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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: lurqer who wrote (21685)	7/8/2003 3:55:50 PM
From: T L Comiskey	Read Replies (3) \| Respond to of 89467

from Zeev's thread.... Who Put the "Bull" in This Bull Market You Asked? If analysts tell you this morning's (July 7) booming market action is motivated by strong fundamentals, all one needs to check to prove otherwise is the volume of transactions in the underlying index shares in the European and Asian markets prior to the opening of the US exchanges. You would have found that all the buying action was part of a colossal plan to jam the equity indexes higher. The lack of trading volume in the underlying shares that make up the index proves that the index gains pulled the shares up and nothing else. What we are witnessing is simply the greatest power play in the history of markets. And it's all being executed by the Exchange Stabilization fund with credit from the Federal Reserve to the commercial banking system and via International investment banking firms. The intent of course is to prevent a total meltdown of an artificial economy whose pivot point is the huge mountain of derivatives that currently undermines our economic system. Every penny available is being thrown at the index futures in hopes of establishing new highs thereby stimulating business psychology and producing the promised but hard to imagine 3.5% growth rate promised in the US for the second quarter. What scares me to death is that this may be the totality of the Federal Reserve's strategy to prevent the horror of Zero Interest Rate Bound - a place of no economic return. It would explain why the monetary aggregates have not participated in the plan to hold off the ogre of Zero Bound interest rates. We live in a world of manipulation that knows no bounds and is presented in the media as reality. Politics, markets, war, science, are all subjected to Spin Doctors before being presented for domestic consumption. And now - worst of all - market action today declares that our Spin City (Washington DC) masters have come to the point where they are actually believing their own (pardon me) B.S. To rely on a strategy of total deception to rescue the equity and bond market bubbles is the height of insanity. We have needed fundamental change for so long without satisfaction that this act of desperation declares to me that the opportunity for fundamental change is now exhausted. Some people lament that old men send young men and women to their deaths in war. I would like to add that old men making economic policy for political reasons can and do cause more suffering than any war ever did. This day, although welcomed with joy by the puppets of financial TV, is possibly the most serious violation of fundamental economic management in the history of the world. Government and big money interests are attempting to do a con job on the public. What has been forgotten is that the public is broke and unemployment is rising. There are no figures available for those that have dropped through the economic safety net as their time on unemployment has expired. The "victory" in Iraq has taken an entirely new turn as the Saddam plan "B" has come into action with urban guerrilla warfare only beginning to take its toll. Troop moral in Iraq has reached rock bottom as deployment periods exceed those promised by the Administration and in fact may extend years longer than anticipated. The "Big Lie" is becoming very much a part of our everyday lives and at some point "we aren't going to take it anymore." Profits have not returned to corporate America which has also lost its pricing power because of foreign imports that continue to exacerbate our trade deficit which could reach $500 billion this year. And this latest con job power play is credited to one company (Microsoft) dipping into its sizeable cash reserves to pay a dividend when its business is far from good but is still the best in a pack of rabid, emaciated dogs. I would assume that this dip into its coffers was a payback of favors to the financial power structure knowing that some excuse had to be provided to cover the operation planned for Monday a.m.. I told you over the weekend that the war would start Monday morning. The war has not only started as promised but it is the core battle in the war, a modern day version of the invasion of Europe. In one sense, I hope the power play works because the alternative is Zero Bound and by default the same fate as Japan. However, without a public to dump on, the pool operation now taking place is certain to fail -- big time. Somebody should have told the Bank of International Settlements before they issued their recent and "authoritative" annual statement that everything was just dandy in the world of business. In an important article published July 6th by the Guardian out of London the following points were made: 1. "The global economy faces a fundamental dilemma, which is becoming more acute with time. How can imbalances in growth and external accounts across economic regions be solved while maintaining robust growth overall?" 2. The report speaks to the over dependence being placed on the depreciation of the dollar without focusing on the problems that depreciation will produce on countries like Japan and Europe. 3. The BIS says that "The institutional underpinnings of the financial system require further strengthening," pointing to the public's lack of comfort with corporate management and financial markets in general. 4. The BIS suggests that the flagrant abuses in financial markets in recent years still impact the credibility of these markets. 5. The BIS points out the large overhang of excess capacity that still exists in the US. 6. The BIS in its annual statement expresses significant concerns about the potential of deflation. And directly on the heals of that article and last week's poor market performance plus technical signals of weakness, the pool operation blasted the equity indexes higher in a pure expression of "might makes markets right." If it does, then this will be the first time in history. What do you think this morning's operation does for the integrity of market? To add more of a stink to this power play, it appears as if the bond bubble in Japan may have sprung a serious leak. Yields on long-term Japanese bonds leapt by their biggest daily gain last week as auction results turned in a poor performance. Last Wednesday didn't just take the bloat off the US long bond market, it also hit Germany and the UK too. Now think about all this and the 4 a.m. U.S. East Coast time that the equity indexes in Europe found huge supplies of money at their door. There is no question whatsoever that this is the largest power play ever made in market history - limited by the fact that there is no public to fool. There are only major fools to fool. They are called Money Managers and they are handling OPM (other people's money). This is a cashed-out public both in terms of cash reserves and borrowing power. Every operation needs a public to bail out on and there is none in this case. This artificially induced rally will fail and with it the reputation of US Federal Reserve managers. No professional can be fooled into thinking that today's blast upwards in the equity indexes is anything but a sign of total desperation from a failed pool operation comprised of the ESF, Fed credit facilities, commercial banks and major investment banks. Giants, when they fall, take everyone with them. That fall is coming soon. jsmineset.com

