Baltimore – (TFN): All eyes and ears are on the Fed this week. With Bernanke in New York discussing potential new bubbles and the New York Fed getting heat for overpaying AIG’s many creditors, investors are having a tough time knowing exactly who to follow.

For those of you who hold up the “Fire the Fed” signs, move over. I am thinking about joining your camp.

First, the real bad stuff. According to Neil Barofsky, TARP’s special inspector general, New York’s Fed (under the leadership of Tim Geithner) failed to use its leverage as the top-banking regulator to tell AIG’s lenders to take less than they were owed.

Instead of taking an across-the-board “haircut” as Obama and Pelosi told us we all should, finance giants like Goldman Sachs, Merrill Lynch and Societe Generale said they want 100% of what they were owed.

The only holdout, UBS, said it would be willing to take 98%. But after tough looks from the guys from across the table, that offer was quickly rescinded.

According to Barofsky, the move cost the country billions of dollars and much, much more in confidence for the nation’s banking cops.

Thanks, Tim!

With that bit of news in today’s headlines, it is tough to find the confidence in some of the Fed’s latest plans to help pull the country from financial failure.

As the nation slowly recovers from last fall’s economic collapse, Bernanke and his troops at the Fed are now facing the difficult task of unwinding massive expansionary policies.

One trick discussed today is shortening the length of emergency loans from 90 days to just 24 days starting in January. It’s a pretty mundane move that will have little tangible effect on the markets.

But what could have a much larger impact, with much less transparency, is Bernanke’s recent discussion of paying interest on the reserves banks place with the Fed.

A popular move with many overseas central banks, the interest rates paid on reserves helps to establish a rate floor that regulators can gradually increase without raising overall interest rates.

Essentially, the move is a way of mopping up excessive liquidity without draining or lowering the water in a much larger pool of lending capital.

Like many things, the idea sounds great on paper, but so did letting the Fed negotiate with AIG’s trading partners and we now know how much that cost us.

Let’s face it. The markets like transparency and predictability. Anything less gives us what Friedrich Hayek called “malinvestment.”

As the Fed gets more and more creative in its efforts to boost the economy without creating deadly bubbles, transparency will go out the window.

Toss in growing political pressure from the folks from Washington and one thing is certain.

Anything the Fed does will cost you and I more money.

Unlike some stockpickers and newsletter analysts, who proudly trumpet all their winners, while shuffling the losers under the rug, I have no problem admitting when my calls go against me.

And to the delight of all the naysayers, this happened just a couple of days ago when gold prices shot to a record high. That triggered my sell-stop and, rather than let my pride come before a fall and hang on, it’s time to move on.

Don’t get me wrong, though… I’m still convinced that the yellow metal could suffer a correction for three main reasons…

• So far, inflation hasn’t reared its ugly head. If it stays in hiding much longer, disillusioned investors will probably head for the exits.
• If the U.S. economy recovers quicker than expected, investors will be inclined to abandon the safe haven of gold and reinvest in equities.
• The technicals point to a drop. The last four times gold spiked near or above $1,000 per ounce, it quickly (and sometimes precipitously) corrected.

However, giving into these convictions – and doubling down on gold – would mean abandoning two core investing disciplines that I swear by – position sizing and trailing-stops…

Have You Considered Using Trailing Stops & Position Sizing?

I know… you’ve heard about them countless times before. But indulge me for a moment, as I explain an aspect of both trailing stops and position sizing that you’ve probably never considered…

• When I speak at investment conferences, I always like to ask people to share their biggest loser. Heads go down and nary a hand rises.
• Conversely, when I ask them to share their biggest winner, it’s like I just offered free candy to an auditorium full of kindergarteners. Everyone’s hand shoots up and there’s a chorus of anxious, “Oohs!”

Nobody likes to talk about losing investments. Instead, we want to thump our chest over the latest 1,000% gainer. The reason for that is obvious, so let’s focus on the fear about talking about our losers.

Many investors turn their biggest loser into a total loss. Instead of employing a trailing-stop and exiting a trade as the price tumbles, they make it a long-term investment to save face. Or worse, they invest more at lower prices. Most times, the stock goes belly up and they lose even more.

Even the professionals can’t claim immunity here.

