Mish's Global Economic Trend Analysis

Big 3 Becomes Big 7; More Competition in Cars
S&P 500 PE Ratios Well Above Mean and Median Long-Term Averages; What's Next?
Cash-Strapped States Seek Laws To Curb Labor Union Power
More Bank of America Putbacks Coming; Fraud Exposed

Big 3 Becomes Big 7; More Competition in Cars

Posted: 04 Jan 2011 08:28 PM PST

With the resurgence of GM and Ford, mistakes by Toyota, and records sales by Hyundai, car buyers have more choices than before, and they are using them. Please consider U.S. Car Business in Major Shift.

U.S. auto sales rose 11% in December, capping a year that suggests the industry is on the verge of one of the most dramatic shifts in its history.

For most of the past century, the U.S. car industry was dominated by General Motors Co., Ford Motor Co. and Chrysler Group LLC. Now, as a result of both long-term trends and the upheaval of the last two years, the Big Three are about to be replaced by a Gang of Seven as the industry's driving force.

In 2010, Hyundai Motor Co. saw its U.S. market share climb to just short of 5%. If the Korean auto maker crosses that threshold as expected this year, the U.S. market will have seven manufacturers—GM, Ford, Toyota Motor Corp., Honda Motor Co., Chrysler, Nissan Motor Co. and Hyundai—with market share of 5% or more. That's a dramatic shift from the days when the three Detroit companies dominated the market and dictated the industry's direction.

In 2008 and 2009, the Detroit Three were beaten down by massive losses and, later, bankruptcy. But in 2010, Ford and Chrysler both gained market share. GM, while its share slipped less than a percentage point, is on its way to reporting billions of dollars in profit for 2010 as its sales rise.

Meanwhile, Hyundai, which a decade ago was laughed off as a maker of cheap, small cars, said its December sales climbed 33% to 44,802. For the full year, its sales totaled 538,228, up 24%. It was the first year Hyundai's U.S. sales exceeded 500,000 vehicles.

Light Vehicle Sales By Month

The Wall Street Journal has a nice interactive chart of light vehicle sales, shown above. The spike in August 2009 is "cash for clunkers".

The big winner for December is "Other" with 322,595 out of 1,144,739, a substantial 28.2% of the market.

Other 322,595 - 28.2%
GM 224,127 - 19.5%
Ford 190,191 - 16.6%
Toyota 177,488 - 15.5%
Honda 129,616 - 11.3%
Chrysler 100,702 - 8.8%

Chrysler is long gone from the Big-Three, never to return.

The overall sales numbers look respectable until you total them up.

click on chart for sharper image

Sales are back to 1991 levels. Population adjusted, the chart would look even worse.

Nonetheless many will point to the bailout of GM by the Bush and Obama administrations as a success. Nothing could be further from the truth. It was bankruptcy that saved GM, not a bailout.

GM would have gone bankrupt sooner without government interference and would have recovered sooner as well. There was no need for government to get involved at all.

I always said GM would go bankrupt but survive, and that is what happened. It would have happened just the same without government interference.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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S&P 500 PE Ratios Well Above Mean and Median Long-Term Averages; What's Next?

Posted: 04 Jan 2011 12:30 PM PST

Here is an interesting chart of long-term S&P 500 PE ratios courtesy of multpl.com. I added the annotations in red.

click on chart for sharper image

Two Key Points

1. In spite of what most cheerleaders suggest, this is one strenuously overvalued market.

2. In spite of the crash in 2008 and early 2009, valuations never reached typical bear market trough valuations.

From the FAQ:

The figures on this site are the PE10 or Shiller PE. They are the price to average earnings from the past ten years. Because this factors in earnings from the previous ten years, it is less prone to wild swings in any one year.

To calculate P/E10:

1. Look at the yearly earning of the S&P 500 for each of the past ten years.
2. Adjust these earnings for inflation, using the CPI (ie: quote each earnings figure in 2010 dollars)
3. Average these values (ie: add them up and divide by ten), giving us e10.
4. Then take the current Price of the S&P 500 and divide by e10.