To: lurqer who wrote (21685)	7/9/2003 10:53:43 AM
From: Jim Willie CB	Respond to of 89467

WalMart competes with entire nations now on Chinese gap from Daily Reckoning: While we are 40 months into the correction, the boom that preceded it developed over the course of an entire generation and shaped its habits. The Dollar Standard came into being when Richard Nixon eliminated gold from the international monetary system in the early '70s. Henceforth, central banks would measure their reserves in dollars, not in gold. And henceforth, Americans were able to print as many dollars as they wanted, without worrying about whether they had the gold to back them up. There is probably no one more spendthrift than the man who can print money in his own garage. By Year 15 of the Dollar Standard period, Americans had spent so much that the nation slipped below the water line of debt, having been the world's largest creditor a few years before. By year 30, it had sunk so deep it was the world's largest debtor...and the largest debtor the world had ever seen. Yesterday's news brought word that the U.S. had achieved yet another record. Its trade with China produced the largest deficit between two countries the world has ever seen. Walmart alone bought so much stuff from China that it would be China's 8th largest trading partner, ahead of Britain and Russia, if it were a sovereign nation. And the gap continues to widen!

To: lurqer who wrote (21685)	7/9/2003 10:56:16 AM
From: Jim Willie CB	Read Replies (2) \| Respond to of 89467

China will next wreck the auto parts sector in USA from Daily Reckoning: Automotive News: "The shift to Chinese production eventually will cost hundreds of thousands of manufacturing jobs in the United States. And it will put more pressure on smaller, cash-strapped suppliers to make a risky investment on a distant continent. "Both Ford and GM are offering a two-continent deal. If a supplier builds a factory in China, it can sell parts to a Ford or GM assembly plant in China, then export parts to the automaker's North American assembly plants. Those deals are starting to add up. According to the U.S. Department of Commerce, total imports of Chinese auto components totaled $2.2 billion last year, nearly triple the volume of imports in 1997. "China will dwarf the impact Mexico has had on the U.S. auto industry, says Detroit economist David Littmann. From the perspective of North America's purchasing managers, Littmann says, "China is vastly more encouraging than Mexico. "For automakers, China looks like a bargain. For suppliers, that price can be steep. In the years to come, segments of the U.S. supplier industry may migrate to Asia. For example, U.S. mold and die makers already have lost an estimated 6,000 jobs to Chinese rivals in recent years."

To: lurqer who wrote (21685)	7/9/2003 10:59:20 AM
From: Jim Willie CB	Respond to of 89467

