Mish's Global Economic Trend Analysis

After Two Horrendous Articles, Ambrose Evans-Pritchard Back on Track: "Germany is the Ultimate Victim of EMU"
Monti's "Save Italy" Package Sure to Cause "Super Recession"
Detroit Poised for Hostile Takeover by State of Michigan; What Needs to Be Done to Fix Detroit
Banks Make $13 Billion on $7.7 Trillion in Secret Fed Loans; SEC Stands by Does Nothing
Commerzbank Desperately Needs Money; Der Spiegel Reports "Germany Considers Nationalization of Commerzbank"; First of Many Nationalizations
Earnings Outlook Deteriorates Rapidly; Reduced Forecasts Greatest in 10 Years; Don't Worry Companies Will Still "Beat the Street"

After Two Horrendous Articles, Ambrose Evans-Pritchard Back on Track: "Germany is the Ultimate Victim of EMU"

Posted: 04 Dec 2011 10:28 PM PST

I took Ambrose Evans-Pritchard to task twice recently, primarily for making monetary proposals claiming central banks could print their way out of this economic mess but also for unwarranted attacks on Germany.

My friend Pater Tenebrarum has done the same. Here are a few articles.

Mish: Has Ambrose Evans-Pritchard Lost His Mind?

Mish: We Must Crush Ambrose Evans-Pritchard, Nouriel Roubini, Martin Wolf, the Army of Krugmanites into Submission; Reflections on "Dangerous and Insane"

Pater: Central Banks and Monetary Cranks

Pater: The ECB and 'Balance Sheet Recessions'

Here are a few snips from Pater's Balance Sheet Recession link above.

If government debt is at some point monetized on a grand scale, there will eventually also come a point when the demand for money is overwhelmed by the increase in its supply. The supporters of money printing, such as e.g. Ambrose Evans-Pritchard, who has just penned another screed calling for ECB intervention, seem oblivious to this fact. Even if they are not au fait with economic theory, they should at least not pretend that Weimar never happened. After all, what is the central bank supposed to do when the effects of its intervention wear off, as they invariably do? Why, print more of course – until the bitter end, one presumes.

In addition, these ex-post rationalizations (which basically assert that 'now that we're in crisis we have to do what normally would be an error') always avoid discussing why we have arrived at the point of crisis in the first place. It was after all the credit expansion of the fractionally reserved and central bank-backstopped banking system that has been the root cause of the boom and bust. It is not enough to just say that the euro has 'design flaws' (even though that is quite correct). Its major design flaw is that plaguing all modern fiat monies.

The question in the end comes always down to whether one wants to take the losses as soon as possible and begin again with a clean slate, or whether one wants to delay the day of reckoning by doing again – and usually on a bigger scale – what has led to the crisis in the first place. The choice is always between short term pain in exchange for long term gain or the avoidance of short term pain in exchange for long term misery.

Why everyone seems to favor taking the path to long term misery remains a mystery to us. As we keep saying, the focus, especially in Europe, should be on how to revive the currently taxed-and-regulated-to-death entrepreneurial spirit. In the end, only a resumption of genuine wealth creation can solve the economic problems of the region. This requires that the market economy be freed to do what it does best. Printing more money is not going to help this process.

I have also commented many times previously on how Koo has learned nothing in 20 years. The lesson of Japan is not what Koo suggests (more firepower), but rather forcing banks to take writedowns.

The amazing thing about the Japanese situation is that Greenspan and Bernanke both made statements that Japan should write down bad debts, but when the US faced the same situation, Bernanke not only did the opposite, but now says that letting Lehman collapse was his biggest mistake.

Excuse me! Letting Lehman collapse was the only thing Bernanke did correct. I might also point out the world did not end. Anyway back to Pritchard.

Ambrose Evans-Pritchard Back on Track

Please consider Germany is the ultimate victim of EMU by Ambrose Evans-Pritchard.

