The Tycoon Report

Concessions, or a Concession-stand Conspiracy?

Monday, May 18, 2009 | Barbara Cohen

On Friday, May 8,  we all found out about the results of the banks' "stress tests."  We learned that 10 of the 19 banks need to raise $75 billion to cover whatever. 

On Friday, the S&P 500 index reached a high of 930 -- a 30% rise from its lowest point.

On Saturday, May 9, we learned that the banks won "concessions" from the federal government.  Were these really "concessions," or did the federal government just open a "concession stand"?

Let's look at the chronology of what happened during the last two months.  I don't necessarily have a "conspiracy theory," Type A personality. But, in this case, well, hmm. ....

Putting the Puzzle Pieces Together

On Feb. 25, the federal government announced that U.S.-based banks with total assets exceeding $100 billion would undergo stress tests.  And the purpose? To lend confidence to the economy that the banks would not just collapse.  The big players were named as participants, including Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), SunTrust (STI), etc.

On March 9, the S&P 500 hit a low of 654.  At that time, these bank stocks were all trading at their lowest ranges.  Citi was trading around $1 per share.   Bank of America was not far above it.  In the previous month's Treasury Department's International Capital (TIC) report, released Feb. 17, it showed that the number of domestic securities purchased had dramatically shrunk. 

At the end of 2007, purchases were 1 trillion while, at the end of 2008, purchases were only 412 billion -- about 40% of what they were a year earlier.  And financial stocks were the "low man on the totem pole," as nobody was buying them.

In March, U.S. banks and brokerages sent more than 12,000 employees packing, while they sat on $70 billion in stimulus dollars.  The top brass paid themselves bonuses, went to expensive hotels, upgraded their corporate bathrooms, made sure their friends received nice dividend checks, etc. -- all at the expense of the U.S. taxpayer.  This came on the heels of the previous Treasury Secretary Henry Paulson (an ex-Goldman Sachs executive) writing a three-page memo to give the banks/brokerages $700 billion with no strings and no oversight.

In March, American International Group (AIG, the company that received $150 billion bailout) protested the "restructuring" of bonuses, saying that the failure to give bonuses would demoralize the very employees who could turn the company around. In their line of thinking, why would anyone work at AIG if they knew their salary was limited?  Of course, AIG failed to state that it was these same employees who created the mess that the company was in already.  Just about every news agency ran a "this is pathetic" story about AIG.

Given the banks' flagrant, in-your-face, abusive handling of taxpayer dollars, had Barack Obama's administration approved any more bailout money beyond the $700 billion, probably he, Joe Biden, Tim Geithner, etc. would have all been lynched by U.S. taxpayers, and Obama would never had seen his first 100 days in office.

Now Comes the Conspiracy Theory...

Here's the March 9 "Catch-22": 

Financial stocks are trading at rock-bottom prices.  There is no confidence in the banks, so no one is buying their shares. The TIC report shows that no foreign country is buying U.S. bank stocks.  The feds can't give any more money to bail out the abusive banks or else they will get lynched.  Banks can't pass the stress tests and will have to raise more more cash.  Banks cannot raise more money because there is no confidence in them and no one is buying their stocks.

What can the feds do?

The Plan is Hatched ...

It's simple; we'll just inflate the S&P 500 and Dow 30% by creating a "bear-market rally."

The Feds knew they had to work hard at this plan.  No rest for the weary.  Why?  Because the economic data simply did not support the Dow's 30% increase. 

One in 374 homes are in foreclosure/short sale.  In March, 663,000 people joined the ranks of the unemployed.  April added another 659,000, with the March unemployment revised upward by nearly 100,000. The unemployment rate (that they are willing to admit) ticked up to 8.9%.  Retail sales were in the red for seven consecutive months. And the GDP was down 6.1% in Q1 2009.

With all this bad news, how will the Dow go up 30%?  That's easy -- the feds likely said, "We'll just 'pump' the stocks up."

How?

I imagine the conversation went something like this:

"We'll get pundits all over the news channels talking it up, saying the bad times are over.  We'll get small investors believing that they should invest.  And when the Dow is back up 30% (May 8), we'll announce that the stress test is completed (also May 8).  Now the banks will be able to raise the cash they need.

"To make this work, we'll leak some of the results of the stress tests early so that the banks can begin raising capital before the S&P 500 hits the high." 

On April 28, 50 days after the start of the bear-market rally, it was leaked that Bank of America needed to raise $34 billion, and Citigroup $10 billion, and that they were in the process of raising the money.

On May 11, 63 days after the start of the bear market rally, Federal Reserve Chairman Ben Bernanke said he was "encouraged" by how quickly the banks were able to raise private capital as required by the stress tests.

Uh Oh, Here Comes the Rub ...

Since 1900, there have been 34 bear-market bottoms. The one in particular that seems to model our current recession happened from 1929-'32.  Combined, those bear-market rallies each averaged 70 days in length with the Dow rising about 30%.   If we calculate the days from March 9, 2009, to Wednesday, May 13, 2009, we get 65 days.  On May 8, the Dow rose 30%.

But on Monday, May 11, the Dow closed down 155 points.  On Tuesday, it was down until the very very end of the day, and closed higher, up 50 points.  On Wednesday, the Dow was down 184 points.  It was up just a little on Thursday by 46, but on Friday, down 62.  For the week, the Dow was down more than 300 points.  Did last week mark the end of the bear-market rally?

Like I said, I am not big on conspiracy theories, but this time, this data would be enough to make even the biggest skeptic pause and wonder.  Be my guest and make the call: Were these concessions, or a concession-stand conspiracy?






