Stocks were quiet today as many on Wall St. waited for the big earnings reports after hours. Unfortunately for the bulls, the reports were flat out ugly.
American Express
Apparently, American Express cardholders decided to "leave home without it" this quarter. Earnings came in at .56/share versus analysts estimates of .83/share. This is a gigantic miss. There guidance going forward was even worse. They refused to give any until the economy turns around! Yikes!
Here is the ugliness on Bloomberg:
"July 21 (Bloomberg) -- American Express Co., the biggest U.S. credit-card company by purchases, said second-quarter profit fell 37 percent on worse-than-expected consumer defaults. The shares dropped 9.6 percent in extended trading.
Profit from continuing operations was $655 million, or 56 cents a share, declining from $1.04 billion, or 86 cents a year earlier, the company said today in a statement. The average estimate of 17 analysts surveyed by Bloomberg was 82 cents. American Express abandoned its prior earnings forecast after saying conditions ``weakened considerably'' and it added $600 million to reserves for U.S. loan losses.
``They're like any other consumer lender right now, caught behind the 8-ball,'' Craig Maurer, analyst at New York-based Calyon Securities who rates the company ``buy,'' said in a Bloomberg Television interview. ``I don't think the environment's going to be helpful to the company over the next nine to 12 months.''
Quick Take:
Whats most concerning about this earnings miss is American Express is the card of the "wealthy". This tells me that even the high end consumer is starting to fall apart.
Stock Futures Tumbled after Hours on the AmEx/Apple News
July 21 (Bloomberg) -- U.S. stock futures tumbled after the close of U.S. exchanges, dragged down by lower-than-estimated earnings at American Express Co. and disappointing forecasts at Apple Inc. Treasury yields and the dollar also dropped.
American Express, the biggest U.S. credit card company by purchases, fell 11 percent from its 4 p.m. close after second- quarter profit trailed analysts' estimates by 32 percent. Apple, maker of the iPod music player, lost 6.5 percent after saying sales and earnings will fall short of projections. SandDisk Corp. tumbled 12 percent after reporting a loss."
My Take:
Amex will take its toll on the bank stocks tomorrow. The financials may be in deep trouble tomorrow as many regional banks report earnings including Wachovia. Regional bank earnings reports are expected to be horrific as bad loans continue to clog up the balance sheet.
I think we need to rename the quarterly earnings reports for financials. Every three months banks should report their quarterly "losses". We can call them earnings reports again in about 10 years when they have earnings again.
The I-Phone:
Just a couple comments here. I think this is an interesting example of the deflation that we are about to start seeing in all assets including tech. Everyone has seen the ongoing massive deflation in home prices.
It looks like Apple is the first tech company that sees deflation as the only way out of this. A great axample of this is the I-phone. The first Apple I-phone had a pricing point of $599 about a year ago. The newer faster 3G I-phone that launched last week was priced at $199.00.
A faster phone at less than half the price.
So how did consumers respond? Apple was expecting to sell about 500,000 phones the first weekend. They ended up selling over 1 million. Note to home sellers: Your bubble house is not going to sell at 2005 prices! If you price the home right, it will sell! Apple new I-phone is proof of this.
Apple is a smart company. They see whats coming. The lowering of earnings guidance is what hurt the stock today. Many blame lower prices on the I-phone and Mac as the main reason why their guidance had to be lowered going forward.
Kudos to Apple for stepping up and selling new technology at affordable prices. This will make Apple a stronger company in the long run. The companies that do not deflate will pay for it with crippled sales. Corporations need to face the reality of selling to a different consumer.
The New USA
Every other company better realize that deflation is here. If they don't, their sales are going to drop like a rock. Peter Schiff said it best this weekend: " Most of us have borrowed our way into Bankruptcy".
We have no disposable income after we pay our bloated mortgage payment in the face of higher inflation. Many are still paying off their credit cards after splurging on that $4000 65" HDTV. Oh and don't forget that Hummer that we financed with all of the "equity" that was borrowed in the form of HELOC loans.
There are already signs of a more simple standard of living as we pay off debts. The Hummer now sits in the driveway with a for sale sign on it because it only gets 9 miles to the gallon. Cruising the streets in the Hummer doesn't sound so fun when its cots you $10 roundtrip just to go the grocery store and back.
Another sign of deflation:
Look at how the summer movies are doing this year. Every weekend it seems there is a new movie that does $100 million during its first weekend. This week the new Batman movie broke the all time opening for a non holiday weekend by raking in $150 million.