• For instance, take Bill Miller, the famous manager of the Legg Mason Value Trust Fund (LMVFX). Although Miller beat the S&P 500 for 15 consecutive years, he refused to man up to his mistakes when the market took a nosedive in 2008. He kept averaging down in stocks like Countrywide, Bear Stearns, Freddie Mac (NYSE:FRE), Merrill Lynch, Washington Mutual (OTC:WAMUQ) and AIG.
• He revealed the true depth of his arrogance when he was asked how he knew when to stop buying a falling stock. “When we can no longer get a quote,” he replied. In other words, the only price at which he was unwilling to buy more was zero.

Here’s my point…

Avoid Losses With A Position Sizing & Trailing Stop Discipline

When I joined The Oxford Club, I immediately stopped worrying about my losses. That’s because we religiously adhere to a 25% trailing-stop discipline and a position size of no more than 4% in any one investment. Thus, losses are always contained.

The beauty of such a simple, disciplined approach is two-fold…

• The results add up, decidedly on the plus side. Case in point: The independent Hulbert Financial Digest has ranked The Oxford Club newsletter (The Communiqué) among the top five in the nation. That’s based on 10-year returns, too.
• A trailing-stop and position sizing policy allow me to keep making bold calls without regret. The bolder they are, the smaller my position size.

For instance, for my short gold call, I only invested 2%. For a hypothetical $100,000 portfolio, that means investing  $2,000 and losing $500, or less than 1% of the total portfolio value.

Bottom line: I don’t ever let an investment turn into an unacceptable loss. And I never put too many eggs in one basket. Sure I might lose 25% here or 25% there, but when I keep my position sizes small, in the grand scheme of things, it’s no big deal.

Such a strategy leaves me with plenty of capital to re-deploy and keep gunslinging. And while gold didn’t work out, some other contrarian bets are already making up for the loss and then some.

• Take Sotheby’s (NYSE: BID), for example. Back in June, I advised readers to buy shares when everyone else believed the market for investing in fine art was going into a long hibernation. The fundamentals faltered, but they didn’t collapse. As a result, Sotheby’s rallied 68% from my entry point.
• Then there’s my recommendation last Thursday to buy into the beleaguered retail sector with hhgregg (NYSE: HGG). It’s up 5.7% since then.

If I take profits on both now, my misstep by shorting gold doesn’t even matter.

The Critical Component to a Disciplined Investment Approach: Accountability

But of course, a disciplined investment approach is useless without the critical component of accountability… In terms of position sizing, there’s only one person who can keep you honest: Yourself.

But when it comes to implementing trailing-stops, multiple options exist…

• A So-So Option: Enter the stop levels with your broker. However, this is not ideal. Market makers can manipulate prices to trigger these stops.
• A Better Option: Use a service like TradeStops (www.tradestops.com). For a nominal annual fee, it will alert you via text message and/or e-mail when your stocks hit their trailing-stops.
• The Best Option: Excuse my bias, but the best value for your money is The Oxford Club. We constantly remind you about position sizing and more importantly, notify you immediately when we hit a stop-loss or trailing-stop. And our members keep each other honest.

In addition, membership also comes with a constant stream of high quality, profitable recommendations. And they make up for the occasional downer, like my short gold recommendation! To find out more, take a few minutes to read our report on how it all works.

Good investing,

Louis Basenese

Source: Two Tips to Avoid Letting a Bad Stock Sucker-Punch You

Years of debt and securitization finally caught up to the FIRE (finance-insurance-real estate) sector of the economy. The titans of finance refused to come clean about the real value of the ‘assets’ they sat on…and finally it came time to pay the piper.

Dan Amoss, whose recommendation of Lehman put options generated 462% gains earlier that summer, wrote in this space a year ago, “Think about how much better off Lehman Brothers would be if its management hadn’t put off the process of reporting losses, dumping impaired assets and raising new capital. Would its stock be 26 cents today? Probably not.”

So the heavy-hitters of the finance sector have surely learned their lessons and proceeded to mark down their “assets” to realistic levels over the last year, right?

You wish. Even mainstream economists like the Nobel laureate Joseph Stiglitz say we’re in a worse pickle now. “In the US and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz told Bloomberg over the weekend. “The problems are worse than they were in 2007 before the crisis. It’s an outrage.”

And how do ordinary people feel about the response their government leaders have made to the crisis? Americans are, as our friend Doug Casey would put it, ‘a bunch of whipped dogs.’ Rather, they’re supremely sanguine, compared to much of the rest of the world.

