Estate market and the effects will be felt by some of the largest banks in the U.S. The commercial and consumer financing collapse at CIT also advances the effects, all of which point to further credit restriction in the next 8 to 12 months.

This past earnings season

Did you notice this past earning season was a blow out?  Companies the financial pundits expect to report poor results did not and everyone was celebrating.  I mean, really, the DOW broke 10,000 again on the news.

CSX, the transportation giant, turned a profit of .74 cents per share. Alcoa recorded their first profit in more than a year, equipment giant Caterpillar turned a profit of .60 cents a share, Du Pont profits jumped 11%, GE posted a $2.5B net income… and the story can go on and on of positive news.

It’s a sham.

CSX turned a profit on revenue that was down 23%, Alcoa’s shipments were down by sequentially, the sales at Caterpillar fell 41%, Du Pont saw revenue fall 18% and GE’s revenue fell by 20%.

What people are seeing as a “positive” economic recovery is actually the result of major companies performing cost cutting.  On the majority, revenues in the large S&P companies were down year over year showing NO sign of improvement.

Stabilization, yes. Improvement, no.

The problem with this earnings season isn’t what took place here, rather what will happen in 6 months when it is obvious that companies can no longer cut costs without cutting in their ability to remain operational, or what will take place when people take notice to the fact that the holiday sales for 2009 will be flat – if no lower – than 2008?

Easy.  Everyday people will wake up to the lack of a recovery, leading to consumers spending less.  The impact will be felt in organizations as layoffs increase and more companies going under.

Not trying to be all negative, there were two really impressive notes from the 3Q earning season  – Apple and Amazon.  Both companies provided outstanding results on the bottom line and on revenue.

Oh, and about the dollar and gold…

There is something scary going on in the Gold and Dollar markets.

The dollar is bouncing index (USDX) is bouncing around the 75.00 support level, which is a drop of nearly 15 points since the start of 2009.

Why is this happening? Easy, the dollar is experiencing the world moving away from it as an investment vehicle due to the roughly trillion dollars the Federal Reserve has pumped into the system over the last 12 months.

Essentially, the Fed is literally making money out of nothing there by diluting the current currency value and the world market wants nothing to do with it.

Iran has stated they will not sell oil in dollars, rather a basked of currencies and gold. Russia, China, Turkey have all suggested the same possibility. As to add insult to injury all of the above countries have stated the U.S. dollar should no longer be the world’s reserve currency.

And since there is no other true reserve currency where is all the money going? It’s going into gold.

India recently purchased 403.3 tons of gold, which pushed the price up to an all time high over $1,100 an ounce. China and Russia are also fighting to purchase 200 tons of the glitter from the IMF as a safety net. There are cases being reported worldwide of such events – major world governments and banks making large (or huge) gold purchases, and they are doing so in order to protect themselves from the falling dollar.

The world sees the coming economic issues and they are doing their best to protect themselves.  For those who suggest that China would never let the dollar collapse due to their investments needs to think again.  They are selling off their dollar positions in small amounts and buying HUGE stocks of commodities.

And where does this lead us?

One day in the not too distant future the world will see an event that really catches them off guard, and as with other currency collapses, there will be not apparent reason for it. One day the dollar will make a large, if not unprecedented, turn downward. This will lead to massive and rapid inflation of specific goods… namely the commodities that China (and other world governments) have been stocking up on. The price of food will elevate quickly while the cost of your wonderful LCD TV will fall.

The rapid inflation will lead to small businesses trying to find cash to run operations, but guess what, the commercial financing market is going to be at a trickle thanks to the collapse of CIT and the restricted credit market. Oil prices will rise rapidly leading to the U.S. trucking and transportation industry straight into a depression. Commercial real estate will continue to collapse as people will be spending money on food, not on clothing, cars and electronics.  As a results, banks will feel the pinch.

Truly, we are in the perfect storm of economic events.  But what is the solution?

The answer comes down to our government and their willingness to mop-up the nearly trillion dollars in excess liquidity, as well as their actions to cut the level of U.S. debt.  Problem being, doing so will pull the legs out of the already weak economy.

In the end, it comes down to picking the lesser of two evils – preventing the collapse of the dollar or allowing the country to officially go back into a recession. The actions by this administration, as well as the past administration, have shown a history of poor critical decision making skills.

I understand that anything can happen and the economic world is “alive”.  Literally, things can change in a second; however, too many things have taken place and are all pointing in one direction. The best way to summarize the events we face is in a quote from the classic HBO series – Deadwood.

Wild Bill Hickok: You know the sound of thunder, Mrs. Garret?

Alma Garret: Of course.

Wild Bill Hickok: Can you imagine that sound if I asked you to?