Ambrose: Enough is enough. Please stop defaming Germany out there in the blogosphere.

Mish: Since Ambrose cannot not mean me, perhaps he means himself. Regardless, I certainly agree.

Ambrose: The German people entered monetary union for honourable motives, believing they were acting as good Europeans. It is excruciating for them to see those Athens banners in Syntagma Square showing Chancellor Angela Merkel wearing the Swastika, or read that sign "Arbeit Macht Frei".

They gave up the D-Mark reluctantly under French and Italian pressure, as the price for acquiescence in Reunification.

They entered EMU at an overvalued rate after the Reunification bubble, leaving them in semi-slump for half a decade. They slowly clawed back competitiveness the hard way, by squeezing wages and driving up productivity.

It is entirely understandable that they now think Club Med can and should do the same. (They are profoundly wrong, of course, because Germany was able to lower relative wages during a) a global boom, b) against other EMU states that were inflating c) and with benchmark borrowing cost that stayed low even during the dog days. None of these factors apply to Italy or Spain now. But this is hard to explain this to the man or woman on the Berlin tram.)

Mish: I am in general agreement.

Previously I wrote "Pritchard clearly has it in for Germany. Why I do not know."

The above article shows otherwise. However, many people emailed in agreement. Will the above article change perceptions? Perhaps not. Pritchard has been a big German basher recently.

Pritchard: She [Merkel] is entirely right in one sense to continue ruling out Eurobonds as "unthinkable" under current structures, and a violation of German constitution, but that is not really an answer to the historical challenge that she faces in late 2011.

Germany cannot unwind the clock. It did take the fateful step of joining monetary union, and from that awful error follows a string of strategic imperatives.

As the wise professors warned at the time, EMU would lead ineluctably to full fiscal union because an orphan currency would not endure without an EU Treasury and government to back it up, but it would a fiscal union accountable to nobody, because no European democracy exists, or can exist.

It would lead to debt pooling and shared budgets.

It would lead – fatally – to loss of the Bundestag's sovereign powers to tax and spend. The core functions of parliament would slip away to EU mandarins.

It would lead to the emasculation of Germany's exemplary post-War democracy.

It would lead in essence to the abolition of Germany as a nation state, even if the window flowers remained in place.

All else was illusion and wishful thinking.

Mish: Precisely. And as I have asked before, Who made the rules? Whose fault is it that Germany was pressured to join the Euro? Did the 17 countries know the rules when they joined? Whose fault is it that 17 countries joined?

To partially answer the first question Jean-Claude Trichet was one of the architects. Perhaps we should blame France.

Here are a couple of interesting European Monetary Union References to further assist in placing blame:

Otmar Issuing, Chief Economist of the German Bundesbank Council, 1991: "There is no example in history of a lasting monetary union that was not linked to one State."

John Major, British Conservative politician, Prime Minister 1991-1997, widely viewed as a failure and famous mainly for calling Eurosceptics bastards and shagging Edwina Currie. November 1996: "A single currency is about the politics of Europe. It is about a Federal Europe by the back door."

Perhaps we should place some blame on John Major and the UK.

How about this quote?

Romano Prodi, EU Commission President [an Italian Statesman]. Interview in the Financial Times, April 1999: "[My] real goal [is to draw on] the consequences of the single currency and create a political Europe."

Yes, indeed. The REAL GOAL was a political Europe that the German people did not want!

What else did Prodi say?

Romano Prodi, EU Commission President, speech to European Parliament, 13th October 1999: "We must now face the difficult task of moving forward towards a single economy, a single political entity... For the first time since the fall of the Roman Empire we have the opportunity to unite Europe."

Romano Prodi, EU Commission President. Financial Times, 4 December 2001: "I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created."

Here is one from Wim Duisenburg, President of the European Central Bank. Date uncertain. Note the choice of words "was always meant to be", which communicates a false inevitability: "The process of monetary union goes hand in hand, must go hand in hand, with political integration and ultimately political union. EMU is, and always was meant to be, a stepping stone on the way to a united Europe."