For all the honeymoon-is-over talk surrounding Obama, we’re struck by how much grumpier people seem to be elsewhere. Americans are as satisfied with the actions of Obama and Congress to the same extent Russians are satisfied with those of the Putinocracy.

We should note here that Russian GDP contracted at a breathtaking 10.9% last quarter, while consumer prices are rising at a better-than-10% clip.

Source: Have the Titans of Finance Learned Their Lesson?

The 64-year-old Mack will remain as Morgan’s Chairman when Gorman, 51, takes over the CEO post on January 1, the company said.

Mack came under criticism as he scaled back Morgan’s risk profile even as rivals like Goldman Sachs Group Inc. (NYSE: GS) regained momentum as the worst economic downturn since World War II began to wane, according to the Associated Press.

“Gorman has really earned his stripes,” Anton Schutz, president of Mendon Capital Advisors Corp., which owns Morgan Stanley shares, told Reuters. “He did a great job at Merrill, he’s doing a good job at Morgan Stanley, and the timing for a change seems to be good, because we’ve made it through the worst of the crisis.”

Before joining Morgan in 2006, Gorman had held a series of positions at Merrill Lynch & Co. Inc., including leading its global private client business from 2001 to 2005.

Morgan received $25 billion in federal funds under the Troubled Asset Relief Program (TARP) last year, and has since repaid the entire amount to the U.S. government.

Source: Morgan Stanley CEO Steps Down, Will Remain as Chairman

Then, he followed his own theory… coolly… confidently… cutting Fed rates down to nearly zero, pushing Congress to pass a huge ‘stimulus’ bill, and even forcing Bank of America (NYSE:BAC) to take over Merrill Lynch. In this last event, he is accused of deliberately hiding Merrill’s enormous losses and then threatening the BofA board with dismissal if they refused.

Because of Bernanke’s swift and assertive action, the nation’s banking system held together during those critical weeks of late-2008. And because of his monetary (and fiscal) policies, all the worlds’ economies are now in some stage of recovery. Stocks are rising. House sales are increasing. All the indicators point to a better world.

In recognition of the fact that he saved the world, Ben Bernanke was given the nation’s highest honour; Obama picked him to continue as head of America’s central bank, the Federal Reserve… even though he was appointed by his predecessor, a Republican.

Everyone needs a story. It’s the way we understand things. Data is just data. Numbers are just numbers. Facts are just facts. Without the framework of a good tale to hold them together, they are worthless.

That’s why, here at the Daily Reckoning, we are suspicious of facts, data and numbers. As for the numbers, they are wrong before they get to us… often intentionally. Then, when they are later straightened out, they sometimes tell a completely different story. Even the ‘facts’ often turn out to be not facts at all… but distorted data, information has been twisted to fit into a storyline.

The more precise the data, meanwhile, the more they lie. Give us a CPI rate of 6.24% and we will give you back two numbers that are total fictions… and another one that turns out to be wrong later. As for the GDP growth rate… don’t even bother to give us a number at all. Whatever the digits say, it’s a lie.

This week came news that the GDP is falling at a 1% rate. This number surprised economists. They thought it was falling at a 1.5% rate. This better-than-expected number encouraged investors to buy stocks; the Dow rose 37 points yesterday. Oil and gold remained more or less where they were.

Economists are frequently surprised. In a study of GDP forecasts, a researcher found that economists did nothing more than extrapolate current trends into the future. If the GDP was growing at 2%… they projected that it would grow at 2.3% the following year. Or maybe 1.9%. These projections were mostly correct. Generally, one year is a lot like the year before. But whenever the direction changed dramatically, economists missed it completely. In other words, they’re not really capable of telling us what the economy will do – unless it does nothing different.

We’ve discussed the emptiness of the GDP figures many times. Just because the GDP is growing doesn’t mean people are really any better off. In fact, GDP growth during the Bubble Epoque was really a measure of how fast people were ruining themselves. Seventy percent of the GDP was consumer spending; as consumer spending went up so did debt. The result was a paradox and a shame – at the end of one of the longest periods of uninterrupted GDP growth in history, the typical householder was poorer than he was than when it began.

That’s why we are skeptical of numbers… especially precise numbers. They lie through their decimals.

What matters is the story… and our story now centers on the role of one man: Ben Bernanke. But the story that most people hear… and believe… is false. It is like GDP growth in the Bubble years… it may sound right on the surface, but the real story is opposite to what is commonly believed.

