OCCUPY Weekend Economists! September 14-16, 2012

[Demeter]

45. Three Key Take-Aways From Today’s Headlines By Chris Mayer

“Markets are going in the opposite direction of the world economy. If you’re positioned fundamentally, you’re positioned against these clowns.”

— John Burbank, Passport Capital, on the latest news from Europe’s central bank

Three headline events each tell us something important about global markets. More and more, government is a big player in markets — creating distortions, along with pitfalls and opportunities.

Item No. 1: The market says one thing. Earnings say something different.

The stock market rallied last week on news that the European Central Bank will “save the euro.” Basically, the ECB said it stands ready to buy bonds in unlimited quantities. To finance this, the ECB will essentially print money. This follows talk about how the US Federal Reserve stands ready to goose markets further — by printing more money. In essence, the actions and chatter of central bankers are what are driving the rally since that little bottom we had in June after the market sold off about 9%.

Earnings are not driving the rally, that’s for sure. The S&P 500 just registered a 0.8% growth rate in earnings for the second quarter, according to today’s Financial Times. The consensus for the third quarter is negative for the first time in three years. The ratio of companies saying they’d miss third-quarter forecasts versus those that that said they’d meet them was 3-to-1. That is the worst ratio since the fourth quarter of 2008, which came on the heels of the Lehman Bros. bust. “Historically, we have only seen numbers like this during times of recession,” says Christine Short of S&P Capital IQ (which tracks earnings) in today’s FT.

Yet the market hits a four-year high.

Take-away: Trust earnings. The market can go only so far on the gas of central banking. Don’t believe prices reflect what’s happening with the underlying companies. The market is too optimistic.

Item No. 2: Gloom spreads in China despite the best efforts of officials.
SEE LINK BELOW FOR DETAILS

Item No. 3: The US government is selling its AIG stake.

Front page on The Wall Street Journal: The US government says it is going to sell $18 billion in AIG stock. This will cut its stake in the big insurer by half.

This is a reminder that the US government is still in the business of owning major stakes in big companies. It still owns stakes in Fannie Mae and Freddie Mac — which the government spent $188 billion on. It still owns big stakes in GM and in Ally Financial, which it spent $68 billion on. These are companies that would have otherwise gone through the bankruptcy process — as would have a long list of institutions. What the bailouts did was preserve the same bad actors that got us into trouble in the first place. The corrective tonic of bankruptcy never got to do its full work.

I’m not going to get into the politics of it, or even the economics of it. I’m a practical man in these pages. We have to take the world as it is, not how we wish it would be. We have to do the best we can with the markets we find ourselves in....Take-away: The US government still has large stakes in several financial companies. It is still a source of great distortions. However, as it sells these stakes, the overhang from its ownership will disappear. So too might the discounts these stocks trade for. AIG looks like a double as these things sort themselves out.

It’s a weird market we’re in. I can’t recall a time when government actions seemed to drive prices as much as now. I don’t like it. But there are ways to navigate your portfolio through the mess...


Read more: Three Key Take-Aways From Today's Headlines http://dailyreckoning.com/three-key-take-aways-from-todays-headlines/#ixzz26bIdRSqs