After opening higher stocks struggled late on little real news and enter the final hour with modest gains. The NAHB Index fell to a 1-year low after dropping 2 points to 14. Weakness was broad based; the Western region fell 5 points to just 9.
With earnings season underway the optimism of analysts takes center stage along with forward earnings estimates, and of course Wall Streets agenda which in a nutshell is “just trade baby”! Like economists whose theories are predicated on the idea that we all operate in our own best, rational, self-interest, always make logical decisions and don’t allow emotion to either cloud or influence our decision-making.
Analysts also suffer from glaring fundamental flaws in their thesis, notwithstanding the previously mentioned agenda. Like most economists they just don’t get it because they can’t fathom that this isn’t your garden variety business cycle recession and accept that fact that it is indeed a credit bust induced recession despite considerable data supporting exactly that, this is why real estate is heading south in a hurry sans stimulus.
Accepting rising earnings at face value and not taking the time to really examine the reasons. Figuring a steep yield curve and ultra low rates will do the trick and that the Fed will save us, because surely in this environment people and businesses will continue to borrow and spend. Yet they don’t. The corporate sector, particularly financial has been granted so many sweetheart accounting exemptions that firms that are effectively bankrupt, and feature falling revenues and little real profits instead manage to report what looks like, at first glance, blowout numbers.
Between the off-balance sheet transactions, Special Investment Vehicles, unregulated derivatives bets, accounting standards that allow the capital impairment of existing debt from deteriorating credit quality, and hence increasing default, to be booked as profit. Counting the fully amortized option ARM loan payments as income despite over 85% paying at the lowest or negative amortizing rate, this is phantom income that never was and I doubt ever will be received. Mark to model asset pricing so as to avoid realizing losses on an assortment of impaired and excessively encumbered assets related to real estate. Do you think they’ve allowed the time from mortgage default to actual eviction and hence repossession to increase to 14+ months out of the kindness of their hearts?
For the most part neither the analysts ratings, the financial sectors income and balance sheets nor the recently passed financial reform bill are worth the paper they’re printed on. Better than nothing I agree, particularly with respect to financial reform, but if this is the best we can do then the painful lessons in the need to purse a financially sustainable path will continue.
Hi and welcome to The Profit Motive, I’m your host Caleb Lawrence. Once upon a time in America the media acted as the watchdog of the corporations and the state. In the modern era it’s all about ratings and profits, opinion has been substituted for news and frequently is presented as fact. 
