News that Moves: Retail Sales Reality Check, Financial Sector Supply Concerns, America's AAA Rating Risk, Foreclosure Fiasco Picks Up Pace

RCM Comment: I have explained why the housing numbers are suspect and Q1 EPS numbers being "better than expected" is a farce. Unfortunately for the Government, placing a positive spin on the Retail Sales numbers is a lot harder to do....

ECONX Disappointing Retail Sales Numbers Undermine Rebound Argument
Those glimmers of hope are fading. April retail sales fell 0.4%. This followed a decline of 1.3% in March. It is starting to look like the consumer spending gains in January and February were just rebounds off a very weak fourth quarter, supported by strong seasonal factors... It can certainly be argued that there is some stabilization occurring in consumer spending. The April decline in retail sales is not particularly large and suggests that the comprehensive personal consumption expenditures for the month will be near flat. Nevertheless, the markets have been looking to a rebound in consumer spending as a signal of overall economic recovery later this year. The two months in a row of declines in consumer spending don't support that argument quite yet. With unemployment continuing to rise and wage gains stagnating, the outlook for consumer spending remains poor.

RCM Comment: Meredith's thoughts go along with our stated belief that even the "good" banks will be raising capital. I'll say it again because it is reality and bears repeating: The 2 month rally in equity prices was manufactured by a slew of dubious "good" announcements leading to "green shoot" spin all for the purpose of helping the financial sector to raise much needed capital. My question: Who are the suckers buying these secondaries? The glut alone of new supply coming on the market should make it difficult for this sector to advance from current prices.

Meredith Whitney comments on CNBC; says 2010, 2011 earnings are going to be "so far below consensus" for the banks...Says she doesn't think this is the last time these banks raise money.

RCM Comment: Weakening US treasury bond prices, recent US$ decrepitude vs other world currencies and firming gold prices add some weight to the following story...

Former comptroller general of the US David Walker says America’s triple A rating is at risk - FT, David Walker writes "Long before the current financial crisis a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us...

The facts show we're in even worse shape now, and there are signs that confidence in America's ability to control its finances is eroding... Prices have risen on credit default insurance on US government bonds...

Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People's Bank of China have expressed concern about America's longer-term credit worthiness and the value of the dollar...

In my view, either one of two developments could be enough to cause us to lose our top rating. First, while comprehensive healthcare reform is needed, it must not further harm our nation's financial condition... Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us."

Foreclosure activity remains at record levels in April According to RealtyTrac U.S. Foreclosure Market report
RealtyTrac released its April 2009 U.S. Foreclosure Market Report, which shows foreclosure filings were reported on 342,038 U.S. properties during the month, an increase of less than 1% from the previous month and an increase of 32% from April 2008. The report also shows that one in every 374 U.S. housing units received a foreclosure filing in April, the highest monthly foreclosure rate ever posted since RealtyTrac began issuing its report in January 2005.

"Total foreclosure activity in April ended up slightly above the previous month, once again hitting a record-high level," said James Saccacio, chief executive officer of RealtyTrac. "Much of this activity is at the initial stages of foreclosure - the default and auction stages - while bank repossessions, or REOs, were down on a monthly and annual basis to their lowest level since March 2008. This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria (This is something we at RCM have highlighted repeatedly). It's likely that we'll see a corresponding spike in REOs as these loans move through the foreclosure process over the next few months."

News that Moves: Massive Drop in Consumer Credit, Truth Behind the Employment Figures, Geithner's NY Times Op-Ed

Zero Hedge:

The latest G.19 filing shows a massive drop in both revolving and non-revolving consumer credit, which has fallen to a one year low at $2.551 trillion, an $11 billion reduction sequentially in credit, split about even between revolving and non-revolving. RCM Comment: The government is trying desperately to spend its way out of this recession, but it cannot do it alone. Uncle Sam needs you, the individual credit junky, to fall off the wagon, tap that vein and shoot up by taking on more debt. What the story above shows is that the credit junky is not cooperating. Instead, he is still sequestered at the Betty Ford Clinic continuing to detox. Maybe the story below will help us understand why...

RCM Comment: The equity markets rallied on the employment figures last week as the media outlets and various government officials applauded the numbers. However, a closer inspection, with the help of Market Ticker, will reveal the true essence of the numbers and perhaps give us a hint at the future direction of the equity markets.

Market Ticker:
The advance seasonally adjusted insured unemployment rate was 4.7 percent for the week ending April 18, an increase of 0.1 percentage point from the prior week's unrevised rate of 4.6 percent.

Half of the unemployed are in fact not insured (they've run out of benefits) but the insured percentage as a percentage of the total ticked up this last week.

The important number isn't initial claims; it is continuing claims, as that defines the number of people who got laid off and can't find a replacement job. How's that doing?
The advance number for seasonally adjusted insured unemployment during the week ending April 18 was 6,271,000, an increase of 133,000 from the preceding week's revised level of 6,138,000.