The idea the Euro is a German hatched plot to control Europe is patently false. Most German citizens (though unfortunately not all German politicians were extremely leery of a fiscal union and loss of sovereignty which is precisely why they insisted on a set of exact controls in the Maastricht Treaty to prevent the formation of a fiscal transfer union.

Pritchard: That is what monetary union always meant and means now, though the trick being played on Europe's citizens was fudged by dishonest treaties, themselves dishonestly ratified.

It is why so many of us on this side of the Ärmelkanal have fought tooth and nail for twenty years to stop Britain being subsumed into this plaything of unaccountable elites, this Project so profoundly threatening to our self-government and constitutional order.

Mish: "dishonest treaties, themselves dishonestly ratified"

Hello Ambrose - you are 100% correct. So why the hell did you throw that all away with two recent articles? How about taking them back, right here, right now?

Ambrose: But this is where Germany now is. It must either immolate itself and dismantle the Bismarckian state for the cause of EMU, or prepare to finance an orderly withdrawal from monetary union (with the Finns, Dutch, and Austrians) so that the South can breathe again and hope to recover.

That is the choice. All else is can-kicking, denial, obfuscation, muddle, and self-delusion. As is now becoming obvious, the failure to resolve the matter one way or the other is becoming a danger to the global financial system. It threatens to uncork a global depression. Germany must at last decide.

It is a horrible choice. My sympathies go to the German people who were never given a vote on this ensnarement and infeudation of their peaceful country, and who were egregiously deceived by their own leaders, and who cannot now begin to understand why they suddenly are target of such furious and venomous global criticism.

The Germans too are victims of this ruinous project, the greatest victims of all. Their elites have led them into a diplomatic and economic Stalingrad.

Mish: Exactly!

All else, including Pritchard's horrendous idea You are all wrong, printing money can halt Europe's crisis is an exercise in can-kicking!

Ambrose, we both know Germany is going to pay a price. Indeed every country in Europe is going to pay a price, even the UK.

The idea is to make that price as small as possible. To do that we need an orderly (as orderly as possible) breakup of the EMU. The UK can help.

UK Should Exit the EU

The UK can start the ball rolling in the proper direction by exiting the EU. Why should UK citizens pay through the nose for inane trade regulations especially on agricultural goods?

The UK needs to send a statement that it has had enough. If France wants protectionist agricultural policies then France, not the UK should suffer the consequences.

Those who do not know what I am talking about can find a nice example in UK facing £20m garlic tax bill

The UK Government has received a European Commission ultimatum to hand over £20 million within two months or face legal action. The wrangle is over the fact that import tariffs on frozen garlic from outside the EU are lower than the rates for fresh garlic. And, according to the Commission, UK authorities carelessly levied the lower rate applicable to frozen garlic on imports of the fresh product from China, in breach of EU customs rules.

A Commission statement explained: "Between 2005 and 2006, the UK customs authorities allowed imports of fresh garlic from the People's Republic of China under wrong authorising documents. They have erroneously stated that the goods imported were frozen garlic for which significantly lower import duties apply.

Why put up with this? What on God's green earth does the UK get for these endless regulations other than higher prices and direct subsidies to French farmers?

John Law Mississippi Bubble

I also need to point out one major historical item that Pritchard seems to have forgotten about when he proposed his can-kicking printing solution. I invite everyone to read about John Law and the Mississippi Bubble: 1718-1720.

In 1716 Law convinced the French government to let him open a bank, the Bank Generale, that could issue paper money, or bank notes. The paper notes would be supported by the bank's assets of gold and silver and would circulate as a medium of exchange. Paper money was a new concept for the French; money to them was silver and gold. Law believed that paper notes would increase the money in circulation, which, in turn, would increase commerce. These conditions would help revitalize and rehabilitate the finances of the French government.