Gee you think maybe because this might be because its the only form of family entertainment that doesn't cost you at least $100? The days of taking your family to a baseball game at $250 a pop are over. These million dollar athletes will be taking pay cuts as attendance begins to drop over the next few years.
The signs are everywhere folks. Look around and see how your friends are living. My guess is they are acting a little more frugal.
If you don't think this is going to murder our "consumer obsessed" economy then you need to rethink your position.
70% of our economy is based on the consumer. Sadly, all he can afford to do on a summer weekend right now is watch Batman battle the Joker.
Monday, July 21, 2008
Global Economy Hits Maximum Danger Levels
I will be on later today with an update on the market action. I wanted to share a great piece from the Telegraph.co.uk from Ambrose Evans-Prichard. He warns of a potential worldwide recession of epic proportions.
It appears Europe may fall into a recession before we do. It appears the "Global Growth" story is starting to fall apart. Our exports and cheap dollar have allowed many Fortune 500 companies to keep their heads above water.
Here is the piece in full. Its an excellent read:
"The global economy is at the point of maximum danger
By Ambrose Evans- Pritchard
Last Updated: 11:54pm BST 20/07/2008
It feels like the summer of 1931. The world's two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution.
The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning of a "chance of a global recession". Plainly, the IMF cannot or will not offer any useful insights.
Its "mean-reversion" model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels by holding interest too low for a generation, and now the chickens have come home to roost. True "mean-reversion" would imply debt deflation on such a scale that would, if abrupt, threaten democracy.
The risk is that these same central banks will commit a fresh error, this time overreacting to the oil spike. The European Central Bank has raised rates, warning of a 1970s wage-price spiral. Fixated on the rear-view mirror, it is not looking through the windscreen.
The eurozone is falling into recession before the US itself. Its level of credit stress is worse, if measured by Euribor or the iTraxx bond indexes. Core inflation has fallen over the last year from 1.9pc to 1.8pc.
The US may soon tip into a second leg of this crisis as the fiscal package runs out and Americans lose jobs in earnest. US bank credit has contracted for three months. Real US wages fell at almost 10pc (annualised) over May and June. This is a ferocious squeeze for an economy already in the grip of the property and debt crunch.
No doubt the rescue of Fannie Mae and Freddie Mac - $5.3 trillion pillars of America's mortgage market - stinks of moral hazard. The Treasury is to buy shares: the Fed has opened its window yet wider. Risks have been socialised. Any rewards will go to capitalists.
Alas, no Scandinavian discipline for Wall Street. When Norway's banks fell below critical capital levels in the early 1990s, the Storting authorised seizure. Shareholders were stiffed.
But Nordic purism in the vast universe of US credit would court fate. The Californian lender IndyMac was indeed seized after depositors panicked on the streets of Encino. The police had to restore order. This was America's Northern Rock moment.
IndyMac will deplete a tenth of the $53bn reserve of the Federal Deposit Insurance Corporation. The FDIC has some 90 "troubled" lenders on watch. IndyMac was not one of them.
The awful reality is that Washington has its back to the wall. Fed chief Ben Bernanke thought the US could always get out of trouble by monetary stimulus "à l'outrance", and letting the dollar slide. He has learned that the world is a more complicated place.
Oil has queered the pitch. So has America's fatal reliance on foreign debt. The Fannie/Freddie rescue, incidentally, has just lifted the US national debt from German 'AAA' levels to Italian 'AA-' levels.
China, Russia, petro-powers and other foreign states own $985bn of US agency debt, besides holdings of US Treasuries. Purchases of Fannie/Freddie debt covered a third of the US current account deficit of $700bn over the last year. Alex Patelis from Merrill Lynch says America faces the risk of a "financing crisis" within months. Foreigners have a veto over US policy.
Japan did not have this problem during its Lost Decade. As the world's supplier of credit, it could let the yen slide. It also had a savings rate of 15pc. Albert Edwards from Société Générale says this has fallen to 3pc today. It has cushioned the slump. Americans are under water before they start.
My view is that a dollar crash will be averted as it becomes clearer that contagion has spread worldwide. But we are now at the point of maximum danger. Britain, Japan, and the Antipodes are stalling. Denmark is in recession. Germany contracted in the second quarter. May industrial output fell 6pc in Holland and 5.5pc in Sweden.
The coalitions in Belgium and Austria have just collapsed. Germany's left-right team is fraying. One German banker told me that the doctrines of "left Nazism" (Otto Strasser's group, purged by Hitler) had captured the rising Die Linke party. The Social Democrats are picking up its themes to protect their flank.
This is the healthy part of Europe. Further south, we are not far away from civic protest. BNP Paribas has just issued a hurricane alert for Spain.
