During the summer of 1914, approximately 150,000 American tourists were stranded when war engulfed Europe, many without access to funds. Banks had ceased to pay against foreign letters of credit or any other form of foreign paper. Panic-stricken travelers lined up . . . → Read More: War, Gold and American Express]]> Surfing around I found this excerpt from the history of American Express interesting:

During the summer of 1914, approximately 150,000 American tourists were stranded when war engulfed Europe, many without access to funds. Banks had ceased to pay against foreign letters of credit or any other form of foreign paper. Panic-stricken travelers lined up inside and outside the offices of American Express in whatever city they happened to be visiting. American Express was able to cash all travelers cheques and money orders in full, enabling quick passage home for thousands. Many of those remaining were able to book passage home soon after a decision by American Express and a consortium of nine U.S. banks to ship $10 million in gold to Europe so that local banks could once again honor foreign drafts.

During 1938 and 1939, as the prospect of another world war loomed over Europe, there was still a sizable group of longtime American Express managers and employees who had worked for the company 25 years before, during World War I. Their past experiences – and their advance planning, in this instance – helped the company survive World War II. Even before the official declaration of war, American Express had mounted extensive preparations to protect its financial and real estate assets, including its principal offices in Berlin, London, Paris, Rome and Rotterdam. Throughout Europe, American Express offices continued operating until the last possible moment in countries about to be invaded – often long after American embassies and consulates had been ordered to evacuate.

The history is interesting not for the reminder that in war fiat is worth nothing, but that AMEX had an organisational memory of WW1 that enabled them to prepare for WW2. The two events were close enough that those who had experienced the first were still employed and had not retired.

I think that what is necessary for an organisation (which is really just a collection of individuals) to see the need for “advance planning” is not experience of a crisis, but experience of the period prior to a crisis. Only then can one see similarities between the period that preceded a crisis and one’s current situation and thereby identify the potential for a future crisis.

I also think that what is important is direct experience. One has to have personally experienced the pre-crisis environment – it makes for a strong imprint on the mind. Indirect experience is not the same. Reading the history of a period that draws parallels to now does not have as powerful a call to action. Words on a page can also be rationalised away.

For example, do you think giving Paul Mylchreast’s 4th May Thunder Road Report history of the US and Sterling crises during the Johnson and Nixon administrations in the 1960s and 70s (pages 24 to 35) to someone in their 30s raising a young family will result in them buying gold? It is too distant and academic.

I would also argue that the minimum age for direct experience of economic/financial events to really register would be no younger than say 20 years old. This means that the youngest person to have experienced the 1970s and punishing inflation and a real gold bull market is now 60 years old. Anyone younger than that would probably not really “get it”, at a visceral, emotional level that only direct experience can give.

My only “economic awareness” memory of the 70s would be my father suggesting I invest the $200 worth of Christmas and birthday money I had squirreled away up to my then 10th birthday into State Rail Authority of New South Wales bonds at 15% (my father was a train driver and they were offered to staff first). Getting a $30 cheque each year for 5 years seemed like a good deal. I remember being disappointed that I didn’t hold out longer, because subsequent bond series peaked at 18%, if my memory is correct.

That is the extent of my experience of inflation, as a 40 year old. It makes me reflect on where I would be now if I had not made that fateful decision in 1994 to take a job with the Perth Mint. It is likely that my economic literacy would be negligible, my awareness of the potential for inflation and the role of gold as a wealth preserver in an investment portfolio, zero.

Expected growth in first-quarter earnings for companies in the S&P 500 index has now jumped to 50% from 39% in the prior week . . . → Read More: 83% Beat The Street; Revenues Also Top Forecasts]]> All last week we pointed to the strong earnings numbers released by U.S. corporations. The overall results are in and point to a measure that confirms our sector by sector reports.

Expected growth in first-quarter earnings for companies in the S&P 500 index has now jumped to 50% from 39% in the prior week according to Thomson Reuters.

As we reported last week many companies like Citigroup Inc. (C), Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS) each reported earnings growth far above analysts’ estimates.

In this coming week the Q1 earnings season culminates with six of the 30 Dow Jones Industrial Average components and a third of the S&P 500 companies scheduled to post their operating results.

In the S&P 500 through Friday, 83% have already posted results above analysts’ expectations. In an average quarter only 61% of companies beat the street estimates.

And companies are not sacrificing revenue growth in order to improve their bottom lines. Revenue too has also bested most analyst estimates. Thomson Reuters said 69% of those companies that have reported thus far have topped their revenue views.

Q1 will now mark two quarters in a row where the S&P 500 has recorded earnings growth. It adds additional evidence that when the government reports overall GDP growth estimates next Friday, those initial measurements will register stronger than Q4.