Barbara Cohen
Contributing Editor
The Tycoon Report


Economic Calendar for the Week of May 18-22

TUESDAY, MAY 19

8:30 a.m. Housing Starts and Building Permits

    * Importance (A-F):  This release merits a B-.
    * Source: The Census Bureau of the Department of Commerce
    * Release Time: 8:30 a.m. Eastern around the 16th of the month (data for one month prior).
    * Raw Data Available At: http://www.census.gov/const/www/newresconstindex.html

Housing Starts are a measure of the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Building permits are permits taken out in order to allow excavation. An increase in building permits and starts usually occurs a few months after a reduction in mortgage rates. Permits lead starts, but permits are not required in all regions of the country, and the level of permits therefore tends to be less than the level of starts over time.

Highlights

    * The March housing data were not pretty. Starts dropped 10.8% to a 510,000 annual rate from 572,000 in February. The level is not as low as the 488,000 dismal January number, but it is still the second lowest of this cycle.

    * The March level is well below expectations of about a 540,000 level and below the three-month average of 539,000 the three prior months.

    * By region, starts were up 6.3% in the Northeast, up 15.9% in the Midwest, down 16.8% in the South, and down 26.3% in the West.

    * Housing permits gave no indication of an imminent upturn. Permits fell 9% to a 513,000 annual rate. This is the lowest level of the current cycle and below the 547,000 average of the three prior months.

Key Factors

    * There is no reason not to take the data at face value as an indication that housing remains in a deep slump and that sporadic signs of stabilization have to be viewed with caution.

Big Picture

    * Housing starts are at extremely low levels and the outlook is not likely to improve any time soon due to high levels of inventories of unsold new homes.  An uptrend in consturction will require an improvement in employment and income, and then take some time as inventories need to be reduced.  Government action to boost mortgage lending may also help, and starts might stabilize in the second half of the year.


THURSDAY, MAY 21

8:30 a.m. Initial Claims

    * Importance (A-F): This release merits a C .
    * Source: The Employment and Training Administration of the Department of Labor.
    * Release Time: 8:30 a.m. Eastern each Thursday (data for week ended prior Saturday).
    * Raw Data Available At: http://www.dol.gov/opa/media/press/eta/main.htm

Initial jobless claims measure the number of filings for state jobless benefits. This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signalling slowing (accelerating) job growth. On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four-week moving average to get a better sense of the underlying trend. It typically takes a sustained move of at least 30,000 in claims to signal a meaningful change in job growth.

There are two other statistics in this report -- the number of people receiving state benefits and the insured unemployment rate; neither is watched closely by the market. Some analysts track the number of people receiving state benefits from month to month as a guide for job growth, though this series has a poor track record in predicting the monthly employment report. The insured unemployment rate changes little on a weekly basis and is never a factor for the market.

Highlights

    * Initial claims for the week ended May 9 jumped to 637,000 from 605,000 in the prior week while continuing claims through May 2 increased to another record high of 6.56 million from 6.36 million in the prior report.

    * The 4-week moving average for initial claims rose 5.3% to 630,500.  The four-week moving average for continuing claims rose 3.2% to 6.34 million.

Key Factors

    * One can still argue that the pace of layoffs has slowed, but the disturbing fact remains that hiring isn't picking up.

    * The latter reality will continue to be a key drag on consumer spending activity which, in turn, will slow the trajectory of the economic recovery effort.

Big Picture

    * New claims for unemployment are at recessionary levels, as the financial crisis on Wall Street spilled over to Main Street in noticeable fashion with the seizing up of the credit markets in late summer/early fall 2008.


10 a.m. Leading Indicators

    * Importance (A-F): This release merits a C-.
    * Source: The Conference Board.
    * Release Time: 10:00 ET around the third week of the month for the month prior.
    * Raw Data Available At: http://www.tcb-indicators.org

The Leading Indicators report is, for the most part, a compendium of previously announced economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices. Therefore, the report is extremely predictable and of very little interest to the market. Though this series does have some predictive qualities, it is a common criticism that it has predicted "nine of the last six" recessions.

The Commerce Department previously published the leading indicators series. The collection and publishing of these data is now done by the non-profit Conference Board, which also produces the Consumer Confidence index.

Highlights

    * The March index of Leading Indicators, reported by the Conference Board, declined -0.3%. That was larger than the consensus estimate of -0.2% and marked the third straight monthly decline in the series. The February report was revised higher to show a decline of -0.2% versus a previously reported -0.4%.

    * Looking at the components within the index, it was M2 and the interest rate spread that were the big offsets again, as they contributed 0.34% and 0.26%, respectively, to the leading index.

    * Consumer expectations added 0.08%, consumer goods orders were estimated to be flat, and all other components were reported to have a negative net contribution with building permits (-0.26%) the biggest drag.

    * The coincident index registered a -0.4% decline, its fifth-straight monthly drop, while the lagging index was down -0.3% for its fourth-straight losing month.

Key Factors

    * This index typically does not have much market impact since most of its components are known ahead of time.

Big Picture

    * The leading indicators index does not have a good track record over the past few years.  The index overestimated weakness in 2007 and early 2008.  The index is now understandably reflecting the weakness in many sectors of the US economy and is likely to trend negative for a while.


10 a.m. Philadelphia Fed Index

    * Importance (A-F): The Philadelphia Fed Index merits a B.
    * Source: The Philadelphia Federal Reserve bank.
    * Release Time: Third Thursday of the month at noon Eastern for the current month.
    * Raw Data Available At: http://www.phil.frb.org/

There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting. Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month.

A few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM and are of little value. The purchasing managers' reports are measured like the national NAPM - 50% marks the breakeven line between an expanding and contracting manufacturing sector. For the Philadelphia and Atlanta Fed indexes, 0 is the breakeven mark.

These surveys can be of some help in forecasting the national NAPM -- particularly the Philadelphia and Chicago surveys, which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross-section of national manufacturing activities.