Finance minister Pedro Solbes said Spain is facing the "most complex" economic crisis in its history. Actually, it is very simple. The country was lulled into a trap by giveaway interest rates of 2pc under EMU, leading to a current account deficit of 10pc of GDP.
A manic property bubble was funded by foreigners buying covered bonds and securities. This market has dried up. Monetary policy is now being tightened into the crunch by the ECB, hence the bankruptcy last week of Martinsa-Fadesa (€5.1bn). With Franco-era labour markets (70pc of wages are inflation-linked), the adjustment will occur through closure of the job marts.
China, India, East Europe and emerging Asia have all stolen growth from the future by condoning credit excess. To varying degrees, they are now being forced to pay back their own "inter-temporal overdrafts".
If we are lucky, America will start to stabilise before Asia goes down. Should our leaders mismanage affairs, almost every part of the global system will go down together. Then we are in trouble."
It appears Europe may fall into a recession before we do. It appears the "Global Growth" story is starting to fall apart. Our exports and cheap dollar have allowed many Fortune 500 companies to keep their heads above water.
Here is the piece in full. Its an excellent read:
"The global economy is at the point of maximum danger
By Ambrose Evans- Pritchard
Last Updated: 11:54pm BST 20/07/2008
It feels like the summer of 1931. The world's two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution.
The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning of a "chance of a global recession". Plainly, the IMF cannot or will not offer any useful insights.
Its "mean-reversion" model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels by holding interest too low for a generation, and now the chickens have come home to roost. True "mean-reversion" would imply debt deflation on such a scale that would, if abrupt, threaten democracy.
The risk is that these same central banks will commit a fresh error, this time overreacting to the oil spike. The European Central Bank has raised rates, warning of a 1970s wage-price spiral. Fixated on the rear-view mirror, it is not looking through the windscreen.
The eurozone is falling into recession before the US itself. Its level of credit stress is worse, if measured by Euribor or the iTraxx bond indexes. Core inflation has fallen over the last year from 1.9pc to 1.8pc.
The US may soon tip into a second leg of this crisis as the fiscal package runs out and Americans lose jobs in earnest. US bank credit has contracted for three months. Real US wages fell at almost 10pc (annualised) over May and June. This is a ferocious squeeze for an economy already in the grip of the property and debt crunch.
No doubt the rescue of Fannie Mae and Freddie Mac - $5.3 trillion pillars of America's mortgage market - stinks of moral hazard. The Treasury is to buy shares: the Fed has opened its window yet wider. Risks have been socialised. Any rewards will go to capitalists.
Alas, no Scandinavian discipline for Wall Street. When Norway's banks fell below critical capital levels in the early 1990s, the Storting authorised seizure. Shareholders were stiffed.
But Nordic purism in the vast universe of US credit would court fate. The Californian lender IndyMac was indeed seized after depositors panicked on the streets of Encino. The police had to restore order. This was America's Northern Rock moment.
IndyMac will deplete a tenth of the $53bn reserve of the Federal Deposit Insurance Corporation. The FDIC has some 90 "troubled" lenders on watch. IndyMac was not one of them.
The awful reality is that Washington has its back to the wall. Fed chief Ben Bernanke thought the US could always get out of trouble by monetary stimulus "à l'outrance", and letting the dollar slide. He has learned that the world is a more complicated place.
Oil has queered the pitch. So has America's fatal reliance on foreign debt. The Fannie/Freddie rescue, incidentally, has just lifted the US national debt from German 'AAA' levels to Italian 'AA-' levels.
China, Russia, petro-powers and other foreign states own $985bn of US agency debt, besides holdings of US Treasuries. Purchases of Fannie/Freddie debt covered a third of the US current account deficit of $700bn over the last year. Alex Patelis from Merrill Lynch says America faces the risk of a "financing crisis" within months. Foreigners have a veto over US policy.
Japan did not have this problem during its Lost Decade. As the world's supplier of credit, it could let the yen slide. It also had a savings rate of 15pc. Albert Edwards from Société Générale says this has fallen to 3pc today. It has cushioned the slump. Americans are under water before they start.
My view is that a dollar crash will be averted as it becomes clearer that contagion has spread worldwide. But we are now at the point of maximum danger. Britain, Japan, and the Antipodes are stalling. Denmark is in recession. Germany contracted in the second quarter. May industrial output fell 6pc in Holland and 5.5pc in Sweden.