Bank sector earnings continued strong with Morgan Stanley reporting strong profits.  The New York-based  investment firm posted a first-quarter profit of $1.78 billion compared with a loss of $177 million a . . . → Read More: Banking, Coffee, Movies, and Chips: Another Spate of Positive Earnings]]> Q1 2010 earnings season is in full swing and businesses continue their flurry of better than expected reports to start the new year.

Bank sector earnings continued strong with Morgan Stanley reporting strong profits.  The New York-based  investment firm posted a first-quarter profit of $1.78 billion compared with a loss of $177 million a year ago. Sales more than tripled to $9.08 billion.

Coffee profits were steaming in Q1 for Starbucks.  The firm reported on Wednesday that quarterly profit rose more than eight-fold, as more customers visited its U.S. locations — and on average spent more on each visit.  “I think the trends we’re seeing in the business are real and sustainable,” CFO Troy Alstead told The Associated Press.

Netflix continued its winning ways Wednesday, reporting first-quarter financial results that handily beat expectations.  The company’s net income grew 44% to $32.3 million on revenue that rose 25% to $493.7 million.  Netflix ended the quarter with nearly 14 million subscribers — up 35% compared with a year ago — and said it expects to end the year with as many as 17.3 million, up from its previous estimate of 16.3 million.

And it is not just Intel, that is enjoying a surge in semiconductor chip demand.  Hynix, the world’s second-largest producer of computer memory chips posted a net profit of 822 billion won ($742 million) in the three months ended March 31, sharply reversing from a net loss of 1.18 trillion won a year earlier.

The the montra in this earnings season is clear.  Companies are consistently demonstrating that the economic conditions driving their businesses are improving, and that their forecast data points to an ongoing theme of accelerated growth in 2010.

On Wednesday the second-largest bank in the U.S. said that its net income rose by 55% from a year earlier . . . → Read More: Delinquencies Down; JP Morgan 1Q Profits Rise; Hiring to Follow]]> What a difference a year can make. The improving economy in 2010 now has J.P. Morgan Chase & Co.’s (JPM) growing earnings again, with loan delinquencies declining, and steadily decreasing allocations for bad loans.

On Wednesday the second-largest bank in the U.S. said that its net income rose by 55% from a year earlier and that its provisions for credit losses on all the loans it manages shrunk by 30% — an improving metric that helped overall results in several of its business units.

“There is clear and broad based improvement” in the economy in the U.S. and around the world, possibly resulting in a “strong recovery,” said JPM Chairman Jamie Dimon. “Chances of a double dip [recession] are rapidly going away.”

But perhaps the best news for the battered financial sector was Dimon’s announcement that J.P. Morgan has plans to hire at least 9,000 new staff in the U.S., and aims for further additions worldwide.

With these types of results, it is not hard to imagine an economy that is on track to net more than 4M new jobs by year end.

First the banking sector became awash in surprisingly good news. Four of the US top banks smashed all earnings estimates and posted collective net profits of $13.6B for the second quarter.

Bank of America (BAC) posted . . . → Read More: Surprise, Surprise, Surprise: Roubini, Jobs, Banks, and More]]> The immortal words of Gomer Pyle rang out in financial headline after headline this week, “Surprise, Surprise, Surprise!”

First the banking sector became awash in surprisingly good news. Four of the US top banks smashed all earnings estimates and posted collective net profits of $13.6B for the second quarter.

Bank of America (BAC) posted a profit of $3.2B
Citigroup(C): $4.3B
Goldman Sachs (GS): $3.4B
JP Morgan Chase (JPM): $2.7B

The technology sector followed with Intel’s surprise. It posted its best quarter over quarter sales increase since 1988. Further, the chip leader formally asserted that this current quarter ending in Sept, will be significantly stronger than any analysts had even dreamed of. IBM also added its vote of Q3 confidence later in the week.

And there was more surprisingly good news in the jobs data Thursday. The number of initial claims in the week ending July 11 fell 47,000 to 522,000 – the lowest level since early January. The data for continuing claims also fell by 642,000 — the largest drop on record! This huge downward surprise even pulled the four-week moving average of these continuing unemployment claims down by 110,250.

And then on Friday, the housing market chimed in with surprises of its own. Contractors started building single-family homes at the fastest rate in 4-1/2 years. “The bond market was completely caught off guard by the increase in housing starts,” said Jane Caron, chief economic strategist at Dwight Asset Management in Burlington VT.

And stocks surprised most strategists as well. Just last week many had forecast stocks to continue their recent declines (or at least continue to move sideways). Q2 earnings jitters dominated the news. But as markets closed on Friday, many traders were left scratching their heads as the Dow rocketed to its best weekly gain since March, closing within easy striking distance of the 9000 mark.