Bernanke ‘wrote the book’ on avoiding deflation, ‘tis true. But he doesn’t really have a clue what he is doing. He didn’t really avoid a Second Great Depression. There isn’t really a genuine recovery underway. And the world is not becoming a better place as a result of Ben Bernanke’s exertions.

Au contraire… he’s making a natural mess into an unnatural one. He’s turning a depression into a Great Depression… He’s making a bad situation worse.

At least, that is OUR plotline. But we’ll let the story tell itself… day by day… and see where it leads us. If we are wrong about the plot… we’ll find out…

*** What a summer.

Last night we invited our neighbours over for a barbecue. Damien, our gardener, manned the fire. Jules took care of drinks.

Along with the farmers, their wives and their children, came the girls from across the road. You’ll recall THAT storyline, dear reader. This has been a summer of awakening for the teenagers. For the first time since we’ve been here – 14 years – our boys have noticed our neighbours’ girls. Every summer before, we would only see them in church, lined up in pretty dresses… quiet… polite… We exchanged kisses, in the French manner, after the mass, but that was it. Otherwise, we never saw them.

“This is a summer the boys aren’t likely to forget,” began their older brother at breakfast this morning. “They all went down to the pond after dinner last night. I went down to say hello, but after a few minutes, I felt out of place. It was pretty hot down there.”

Yes, the girls have grown up. And so have the boys. Back and forth, all the month of August. Playing tennis and swimming in the daytime. Having dinner and hanging out at the pond at night.

“It’s a lot of fun,” our youngest boy, 15, reported earlier in the week. “But it’s complicated. We all seem to like someone else… but not the one who likes us. Eloise likes Henry, but Henry likes Claire. Claire likes me, I think, but I like Sylvie. I don’t know who Jules likes, but I think all the girls like him.”

Last night, however, it looked as though the iron filings were finally lining up. Your editor went down to the pond at 2AM; it was time to take the girls home, he told them.

“I don’t care if the girls want to stay or not… Take them home,” he told them.

The boys obeyed. But it was obvious that none of them wanted to leave. Edward had one of the girls by the arm. Henry and another were deep in conversation on the other side of the fire. Jules was nowhere to be seen.

It was the last time they would see each other until next summer. The girls would go back to their lives in Paris or elsewhere. Our boys would go back to school or on to their careers. Tonight was their last night together. The goodbyes were long… and, probably, tender.

“C’mon… get going,” said Father, heartlessly. “Wrap it up…”

Source: Making a Bad Situation Worse

Here at the Daily Reckoning, we always take the part of the humble… the despised… the oppressed… and the misbegotten.

Today, that means the rich…

Yes, dear reader, the rich are getting beaten up. Maligned. Mistreated.

Their governments all have in it for them… taxes on ‘the rich’ are rising. In the US, the Democrats are talking about financing the entire nation’s health care system on the backs of the super-rich.

And their salaries are being targeted by prosecutors and politicians. No more million-dollar paydays… not with the feds looking over their shoulders. Oh… and their investment earnings are down too. The dividend yield on the stock market is scarcely 3% — try living on that, you rentiers! As for the 10-year T-note, the yield is only 3.5%.

And capital gains? Fugetaboutit. Stocks have been rallying (bouncing) since March 9 th. The bounce has helped investors recover about 45% of what they lost. But, overall, there have been no gains in the stock market for more than 10 years. None. Factor in the effect of inflation and the story is worse; investors have lost about 25% to 30% of their money.

But everyone is pointing a finger at the rich – as if they were to blame for the financial debacle of the last few years. Some economists even blame the “growing inequality of incomes” as a cause of the crisis.

This is completely unfair. The rich didn’t cause the problem – they merely took advantage of it as best they could. It was a time when ‘financialization’ was on the rise… when money made money, at least in theory. Speculation and lending paid off. Obviously, you have to have money if you’re going to lend or speculate. Some of ‘the rich’ – those in the financial industry – cleaned up.

But come the revolution of ’07-’08 and the rich lost their heads. Who lost $50 trillion in stock and real estate? It wasn’t the poor. Whose derivative positions went belly up? Whose stocks went down? Whose mega-mc-mansions got re-priced as cracker shacks?

