Quote for the Week, July 31-August 6, 2011

Paranoia means having all the facts.

--William S. Burroughs

How To Liberate America

David Korten:

"Wall Street’s mega-banks lost interest in real investment and developed a new business model. They now specialize in charging excessive fees and usurious interest rates, providing leverage to speculators, speculating for their own accounts, luring the unwary into mortgages they cannot afford, bundling junk mortgages to sell them as triple-A securities, betting against the clients to whom they sell the overrated securities, extracting subsidies and bailouts from government, laundering money from drug and arms traders, and offshoring their profits to avoid taxes."

PDF report here.

Quote for the Week, July 24-30, 2011

We would rather be ruined than changed.
--W.H. Auden

The Sinkhole That Is Bank of America

Jonathan Weil,

"Curse the Geniuses Who Gave Us Bank of America"

[Bloomberg]

[update 07-22-11:]

From ZeroHedge:

Instead of $8.5 billion, Bank of America is actually on the hook for an amount that is at least 3 times greater if one uses proper impaired security valuation protocols...

Should the true extent of deterioration of Bank of America's books be revealed, then its market cap would be not $100 billion but some modest fraction thereof. In fact, even John Paulson, formerly the biggest believer in BAC has now washed his hands. And he doesn't give up (read: look foolish to the investment community) easily. Our advice is to have a chat with Jon Weil: after all he is the man who said to "Curse the geniuses who brought us this madness."

MainePERS Can't Get Enough

Bank of America earlier this morning released its latest quarterly earnings report. "Earnings" may be a misnomer, as the company lost $8.8 billion in its second quarter. In case you just drove through a dead zone, let me repeat. Eight-point-eight BILLION. The company's earnings presentation appears here.

The slide to which we should pay particular attention is this one:

[click to enlarge]

The company is required by regulators to accumulate capital as a cushion against any future liquidity crisis similar to what occurred in 2008. As a "a systemically important financial institution" (SIFI), Bank of America must achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019. But as the chart above shows, the Tangible Common Equity Ratio actually contracted in Q2 to less than 5.9 percent. The company now expects a ratio of no more than 7 percent in 2013, which would still leave it $50 billion short of the Basel requirement.

According to Bloomberg, Oppenheimer & Co. analyst Chris Kotowski believes that Bank of America will be hoarding cash until at least 2016 to reach the 9.5 percent goal. That means no dividend increases for shareholders. In fact Kotowski does not rule out a share offering, which typically depresses the share price. “Bank of America’s capital position relative to peers creates dilution risk,” wrote Kotowski in a June 30 research note. “While we aren’t certain that an equity raise will actually happen, the risk is certainly there.”

The company's stock, which trades under the ticker symbol BAC, has been getting crushed. The stock price slid from $13.33 per share at the beginning of April to $10.96 at the end of June, a drop of 17.8 percent during the quarter. Managers of the MainePERS investment portfolio fell for the value trap and bought 63,358 more shares during that same period. As the quarter drew to a close, MainePERS held over 2.6 million shares. That's when Bank of America announced a $20.4-billion hit to its balance sheet. Talk about buyer's remorse.

The rout has continued into the third quarter. On Friday BAC traded briefly under $10, triggering the following playful headline at Zero Hedge:

Goodbye Teenage Wasteland: Bank Of America Pulls A Benjamin Button, Reenters Single Digits

By the close of trading on Friday, the stock recovered to precisely $10.00. With options expiration now out of the way, price support has vanished. Yesterday, the stock closed at $9.72, a level last seen in May 2009.

BAC, one-day chart (07-18-11)

This morning's earnings release did nothing to revive the stock, which has lost another 15 cents on the day. That means that BAC has lost 12.7 percent of its value just in the twelve trading days of July. For MainePERS, that is a loss of over $3.6 million, or $300,000 every day the market has been open this month. Does anyone know what KA-CHING sounds like when played backwards?