But perhaps the mother of all surprises this week came from the bear of all bears, Doctor Doom, Nouriel Roubini. Just last week the ultra depressing economic prognosticator wrote an article “Brown Manure, Not Green Shoots.” But this week in a significant flip, flop, Roubini actually stated, “the worst of the worst is behind us.” (He later of course whined that his words were taken out of context.)

Gomer Pyle frequently exasperated his immediate supervisor Sergeant Carter with the Private’s Pollyanna-style demeanor. With positive economic surprises everywhere, it is no surprise that Roubini feels a bit frustrated as well.

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The transaction occurred on Wednesday and . . . → Read More: TARP Warrants: A Boon for Taxpayers?]]> On Friday it was announced that State Street Corp. became the first of 10 large banks to repurchase warrants held by the US Treasury. The warrants were put in place to assure that taxpayers are rewarded for their collective TARP loan to banks as the finance sector recovers.

The transaction occurred on Wednesday and cost State Street $60 million dollars. The proceeds flowed directly into US government coffers. The transaction sets the warrant bar for the nine other top banks who have collectively repayed $66B in rescue aid principal, but have yet to retire their warrant obligations by negotiating deals with the Treasury.

The State Street transaction equates to $30M per $1B borrowed. That could well mean that the other nine banks are looking at a collective $2B payback on their $66B.

The warrant deals are politically sensitive, with congress calling on the Treasury to drive a hard bargain on behalf of taxpayers. Banks have complained that valuing the warrants too highly could impede the goal of restoring health to the financial system. (I’ll use that line on my bank loan officer the next time and see how well it works)

For taxpayers (many of which viewed the bailout monies as a gift rather than a loan to the banks) are now reveling in the reality that they’ve just made a quick 3% gain in less than a year.

A quite healthy return in the current investment climate.

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At a congressional oversight panel on the government’s financial rescue program the tax evading Treasury Secretary Timothy Geithner testified, “Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.”  With the recent fair-value lying accounting changes banks have reported surging . . . → Read More: Bankrupt Banks]]> BANKS HAVE MORE THAN ENOUGH CAPITAL

At a congressional oversight panel on the government’s financial rescue program the tax evading Treasury Secretary Timothy Geithner testified, “Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.”  With the recent fair-value lying accounting changes banks have reported surging quarterly profits.  Even the single digit midget Bank of America booked a first quarter net income of $4.247 billion – 6% more than it made in all of 2008.

Olivier Garret, CEO of Casey Research, asks a couple penetrating questions and gives a couple answers.

“For starters, just where did all this income come from?  And has credit quality really improved.

The answers to both can be found buried in a company press release bearing the encouraging title “Bank of America Earns $4.2 Billion in First Quarter.”

I’d like to draw your attention to the four most telling excerpts from this release.

1. Equity investment income includes a $1.9 billion pretax gain on the sale of China Construction Bank (CCB) shares.”
2. Noninterest income included $2.2 billion in gains related to mark-to-market adjustments on certain Merrill Lynch structured notes as a result of credit spreads widening.”
3. Credit quality deteriorated further across all lines of business as housing prices continued to fall and the economic environment weakened.”
4. Nonperforming assets were $25.7 billion compared with $18.2 billion at December 31, 2008 and $7.8 billion at March 31, 2008, reflecting the continued deterioration in portfolios tied to housing.”

BANKRUPT BANKS

Bank of America makes $4.2B almost completely from a one time sale of a Chinese bank and some accounting sorcery on Merrill’s failing mortgages.  Looking at the cash position of Bank of America if those two extraordinary events were backed out and preferred dividends were included then Bank of America actually bled about $1.3B.

The head of the sorcery order, Goldman Sachs, was very creative by changing its reporting calendar which effectively erased the impact of $1.5B loss in December from showing up in its earning statements although it still flowed through to the balance sheet.  Bank of America is not the only bank with these shenanigans.

The FDIC poltergeist possessed another four banks on Friday bringing the total for the year to 29.  The evaporated banks that went poof were dotted across the nation holding about $1.6B in deposits including American Southern Bank of Kennesaw, GA with $104M in deposits, Heritage Bank of Farmington Hills, MI with $152M in deposits, First Bank of Beverly Hills in Calabasas, CA with $1B in deposits and the First Bank of Idaho in Ketchum, ID with $374M in deposits.

DETERIORATING CREDIT QUALITY

It is clear that credit quality continues to deteriorate at the banks and almost all banks are engaged in fraudulent accounting sorcery.  On the bright side for these vampires, the steep yield curve helps generate tremendous real income for the banks as they are able to suck the life out of the remaining wealth generating companies in the economy.

JP Morgan reported a stunning profit because the value of their bonds declined in the market and Citigroup had a similar $2.5B gain.

MARKED DOWN BUT NOT ENOUGH

A few days ago I attended an art walk with some colleagues.  While the funnel cakes, BBQ, smoothies and live music were fun we began to chatter about business.