Please read the article to see how printing paper money to revitalize the French economy ended.

Germany Needs to Exit EMU

The best solution for the EMU is for Germany to leave. If France wants the Euro it can have it. Let France have the ECB and let France print if it wants to. Perhaps the result will be better than last time.

Regardless, It will be far less disruptive for Germany to leave than for Greece, then Portugal, then Spain to leave.

Either way, German banks take a hit. So do French banks and any banks in general holding debts in Euros. However, the Deutschmark would be a credible currency right off the bat.

That makes it less disruptive for Germany to leave rather than Greece, Portugal, and Spain to leave. Those countries have no credible currencies to go back to.

Please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied) for further discussion of why things are better if Germany leaves rather than a piecemeal breakup.

Reflections on Credibility

We need to discuss Eurozone breakup ideas, not mindless printing schemes that will do nothing but kick the can down the road, bailing out the banks, and leaving the taxpayers saddled with the debt or the inflation (or both).

Pritchard lost a lot of credibility in those two recent articles I blasted. His latest article, referenced above helps, but a complete retraction of his can-kicking monetary printing proposal would help even more.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Monti's "Save Italy" Package Sure to Cause "Super Recession"

Posted: 04 Dec 2011 08:16 PM PST

Super Mario has a five-point plan to "Save Italy".

Raise more than 10 billion euros from a new property tax
Impose a new tax on luxury items like yachts
Raise value added tax
Crack down on tax evasion
Increase the pension age

The above package was dubbed the "Save Italy" package by Prime Minister Mario Monti. Supposedly it will boost growth.

While I agree pension reform is much needed, there is not a single thing in the package to boost growth. Italy is in recession. Raising taxes in a recession is the last thing you want to do, yet four of Monti's five ideas raise taxes.

This proposal may temporarily placate the bond market, but Italy is headed for one "super recession" if Mario's mix of idiotic tax hikes passes. Instead, Italy needs to cut wasteful government spending and lower taxes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Detroit Poised for Hostile Takeover by State of Michigan; What Needs to Be Done to Fix Detroit

Posted: 04 Dec 2011 03:06 PM PST

Detroit Mayor Dave Bing is upset about a possible takeover by the state. Bing says "We know what needs to be done, and we stand ready to do it."

I have a simple suggestion for Bing don't "stand ready to do it, just do it". Indeed he has had years to "just do it" yet hasn't done it.

Please consider Detroit in a hostile takeover bid?

The idea is extreme, even in a city accustomed to fighting for survival: Should the state of Michigan step in to run Detroit?

The governor has taken steps in that direction, proposing an unprecedented move that could give an appointed manager virtually unchecked power to gut union contracts, cut employee health insurance and slash services. But city leaders bristle at the notion. Said the mayor: "This is our city. Detroit needs to be run by Detroiters."

If it happens, Detroit would be the largest American city ever taken over by a state. Michigan has seized control of smaller struggling cities, but until now Detroit was always off-limits.

That changed this week, when Republican Gov. Rick Snyder's administration said it would begin a review of Detroit's precarious finances. If the governor concludes that the city's economic situation constitutes an emergency, he could dispatch a manager who could push the mayor and city council to the sidelines.

Democratic Mayor Dave Bing says Detroit doesn't need the help. He insists the city is reducing a $150 million budget deficit and easing cash-flow problems on its own.

"We know what needs to be done, and we stand ready to do it," an indignant Bing said.

"It terms of a city, I think Detroit stands alone," said Michael LaFaive, director of fiscal policy at Michigan's Mackinac Center for Public Policy, a nonpartisan group that espouses free markets.

An emergency financial manager would have the power to privatize utility departments, as well as the bus system and other agencies. A manager also could sell off city-owned parking lots and even Belle Isle, Detroit's popular island park, LaFaive said.

In a 2001 report, LaFaive wrote about Detroit's burgeoning fiscal problems and recommended privatization, contracting out services and ways to generate revenue.

