General Motors filed for a $100 million initial public offering on Wednesday.  This marks an important milestone in the car-maker’s attempt to reemerge to prominence following an incredibly tumultuous time in the company’s long history.  While GM filed to raise $100 million in the offering, that is not necessarily the amount the company expects and hopes to raise.

Prior to the filing, many expected GM to seek $16 billion in an IPO in order to take the US Treasury’s ownership stake down from 61% to somewhere under 50%.   It would take $70 billion for the US Treasury to sell its full stake in the company.  In response to my post yesterday on the upcoming “hot” IPOs, reader Nickprc observed that the $70 billion figure “would be more than Ford’s market value of roughly $44 billion, but less than Toyota’s total market value of about $113 billion.”

Along with a common stock offering, GM will look to raise money via the sale of preferred stock.  Whereas the common stock offering is an attempt to divest some of the ownership interests of the US Treasury and United Autoworkers Union (a 17.5% owner), the preferred stock offering will help General Motors raise money for the rejuvenated company’s own balance sheet.

The lead underwriters on the offering are some of GM’s fellow “bailout” recipients from the financial crisis days in JP Morgan (NYSE: JPM), Bank of America (NYSE: BAC), Citibank (NYSE: C) and Morgan Stanley (NYSE: MS).  The IPO will be priced at some point closer to the actual offering date, which many expect to happen at some time between November and December.

Check back later for more information as the story unfolds.

The classic battle between bulls and bears on Wall Street continues:

Lagging Macro Economic Data vs. Positive U.S. Earnings Reports;

Technical Analysis vs. Fundamental Value;

Greed vs. Fear; and, Confidence vs. Caution.

Lately, the bear argument for a collapse has not been manifesting in reality as the Dow Jones Industrial Average (DJIA) is up nearly 1,000 points and S&P 500 is up 100 points from the recent bottom. Has Robert Prechter gone certifiably insane with his Dow 1,000 prediction? I personally invite Robert Prechter to read my recent recap on 3 Dow bellwether earnings reports highlighting improvement and recovery, not Armageddon or doom-and-gloom.

Big names like Pimco’s Bill Gross, fund manager Jeremy Grantham, and Schwab’s Chief Investment Strategist Liz Ann Sonders are all sharing interest in stocks again. They aren’t calling for another huge boom in prosperity, but they are selectively picking names in the current market.  As the tides are turning, I believe there are 4 compelling catalysts that could awaken the idle animal spirits on Wall Street:

4) The Re-emergence of an Iconic American Auto Company: General Motors

On Tuesday, General Motors Co. said July sales from its four core brands – Chevrolet, Buick, Cadillac & GMC — leaped 25% from July of 2009. That makes the 10th straight month of year-over-year gains.

GM’s sales of crossovers jumped 41% and combined sales of full-size pickup trucks rose 22%. If you are still unsure the U.S. economy is recovering after such a strong report, let’s examine a list of companies that have all successfully paid back the taxpayer ‘bailout funds’ (a.k.a. Troubled Asset Relief Program, or TARP) once needed to survive the financial crisis of the Great Recession:

American Express (AXP) – Repaid $3.389 Billion in preferred stock purchased by TARP

Bank of America (BAC) - Repaid $45 Billion in preferred stock purchased by TARP

Bank of New York Mellon Corp (BK) – Repaid $2-$3 Billion in preferred stock purchased by TARP

BB&T (BBT) – Repaid $3.1 Billion in preferred stock purchased by TARP

Capital One Financial (COF) – Repaid $3.555 Billion in preferred stock purchased by TARP

Citigroup (C) – Repaid $45 Billion in preferred stock purchased by TARP

Discover Financial (DFS) – Repaid $1.23 Billion in preferred stock purchased by TARP

Goldman Sachs (GS) -Repaid $10 Billion in preferred stock purchased by TARP

J.P. Morgan (JPM) – Repaid $25 Billion in preferred stock purchased by TARP

Morgan Stanley (MS) – Repaid $10 Billion in preferred stock purchased by TARP

PNC Financial (PNC) -  Repaid $7.579 Billion in preferred stock purchased by TARP

State Street Corp (STT) – Repaid $2-$3 Billion in preferred stock purchased by TARP

U.S. Bancorp (USB) – Repaid $6.6 Billion in preferred stock purchased by TARP

Wells Fargo (WFC) – Repaid $25 Billion in preferred stock purchased by TARP

The Total Repayment by the 14 companies listed above = ~$190 Billion Dollars

Meanwhile, General Motors repaid its total loan portion with interest to U.S. & Canadian governments as of April 21, 2010 with only $2.1 billion in preferred stock and 61% common equity shares outstanding (source: USA Today).

Founded in 1908, General Motors and the American auto industry became the foundation for driving the industrial engine into the future. GM is now in 140 countries across the globe. This month, GM plans to file its IPO registration during the week of August 16th.

