The Propaganda is now getting silly!

By Marco Pietropoli, August 2010

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Investment Performance

As much as it pains me to criticise Bloomberg, I have my academic integrity to consider. Bloomberg is an amazing institution that I rely on for information; I look at their website 10-30 times a day when I am in the office.

Bloomberg should try not to be so blatant when misleading investors. I do understand that they make their money from financial institutions many of whom sell Equity & Property investments. I also understand that Obama's approval ratings are significantly down and the last thing the White House needs before the mid-term elections this autumn, is a fall in the Stock Market.

I will give you a couple of examples. The reporting of the Durable Goods Orders on the 28th July in my view was not objective. Bloomberg gives plenty of information and you can see the report data at: http://www.bloomberg.com/markets/economic-calendar/ (You will need to click on the 26th July and on "Durable Goods Orders"). If you scroll down you can see the 3 year chart and if you click on "Why Investors Care" it will give you further information.

Bloomberg led with:

"U.S. Economy: Durables Show Investment Picking Up - Business investment in the U.S. picked up in the second quarter, helping sustain the economic recovery, June data on durable goods showed today." You can read the full article at: http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=atvSUNWJAE30


                                                   Medway Independent Financial Advisor


Durable goods orders were actually down 1% on the previous month, which was also a negative number. Now, within the numbers this month there was a 0.6% rise month on month for non-military capital equipment (plant & machinery) which is a real positive. This type of business investment can potentially create permanent jobs if headline sales increase and it shows that businesses are prepared to invest in the future. Or, it could simply show the updating of old plant and machinery now that business conditions are a little more stable.

Monthly numbers are very volatile, but if you look at the 3 year chart it clearly shows that monthly percentage increases peaked about a year ago and there has been an overall decline since then. You have to stop going positive, before you start going negative. This is why you are seeing a stabilisation of the yearly percentage charge numbers.

If you report on the data in an objective way you would say something like:

"Durable goods orders have been showing weakness in the last couple of months, which would fit with expectations. Significant fiscal stimulus and the restocking of inventories have essentially finished so you would expect a softening of the numbers in the following months. The yearly trend has levelled off."

Another example of dubious reporting by Bloomberg was the New Homes Sales number on 26th July. You can see the report and the 3 year chart at: http://www.bloomberg.com/markets/economic-calendar/

Bloomberg led with:

"U.K. Stocks Advance After U.S. Home-Sales Data Tops Forecasts - U.K. stocks climbed to a 10-week high after a government report showed sales of new homes in the U.S. rose more than forecast in June, spurring optimism that the global economic recovery is intact. http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ano9orjfYieA

And,

June Sales of U.S. New Homes Climb More Than Forecast - Sales of U.S. new homes rose in June more than forecast following an unprecedented collapse the prior month, a signal the worst of the slump triggered by the end of a government tax credit is over." http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aoXyDFb0pJ5M

Again this is a monthly number, but it is generally a little less volatile than the Durable Goods Orders. In recent months there have been significant distortions due to tax breaks which came to an end on 30th April 2010. You can read about this at: http://www.federalhousingtaxcredit.com .

So, as you would expect the New Home Sales numbers climbed leading up to the expiry of the tax credits as people brought their purchases forward to benefit from the government's hand out. Following the expiry of the tax break you would also expect a significant drop off in sales in May. Which is what happened. The May figure was the lowest point of the last 3 years with only 300,000 New Home Sales in the US.

You would also expect the June figure to be up from May as the market got back to more normal conditions. So yes, there was an increase on the month on month figure, but if you discount last month's distortion you realise that the June 2010 New Home Sales number of 330,000 is practically at the lows for the last 3 years. In June 07 the US was selling around 800,000 new homes per month.

The 3 year chart shows a fairly constant decline in new home sales over the last 3 years alleviated only briefly by a sharp drop in interest rates and significant fiscal stimulus.
If you were reporting on the data in an objective way you may say something like:
" New Home Sales are still at very depressed levels showing continuing weakness in the US housing market."

The reality is that the stream of data from the US has shown weakness in the last few weeks. These numbers need to be put into overall context of what an independent observer would say is a cooling of economic activity in the US.

The European Stress tests were also a complete farce and constituted blatant propaganda. I do understand the need to instil confidence in the market, but the process could have been managed in a far more credible way.

The US had a stress test a while ago and the Europeans needed to show that they could do something similar. It was a political exercise rather than objective analysis. If you did a test that all banks failed this would create panic. If all banks passed, the stress test would not have been credible at all.

So as expected there was a few sacrificial lambs that failed. Some of the banks that had failed had been nationalised or had merged with other institutions so the problem reported was really not that big.

Are we really to believe that out of the 91 banks that were tested in Europe, only 7 had any significant issues and that all the rest could deal with severe economic turmoil? If you stress test a metal for building, you test it to destruction to see what it can handle. The European bank stress tests did not do this and had some basic flaws.

Firstly, the test assumed only an economic contraction of just 0.4%. In the UK, the last recession was approximately a 6% downturn. Ok, the last recession was particularly severe but 0.4% is simply not a credible number.

Secondly, there was the basic assumption that no country in Europe would ever default or restructure its debts. This is certainly not the worst case scenario.

Thirdly, only part of the Sovereign Debt that the banks hold on their balance sheet was marked to market (i.e. what the present value is, rather than the nominal value). Only the bonds held in their so called "trading accounts" were priced properly, all other bonds were assumed to be held to redemption and therefore the nominal value was counted.

As you can imagine the Greek, Portuguese and Spanish government bonds, for example, have reduced in value tremendously in the recent year as the countries have been steadily downgraded and the risk of default has increased. If banks need to call on their reserves, they may not have the luxury of waiting until the bonds mature. They will have to sell them at the market price when the funds are needed.

When the US stress tested its top 19 banks in May 09, 10 institutions failed and they were told to raise $75 billion. This they did, which helped the banking system be more adequately capitalised. Many argued at the time that the tests were not really stringent enough and did not cover enough of the banking system.

The European stress tests suggested a need for only €3.5 billion of further capital to safeguard the future stability of 91 European banks. This is a drop in the ocean. All this test has done in my mind, is to produce a false sense of security.