"I think they knew what the recommendations were, but their hands were tied a bit by recalcitrant employee unions," LaFaive said. "Those kinds of bold reforms would be difficult to get over with the city council or voters, in general."

Last month, Bing declared the city government "broken" and said the public's checkbook would be short by $45 million next year unless Detroit starts saving money fast. In an attempt to ward off an emergency manager, he proposed laying off 1,000 employees — 9 percent of the workforce — and negotiating 10 percent pay cuts with unions.

Bing Hasn't Done It Because He Can't

Union rules and contracts prevent Bing from doing what needs to be done. Moreover, I doubt he would do it even if he could.

Last month Bing declared city government "broken".

Sheeesh. Detroit has been broken and bankrupt for years, decades probably, but certainly for the entire time Bing has been mayor.

I have written about Detroit on many occasions.

June 12, 2009: Median Home Prices In Detroit Fall To $6,000

Although I am a deflationist, I must admit surprise that the median home price in Detroit has fallen to a stunningly low $6,000.

July 11, 2009: Detroit Public School System Ponders Bankruptcy

Freep is reporting the Detroit Public School System May Wind Up In Bankruptcy.

July 24, 2009: Detroit Heads For Bankruptcy; 50 Cities Must "Shrink to Survive"

For Detroit, as with GM, bankruptcy has always been a question of when, not if. Detroit's time is nearly up even as Mayor Dave Bing says I'm fighting to keep city from going broke.

April 6, 2010: Detroit Bankruptcy Looms with Deficit of $446 Million in Budget of $1.6 Billion

Detroit has hit the end of the line. It's budget deficit is between $446 million and $466 million (28% to 29%) of $1.6 billion with few ways other than drastic cuts in wages and benefits to address the problem. If unions will not give in (and they won't), Detroit Faces Bankruptcy.

December 13, 2010: Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City

Detroit has been bankrupt for years. It simply refuses to admit it. Detroit's schools are bankrupt as well. A mere 25% of students graduate from high school.

Yet, in spite of hints and threats from mayors and budget commissions, and in spite of common sense talk of bankruptcy, Detroit has not pulled the bankruptcy trigger.

In a futile attempt to stave off the inevitable one last time, Mayor Bing's latest plan is to cutoff city services including road repairs, police patrols, street lights, and garbage collection in 20% of Detroit.

Bing to Cede 20% of Detroit to Gangs and Homeless

City officials suggest this will not shrink the size of the city. Perhaps it won't shrink Detroit on Google Maps. However, Bing's plan would effectively surrender 20% of the city to gangs and the homeless.

Would you want to live in one of the gang war-zones that his plan would create? Would you want to live in a bordering neighborhood or in a bordering city?

Regardless of your answer, Bing's plan cannot and will not work and I believe Detroit will, sometime in 2011, file for bankruptcy.

Repurpose or Abandon?

Of course the Mayor's office did not say they would abandon sections of the city to gangs. But how the hell can repurposing as described above possibly mean anything else?

What's next? Barbed wire? Oh wait a minute, Detroit already has tried that. Razor-wire too. Here's a picture of Detroit's clearly ~~abandoned~~ repurposed Michigan Central Train Depot.

Image courtesy of the Journal and the AP.

November 16, 2011: Detroit May Run Out of Cash Next Month, Unable to Meet Payroll, Situation Worse than Reported

Michigan Live reports Detroit could run out of cash in December, plan must include layoffs

Enough Already!

Will someone, anyone please put Detroit out of its misery. Bing cannot do it. Only a complete overhaul stands a chance.