BAC, 6-month chart

Even the Vampire Squid, Goldman Sachs, is struggling. The investment bank's quarterly earnings report, also today, was not much better than Bank of America's. The Lex column at Financial Times sums up the industry's challenges this way:

If an interminable period of declining asset prices is the first Japan-like problem for US banks, the second is the effect of deleveraging on economic activity. Goldman Sachs, like any business, needs enthusiastic clients to make money. That underwriting revenues fell by a 10th versus last quarter, equities trading by a third, and fixed income, currency and commodity trading by twice that, suggests an increasingly nervous client base. Likewise, reversing the downward trend in net interest income at BofA (almost a $1bn less this quarter) and other banks will only be possible if an improving economy causes interest rates to start rising again.

Todd Harrison at Minyanville offers the chart below to illustrate how the banks (reflected in the BKX index, white line) are lagging the broader market (SPX in orange):

[click to enlarge]

Finally, just one more picture to show Bank of America (blue line) lagging its peers:

[click to enlarge]

BofA is the worst of a bad breed, and we Mainers own more of it now than we did three months ago. Let's raise our Shipyard Summer Ales to celebrate. Bottoms up.

Quote for the Week, July 17-23, 2011

Foreign aid might be defined as a transfer from poor people in rich countries to rich people in poor countries.
--Doug Casey

But Who's Counting?

Peru--Eight volunteers at Worthley Pond fanned out early this morning to count loons, part of Maine Audubon's annual statewide survey. Comparing notes after the observation period (7 to 7:30 a.m.), the counters determined that they had seen seven different loons--three in the upper bay, two in the narrows, and two in the lower bay.

By coincidence, at the same time that the Worthley eight were conducting their Loon Count, the resident loons were doing a Stupid Human Count. It got to be a contest, and the loons were winning. They dove here and resurfaced, seconds later, way over there. They congregated, then dispersed. They did everything in their considerable power to be double- and triple-counted. Something about fish-stocking benefits from the government. The soaring call of one, reverberating off the hillsides, sounded like more-than-one. The humans were doing head spins straight out of The Exorcist.

In the end, the humans are the ones who mail in the results. So what they say goes. And they say that Worthley Pond had its highest count ever, one more than last year. (Two days before the survey, the Associated Press ran this story about the loon census.)

As for loon habitat, what could be better than Trout Lake?

Quote for the Week, July 10-16, 2011

If a politician found he had cannibals among his constituents, he would promise them missionaries for dinner.
--H.L. Mencken

Roll Over, Beethoven

Abysmal.

Is there a better word to describe today's job numbers from the Bureau of Labor Statistics? Only 43,000 nonfarm payrolls (according to the Establishment Survey) have been added in the U.S. economy in the last two months, a number insufficient to accommodate all the new entrants to the workforce, never mind the 8 million-plus who lost jobs since December 2007.

If you prefer the Household Survey for your employment data, put on your seat belt. The number of people employed nationwide in June plunged either by 445,000 (Table A-1 here) or by 542,000 (Table A-8 here, ag plus non-ag) depending on which table you peruse. The so-called Adjusted Household Survey, which tries to dovetail the establishment and household methodologies, comes in at minus 401,000. Pick a number, any number, it's all the same. Upchuck city.

Mike Mish Shedlock points out that there has been no progress in upgrading part-time jobs in the past year:

Dave Rosenberg has a chart showing the difficulty the unemployed are having trying to get back to work:

Lee Adler shows how payroll withholdings (hence wages and salaries) are flatlining:

The stock market looked primed for major pukage at the open today. But hours after the BLS release came a report that consumer credit expanded in May. Traders jumped on that slim reed as evidence that the economy is picking up steam. Karl Denninger cautions, however, that any growth in non-revolving credit (red line, below) is purely the result of federally guaranteed student loans. Absent indentured college graduates, non-revolving credit is still contracting (green line). Revolving credit (blue line--think credit cards) is not rebounding meaningfully.

Look at these charts carefully, then invest accordingly.

Loon Count 2011

Saturday, July 16th, is the date for Maine Audubon's annual statewide survey of the loon population on Maine's lakes and ponds.

Check out this stunning slide show from last year's photo contest.

Quote for the Week, July 3-9, 2011

Politics, n.--A strife of interests masquerading as a contest of principles.
--Ambrose Bierce, The Devil's Dictionary