Wildly Optimistic Forward Estimates

Most PE estimates bandied about only look reasonable based on inflated current earnings and wildly optimistic forward earning estimates.

I took a look at forward earnings estimates and the so called Fed-model in The Question "Are Stocks a Screaming Buy Relative to Bonds?" Creates False Premises Here are a few key snips....

Relative Valuation Comparisons are Problematic

The question "Are stocks cheap compared to bonds?" is pretty much like asking "Are rubber bands cheap compared to oranges?"

When both stocks and bonds are unattractive, assuming one has to choose between those classes is tantamount to asking "Would you rather risk losing an arm or a leg?"

The correct answer to that last question is "Why risk either?"

False Premise

Thus, right off the bat, the initial question implies a false premise "Should one be in stocks or Bonds?" Why does it have to be either?

Relative valuation comparisons can get one in all kinds of trouble. Both asset classes may be overvalued or undervalued.

Indeed, If stocks and bonds are richly priced, perhaps one should be in gold, commodities, currencies, cash, or hedged in some fashion. There is absolutely nothing wrong with sitting on the sidelines.

Forward Earnings Estimates Persistently Optimistic For 25 Years

A a McKinsey Quarterly report Equity analysts: Still too bullish
No executive would dispute that analysts' forecasts serve as an important benchmark of the current and future health of companies. To better understand their accuracy, we undertook research nearly a decade ago that produced sobering results. Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.

click on chart to expand

Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year,4 compared with actual earnings growth of 6 percent. Over this time frame, actual earnings growth surpassed forecasts in only two instances, both during the earnings recovery following a recession. On average, analysts' forecasts have been almost 100 percent too high.

Because forward estimates have been far too optimistic and also to eliminate huge earnings spikes, Robert Shiller and sites like multpl.com use 10-year smoothings.

Finally, I do not believe current earnings statements because banks are still hiding losses off the balance sheets, assets are still not marked-to-market, reserves are insufficient to handle upcoming losses, and because various capital-raising efforts required by Basel III have not been implemented.

On that basis, the market (and forward estimates) are both far frothier than the opening chart implies.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Cash-Strapped States Seek Laws To Curb Labor Union Power

Posted: 04 Jan 2011 09:47 AM PST

In a growing, justified wave of public-union resentment, at least 10 states seek to make major changes in labor law. Radical proposals come from newly elected governors in Wisconsin and Ohio.

I heartily endorse Strained States Turning to Laws to Curb Labor Unions

Faced with growing budget deficits and restive taxpayers, elected officials from Maine to Alabama, Ohio to Arizona, are pushing new legislation to limit the power of labor unions, particularly those representing government workers, in collective bargaining and politics.

On Wednesday, for example, New York's new Democratic governor, Andrew M. Cuomo, is expected to call for a one-year salary freeze for state workers, a move that would save $200 million to $400 million and challenge labor's traditional clout in Albany.

But in some cases — mostly in states with Republican governors and Republican statehouse majorities — officials are seeking more far-reaching, structural changes that would weaken the bargaining power and political influence of unions, including private sector ones.

For example, Republican lawmakers in Indiana, Maine, Missouri and seven other states plan to introduce legislation that would bar private sector unions from forcing workers they represent to pay dues or fees, reducing the flow of funds into union treasuries. In Ohio, the new Republican governor, following the precedent of many other states, wants to ban strikes by public school teachers.

Some new governors, most notably Scott Walker of Wisconsin, are even threatening to take away government workers' right to form unions and bargain contracts.

"We can no longer live in a society where the public employees are the haves and taxpayers who foot the bills are the have-nots," Mr. Walker, a Republican, said in a speech. "The bottom line is that we are going to look at every legal means we have to try to put that balance more on the side of taxpayers."

But it is not only Republicans who are seeking to rein in unions. In addition to Mr. Cuomo, California's new Democratic governor, Jerry Brown, is promising to review the benefits received by government workers in his state, which faces a more than $20 billion budget shortfall over the next 18 months.