DISROBING FANNIE MAE, by Eric J. Fry from Daily Reckoning: Last week, a French reader of the Daily Reckoning inquired, "Bonsoir, J'aimerais bien connaître l'opinion de M. Eric Fry en ce qui concerne Freddie Mac et Fannie Mae, les grandes firmes americaines de refinancement hypothecaire. Merci." Translation: I'd like to know Eric Fry's opinion about Freddie Mac and Fannie Mae, the large American mortgage companies. I was flattered that a Daily Reckoning reader - and one who is neither a relative nor a close friend - would solicit my opinion. But I will demur. No opinion will be forthcoming. However, I will happily provide a series of skeptical observations about Fannie, the widely adored mortgage lender. To preview: My observations cause me neither to like nor dislike the company's stock, merely to fear it. It is not easy to become rabidly negative about a stock selling for nine times earnings. But that does not mean it is difficult to fear it. Fannie Mae is like a great- tasting, non-fat dessert, simply too good to be true. Beginning with its privileged status as a government- sponsored enterprise (GSE) and ending with its impossibly consistent earnings history, there is almost nothing about this financial behemoth that is NOT too good to be true. The company is a financial marvel. When a mortgage-lending institution grows its earnings year after year at a rate that is several times faster than GDP growth, something is too good to be true...especially when that spectacular growth rate coincides with an equally spectacular increase in debt and balance-sheet leverage. What should we think about a mortgage-finance company that produces consistent, non-volatile earnings growth, alongside an imposing Kilauea of volatile interest-rate derivatives rising up from its balance sheet (or from some location perilously close to its balance sheet)? And yet, somehow, this behemoth produces perfectly smooth, consistent earnings growth year after year. How does this happen? Is it magic? Or just brilliant management? Investors must believe it is the latter, or they would not have awarded Fannie Mae a premium valuation relative to other mortgage lenders and financial institutions. Fannie's stock sells for nearly four times book value. Citibank and Bank of America, by comparison, both trade for about two and a half times book value. "Fannie and Freddie both engage in some form of 'earnings smoothing,'" says Apogee Research's lead analyst, Robert Tracy. Tracy has been digging deep into the financials of Fannie Mae and a couple of other well-known GSEs. "Naturally, senior officers at these companies eagerly justify their unusual accounting practice as something more 'accurate' and 'helpful to investors' than conventional GAAP accounting. But that assertion is highly debatable," says Tracy. "One thing is certain, however - their cosmetically enhanced earnings have been helping to boost their share prices and valuations. And a higher valuation means much larger paydays for the heavily optioned management." Tracy suspects that the era of earnings 'smoothing' may be drawing to a close. If so, the bull market in 'managed earnings' is also winding down. Which means that the premium valuations achieved by the masters of managed earnings - i.e., entities like Fannie Mae - will fade away. "By its very nature, the mortgage finance business, which extensively uses derivatives to hedge various forms of interest-rate risk, will experience erratic trends in GAAP earnings," Tracy continues. "To smooth out the reporting of those GAAP trends, both Freddie and Fannie turned to pro forma disclosure, a method whereby Fannie designated its pro forma numbers as 'core business earnings' and Freddie used the term 'operating earnings.' They encouraged the investment community to focus not upon their GAAP earnings, but rather on pro forma disclosures that excluded certain items, most notably the impact of changes in the valuation of derivatives. "Over at Fannie Mae headquarters, management continues to cling to its preferred version of 'core business earnings.' I guess you can't blame 'em for trying to put the best spin on things - so long as they can get away with it. Fannie's pro forma treatment dishes up a more pleasing and consistent earnings trend than the erratic swings you get with GAAP. Then, too, for the past six quarters, Fannie's reported GAAP earnings totaled $8.5 billion, while pro forma net income totaled $9.7 billion. Who wouldn't want to claim an extra $1.2 billion of earnings? You have to admit that, from Fannie's perspective, pro forma is a win-win situation: not only do the earnings appear more consistent, but, all of a sudden, there's $1.2 billion more of them!" "So is all the bad news out on the GSEs?" I asked the Apogee analyst. "After all, Freddie Mac's own chairman, Shaun F. O'Malley, declared on June 25: 'The company remains safe and sound.'" "I don't believe him," Tracy replied. "I don't think he's lying. But he may be mistaken. Investors still do not have access to enough detail about the company's finances to be able to invest confidently in its shares." In other words, in the case of the GSEs, ignorance is not bliss. "What, for instance, would have happened had Freddie bet the wrong way on interest-rate movements," Business Week asks provocatively, "or if banks, fearing further problems, refused to buy its debt? Freddie's problems reveal just how little is known about its inner workings - and highlight the risks should the markets lose confidence in its ability to manage its huge derivatives portfolio." If these companies weren't so big, we might not care how they account for the thousands of derivatives contracts on their books. But Freddie and Fannie are not merely part of the housing market, they are the housing market. "Fannie and Freddie now carry an astronomical $1.6 trillion in assets on their balance sheets, up from $962 billion in 1999," Business Week notes. What's more, based on the Fed's recent flow-of-funds report, a whopping 77% of total U.S. financial-sector debt outstanding as of the end of this year's first quarter resided with the GSEs, federally regulated mortgage pools and the asset-backed issuers. "These are the very folks at the direct heart of, and largely responsible for, the bulk of current credit creation in our economic system," observes Contrary Investor. "Many of these financial-sector participants are also significantly leveraged to derivatives as part of the risk-management component of their credit-creation operations. And these folks are operating completely outside of the regulated U.S. banking system." Not surprisingly, these two lending giants also wield a giant-sized influence over the U.S. economy. Last year, refinancing activity put an extra $100 billion in consumers' pockets, and that pace has accelerated this year, thereby offsetting a severe drought in capital spending. If these two companies can almost single-handedly support the economy, couldn't they single-handedly pull it down? Is it an exaggeration to infer that a serious problem at either of these two companies would have serious and worrisome implications for their share prices, the housing market, the bond market, the U.S. dollar and the U.S. economy in general? "What a mortal can easily see," says Jim Grant, writing in Grant's Interest Rate Observer, "is that a Freddie accident would be a dollar accident as well as a corporate-finance accident." In other words, containing financial market volatility is a little bit like herding cats. Who can say what sorts of traumas may result from the brave new world of volatility at Fannie Mae and Freddie Mac? Lower share prices would seem to be the best- case scenario. "I'm hoping for the best," says Tracy, "but I fear the worst. Now that two prominent members of the GSE family have come under the harsh light of disclosure, it's only a matter of time before their share prices reflect the real- world volatility and uncertainty of their earnings results. 'Uncertainty' is just another way of saying, 'falling share price.'" Regards, Eric Fry, The Daily Reckoning