On this last point, we have new information. The housing crisis may have begun in the sub-prime trailer part of town. But now it’s in the older suburbs – it’s the prime and super-prime homeowner whose back is to the garden wall. A third of foreclosures in the 2 nd quarter were of houses financed by prime, fixed-rate mortgages. Of prime borrowers, 41% are expected to be underwater by 2011, says a forecast from Deutsche Bank – nearly three times as many as at the beginning of 2009.

And now nearly half of all jumbo mortgages are underwater. Yikes, the rich… and bourgeois classes… are up to their necks.

And now this sad report from the New York Times:

“Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.

“Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price . In one ZIP code in Vail, Colo., only five homes sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick. In Bronxville, an affluent New York suburb, the decline was to two, from 17, according to Coldwell Banker Residential Brokerage.”

And so, we pause to wonder. What does it mean? Where does it lead? Who gives a flying fig?

*** At a certain level, all of this concern about who earns what… and who has what… is just so much envious claptrap. For most of us – who have enough to eat and a roof over our heads – money is just sport. We aim to win, just as we would try to win a croquet match. But what difference does it make?

We don’t know. So we turn back to the game. How can we get more wealth than our neighbours?

And here… a bit of perspective…

When the Great Khans road across the heartland of Eurasia in the 13 th and 14 th centuries, nothing could stop them… or so it seemed. Their soldiers were practically born in the saddle. From childhood they learned how to ride, and fight… and little else. Europe’s population, meanwhile, was more settled… and more soft.

But Europe was hardly the brightest bauble on the tree. The Mongols had their pick. West – to conquer Europe. South – to conquer India. Or East – to conquer China.

They attacked Europe, but only half-heartedly. Instead, they devoted most of their efforts to India and China. Why? India and China were richer! There was more stuff to steal.

It’s hard to make comparisons. But, at the time, the East was at least as rich as the West. But then, along came the Indus trial Revolution and the East was left behind. People in the West learned to save… and to invest their savings in capital improvements – machines, factories, canals, railroads, mines, ships and all the other things that allow people to be more productive. This extra production made them rich. Not to put too fine a point on it, but they could make more stuff!

Then, with the ability to produce more and better stuff came the ability to produce the kind of stuff that you can kill people with. So, pretty soon, they were making machine guns. And pretty soon, the horse-mounted warrior of the steppes was as archaic and irrelevant as the Roman legions. He could still charge with great élan. He could still raise his saber and his bow… providing a rich subject for artists and poets. And he could die so well! All you had to do was to open up with your new, factory-made 50-caliber machine gun and down he went.

But what goes around comes around. Who’s saving now? The Chinese save 25% of their earnings. In America, the rate is rising… from zero to five percent!

Who’s building factories? Who’s harnessing the indus trial revolution? Who’s getting rich? Who’s innovating? Who’s building cities?

Who’s the world’s biggest creditor? Who’s got the biggest pile of money?

Oh, dear reader… you already know the answer…

“West will languish; Asia will lead…” says a headline in Barron’s this week.

And what’s this…

“ China commercial property sales higher than US,” says a headline at Bloomberg.

Yes, dear reader… it is the way of the world… Losers become winners. Winners become losers. Day yields to night; summer gives way to winter. Life goes on… always as it always was… but never the same.

And we leave you with that philosophical reflection… and go back to the financial world…

*** The nights have turned cooler. And the hot social season is giving off heat… like a pond in the autumn. Last night we went to a dinner under the stars. Without mentioning names, the crowd with mixed… and interesting: the widow of one of the greatest admen of all time… a descendant of Jacques de Liniers, who sank the English fleet at the battle of La Plata, thus protecting the Spanish possessions in Argentina, and a few members of the world’s most celebrated banking family. What were they doing in the middle of nowhere in France?

“There’s no explanation for it… I was surprised as you,” explained one of our companions. “You don’t expect it. The whole area is as dead as a doornail 10 months of the year. Then, in the summer it really comes alive. I’ve been to several cocktails… and several dinners… and concerts. Last night, there was an English choir – a big choir of more than 30 people – performing at the church in Montmorillon. There’s something going on almost all the time…

“Maybe it’s because the countryside is so quiet. And there aren’t many restaurants. Not much to do. So when you come here for the summer you just have to organize something yourself.

“The nice thing about it is that we all have friends here that we see nowhere else… and only once a year. So, we catch up.

“And I hear your children are making friends,” she said with a wink.

Word gets around.