What Needs to Be Done

Privatize all city services
Outsource the entire police department to the local sheriff's association
Void all union contracts
Renegotiate union pensions
Establish charter schools
Merit raises for teachers
Fire Bing and his entire staff

It will take a hostile takeover and very tough positioning by Republican Governor Rick Snyder. He has the votes. Does he have the political courage?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Banks Make $13 Billion on $7.7 Trillion in Secret Fed Loans; SEC Stands by Does Nothing

Posted: 04 Dec 2011 09:46 AM PST

On November 27, Bloomberg reported Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn't tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn't mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed's below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

$7.77 Trillion

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he "wasn't aware of the magnitude." It dwarfed the Treasury Department's better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

Citigroup, Bank of America, RBS, Wells Fargo Top Recipients

The Bloomberg article has a nice interactive graphic that details how much each bank profited.

Citigroup made $1.8 Billion, Bank of America made $1.5 billion, Royal Bank of Scotland made $1.2 Billion, and Wells Fargo made $878 million. Those are the top four.

SEC Stands by Does Nothing

Yesterday, Gretchen Morgenson at the New York Times commented on the Bloomberg report in Secrets of the Bailout, Now Told

A FRESH account emerged last week about the magnitude of financial aid that the Federal Reserve bestowed on big banks during the 2008-09 credit crisis. The report came from Bloomberg News, which had to mount a lengthy legal fight to wrest documents from the Fed that detailed its rescue efforts.

It is dispiriting, of course, that we are still learning about the billions provided to various financial firms during the crisis. Another sad element to this mess is that getting the truth requires the legal firepower of an organization as rich as Bloomberg.

During the first three months of 2009, for example, when Citigroup's Fed borrowing apparently peaked, Vikram Pandit, its chief executive, hailed the company's performance. Calling that first quarter the best over all since 2007, Mr. Pandit said the results showed "the strength of Citi's franchise."

Citi's earnings release didn't detail its large Fed borrowings; neither did its filing for the first quarter of 2009 with the Securities and Exchange Commission. Other banks kept silent on these activities or mentioned them in passing with few specifics.

These disclosure lapses are disturbing to Lynn E. Turner, a former chief accountant at the S.E.C. Since 1989, he said, commission rules have required public companies to disclose details about material federal assistance they receive. The rules grew out of the savings and loan crisis, during which hundreds of banks failed and others received government help.

Given these rules, Mr. Turner said: "I would have expected some discussion in the management discussion and analysis of how this has had a positive impact on these banks' operating results. The borrowings had to have an impact on their liquidity and earnings, but I don't ever recall anybody saying 'we borrowed a bunch of money from the Fed at zero percent interest.' "

"These banks and the Fed have never believed in transparency," Mr. Turner said. "I actually think their thought process is sorely flawed. If the banks knew this stuff was going to be made public they'd behave differently. Instead of runs on the bank you'd have bankers doing things intelligently to avoid getting into trouble."

What an idea!

Yes indeed. What an idea. Unfortunately there are two sets of rules, one set for big financial players and another set for everyone else.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Commerzbank Desperately Needs Money; Der Spiegel Reports "Germany Considers Nationalization of Commerzbank"; First of Many Nationalizations

Posted: 04 Dec 2011 09:18 AM PST

Via Google Translate [with some minor tweaks by me where obvious], Spiegel Online reports Federal Government is considering nationalization of Commerzbank

After the end of 2008, the institute plunged into the vortex of the financial crisis and needed financial assistance. The federal government holds 25 percent plus one share. Germany wanted Commerzbank CEO Martin Blessing to be independent again as quickly as possible . But now SPIEGEL reports information the contrary, that the federal government does not rule out the nationalization of Commerzbank.

If Commerzbank, the second largest German bank does not manage to get hold of enough capital by next summer, Germany will resume the Berlin bank rescue fund Soffin and take on additional shares according to government sources.

Commerzbank Desperately Needs Money

In a separate article Spiegel Online reports Commerzbank considers selling daughter bank € Hypo

Commerzbank desperately needs money in order to guard against the debt crisis in Europe. Now the bank is considering, according to a newspaper report, to sell his daughter € Hypo - to the state. In the deal, the bank would have suffered a considerable loss.

