The Economy: Lets put some Lipstick on this Pig!

Good afternoon everyone!

Wow today was a serious window dressing day on Wall St. Stocks are up today because guess what everyone? There is very little inflation!!! Yeah right and I just saw a pig fly by my window.

Lets start with the CPI number today. Here is the CPI from Bloomberg:

"May 14 (Bloomberg) -- U.S. consumer prices rose less than forecast in April, reflecting cheaper costs for cars and hotel rooms that offset the biggest jump in food in 18 years.

The consumer price index increased 0.2 percent after a 0.3 percent gain in March, the Labor Department said today in Washington. So-called core prices, which exclude food and energy costs, climbed 0.1 percent, compared with 0.2 percent.

Food prices, which account for about a fifth of the CPI, jumped 0.9 percent, the most since January 1990. The increase was paced by rising costs for fresh fruits and pork.

The government said yesterday that prices of imported goods rose 1.8 percent in April and were up 15.4 percent in the last 12 months, the most since records began in 1982."


My Take:

Well the headline number you see in the news is inflation rose only .2% which was lower than expected. What you need to focus on are the things I highlighted above.

Remember the CPI excludes food and energy. My question is how on earth does this CPI number mean anything in today's economy?

Think about what you spend you money on each week. You go to the grocery store so you can eat, and you fill your gas tank up so you can go to work and pickup the kids etc. You also go shopping for clothes and things for the house. Almost all of these goods made in another country like China.

It seems like almost all of Walmart was made in China!!

So look at the real numbers above. Food prices rose .9% which is about 11-12% annualized. Imported goods are up 15% over the last twelve months. The average raise for an American right from their job is around 3% or less. A lot of the data recently is showing wages are flat.

When wages grow 0-3% and everything is going up by 11-15% you are getting poorer and poorer each month! Still feel like there is no inflation when you break it down? I know I feel it hurting my wallet.

Of course the stock market just runs with the headline number and bids up the market. There will be a day where this data manipulation will stop because the consumer is going to be so weak that he can't afford anything anymore!!

The economy will then tank, and the CPI will start becoming a joke that no one pays attention too. If the Government was smart, they would throw food and energy back into this number to make it more indicative of whats really going on.


Lipstick #2: Freddie Mac

Well we need a big lipstick to make this pig look pretty. Freddie Mac came out with earnings today and only lost $151 million which was the lower then analysts expected. The stock rose 10% on the news. Sounds great right? Now lets take a look at the real numbers:

"Freddie Mac rose as much as 10 percent in New York Stock Exchange trading after reporting a first-quarter net loss of $151 million, or 66 cents a share, beating the 84 cent average analyst estimate in a Bloomberg survey.

Without the use of two new accounting rules, Freddie Mac would have posted a loss of at least $1.7 billion, analysts said. A change in the way the company values some assets that aren't traded reduced credit losses by $1.3 billion, while a separate rule that lets the company pick and choose which assets to measure contributed an equal amount as well, Freddie Mac said.

Financial Accounting Standard 157 allows companies to estimate a value on holdings that aren't traded. Freddie Mac increased its Level 3 assets under FAS 157 to $156.7 billion, or 23 percent of its assets, from $31.9 billion as of December. The company also adopted FAS 159, which lets it pick which financial assets and liabilities to measure at fair value through earnings.

The first-quarter results also benefited from a change in policy for buying seriously delinquent loans, 120 or more days past due, out of the mortgage pools Freddie Mac guarantees. Under accounting rules, the company must book the decline in the value on loans bought from pools at the time of purchase. Freddie Mac ended that practice in the first quarter, cutting such losses to $51 million from $736 million in the fourth quarter."

"Credit Suisse analyst Moshe Orenbuch, who has an underperform rating on Freddie Mac stock, said the accounting changes made the company's performance look better and was skeptical of the surge in its stock price.

``Obviously people liked it,'' Orenbuch said. ``Management was selective as to how they applied certain accounting principles.''


My Take:

My god how shady is this? So the real loss was $1.7 billion! However, with a little accounting hocus pocus, they got this number down to $151 million. What amazes me is investors are stupid enough to push this stock higher when the earnings are a complete sham.

Look at the amount of money moved to Level 3 assets. They increased their pool of level 3 assets from $31 billion up to $157 billion! These are assets that are in the "hard to value" category, and the accounting rules as of right now are not forcing them to be valued. The investment banks love level 3's. Its a great place to hide your garbage!

The level 3 assets are the equivalent of taking your losses and throwing them into a closet and pretending they don't exist. Do these assets have value? Of course they do. But until they are sold off no one knows what the true value is.

Trust me, if these assets were worth what they are stated for then they would be on the books or sold off. Instead, they just become a skeleton in the closet.

In case you were wondering, Freddie has around $40 billion in capital. Any change in this level 3 accounting rule and Freddie could technically become insolvent. Now would the government ever allow this to happen? Who knows. I know one thing. I wouldn't want to be a shareholder with that kind of risk.

Bottom Line:

The games continue on Wall St. I have never seen so much fraud and corruption in my life on the street. Everyone is desperately trying to prop up this economy as we suffer from the biggest housing/inflation/economic crisis in the last 70 years.

Congress needs to get involved and force Wall St. to takes its losses.

If they continue to ignore this issue, then we will be looking at a lost decade similar to what Japan experienced. If they follow through with the SEC mandate that I discussed last week, then we will have a bad recession, but it will be much shorter and we can then get back to being a healthy growing economy.

Sadly as of right now, the pigmen continue to get their way.