The coalitions in Belgium and Austria have just collapsed. Germany's left-right team is fraying. One German banker told me that the doctrines of "left Nazism" (Otto Strasser's group, purged by Hitler) had captured the rising Die Linke party. The Social Democrats are picking up its themes to protect their flank.
This is the healthy part of Europe. Further south, we are not far away from civic protest. BNP Paribas has just issued a hurricane alert for Spain.
Finance minister Pedro Solbes said Spain is facing the "most complex" economic crisis in its history. Actually, it is very simple. The country was lulled into a trap by giveaway interest rates of 2pc under EMU, leading to a current account deficit of 10pc of GDP.
A manic property bubble was funded by foreigners buying covered bonds and securities. This market has dried up. Monetary policy is now being tightened into the crunch by the ECB, hence the bankruptcy last week of Martinsa-Fadesa (€5.1bn). With Franco-era labour markets (70pc of wages are inflation-linked), the adjustment will occur through closure of the job marts.
China, India, East Europe and emerging Asia have all stolen growth from the future by condoning credit excess. To varying degrees, they are now being forced to pay back their own "inter-temporal overdrafts".
If we are lucky, America will start to stabilise before Asia goes down. Should our leaders mismanage affairs, almost every part of the global system will go down together. Then we are in trouble."
Sunday, July 20, 2008
Is America Too Big To Fail?
Good afternoon!
I put this article in the must read category. It appears that some economists are becoming increasingly concerned that countries will continue to buy our debt.
As I described yesterday, there may be a day of reckoning where Russia and China say enough is enough and stop buying our debt.
So the question must be asked? Is America too big to fail? According to this article, the jury is still out. Here is the link to the International Herald Tribune piece.
Here are some of the highlights in the article:
"NEW YORK: In the narrative that has governed American commercial life for the last quarter-century, saving companies from their own mistakes was not supposed to be part of the government's job description. Economic policymakers in the United States took swaggering pride in the cutthroat but lucrative form of capitalism that was supposedly indigenous to their frontier nation.
Through this uniquely American lens, saving businesses from collapse was the sort of thing that happened on other shores, where sentimental commitments to social welfare trumped sharp-edged competition. Weak-kneed European and Asian leaders were too frightened to endure the animal instincts of a real market, the story went. So they intervened time and again, using government largess to lift inefficient firms to safety, sparing jobs and limiting pain but keeping their economies from reaching full potential.
Today, among strict adherents of laissez-faire economics, the offer to bail out Fannie and Freddie is already being criticized as a trip down the Japanese path of putting off immediate pain while loading up the costs further along.
For one thing, this argument goes, taxpayers - who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel - will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly, or the Fed can print more money - a step that encourages further inflation.
"They are going to raise the cost of living for every American," said Peter Schiff, president of Euro Pacific Capital, a Connecticut-based brokerage house that focuses on international investments. "The government is debasing the value of our money. Freddie and Fannie need to fail. They are too big to save."
Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf. Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds. And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.
Meanwhile, as American debts swell and foreigners hold more of it, nervousness grows that, someday, this arrangement will end badly. The dollar has been declining in value against other currencies. Some foreigners have begun to hedge their bets by buying more euros.
"Obviously, this is going to come to an end," Schiff said. "Foreigners are not charitable organizations, and they're going to demand that we pay them back."
No single country owning large amounts of dollar-based investments is inclined to dump them abruptly; nobody aims to start a panic. But fears have begun to grow that one day a country may get spooked that another is about to dump its dollars - and that could trigger pre-emptive panic selling.
"Foreigners could decide it's just not worth the risk and sell," says Andrew Tilton, an economist at Goldman Sachs. "The really dire scenarios have become a lot more likely than they were a year or two ago."
The central truth of that logic still seems to be apparent as the Treasury keeps finding takers for American debt.
So the government offers its rescue of the mortgage companies, and foreigners keep stocking the government's coffers. "They don't want the U.S. to go into the worst downturn since the Depression," Tilton says.
But all the while, the debt mounts along with the costs of an ultimate day of reckoning. Debate grows about the wisdom of leaning on foreign credit, and about how much longer Americans will retain the privilege of spending and investing money that isn't really theirs.
Bailouts amount to mortgaging the future to stave off the wolf howling at the door. The likelihood of a painful reckoning is diminished, while the costs of a reckoning - should one come - are increased.
The costs are getting big."
Final Take:
Its looking more and more like we are about to take the same path that Japan did when their housing market collapsed. The banks were allowed to walk around like zombies without being forced to open their balance sheets. Japan had no confidence in its stock market as a result and it collapsed.
How bad was the collapse? Japan's stock market dropped from 38,000 in the late '80s down to its current levels of around 13,000.