"We will also have to look at our system of pensions and how to ensure that they are transparent and actuarially sound and fair — fair to the workers and fair to the taxpayers," Mr. Brown said in his inaugural speech on Monday.

Of all the new governors, John Kasich, Republican of Ohio, appears to be planning the most comprehensive assault against unions. He is proposing to take away the right of 14,000 state-financed child care and home care workers to unionize. He also wants to ban strikes by teachers, much the way some states bar strikes by the police and firefighters.

"If they want to strike, they should be fired," Mr. Kasich said in a speech. "They've got good jobs, they've got high pay, they get good benefits, a great retirement. What are they striking for?"

Mr. Kasich also wants to eliminate a requirement that the state pay union-scale wages to construction workers on public contracts, even if the contractors are nonunion. In addition, he would like to ban the use of binding arbitration to settle disputes between the state and unions representing government employees.

Union leaders particularly dread the spread of right-to-work laws, which prevail in 22 states, almost all in the South or West. Under such laws, unions and employers cannot require workers to join a union or pay any dues or fees to unions to represent them.

Unions complain that such laws allow workers in unionized workplaces to reap the benefits of collective bargaining without paying for it.

"They're throwing the kitchen sink at us," said Randi Weingarten, president of the American Federation of Teachers. "We're seeing people use the budget crisis to make every attempt to roll back workers' voices and any ability of workers to join collectively in any way whatsoever."

In Praise of Throwing the Kitchen Sink

I salute governor John Kasich of Ohio and especially Scott Walker in Wisconsin. Walker wants to eliminate the ability of unions to negotiate including decertification.

Please see Wisconsin Governor-Elect Proposes Abolishing State Employee Unions for details.

From Hardball in Wisconsin; Massive Defeat for Unions in Lame-Duck Session

Nationally, we need to kill collective bargaining for all public unions, scrap Davis-Bacon and all prevailing wage laws, mandate Right-to-Work laws, and do something to cleanup untenable public union pension promises, not just going forward, but existing benefits as well.

To do the latter, I propose taxing public union pension benefits above $120,000 at 90%, returning the excess to the pension plans until the plans are fully funded using a reasonable rate of return estimate of the long-term T-Bill rate. That rate is currently 4.25%.

Day of Reckoning Arrives

To fully appreciate the problem, please see 60 Minutes: Day of Reckoning Arrives; Chris Christie "It's Not an Income Problem, It's a Benefits Problem"; Six Common Sense Solutions

It is a statement of fact that public unions in cooperation with corrupt politicians have bankrupted numerous states and nearly every major city in the country. The worst states are those where the unions have been the most in bed with politicians: California, Illinois, New York, New Jersey. None of them are right-to-work states.

Fortunately for New Jersey, governor Chris Christie is turning thing around.

Six Common Sense Solutions

Scrap Davis-Bacon and all prevailing wage laws.
Scrap collective bargaining for public union workers entirely.
Implement national right-to-work laws.
Outsource every public sector job possible including police and fire departments to the lowest cost private sector provider.
Kill defined benefit pension plans for all new hires and for all public employees that do remain in the system.
Tax public union retiree benefits over a certain amount.

Every states should be a right-to-work state. Better yet, the goal should be complete elimination of public union in the country.

Addendum:

The question keeps coming up: "Don't we need to fix problems with executive pay and fraud at banks at the same time?"

Of course not. It would be like saying one should not organize a save the whales campaign unless there was a simultaneous effort to send a man to mars.

Boom-bust cycles are caused by the Fed and Congressional spending. The solution is elimination of the Fed.

City and state bankruptcies are caused by the unions buying votes of corrupt politicians resulting in untenable wage and benefit packages of public unions. Something needs to be done now about pension promises that cannot be met.

Attempts to address both together as one issue is not workable because the problems are not closely related. Banks and the unions would both lobbying against the bill at the same time.

