• A day after posting better-than-expected quarterly earnings, Goldman Sachs Group Inc. (GS) sold $5 billion in stock to repay federal bailout money. All totaled, Goldman sold 40.65 million in shares at $123 a piece, 5.5% below Monday’s closing price, Reuters reported. Goldman received a total of $10 billion from the Troubled Asset Relief Program.
• Amsterdam-based Royal Phillips Electronics NV (PHG) said its cost-reduction program will save the company more than 500 million euros ($664 million) this year, Bloomberg reported. The announcement came with its quarterly earnings report, in which Europe’s largest consumer-electronics maker reported its second-consecutive loss.

• First quarter earnings for pharmaceutical and health care retail giant Johnson & Johnson (JNJ) fell, but beat estimates by cutting costs, Reuters reported. The company $3.51 billion, or $1.26 a share, in the first quarter compared with $3.6 billion, or $1.26 a share, in the first quarter last year. Johnson & Johnson reaffirmed its 2009 profit forecast of $4.45 to $4.55 a share.

• Singapore’s economy may shrink 6% to 9% this year, the government said in its third reduced forecast this year. To counter contraction, the government will adjust the trading range of the Singapore dollar. “The situation is really dire and the central bank’s policy will improve sentiment and help the economy,” Vishnu Varathan, an economist at Forecast Singapore Pte., told Bloomberg.

• Discover Financial Services (DFS), will cut 500 jobs in May, or 4% of its workforce, Reuters reported, citing company sources. Discover, the fourth-largest U.S. credit card network, last month posted a deeper-than-expected quarterly operating loss, cut its dividend and set aside more money to cover bad loans as defaults increase.

• In a sign bankers are gaining confidence that the worst of the financial crisis is over, the London inter-bank offered rate (LIBOR) for three-month dollar loans is dropping at the fastest pace since January, Bloomberg reported. Debt strategists at Credit Suisse Group AG (ADR: CS) Societe Generale SA (ADR: SCGLY) and Royal Bank of Canada (RY), three of the 16 banks that provide the data that sets Libor each day, say the declines will continue.

• Weak demand and a supply glut could cloud the coal industry’s prospects for the rest of the year, even as U.S. coal miners are likely to show strong quarterly profits this month, Reuters reported. But big U.S. coal producers should weather the economic downturn because they sold much of this year’s production at higher prices negotiated before the recession hit last September. Coal prices are expected to stay low throughout 2009 until production cuts by major miners begin to restrict the coal supply.

• Madoff Securities International Ltd., filed for bankruptcy protection in Florida under Chapter 15 of the federal bankruptcy code. The code is designed to block U.S. lawsuits against foreign companies reorganizing overseas that have U.S. operations, Bloomberg reported. Bernard Madoff pleaded guilty last month to 11 counts including fraud and money laundering for directing the largest Ponzi scheme ever.

Source: Global Investment News Briefs Wednesday April 15, 2009

There is a new report from the Comptroller of the Currency titled “OCC’s Quarterly Report on Bank Trading and Derivative Activities, Fourth Quarter 2007″, which shows that total bank holdings of derivatives is estimated to be “only” $164.2 trillion, whereas I seem to remember that the global glut of derivatives is upward of $700 trillion, which are both numbers so big that I cannot even begin to comprehend the enormity of them.

The report shows that the notional value of derivatives held by U.S. commercial banks has suddenly plunged by a whopping $8 trillion, which is (unbelievably) still only 5% of the total, and which merely takes the total down to the aforementioned-yet-still-staggering $164.2 trillion.

When I realized that $8 trillion is more than half of America’s GDP, that is when I realized that “Houston, we seem to have a problem, as we are on fire, and we are tumbling out of control into the sun where we will soon be fried to a cinder.”

And let’s not forget that even this baleful news is the best that the banks can come up with, as the whole report is based on banks volunteering to tell stories about themselves, which is unbelievably the same as with, according to an article in the Financial Times, Libor rates, which are the agreed-upon interest rates that London bankers agree to charge on short term loans to each other.

The upshot of asking lying, greedy bankers (the villains of history) to tell the truth and let everyone know what disreputable, untrustworthy scum they are has now proved to be an unreliable system of self-regulation, and thus the Libor rate may be understated because the rate is based on self-reports of people who are bankers, which means that they are lying scumbags who falsely report that their short-term borrowing costs are lower than they are, because they know it looks bad that they are getting charged a high interest rate, which proves that the people who are loaning the money to them know what kind of lying, scumbag bankers (as redundant as that is) they are.

But it is these self-reports, like the American O.C.C reports, that are the backbone of the Libor rate, which affects lots and lots and lots of other rates.

By how much is the Libor lending rate understated? Maybe as much as 0.3%, which doesn’t sound like that much, but when you are talking about trillions and trillions of pounds and euros of debt, it adds up to a lot of money! Now you see why they are so interested in lying!

And the last thing we need is higher interest rates, as Bloomberg.com reports that “U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit”, which is being made manifest by noting that a Merrill Lynch index showed that “The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007.” Wow! What’s that, an increase of 5,000% or something?

And another scary Bloomberg item was that loans are becoming harder to get, regardless of the interest rates, and “Banks worldwide are demanding 60% more in collateral from investors such as hedge funds to cut the risk of derivative trades going bad, the International Swaps and Derivatives Association said.”

And another horror is that the stock market went up, which is Pretty Freaking Strange (PFS) since Barron’s reports that the earnings of the Dow Jones Industrials went down, dropping to $225.53 from $234.49. This has produced the unbelievable price-to-earnings ratio of 57! Earnings are going down, but the stocks are going up! To a P/E of 57! Un-freaking-believable!