The best case scenario here is we continue to find buyers of our debt. However, there are no free lunches. We will be punished for doing so in the form of higher taxes and a weaker dollar. Our standard of living will also diminish as inflation rises because our currency will be so weak. This will then pummel the consumer.
Look at Japan's currency after taking the "hide the sausage" approach to their banking sytem and its failures. The Yen(Japan's currency) is the joke of the world. You may see the US dollar right beside it if we use Japan's gameplan to get out of our economic mess.
So what do you guys think? Is America too big to fail? I am starting to think this risk is a serious one that I may see in my lifetime if the bailouts don't stop.
I put this article in the must read category. It appears that some economists are becoming increasingly concerned that countries will continue to buy our debt.
As I described yesterday, there may be a day of reckoning where Russia and China say enough is enough and stop buying our debt.
So the question must be asked? Is America too big to fail? According to this article, the jury is still out. Here is the link to the International Herald Tribune piece.
Here are some of the highlights in the article:
"NEW YORK: In the narrative that has governed American commercial life for the last quarter-century, saving companies from their own mistakes was not supposed to be part of the government's job description. Economic policymakers in the United States took swaggering pride in the cutthroat but lucrative form of capitalism that was supposedly indigenous to their frontier nation.
Through this uniquely American lens, saving businesses from collapse was the sort of thing that happened on other shores, where sentimental commitments to social welfare trumped sharp-edged competition. Weak-kneed European and Asian leaders were too frightened to endure the animal instincts of a real market, the story went. So they intervened time and again, using government largess to lift inefficient firms to safety, sparing jobs and limiting pain but keeping their economies from reaching full potential.
Today, among strict adherents of laissez-faire economics, the offer to bail out Fannie and Freddie is already being criticized as a trip down the Japanese path of putting off immediate pain while loading up the costs further along.
For one thing, this argument goes, taxpayers - who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel - will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly, or the Fed can print more money - a step that encourages further inflation.
"They are going to raise the cost of living for every American," said Peter Schiff, president of Euro Pacific Capital, a Connecticut-based brokerage house that focuses on international investments. "The government is debasing the value of our money. Freddie and Fannie need to fail. They are too big to save."
Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf. Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds. And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.
Meanwhile, as American debts swell and foreigners hold more of it, nervousness grows that, someday, this arrangement will end badly. The dollar has been declining in value against other currencies. Some foreigners have begun to hedge their bets by buying more euros.
"Obviously, this is going to come to an end," Schiff said. "Foreigners are not charitable organizations, and they're going to demand that we pay them back."
No single country owning large amounts of dollar-based investments is inclined to dump them abruptly; nobody aims to start a panic. But fears have begun to grow that one day a country may get spooked that another is about to dump its dollars - and that could trigger pre-emptive panic selling.
"Foreigners could decide it's just not worth the risk and sell," says Andrew Tilton, an economist at Goldman Sachs. "The really dire scenarios have become a lot more likely than they were a year or two ago."
The central truth of that logic still seems to be apparent as the Treasury keeps finding takers for American debt.
So the government offers its rescue of the mortgage companies, and foreigners keep stocking the government's coffers. "They don't want the U.S. to go into the worst downturn since the Depression," Tilton says.
But all the while, the debt mounts along with the costs of an ultimate day of reckoning. Debate grows about the wisdom of leaning on foreign credit, and about how much longer Americans will retain the privilege of spending and investing money that isn't really theirs.
Bailouts amount to mortgaging the future to stave off the wolf howling at the door. The likelihood of a painful reckoning is diminished, while the costs of a reckoning - should one come - are increased.
The costs are getting big."
Final Take:
Its looking more and more like we are about to take the same path that Japan did when their housing market collapsed. The banks were allowed to walk around like zombies without being forced to open their balance sheets. Japan had no confidence in its stock market as a result and it collapsed.
How bad was the collapse? Japan's stock market dropped from 38,000 in the late '80s down to its current levels of around 13,000.
The best case scenario here is we continue to find buyers of our debt. However, there are no free lunches. We will be punished for doing so in the form of higher taxes and a weaker dollar. Our standard of living will also diminish as inflation rises because our currency will be so weak. This will then pummel the consumer.
Look at Japan's currency after taking the "hide the sausage" approach to their banking sytem and its failures. The Yen(Japan's currency) is the joke of the world. You may see the US dollar right beside it if we use Japan's gameplan to get out of our economic mess.
So what do you guys think? Is America too big to fail? I am starting to think this risk is a serious one that I may see in my lifetime if the bailouts don't stop.
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