Yes, it has been a summer of awakening, I think. Our sons have discovered that the little girls across the street have grown up. And the little girls across the street have discovered that they can charm young men. They hardly knew each other until this summer – though we’ve all been practically next to each other for nearly 15 years. But we were only here in the summer. And they were only there in the summer. And until this summer they never took much interest in one another.

This summer, they’re going back and forth from one house to another. They swim in our neighbour’s pool. They ride horses at our house. They play tennis. And it goes on all day and late into the night.

We left the party at about 1AM. When we got home, we spotted a campfire beside the pond.

“Let’s go see who’s still up,” said Elizabeth.

“Do we dare? I don’t think they want us intruding…”

“Let’s do it anyway…”

Next to the gypsy wagon, there was a group of about 10 teenagers. There were some we didn’t recognize. There were our three sons… and a couple of their friends. And there were the girls from across the road, with their friends. And one of their brothers, too. One of our sons was sitting very close to one of the girls from across the road – a charming 17 year old. In the light of the campfire, he looked very pleased with himself.

“Don’t you girls have to go home,” we asked.

“At 1:30AM…” they replied.

It was 1:25. Why waste a minute… when you are 17… and the summer is coming to an end?

Source: Pointing a Finger at the Rich

And Bank of America arbitrarily assigned a higher value to its Merrill Lynch assets. Earnings reports this quarter may also impress investors. Trade revenue is up on the big spread between treasury and other bonds. And the banks earned fees in May helping each other raise capital.

Didn’t Bernanke also recently lean on BoA CEO Ken Lewis to commit securities fraud by not declaring losses at Merrill Lynch prior to its takeover by BoA? We appreciate that Gentle Ben is just doing his job and all. But does he really think we’re going to trust him following the Merrill-BoA episode?

We don’t believe a word Bernanke says about the economy… or about banks. As NYU economics professor Nouriel Roubini put it recently, the stress tests (or “fudge tests” as he calls them) aren’t worth the paper they’re written on. They’re meaningless, because they have been reverse engineered to create positive results. Here’s Roubini on the subject:

If you look at the actual data today macro data for Q1 on the three variables used in the stress tests – growth rate, unemployment rate, and home price depreciation – are already worse than those in U.S. government baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.

Nassim Nicholas Taleb, a scholar of risk and chance at Polytechnic Institute of New York University, author of The Black Swan:

The Impact of the Highly Improbable: “This stress test is the equivalent of testing the Brooklyn Bridge by running a single heavy truck on it.”

“Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” Geithner said in testimony to a congressional oversight panel on the government’s financial rescue program.

One of these banks, Bank of America (BAC), the world’s second largest in terms of market capitalization, booked a first-quarter net income of $4.247 billion – 6% more than it made in all of 2008.

So is this the turnaround Geithner et al. have been willing to beggar our nation’s future for?

Before calling your broker and placing a big order for bank stocks based on all this “good” news, it might be prudent to answer a couple questions first.

For starters, just where did all this income come from? And has credit quality really improved?

The answers to both can be found buried in a company press release bearing the encouraging title “Bank of America Earns $4.2 Billion in First Quarter.”

I’d like to draw your attention to the four most telling excerpts from this release.
1. “Equity investment income includes a $1.9 billion pretax gain on the sale of China Construction Bank (CCB) shares.”
2. “Noninterest income included $2.2 billion in gains related to mark-to-market adjustments on certain Merrill Lynch structured notes as a result of credit spreads widening.”
3. “Credit quality deteriorated further across all lines of business as housing prices continued to fall and the economic environment weakened.”
4. Nonperforming assets were $25.7 billion compared with $18.2 billion at December 31, 2008 and $7.8 billion at March 31, 2008, reflecting the continued deterioration in portfolios tied to housing.”
Now we see that out of its $4.2 billion in profits, a total of $4.1 billion came from a one-time sale of CCB stock and marking up Merrill’s book of mortgages. If you subtract these one-time gains from net income and include preferred dividends, Bank of America actually lost $1.286 billion.

As far as credit quality goes, I think number 3 above makes the situation as clear as can be.

Importantly, Bank of America is not the only big bank engaged in accounting sleight of hand.

As The New York Times article “Bank Profits Appear Out of Thin Air” by Andrew Ross Sorkin points out:
With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JP Morgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

So what’s the takeaway?

When the Treasury secretary tells you banks are well capitalized and you read in the press that financial institutions have turned a corner, don’t buy it. And don’t buy the stocks of these companies either.

