Bankers, Gamblers & Investors
Research for Online Investors

by John Dalt

9/16/11

One of the part time jobs I had in college was selling advertising for a small weekly shopper. I didn’t last long as the sales commissions were too meager to afford fifty-cent per gallon gasoline. But, I learned one thing. Printers could not buy green ink. Thirty-five years ago, the government was suspicious of anyone buying quantities of green ink; they might decide to make some money!

Of course we all want to make money, but somebody needs to take away Bernanke’s green ink.  Yesterday, the Federal Reserve worked a deal with the European Central Bank (ECB) to provide dollar liquidity to European banks through the end of the year in three operations of three month notes.

The ECB will borrow dollars from the U.S. Federal Reserve and then troubled loans from European banks.  European banks have $8 trillion dollars that must be rolled over by the end of 2012.

Normally, these banks could borrow week-to-week from the ECB and the ECB could always ring up Uncle Ben for a little extra if Jean-Claude Trichet needed some dollars.  The problem was the money market funds that normally supply liquidity to foreign banks were closing to banks that had large holdings of Greece, Italian and Spanish bonds.

What is the problem? A little thing called mark to market; no one knows what the paper these banks are holding is worth. Actually, everyone knows what the paper is worth, but eurozone laws don’t require banks to “mark to market” sovereign debt.

Because everyone knows the paper is not worth face value, and the banks are leveraged with so much of the “dodgy debt” that their equity would be gone if they marked it all to market.

Wednesday was the third anniversary of the Lehman Brothers bankruptcy.  Ironic.

The Donald (Trump) offered a 10-year lease on one of his buildings in New York.  Deposit required is 96 ounces of gold.  The Donald said, “It’s a sad day when a large property owner starts accepting gold instead of the dollar…The economy is bad, and Obama’s not protecting the dollar at all…If I do this, other people are going to start doing it, and maybe we’ll see some changes.”

The Federal Open Market Committee is meeting next Tuesday and Wednesday.  Wouldn’t it be interesting to know what the conservative minority on the FOMC think about the Fed’s rescue of the ECB?

A Trap with No Exit Plan

The ECB has now painted the eurozone governments into a corner. The ECB is going to fill their balance sheet with assets that are worth less than fifty cents on the dollar, all the while building liabilities of dollars owed to the Federal Reserve. The dollar will appreciate versus the euro when the eurozone collapses. Who will be expected to make up the losses? There is no stop loss for the ECB; they are building a trap with no exit. It will require more and more new money to keep it from collapsing around them. These guys are not bankers, gamblers or investors. None of these professionals would ever make this mistake.

Second-quarter earnings came in ahead of projections for most reporting companies. Today's chart provides long-term perspective to the current earnings environment by focusing on 12-month earnings. Notice how earnings declined over 92% from the Q3 2007 peak to Q1 2009 low which brought inflation-adjusted earnings to near Great Depression lows. Since its Q1 2009 low, S&P 500 earnings have surged (up over 1000%) and currently come in at a level that is greater than what occurred at the peak of the dot-com bubble and very near what occurred at the peak of the credit bubble. It is interesting to note that the original run up in real earnings from Great Depression lows to credit bubble highs took over 78 years. The current spike has taken 26 months. Second quarter earnings showed 11.9% growth rate for the S&P 500. This was higher than the 9.7% expected rate. Third quarter earnings are expected to grow at a 6.6% rate year over year. This would put S&P earnings at $98.57 At 13 times earnings; we could see 1281 on the S&P by the end of the year.

Chart courtesy of www.chartoftheday.com

Quote:

European elites, including German elites, must decide if they want the euro to survive - even at a high price - or not. If not, we should prepare for a controlled dismantling of the currency zone.--- Polish finance minister Jacek Rostowski

We wrote about attending Oktoberfest in Frisco, Colorado over Labor Day weekend with the in-laws.  My mother-in-law escaped Communist Germany after WWII and father-in-law played in a polka band up until a few years ago.  His band played in the Munich Oktoberfest 20 years ago, so this was a great time for them.

Your editor learns to sing German with the Austrian Boys Polka Band!
They let me wear the hat!

Editor’s note:  Thanks to all notes of concern for our daughter’s recovery from throat surgery.  The doctor tells me he successfully removed all of the cyst this time.  I took her to two classes on Thursday morning for quizzes, then escorted her home for rest.  She is in pain but sleeping and should be able to attend classes on Monday.  She is tough and a trooper.  We are very proud of her.  She is taking 24 credit hours this semester in order to graduate in 3 1/2 years!  She has a job starting the third week of December, but must complete her Business Degree.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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