Alma Garret: Yes, I can, Mr. Hickok.

Wild Bill Hickok: Your husband and me had this talk, and I told him to head home to avoid a dark result. But I didn’t say it in thunder. Ma’am, listen to the thunder.

Listen to the thunder, folks…

Why do I have a feeling Fed Chairman Bernanke’s comments of “green shoots” will haunt him for the rest of his days.  Sure, he was trying to inject confidence in the market but without any real evidence of a recovery.  Economist Nouriel Roubini is once again point out there are weeds in with the “green shoots”

Here are the highlights:

• growing divergence between business sentiment surveys
• and industrial production, which is down sharply and receded another 1.1 percent in May
• U.S. jobless rate, already at a 26-year high of 9.4 percent, would reach 11 percent before it begins to ease
• few engines for growth given that U.S. consumers are tapped out
• Rampant inflation could lead to negative economic cycles like the ones that plagued much of the industrialized world in the 1970s

People continue to cheer when 500K jobs are lost instead of 600K, or when retail sales are down but not a much as the month previous.  Bottom line, we are not in a recovery as of yet.  You can cheer all you want but you are, ultimately, just cheering bad news.

We are back to 2006/7 gas prices and for what, exactly? It’s not demand. That has fallen by roughly 2 Million barrels a day. It’s not Geopolitical. While tension between Iran and Israel continues, what we are seeing is nothing new. We are now seeing two factors:

1) Oil producing countries need the money to fund government operations, therefore cut production to raise cost. (spoke about that here)

2) Now investors are looking at the economic conditions, see that inflation is coming and are turning to commodities as a way of protecting themselves, as well as hoping that the worst for the economy being over

Oil prices soared above $71 a barrel Wednesday to reach a 2009 high, as investors poured money into crude markets to protect themselves against the inflation risks posed by a weakening U.S. dollar.

Oil, which typically trades inversely to the dollar, has more than doubled in price in three months as traders also cheered news showing the worst of a severe U.S. recession is likely over. They brushed off data — such as a 9.4 percent U.S. unemployment rate in May — that suggest crude demand will remain weak. Even growing inventories have not checked crude’s stellar rise.

The bottom line here: this is Bull! If there was ever a time that the consumer should pay attention to the price of oil it would be now as our current situation shows how vulnerable we are to just about anything. There is no realistic reason oil should be this high. This is purely a profit drive by producers and investors.

On Monday Supreme Court Justice Ruth Bader Ginsburg put the future of the Fiat/Chrysler purchase in doubt by issuing a stay on the sale. Three Indiana pension funds are suing, claiming the bankruptcy is unfair to lenders such as themselves, while favoring other lenders who took less risk. Unfortunately for Chrysler, they had until June 15^th to complete the sale or Fiat could walk away.

Today, however, Fiat is sticking to their guns.

Italian automaker Fiat said Tuesday it will not turn its back on a deal to acquire a controlling stake in Chrysler despite a U.S. Supreme Court stay on the sale.

Under terms of the agreement, Fiat has the option to abandon the deal if it is not completed by June 15.

“Fiat won’t walk away from Chrysler,” Fiat spokesman Gualberto Ranieri said.

If Fiat does walk away, then Chrysler will have basically no choice to liquidate. While Fiat seems committed to the purchase, at this point, anything is possible.

UPDATE: Supreme Court will not block the sale.

As I looked over the business headlines today there was one headline that really, really stood out to me:  Microsoft to raise $3.75B in first debt offering.  

Why did this stick out?  Simply because this company is flush with cash.  As of 3/31/09 the company had roughly $25B in cash and short term investments, so, obviously, they were not having a hard time with funding.

If you look a bit into the justification MSFT gives as to why they are moving forward with the Debt Offering, you’ll see:

The software maker said it will use proceeds from the sale for general corporate purposes, including possible acquisitions and stock buybacks. 

First – a stock buy back is usually a very poor idea.  It really doesn’t help create that much value for the share holders.

Second – We’ve already established that Microsoft has piles of cash, why would they need to sell debt for “general corporate purposes?”.  Again, makes no business sense and adds no share holder value.

I think the reason for the offering is the “including possible acquisitions” that is mentioned in the SEC filing.  It would make more business sense to have cash reserves and funding acquisitions via debt – cheap debt – during times of economic hardship.

Has the target on Yahoo! suddenly increased in size?

The latest unemployment numbers are out and the situation continues to look grim. While layoffs slowed to 539,000 jobs lost in the month of April, down from 699,000 jobs in March, the unemployment rate continues to rise. The official government reported number currently stands at 8.9%, though the argument could easily be made that true unemployment is significantly higher.