Frankfurt - The tougher capital requirements of European Banking Supervisors, Commerzbank EBA could move to a sale: The bank is considering a report from the "Financial Times Germany" According to cede their property financier Hypo € at a loss to the state. The money would house the gap to nine percent core capital, reduce the EBA demands from next year. In addition, Commerzbank would prevent the EU Commission to initiate a re-aid procedures.

The bank missing about three to five billion euros in order to meet the requirements of the EBA, as was recently announced. The real estate financier, who is otherwise deficient, does not belong anyway more to the core business of Commerzbank Chart show . In addition, a sale would reduce the balance of the institute. By the end of 2014, it must repel the daughter anyway, to meet EU requirements for assistance during the financial crisis.

First of Many Nationalizations

Should Commerzbank be nationalized, it will likely be the first of many major nationalizations.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Earnings Outlook Deteriorates Rapidly; Reduced Forecasts Greatest in 10 Years; Don't Worry Companies Will Still "Beat the Street"

Posted: 04 Dec 2011 02:10 AM PST

In a game of "beat the street" companies and analysts are busy downgrading corporate earnings. By the time earnings are reported, companies will "beat the street" on those carefully downgraded estimates.

Please consider Earnings outlook may be deteriorating rapidly

Earnings season is just over a month away, but the early signals are not comforting.

Companies cutting forecasts outpace those raising estimates by the greatest ratio in 10 years, and some sectors, such as materials, have seen a dramatic fall in expectations for the soon-to-be ended fourth quarter, according to Thomson Reuters data.

It is a stark reminder that even as U.S. economic data has improved in recent weeks, the euro zone debt crisis and concerns about slowing growth in China still cast a long shadow.

Estimates for fourth-quarter S&P earnings growth have tumbled over the past two months as global macroeconomic headwinds prompted analysts to slash forecasts.

According to Thomson Reuters, 88 S&P companies have issued negative earnings preannouncements for the fourth quarter, compared with 25 positive announcements, creating a ratio of 3.5, the largest since the second quarter of 2001.

Don't Worry Companies Will Still "Beat the Street"

On August 17, 2011 I wrote Earnings Collapse Coming Up; Don't Worry Companies Will Still "Beat the Street"; Value Traps and Road to Ruin

Of all the inept reasons to be bullish about equities, "beat the street" hype is near the top of the list. The fact is, in aggregate, ever since Reg-FD (full disclosure) companies always beat the street.

In Surprising Optimism in Face of Weekly Global Equity Carnage; Foolish Comments of the Day; "Beat the Street" Bullsweet I noted nearly every quarter, even in 2008 and 2009 the majority of firms beat estimates. Here is the way the process works:

Corporations give analysts "tips" regarding profit expectations.

Those profit expectations are purposely low.

Wall Street analysts lower estimates, if necessary, as the quarter progresses such that corporations can "beat the street".

If corporations are going to miss and need an extra penny, they change tax assumption or make other "one time" adjustments as necessary.

Corporations beat the street by a penny with "pro-forma" (after adjustment) reporting.

Percentage of Companies that "Beat the Street"

click on chart for sharper image

The last time companies failed to "beat the street" was third quarter of 1998. At the earnings trough in third quarter of 2008, 58% of companies in the S&P 500 still managed to "beat the street".

The above chart from Understandings Earnings Estimates by James Bianco on the Big Picture Blog.

Christmas sales may be up, but what about profits? It is taking bigger and bigger discounts to excite customers.

Car sales are up, but it is important to note that shipments to dealers are counted as "sales". Dealer inventories are at record highs. It will take discounts to move them.

Employers are generally running pretty lean as hiring sure did not pick up. Reduced sales and reduced margins will also cut into profits unless employers shed more workers.

Higher energy prices will take a toll unless companies can pass along the costs. Here's a hint: most can't. There is little pricing power anywhere. But hey, don't worry. Companies will beat the street. They have every quarter since 1998.

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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