July 13, 2009
Have you become sick of hearing about the “green shoots”? Back on March 15, Federal Reserve Chairman Ben Bernanke appeared on 60 Minutes and made the self-serving, self-congratulatory claim that “green shoots” could be found in the economy. I guess we’re supposed to thank him for all the extra money printing he had mandated, to facilitate this claimed result. While we normal people continued to cope with ongoing job losses, an almost nonexistent job market, unavailable mortgages, a constipated real estate market and fear about the future . . . Chairman Bernanke was trying to sell us on some good news. Since that time, the expression “green shoots” has been the mantra for those pundits who, for whatever reason, want the naive public to believe in the emperor’s new clothes. The usual motive for chatting up the “green shoots” is to encourage a widespread popular return to investing in the stock market and by so doing, make life more rewarding for those at brokerage firms.
This week brings us a “reality check” that will come in the form of earnings reports from the second quarter of 2009, required for disclosure by publicly-held corporations, traded on our nation’s stock exchanges. Recent news reports have focused on the fact that despite the “bear market rally” that began in May, last week’s drop in stock prices revealed widespread investor concern that the truth will not support all the hype they have been reading since the spring. Here’s what E.S. Browning had to say in the July 8 edition of The Wall Street Journal:
Expectations for the current earnings season are very low, and investors are worried companies will give weak outlooks for the second half of the year.
“We kind of think the market got ahead of itself. It ran too fast, too hard, and we are soon going to be staring at second-quarter earnings reports that are not going to be pretty,” said Janna Sampson, who helps oversee $1.3 billion as co-chief investment officer of OakBrook Investments in Lisle, Ill.
After the market bottomed March 9, investors increasingly embraced risky assets, bidding up stocks, especially those of smaller companies with little or no profit.
Those unfortunate investors were hit by two “sucker punches”. The first was the often-repeated claim that “stocks are now a bargain . . . we’ve hit the bottom so now is the time to BUY!” The second sucker punch involved the use of high-speed trading programs (such as the one recently stolen from Goldman Sachs) to run up the prices on stocks and exploit “retail investors” such as you and me. An astute explanation of this process was recently published by Sal Arnuk and Joseph Saluzzi of Themis Trading. You can read that report here. What’s even more interesting about the computer program used by (and stolen from) Goldman Sachs, is the statement made by Assistant U.S.Attorney Joseph Facciponti, as quoted in the July 6 article by David Glovin and Christine Harper for Bloomberg News:
“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public today.
So Goldman Sachs has a computer program that allows the user to “manipulate the markets in unfair ways”? That’s quite a revelation! If that weren’t bad enough . . . according to a recent report by Tyler Durden at Zero Hedge, Goldman Sachs is not the only kid on the block with a high-frequency trading program.
Alexendra Twin of CNN (in addition to providing us with a schedule of earnings reports and other important economic data to be released over this week and next) pointed out another important reason for last spring’s stock market rally, which is not likely to be a factor this month:
Last quarter, analysts and corporations alike ratcheted down forecasts, setting up a period in which a greater percentage of companies than usual beat forecasts. But this quarter could be different. Fewer companies have been cutting forecasts and analysts haven’t budged as much either, giving corporations less of an opportunity to defy expectations.
“The question is whether we’ll see a similar surprise factor this time,” said John Butters, senior research analyst at Thomson Reuters. “If companies haven’t cut and analysts haven’t cut, can results beat forecasts?”
My take on this process is a bit more cynical: the system is being “gamed” by companies’ providing artificially low estimates for future earnings, in order to win at what commentator Bill Fleckenstein calls “beat the number”.
Once we have read about all these reports — will we finally stop hearing about “green shoots”? I have my money on bad economic news, as I continue to maintain my position in the SRS exchange-traded fund. Nevertheless, I’m keeping one hand on the ripcord, ready to bail out at any minute.