These days, smart investors are well advised to carefully watch the investment as well as the political landscape… because Washington’s movers and shakers’ influence on the markets has never been greater. The Casey Report investigates and analyzes those influences and trends – to find the best investing opportunities with maximum gains. You can try it completely risk-free – check out our 3-month trial with 100% money-back guarantee. Click here to learn more.

Source: Are Banks Going Bankrupt? “NO!”, say Banks

Good day… Yesterday was a big day in St. Louis as President Obama came to visit on his 100th day in office. I can’t believe it has been 100 days since the inauguration. Time sure does fly! I’m sure Obama and the rest of his administration would like the calendar to move even faster as this recession will likely last through the end of 2009. While the government has thrown trillions of dollars at the markets in an attempt to turn them around, the key ingredient for recessionary cycles to reverse is time. There is now ‘quick fix’ for the problems we are in, and the policies the administration has begun will take time to have an impact on our shrinking economy. Obama said as much in his nationally televised press conference last night.

Speaking of shrinking economies, US GDP showed an even steeper contraction in the first quarter than that predicted by economists. US GDP fell 6.1% compared to the 6.3% fall during the last quarter of 2008. This drop confirms that we are now in the worst recession since the Great Depression. There report showed a record slump in inventories and further declines in housing. But another report released by the Commerce Department showed a surprising 2.2% gain in consumer spending in the first quarter, the most in two years. So we have consumers who increased their spending and confidence, while the US economy was contracting at near record pace.

Another report which didn’t get much press was the GDP Price Index and the Core PCE which are measures of price inflation. These numbers rose more than expected, with the GDP price index rising 2.9%, nearly doubling economists predictions of a 1.8% increase, and substantially higher than last quarters .5% rise. This sets up the possibility that we could see what many consider the worst case scenario, falling GDP with rising inflation (STAGFLATION). With inventories at very low levels, a slight increase in consumption can lead to a very quick rise in prices. But the Fed doesn’t seem to be bothered too much by that scenario, as they continue to focus on efforts to get the economy growing, with no apparent concern about inflation.

The Fed’s Open Market Committee voted unanimously yesterday to leave its target interest rate unchanged at between 0 and .25% (they really can’t go much lower!!). They also voted to continue to their purchases of long-term Treasuries and housing debt which they began last month. The FOMC statement said the contraction has slowed and the outlook “improved modestly” but the economy may “remain weak”. Job losses and a very tight credit market will likely inhibit consumer spending in the coming quarters.

As I said earlier, there was no mention whatsoever of an exit strategy on how the Fed plans to pull in the record amount of money supply it has unleashed on the economy. The Fed said they will continue to monetize the debt at an unbelievable pace: as much as $1.25 trillion of mortgage-backed securities, $200 billion of federal agency debt, and $300 billion of Treasuries. They are making these purchases in an attempt to keep interest rates at below market levels to fabricate a refinancing boom. While they have been somewhat successful in keeping rates lower than they would be under normal market conditions, these purchases are extremely inflationary and won’t be easily reversed. But the FOMC believes they will have plenty of time to worry about inflation and have decided to basically ignore it for now. Problem is, inflation can spike pretty quickly, and the FOMC will be hard pressed to raise interest rates just as the economy is starting to pull out of recession. I just don’t believe they will have the guts to be proactive with inflation, and will probably see a major spike in prices on the other side of this recession.

Inflationary concerns are at the forefront of the ECB as they prepare for next weeks policy meeting. ECB President Jean-Claude Trichet has imposed a gag order on council members as they argue over what to do next to rescue the European economy. Some members had been taking their cases to the media recently in an attempt to push the ECB into following the UK, US, and Japan down the quantitative easing path. But more conservative members don’t believe the ECB should use these untested methods, and are worried about the eventual inflationary impact of them. The ECB cut rates less than expected in April, and pushed a decision to use other methods off to next week’s meeting. Germany’s Axel Weber wants to make 1% the floor for the benchmark rates, and is against buying debt to pump additional money into the economy, while other council members want to begin asset purchases to force rates lower.

Data released this morning show Europe’s unemployment rate rose to the highest in more than three years, and inflation held at a record low, which will increase pressure for the ECB to continue to cut rates. The March unemployment rate jumped to 8.9% in the Euro area, and inflation held steady at .6% in April. Other reports released this week suggested confidence in Europe is stabilizing which could counter some of the pressure to take additional measures. Chuck will bring you the details of the ECB meeting, which will occur a week from today.