Ah. So the number the market "liked" was down 10,750, but the truth is that 133,000 more people lost their job than found one last week. That's very bad news; those are real people who can't pay their bills and are unable to find a new job to replace the one they lost.

Good luck with that "green shoot" folks.

Most financial markets are still on some form of government life support and the evidence so far is they can't yet function normally on their own - WSJ
WSJ reports for all of the excitement about improving financial markets, most are still on some form of govt life support and the evidence so far is they can't yet function normally on their own. Last fall, markets froze and interest rates soared as investors dumped stocks and corporate bonds and banks cut back on lending to their customers and to each other. In response, the Federal Reserve sharply cut interest rates and established a Scrabble game's worth of acronymic lending and insurance programs to reassure investors and jump-start markets. Those programs have helped return markets to near normal. Lending has resumed, and many key rates are back to where they were before the peak of the crisis. But in cases where the government has pulled back its support, markets have trembled. Given that history, officials will likely err on the side of intervening too much and for too long. (Gold Bullish) "When the recovery is self-reinforcing and cash flow is picking up for companies and banks, then financial assets will grow on their own without any need for government involvement," says Tony Crescenzi, chief bond strategist at Miller Tabak. "We are nowhere near that self-reinforcing state." In one sign of lingering credit-market anxiety, interest rates not under direct Fed control -- corporate bonds, for example -- haven't fallen as sharply as overnight lending rates, over which the Fed has the greatest power.

RCM Comment: Entertaining liar or credulous fool? You be the judge...
NY Times runs op-ed piece from Treasury Secretary Geithner
Geithner writes "This afternoon, Treasury, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Reserve will announce the results of an unprecedented review of the capital position of the nation's largest banks. This will be an important step forward in President Obama's program to help repair the financial system, restore the flow of credit and put our nation on the path to economic recovery...

The effect of this capital assessment will be to help replace uncertainty with transparency. It will provide greater clarity about the resources major banks have to absorb future losses. It will also bring more private capital into the financial system, increasing the capacity for future lending; allow investors to differentiate more clearly among banks; and ultimately make it easier for banks to raise enough private capital to repay the money they have already received from the government. The test results will indicate that some banks need to raise additional capital to provide a stronger foundation of resources over and above their current capital ratios. These banks have a range of options to raise capital over six months, including new common equity offerings and the conversion of other forms of capital into common equity...

Some banks will be able to begin returning capital to the government, provided they demonstrate that they can finance themselves without F.D.I.C. guarantees. In fact, we expect banks to repay more than the $25 billion initially estimated..."

RCM Comment: Allow me to cut through the confusion, the hysteria and state a simple fact: The equity markets rally of the last 2+ months has been engineered by the government to facilitate banks' raising of capital. A plethora of smoke and mirrors have been employed. The government can pretend employment is better or Q1 EPS are "better than expected" or foreclosures are down, but they would be painting a surreal picture that would make Dali proud. Beware, a significant wave of supply is about to hit the equity markets and when supply out weighs demand, well....

RCM Editorial: It Takes A Lot of Manure To Get These "Green Shoots"

The equity markets continue to work their way higher as the government-sponsored and controlled bank stress test pageantry is in full swing. In my business we commonly refer to this type of charade as "putting lipstick on a pig". However, the herd is content at the moment to try and make that silk purse, so we must respect the trend and trade from the long side. My advice: remain alert, we are witnessing the greater fool theory in full force. Keep one foot out the door or the market will cut off your legs when it turns.

I have heard a lot of talk about Ben Bernanke's "green shoots" comment in regards to the economy. He points to different economic numbers that have been released over the last 6 weeks as reasons to be optimistic. I was asked about this "green shoots" theory during the interview I gave on The Financial Lifeline Radio show Monday. My question in return:

What does it take to get these "green shoots"?

Answer: A lot of manure.

Enough said about "green shoots" let's make a reality check:

Creditors object to Chrysler deal, setting up fight
NEW YORK (AFP) - - A group of Chrysler creditors objected Monday to the struggling automaker’s bid for a quick restructuring, calling it an illegal bid by the government that violates constitutional property rights. More…

RCM Comment: The government conjures up green shoots by stepping all over the Constitution. Maybe Bernanke was right, yes something is growing, but it's green mushrooms and they are poisonous.

Mike Morgan:

The moratorium on foreclosures lasted five months. That’s over now. And real estate brokers have been warned to expect a tsunami of properties to be listed and sold.

Foreclosures are increasing in the luxury space. Prime borrowers are now losing their houses and these repossessed homes are recorded as sales in the national figures. So, now you have a "green shoot" reported by the press as "increasing home sales". Then (to add a little more manure onto the "green shoot") the press reports the increase in median home sales prices as a positive. Of course, the increase comes from the repossessed luxury homes that are valued at higher prices, but no one in the press bothers to mention that little annoying detail.