What Earnings Are Telling Us

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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In general, company earnings are coming in ahead of extremely lowered expectations this quarter. This is a typical Wall Street game of setting the bar low enough so things look good, no matter how bad they are. The big success stories this quarter are technology firms, such as Intel, Apple, Yahoo and Sandisk. Tech earnings are cyclical however and the big traders tend to sell when earnings look the best. It is not clear yet if we are at that point his quarter. The large majority of tech company earnings come from outside the U.S. and their business picking up says more about the state of the economy in East Asia than it does about the U.S. economy.

In contrast to tech, banks are in increasingly bad shape, even in the cases where they are reporting good earnings. Wells Fargo's earnings were out today. Well Fargo said credit losses rose to $5.1 billion, up from $2 billion a year ago and $4.4 billion in the second quarter. Even though this is the bank's core business, it reported a profit of 56 cents per share last quarter, higher than the 49 cents reported a year ago. Wells is the fourth largest bank in the U.S. The pattern of deteriorating loan portfolios was also seen in Bank of America, Citigroup, and JP Morgan. Loan losses also increased in the second quarter. These numbers don't indicate that U.S. consumers and businesses are in good financial shape, nor that any economic recovery is taking place.

As for the the banking system having been saved, we will have to wait to see what happens when the unlimited flow of federal funds is cut off. TARP is supposed to expire at the end of this year. Today, however, President Obama is going to announce a $5 billion program to bail out community banks. Obama will tout the new program as funding to help these banks increase loans. TARP was supposed to accomplish this goal as well. Available U.S. consumer credit has taken a nosedive in the last year since TARP was implemented. There is obviously no lie too outrageous that Washington won't keep repeating it and the U.S. mainstream media won't print it.

It should also be kept in mind that many large cap firms other than tech get a lot of their earnings overseas. As the dollar falls, earnings made in other currencies increase proportionately. Once again this is not an indication of any U.S. economic recovery, but of U.S. economic weakness. The falling dollar is at least finally getting some coverage in the financial press. Business Week had a story on it in its latest issue. This is going to continue to be a big story for many years to come.

NEXT: Dance of the Declining Dollar Continues

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Latest Washington Free Lunches

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. stock market rally continued yesterday, with metals, steels and other infrastructure plays frequently having double digit rallies from usually extreme oversold conditions. What set off the rally was president-elect Obama's announcement over the weekend of the largest infrastructure-spending package since the 1950s to stimulate the U.S economy. The plan to upgrade America's deteriorating bridges and roads, increase energy efficiency in buildings, computerize health records, and increase use of broadband is certainly laudable and economically constructive unlike the visionless money-wasting programs of the historically incompetent Bush administration. While this lunch may be a lot tastier than what has been dished out in the last 8 years, the bill is still going to have to be paid one way or the other however.

An examination of the federal government's record so far in handling the housing crisis (which I would like to remind you that it helped to create and encourage) indicates that government action in that arena has so far been ineffective. Before the credit crisis U.S. foreclosures were running around a million a year. It looks like they will be about 2.25 million this year even after several government programs were instituted to limit the problem. A study just released by the Comptroller of the Currency indicates that over half of borrowers risk losing their homes again only six months after their loans have been renegotiated to lower monthly payments. Even worse, the government through the FHA is once again encouraging lenders to provide these same type of 'bound to default no matter what' loans. A recent Business Week cover story, "Subprime Wolves are Back" reveals that the FHA is supporting 100% insured loans (the government picks up the tab when they go bad) through mortgage lenders with spotty and even criminal records.

Meanwhile the Auto bailout proceeds in Washington. The current figure being discussed is $15 billion, which should stave off bankruptcy for the big three until sometime in the Spring of 2009. After that of course, another bailout will be needed and probably another and even another as well. The idea of a Car Czar is catching on adding another bureaucratic layer to an industry that is drowning because of its own bureaucratic sludge. Expect the auto bailout figures to rise next year, just as the banking/broker bailouts will. Add these figures to the up to one trillion dollars in the Obama proposed infrastructure spending - or at least that's the initial figure (pick whatever multiple you like to come up with the actual one).

It is my belief that all of these government programs and the ones that follow will indeed save the economy and once again make it robust, at least for awhile. It is not possible to spend almost unlimited amounts of money without causing inflation. When the spending is coming from essentially printing the money being spent, you can add major currency devaluation and the possibility of hyperinflation. Yes, we will get out of the frying pan, but we will wind up in the fire.

NEXT: China's Trade Gap and the Global Economic Future

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.