Yes, the job loss rate slowed in April. That is nothing to get excited about, especially when you consider that this is the 16th consecutive month of job losses AND there is no sign of increased hiring activity. Simply put, the U.S. economy is far from recovery.

Only 4 months into the year, I still hold to my view that unemployment will hit 10% by the end of December.

UPDATE: The TRUE Unemployment number is…

Above I noted that the 8.9% unemployment rate is debatable. Why is that? The 8.9% represents “Totally unemployed, as a percent of the civilian labor force”.

Got that? Good. When one looks at “Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers” then unemployment jumps to 15.8%

But what is this whole “marginally attached workers” thing you speak of?

Simply put, a marginally attached worker is a person who currently is neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.

They are the despondent, those who have given up hope. So, take those who still are looking for work (hopeful) and those who are not (given up) and one arrives at 15.8% – that is your TRUE unemployment number.

If you take a quick trip down memory lane you will recall there was significant debate as to releasing the bank stress test data.  When will the government?  Should the government?  How will they do it?  

You get the point.

Anyway, the data is due to be reported this week and the information that is leaking out seems to be a bit disturbing – 10 of the 19 banks will need to raise capital.

The U.S. is expected to direct about 10 of the 19 banks undergoing government stress tests to boost their capital, according to several people familiar with the matter, a move that officials hope will quell fears about the solvency of the financial sector.

The exact number of banks affected remains under discussion. It could include Wells Fargo & Co., Bank of America, Citigroup Inc. and several regional banks. At one point, officials believed as many as 14 banks would need to raise more funds to create a stronger buffer against future losses, these people said, but that number has fallen in recent days.

Looking a bit deeper into the news that is in the press, the really disturbing information starts to find the light of day:

Bank of America Corp(BAC.N) has been deemed to need as much as $34 billion in additional capital, according to the results of a government stress test, a source familiar with the results said on late Tuesday.

Bank of America spokesman Scott Silvestri declined comment

Remember that Bank of America was considered to be surviving institution.  While the acquisition of Merrill was significantly more difficult than expected, the government had already provided support due to the situation.  

If the information out now is to believed, and Bank of America does need an additional 34B, what does that mean for the financial institutions deemed at risk, such as Citibank?  Better yet, what does it mean for the “solid” companies such as J.P. Morgan or Wells Fargo. 

The data release date is on 5/7… it will be interesting to see how the market reacts.

Yesterday I raised the question “what’s up with the mix signals on the economy?” The economic numbers just didn’t seem to match what the Federal Reserve was saying. I simply couldn’t see how the world is ending mentality gave way to a 6 week market rally and the Fed to say things are fundamentally sound.

Jim Rogers, a one time monster hedge guru, just isn’t buying the economic and stock market recovery:

I am not buying U.S. companies mainly because I think we may have seen a bottom but I don’t think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn’t last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system. The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.

It’s laughable on its face, but politicians think they’ve got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.

For the record, I do think that mark-to-market rules need to change but they would not solve the problem.

I’m slightly confused as to why the Federal Prosecutors would be willing to offer Bernie Madoff a guilty plea. This is the man behind the largest Ponzi Scheme in the history of, well, Ponzi Scheme as he stole roughly $50 Billion of funds.

With the “rock solid case” prosecutors had, which included testimony from his son and documents showing he never committed the trades he stated, why simply offer him 11 felony charges? Yes, this will most likely result with Madoff spending the rest of his life in prison, but was justice served on behalf of the people he swindled?

I could potentially see the Feds making would be related to the potential costs of a trial. They could say this man already cost thousands of people Billions of dollars, so why spend more tax payer money when the Madoff was willing to admit guilt and go away quietly?

Looking at this situation with a bit of skepticism, I wonder what information Madoff provided to the Government that would cause prosecutors to stop short of taking this mans head and putting it on top of a take at Wall and Broad.

Two things I can think of…

1. Madoff showed the SEC and Federal Regulators how he managed to scheme the system for so long. Simply put, he pointed out the flaws.
2. The Government wanted to “protect” the “investment” system and avoid publicizing how Madoff truly made money – by off book lending to less than reputable individuals.

I believe that Madoff was involved in some form of money laundering and organized crime outside of the United States. Most of his money was moving through Eastern Europe, which has little regulation, and would allow for him to act as a “black bank”. Terrorists need funding too, and they happen to utilize these “black banks”, so it wouldn’t be a stretch.

Wouldn’t it look real bad for the U.S. government if Madoff laundered funds purchased the explosives used in attacks in the UK or Spain… or funding for a covert paramilitary operation by “agents” (read Contractors) of our government.

I think this case provides more exposure for the government and the financial system, that is why the plea was offered. And, as a result, government won’t have to put their dirty laundry up in the yard for all to see.