4/22/09 (Tim Cheerleads, Morgan Loss? Print Money!)

Traders,

The earnings in the morning all told the same story, lower revenues and lowering forecast. The market saw downside pressure – so what helped spur the rally in the late session? Everyone is waiting to hear about the Stress Test (and whether banks will need more money). If we are to look at the earnings, increase in defaults on the consumer and commercial lending, as well as leverage the answer is yes. Additionally, criticism of the Stress Test seems to be more about the methodology than the results – so say the jobless rate, trade, and expected GDP don’t reflect STRESS – but are rather more optimistic. I heard it best from one economist when he said if it is a STRESS test we must STRESS the variables.

So – with all the concern about the stress test and banks needing more money (and the difficulty of getting Congress to reload the Tarp) – we needed some pre-cheerleading and Tim Geithner came to the rescue. Pretty much he said the “stress test” will show that most of the lenders will have enough capital (even though the results are not finished) and further said that those needing more may convert government preferred shares into common and seek investment from private sources. The reality (in my book) he knows that getting the votes in Congress for more money into the TARP will be a very tough sell – knowing that – what can he really say?

The market seem to only hear the optimism, again this was just a speech – not the results or exact method of the stress test – but optimism and hope is sometimes all we have. We got a good rally off Geithner’s assurances – but while I listened it seemed a little thin on substance.

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Morgan Reports a loss?

I thought these banks got to move bad assets off the balance sheets, use new accounting standards, and re-label assets to “long-term until maturity” – to ramp in huge revenue.

What happened Morgan? I guess even all the “tom foolery” wasn’t enough to get a big enough boost on the balance sheet. Or is Morgan being more honest than the other banks?

The first-quarter loss was $177 million (57 cents a share) – estimates were for a 8 cent per share loss. The company had a $1 billion loss in real estate losses in the first quarter. Also we saw another hint as to the next big problem, commercial real estate, from Peter Kovalski (fund manager of Alpine Woods $5 billion under management), “Residential real estate was last year’s problem and this year’s problem is all the other loan categories, specifically commercial real estate.” – I think we will see more of the commercial paper problem surface the rest of this year.
MS is looking lower by about 10% in the pre-market.

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The middle of the earnings cycle

The story seems to be the same everywhere – lower forecasts and the reality is that consumers have less to spend and little access to credit.

AMD – predicts computer sales to continue to decline for the rest of the year – lower’s forecast.

Capital One – reports first quarter loss and expects defaults on consumer credit to rise by 10% in 2009.

Yahoo – while it did meet estimates (that happen to be set so low it would be hard not to trip over) – the decline in ad revenue was massive which fell 78% year over year. The company plans to lay off 5% of its work force and of course lowered its expectations.

Here is the problem going forward – we are going to see falling revenue and lowered forecasts. However, the game has historically always been the same, lower forecasts so low that when the next round of earnings come it will be easy to beat. As a market maker in AMD for several years – I saw that game played quarter after quarter. Like with Yahoo – they had previous (in 2008) lowered their forecast – very low. Estimates matched that very low forecast. So beating really low estimates because they lost 78% in revenue pretty much SUCKS. But people don’t care about the balance sheet, revenue, margins, debt, etc. all they HEAR is that they BEAT estimates and in this market that sounds GREAT.

So here is a little prediction – I expect this lowered forecasts and future estimates to be so low that it would be hard not to beat them. So when they DO – everyone will get excited and we could see a bounce in the market and all the people come out and say “This must be the bottom!” Of course only a handful of people will actually do the heavy lifting to read the actual results and not just take a cursory view of beating a very low estimates. Remember the market moves on perception – expect very low forecasts. The only reason that won’t work is that their forecasts are not low enough.

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Revenue vs. Spending…

One thing the government doesn’t seem to understand or they just don’t care and that is the core fundamental model of how business works, which ironically is how our government works.

1. A business needs revenue.
2. A business has cost.
3. The difference between revenue + cost = Profit or Loss

The “margin” is the difference between revenue and costs.