One of them happened to be a commercial property appraiser.  He was telling me about the difficulty of appraising buildings because the market is failing to clear and data points are getting extremely scarce.  For example, quarterly he appraises a beautiful 100,000+ square foot high-quality office building that overlooking the Pacific in Oceanside, CA.

Usually this premium building is never vacant but starting November 2008 its vacancy rate climbed to about 20%.  He avoided a write down in Q4 2008 turning in a $64M appraisal.  But because the vacancy rate, lack of comps, etc. is now typical for the market in Q1 2009 he had to evaporate $8M from the building turning in an appraisal of $56M and did not receive any complaint from the client.  He told me he is currently working on the Q2 appraisal and figures he will need to evaporate another $4M.  This is what happens to real estate values when the discounted future cash flows decline because of huge vacancies and leases being renegotiated.

NO BID THEN NO VALUE ASSESSMENT

My suggestion for valuing the building if the market was not clearing and there were no comps was a simple $0.  Then I told him the story of my encounter with a senior partner from DLA Piper whose client had a 40+ story condominium that was worth less than worthless.

Why is there such an effort to keep the asset prices high? If these assets are being ‘held for the long-term’ then it should not matter if they are carried on the balance sheet at tremendously understated values.  After all, Mr. Buffett often takes this approach.

I have never heard of an investor suing or regulator prosecuting fraud, except perhaps in divorce, tax or similar cases, because assets were undervalued on the balance sheets.  They can always be marked up later or a gain can be taken at a sale.  Additionally, this may even have beneficial tax consequences.

Of course, this type of accounting methodology may have a negative effect on fraudsters, Ponzi scam artists and fractional reserve bankers who are by definition engaged in embezzlement.  These immoral individuals always want to misrepresent asset values to the upside but never the downside and prosecuting fractional reserve banking as embezzlement would be beneficial for society and lead to a more efficient allocation of resources.

ILLUSORY INCOME VERSUS REAL ASSETS

So let me get this straight:  the greater depression is intentionally exacerbated with a skyrocketing unemployment rate, construction and commercial loans become impaired as projects are either stopped because the unsustainable consumer economy is grinding to a halt or phantom equity is evaporated.  This causes the banks to either go under or become more of a credit risk.  If the bank survives then it is an even a higher credit risk as their debt trades at a discount and that discount is booked as income.  The banks record profits, CNBC declares all is well and the stock market soars.

By comparison, a consumer charges up a bunch of credit card debt at McDonald’s, loses their job, their credit worthiness diminishes and the bid for the consumer’s credit card debt in the market declines so the the consumer books income.  Which begs three important questions:  Is there any real income?  Will a real economic loss be taken?  By whom?

Wealth can take two forms:  (1) a financial asset or (2) a tangible asset.  Tangible assets have intrinsic value and can never become worthless.

Uncertainty from the lying on financial statements and by costumed government officials is briskly eroding the confidence of a inherently unsound confidence based system.  In times like these there stands only one safe haven:  commodity currency.  At all times and in all circumstances gold and silver remain money.  Their value is not subject to counter-party risk and accounting sorcery, unless it is fool’s gold or silver held in the GLD or SLV ETFs, and the metals will always buy something.  Gold is the risk-free asset and does not require fraudulently induced confidence because it generates real confidence.

CONCLUSION

Fractional reserve banking is embezzlement and the accounting rules have changed to protect those engaged in fraud.  The intrinsic value of the financial companies mentioned is almost impossible to accurately determine, may be nothing and therefore should be avoided.  Asset values are rapidly evaporating and the credit quality of borrowers is quickly deteriorating which will lead to more banks failing.  On 20 March 2009 FDIC Chairwoman Sheila Bair said some very scary words, “Without additional revenue beyond the regular assessments, current projections indicate that the fund balance will approach zero.”

The Great Credit Contraction grinds on and holders of capital continue migrating down the liquidity pyramid seeking the safest and most liquid assets.  Your electronic digits representing illusory currency are not safe in any of the fractional reserve banks and when the FDIC fails there will more pandemonium.  With the FDIC begging to increase its line of credit from the Treasury from $30B to $500B the likely cure, whatever it may be, will inflict another laceration on the already mortally wounded FRN$ and further destroy wealth and hobble the economy.

During these relatively calm times for your businesses and daily transactions I recommend developing an alternative plan, and eventual substitute, to the current monetary system.  For reducing your risk and keeping your capital safe there are three main options:  (1) using gold and silver coins, (2) using the services of a full reserve institution, like GoldMoney, or (3) withdrawing the Federal Reserve Notes, putting them under the mattress and using cash as much as possible.

Disclosures:  Long physical gold and silver with no position in GS, JPM, BAC, C, CCB