Moreover, executive pay, however outrageous, does not come out of taxpayer pockets. Union benefits do.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

More Bank of America Putbacks Coming; Fraud Exposed

Posted: 04 Jan 2011 12:11 AM PST

Bank of America agreed to settle part of its claim with Fannie and Freddie for $2.8 billion. It appears to have gotten off cheap but Market Watch reports For B. of A., mortgage 'put backs' aren't over

Bank of America Corp. unveiled a $2.8 billion deal with Freddie Mac and Fannie Mae on Monday that settles legal spats over losses on hundreds of billions of dollars in home loans that the lender sold to the government-owned mortgage giants.

However, the agreement only deals with part of Bank of America's exposure to mortgage repurchase, or "put back," requests, according to analysts.

The bank said it paid Freddie Mac $1.28 billion in cash on Dec. 31 to extinguish "all outstanding and potential mortgage repurchase and make-whole claims" from alleged breaches of representations and warranties on home loans sold by Countrywide Financial to Freddie through 2008. This covers 787,000 loans with a total unpaid principal balance of $127 billion, the bank noted.

Bank of America also said Monday that it agreed to pay Fannie Mae $1.52 billion in cash. But this payment only deals with 12,045 Countrywide loans with about $2.7 billion of unpaid principal balance. It also resolves specific outstanding repurchase or make-whole claims, or extends the cure period for missing documentation-related claims, on another 5,760 Countrywide loans with roughly $1.3 billion of unpaid principal balance, the company noted.

"We have largely addressed the remaining GSE repurchase exposure for legacy Countrywide and the other Bank of America entities," Bank of America Chief Financial Officer Charles Noski said during a conference call with analysts on Monday.

However, the payments announced Monday don't eliminate future liability on loans with an unpaid principal balance of $394 billion that Bank of America entities sold to Fannie Mae, according to Chris Gamaitoni and other analysts at Compass Point Research & Trading LLC.

"I'm perplexed by the reaction," Gamaitoni said in an interview.

Bank of America's payment to Fannie Mae only resolved claims currently outstanding, he noted.

"To believe this is dealt with, you have to assume that Fannie will suffer no losses on its remaining exposure" to home loans with an unpaid principal balance of $394 billion, Gamaitoni added.

A bigger concern is potential losses from put back requests from private mortgage investors and insurers, according to Gamaitoni and other analysts.

In August, Compass Point estimated that Bank of America may lose $35 billion from put backs by insurers and private investors in mortgage-backed securities.

Deutsche Bank analyst Matt O'Connor reckons Bank of America could take another $15 billion hit from repurchase requests on so-called private label mortgage-backed securities.

Still, losses from private label mortgage put backs aren't a systemic risk for big banks, according to Bose George, analyst at Keefe, Bruyette & Woods in New York.

With private label securities, the originator must have knowledge of the fraud for the investor suit to have merit. In contrast, sales to Fannie and Freddie have a more absolute standard.

Also, private label securities investors must show that the fraud contributed to their losses — something that's difficult to do as time passes, George noted.

Raise your hand if you think Fannie will suffer no losses on $394 billion in loans and that Bank of America is not at huge risk from other lawsuits.

Courtesy of Zero Hedge here is a sampling of what Countrywide alleged in a prospectus and what was actually delivered.

Owner Occupied Fraud

Loan-To-Value Fraud

For more examples and a very good writeup, please see How Allstate Used Sampling To Confirm BofA/Countrywide Lied About Virtually Everything When Selling Mortgages

Clearly, Bank of America (Countrywide Financial) committed fraud, so the idea that investor lawsuits have no merit is preposterous. Moreover, it is a simple matter of common sense that when Bank of America exaggerated various numbers in its pools, that it "contributed to losses".

Nonetheless, private investor cases will not be decided on the merits of easily visible fraud, or on the basis of common sense, but rather on how much BofA can get tossed out of court on various legal technicalities.

Thus, it is difficult to assess the odds as to what extent Bank of America gets away with its fraudulent endeavors.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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