The government works the same way.

1. The government has TAX revenue.
2. The government has costs (Budget, Debt interest, etc.)
3. The difference between the TAX revenue + costs = Surplus or more debt.

With the jobless rate ramping (millions of job losses), also means billions of lost tax revenue. However our government is spending more than it ever has in the history of this nation. Mainly the lending from the Treasury and Fed into the banking sector and auto companies. That doesn’t include the expanded budget and new programs (National Health Care).

The problem – we don’t have ENOUGH revenue (from taxes) to pay for that. But we need to the money now.

The only other way the government can really raise money (beyond selling assets) is borrowing money. The government does that by selling treasury bonds. It wants people and other nations to lend the government money so it can spend more money today. The government pays those people that buy treasuries an interest rate (now very very low).

But the government has a new problem, they want to spend SO MUCH money there is not enough people or nations in the world to loan us the amount of money it wishes to spend. So what does it do? It has the Federal Reserve PRINT more money to buy the treasuries. If it sounds crazy – the sad reality is that it is.

The U.S. Treasury sells treasury bonds to raise money. Now the Federal Reserve is printing money (out of thin air) to buy the treasuries.
We are printing money to finance printed money.

That wouldn’t be a problem if the government had ENOUGH TAX revenue to pay for it – but from resent data the TAX revenue short fall is going to be so massive over the next 3 years there is NO WAY to pay back the treasuries plus interest, without printing more money to finance it.

The government will have to sell $2.4 TRILLION in new treasuries (bonds, bills, notes) in 2009. That has never been done before and the government KNOWS there are NOT enough money in the world to loan the government that much money. So we are going to see the Federal Reserve (who has the ability to print money) – Print 100s of billions (perhaps a trillion) in paper just to loan the government.

But here is the question that no one asks , where does the Federal Reserve get the money? They don’t – they just print it.

http://www.bloomberg.com/apps/news?pid=20601087&sid=anA.WOxto6qQ&refer=home

The math is simple = inflation is coming. You just can’t print that much money and expect inflation not to happen. I don’t know when it is coming, but you can bet your ASS that it is coming.

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Futures Pre-market

The futures are down again in the pre-market as earnings are not looking that great, but Tim is speaking again today and he might cheerlead this market higher- expect a lower opening.

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Support / Resistance

Nice bounce, but I am hearing some call it a “dead cat” bounce already this morning. We will see.

INDU 7750 / 8000 (That 8000 line seems to be a pivot point.)

NDX 1300 / 1350 (Touched 1300 then rallied – now looking lower in the pre-market)

SPX 825-835 / 850 (The 850 seems like a pivot or resistance. Looking lower in the pre-market.)

RUT 450 / 475 (Could 450 be in the cards or do we head through 475?)

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Gold 850 – 900 (It seems that gold doesn’t know if it should test 850 or 900 - in no man’s land.)

Silver 12+

Oil 45! (Oil came off and visited the 45 area but got a good rally going into the close yesterday – I think the dollar will play a bigger role going forward with oil prices.)

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Conclusion

Banks playing accounting games, Geithner knows it will be hard to get Congress to re-load the Tarp (there may not be enough votes) and he is doing his best to keep the calm, the amount of money the Fed is printing to buy MORE treasuries is absurd, and now the commercial paper default rate is starting to make headlines. We are certainly not out of the woods and the Congress/Administration answer seems to be trying to inflate (print) our way out of this. That may work in the short-term but it also means we could be creating the next massive bubble (the dollar bubble) that could make the Dot.com and Housing bubble look like a joke.

Why? Because – only those in that played the Dot.com game got hurt and those that turned their home into an ATM got hurt. However, with the dollar = EVERYONE feels it.

We may see a strong rally later in the year – predicated on very low forecasts and beating estimates and stability could come for some time. However, I think we need to keep an eye on the Fed and Treasury balance sheet and the national debt (and deficit). It is getting massive.