The dollar sold off on safe haven reversals, but then moved back up in European trading. So after a bit of a roller coaster ride, we are pretty much right where we started yesterday morning. But the overall market sentiment seems to be shifting back to dollar negative. Two separate reports released by currency trading desks yesterday revised their currency forecasts down for the US$. Bank of America (NYSE:BAC) – Merrill Lynch revised their forecasts for the dollar, yen, euro, and pound on the ‘rising probability’ the global recession has passed its lowest point. Their report stated the euro would recover faster than previously predicted as the global economy turns. A separate report by Citigroup said the dollar would fall if/when the 10 year Treasury note yields rise above 3.06%. Technical analysts at Citigroup (NYSE:C) wrote that past trading patterns look like they are repeating. “Buying the dollar and US Treasuries was the trade of choice toward the end of 2008 and is now unraveling,” they said.

Global deleveraging pushed investors back into US$, but as the global economy recovers (led by an increase in consumption in China), investors will move these funds out of this safe haven. Yield differentials will again determine investment direction, and growing economies will be able to attract more speculative capital. The US$, which has benefitted from the global downturn, will be sold. In order to protect your portfolio, investors should have some exposure to the currencies and metals.

One currency which has turned in one of the best performances vs. the US$ this week has been the Canadian dollar. The loonie touched the strongest level in two weeks on a move up in the price of oil. Equity markets are up, as investors have become much more confident regarding a global turn around. This confidence has carried over to the commodity markets, where oil and some of the industrial metals have been rising again. Canada relies on shipments of raw materials including oil, natural gas, copper, and lumber for more than half of its export revenues.

A report released by TD Securities, a large Canadian trading desk, predicted the Canadian dollar would appreciate by as much as 14 percent by November if it breaks through a key technical level. If the US dollar breaks below 1.1764 CAD$/$ (or above .85 UScents/CAD$) the upside opens up hugely over the next few months. The report puts a target of 1.04 CAD$/US$ (or .9615 US$/CAD$) for the loonie, a 14% increase from today’s levels.

As I touched on above, the commodity currencies turned in one of their best performances in weeks as the price of oil shot back above $50. Both Norway’s krone and the Australian dollar rallied along with the Canadian dollar. The AUD$ actually rose to the highest level in more than six months against the US$. The Norwegian krone, Australian dollar, and Canadian dollar are three of the best four currencies vs. the US$ on a YTD basis. The top performer vs. the US$ in 2009 has been the South African Rand, but recent rate cuts there may start eating into its recent strength.

South Africa cut its benchmark rate a full percentage point, the fourth reduction since December to help spur their economy. New Zealand’s central bank also cut rates to a record low yesterday. Reserve Bank Governor Alan Bollard reduced the overnight rate by 50 basis points to counter the nation’s worst recession in more than three decades. He indicated that rates may go lower, and will stay down for the foreseeable future. The kiwi sold off after the announcement.

Good economic news out of Japan has been rare, so yesterdays report that Japan’s factory output rose for the first time in six months was a surprise. And even more surprising was the fact that the pace of the output rise was nearly double that predicted by economists. Factory production climbed 1.6% in March from February, when it dropped 9.4%. In a separate report, the Bank of Japan said the world’s second largest economy will resume growth in 2010 after shrinking 3.1% this fiscal year. But I still caution investors regarding investments into the yen. The Japanese yen benefitted from the reversal of the carry trade, but global markets seem to be substantially less leveraged than before. The Japanese yen is not going to be able to benefit from another large push by additional deleveraging.

Got to go now, as we have our quarterly officers meeting in a few minutes. Sounds like it will be all good news, as EverBank continues to hit on all cylinders. It really is another Great Day at EverBank!!

Currencies today 4/30/09: A$ .7289, kiwi .5666, C$ .8383, euro 1.3263, sterling 1.4812, Swiss .8790, rand 8.4585, krone 6.5931, SEK 8.0664, forint 218.38, zloty 3.323, koruna 20.125, yen 98.15, sing 1.4775, HKD 7.75, INR 50.035, China 6.8210, pesos 13.74, BRL 2.1796, dollar index 84.49, Oil $51.81, Silver $12.62, and Gold… $889.20

Source: Shrinking U.S. Economy Puts Pressure on the Dollar