And not only that, but DJ Transportation index saw its earning drop, too, to $218.60 from $230.91, taking this index’s P/E to 23!

And while the venerable S&P500 has not yet shown any more deterioration in its earnings, the fact that the market went up made the P/E of this index go to a lofty 21! All of this in the face of deteriorating conditions and economic collapse! This is beyond incredible!

How can you NOT run to gold in such crazy times? Ponder this question well, as a lot depends on your answering it correctly, much like when the minister asked you, “Do you take this woman to be your lawfully wedded wife?”, and you know how well that turned out. So, like I said, ponder it well!

The Mogambo Sez: The nice thing about owning exclusively gold, silver and oil is that you make a lot of money when inflation is roaring like this, and you are sure to make a lot more in the future, too, which is even nicer!

There is a valuable lesson in there for you if you will look for it and then act on it. If not, then you are not as smart as you look! Hahaha!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

More are likely to follow, at least until normal conditions are resumed. Unclogging the mortgage market would be numero uno on an estate agent’s wish list. Something the Bank of England is working on. They’re look for a way to squirt more cash into the system without adding to the £100bn gorilla dropped on to the taxpayer’s already aching back with Northern Rock.

The Treasury is about to OK a plan for banks and building societies to swap their mortgage-backed assets for government bonds as opposed to cash, reports The Times. Though they don’t say why, but I think we can guess. The BoE can get its treasury bonds back more easily than slippery cash. It’s essential the taxpayer doesn’t shoulder any more risk, says LibDem Treasury spokesman, Vince Cable. Agreed. Otherwise we might as well give old Wedgie Benn a call, nationalise the lot of them and be done with it. Just when we thought we were Thatcher’s spawn, a Socialist utopia muscles in through the back door and repossesses our mortgaged home in the name of the Council.

A deal with the UK banks is pending within the fortnight and London bank shares are having a good day on the back of it. What also came to light today is that Libor, the measured rate at which banks lend to one another, may not be giving an accurate read. Commercial banks may be being a little “economical with the actualite”, say reports, of exactly what they’re having to pay for funding. The fear is that if everyone knew just how bad it was, it wouldn’t help much, not least them. The British Bankers Association is so concerned it has brought forward its review of the Libor rate system in a bid to shore up its credibility.

Over in the US, “real estate is getting worse,” JP Morgan CEO Jamie Dimon told investors yesterday. He expects US house prices to fall by another 9% this year. Others see peak-to-trough falls of around 20% or more.

Another banker, CEO of Wachovia Kennedy Thompson, doesn’t see the economy recovering until late 2009. “Until housing prices find a bottom, capital markets are going to be frozen.” His counterpart at the Bank of America, Kenneth Lewis, would appear to agree. He doesn’t see the US housing bust bottoming before 2009 either.

Former Fed chief Alan “it’s not my fault” Greenspan said this thing won’t be over until the housing market stabilises, but is a little more optimistic that it will come sooner. When that day comes what percentage of the economy will be consumer spending we wonder? It was around 70% before the roof collapsed on the EZ money house-as-a-cash-dispenser economy.

Much the same could be said of the UK’s economy too. Consumers, either voluntarily or involuntarily, have been pulling in their purse strings and refocusing on needs at the expense of wants. The implications of this collective behaviour shift have been showing up regularly in the results of publicly listed companies, most notably in the retail sector. New examples today include WH Smith, where like-for-like sales fell 2% on high street “weakness”. And Findel plc, a shopping catalogue business and educational supplier, which issued a profits warning as it upped its bad debt provision. Something of a swift change of fortune after saying earlier in the month it expects a record profit for the year to March.

*** Woah…oil $115!

It keeps going up in leaps and bounds, but Mr Market doesn’t seem to care. His attentions appear focused exclusively on another form of liquidity. The kind that generally is found above ground and sloshes (or did, pre-August ‘07) through financial markets, ensuring everyone it touches is kept in champagne and bonuses.

And yet a few days ago we had the Russian VP of oil giant Lukoil saying Russia had hit peak oil already… Already? And there we were thinking the natural home of autocratic rule was just getting started with the black goo!

And today, the FT does nothing to calm the nerves of a tight market. Nigerian production could fall by a third by 2015, it reports. Reading further we find this is less a supply issue than a financial one. Big Oil, in the shape of Shell, ExxonMobil and Chevron, are finding an unreliable partner in the Nigerian government (why are we not surprised?) which is not ponying up its share. A headache Big Oil one doesn’t need, particularly Shell, given its recent history of the dodgy reserve booking and its ongoing struggle to replace what it’s sucking out of the ground with new reserves.

*** “Don’t talk to me. You want to know why Poles going home? I tell you,” says Simon, who’s been fixing up the bathroom and is returning home (for a visit he assures).

“I come here four years ago. Then 7 to 1”, (7 Polish Zloty to £1).

“Now 4 to 1 and every day going down.”

A trend noticed by “counter eddy” migrant Jim Parton, who thinks there may be money in it. The former City Whiz kid and author of the bestseller Buck Stops Here, is now installed in a Polish castle and asks: where can one buy Polish bonds? A nice 6% yield, an appreciating currency and wage inflation being crushed by migrant workers returning home. Sounds good to us, and with little call on our testosterone levels.

Finally, as basic food supplies cause shortages and price rises around the world, check this “World Clock” for a sobering estimate of how fast we’re adding to our number.

Finally, finally… no news from Bill again today as the concerns of running a multinational publishing empire make for increased demands on his time. He will be back soon, I’m sure. As to when, I’m not.

Regards,

Rob Mackrill
The Daily Reckoning