GM represents a diversified automotive company with a variety of brands. Even with latest buzz surrounding the electric Vault in 2011, other GM brands are creating a splash. Have you seen the new Chevrolet Equinox? They are commanding a price premium in the market due to demand for the new crossover. The new Chevrolet Camaro is beginning to pop up on roads alongside its long-time competitor, the Ford (F) Mustang.

The U.S. government has made it clear their intention is not to own and operate GM, but to provide help during a time of financial crisis. Over 60% of GM is currently owned by the U.S. taxpayer, but the IPO will put GM back on its own feet as the government sells its stake in the company back to, none other than, the public. The temporary TARP relief to the 244,500 employee-driven organization was a vital necessity to preserve GM and dodge failure. Down the road it will be viewed as a success when we peer at our rear-view mirrors in a few years.

If you are looking for an iconic American brand that experienced a similar GM path, look no further than Sears Holdings (SHLD) and its masterful comeback from bankruptcy in 2003 with an IPO indicative of the 2003-2007 bull market (a rise from $13 per share to over $190 per share over the course of 4 years). Some may call it irrational exuberance, others may call it the awakening of the animal spirits. Remember, Sears is a brand name known since 1886, GM since 1908. Both of their places in American history are unforgettable.

3) Cheap Debt … Again

No one is surprised the U.S. is a debt money system. The real question is how well the U.S. can manage its debt.

At this moment in time during the business cycle, debt is simply cheap. Moreover, debt is being re-financed at extraordinarily low rates. In fact, companies are borrowing tons of cash to invest in the future growth of their company as more executives warm up to the word ‘recovery.’ For example, at the end of July, both McDonald’s (MCD) and Advanced Micro Devices (AMD) sold $750 million and $ $800 million, respectively, worth of debt securities (source: Bloomberg News)

Just last week, I spoke with an anonymous financial advisor at Morgan Stanley (MS) who said he is “buying stock on margin.” Why? Not only because he wants to take part in the rising return of a company like Ford (F) delivering over 20% stock returns in July, but because margin interest (debt) is just too cheap to ignore.

Those who can afford debt — financial citizens who save for a rainy day and do not overextend themselves by ATM-ing their home, car, and any other assets — rightfully deserve to take advantage of cheap debt. They can start putting that money back to work in the U.S. financial system and reaping a return while competitors are vulnerable.

The resurgence of cheap debt and more capital moving back into the system can only lead to better times ahead: jobs, income, the ability to pay a mortgage, and the ability to consume!

2) Justice Served to Crony Capitalists

According to the Department of Justice, in the first half of the 1990-2000 decade, over 3,600 bankers and fraudulent contributors to the late 1980′s savings & loan crisis were prosecuted and penalized with jail time (source: Financial Times). Since the 2008 Great Recession, only a handful of cronies and crooks have been penalized. However, the FBI is handling 2,100 open cases pertaining to securities fraud during the financial crisis. As we discussed on Yahoo TechTicker on June 25th 2010, if these cases start making headlines with handcuffs there will be renewed optimism to invest in markets without financial terrorists.

1) Job Creation May Surprise Sooner Than Bears Think

On July 27th, Derek Thompson of the Atlantic called attention to a very interesting chart in one of his articles. Thompson noticed that corporate profits were up and I say they could act as kindling for new hiring.

As you can see in the chart above, corporate profits broke above the steady unemployment line at the start of Q4 2009. So far during 2nd quarter 2010 earnings season, over 70% of companies are beating earnings estimates. Thus, it is safe to assume the corporate profit (blue) line is continuing to rise and deviate away from the corporate jobs (red) line.

For example, a Dow Industrial component such as Caterpillar (CAT) delivered a 31% increase in revenue growth year-over-year, while a software tech giant like Oracle (ORCL) delivered a 40% increase in revenue growth year-over-year. Looking deeper, for Q2 2010, Caterpillar generated $10.4 billion dollars and Oracle brought home $9.51 billion dollars.

Moreover, there is roughly $1.8 trillion dollars in corporate cash sitting on the sidelines. A lot of this cash could quickly move into the economy as executives get more clarity after the November elections.

Using history as a benchmark for U.S. business cycle activity, it’s fair to say the U.S. economy operates in a domino effect-type manner. Bottom-line and top-line growth usually lead to an increase in capital expenditures such as new employee hiring. More new-hires equals more consumers with disposable income.

The most evident small-scale examples, which are still better than cost-cutting and layoffs announcements of late 2008 and early 2009, are the SEC announcing 800 new positions available as a result of the financial regulatory legislation. Chrysler announcing on July 30th they will add 900 jobs to a Sterling Heights, MI manufacturing plant. A Japanese auto-parts supplier announcing the construction of a new plant in Tennessee to manufacture seat components for Nissan vehicles beginning in mid-2011, eventually employing up to 224 workers. These numbers are small, but we have to start somewhere.

Confidence is a temporary cure, yet can spark animalistic appetites for fat equity returns. As the S&P continues to ‘remain in a range,’ all eyes are moving toward the approaching S&P 1144 battle line. Which animal are you: a bull or bear?

Disclosure: Ford (F) was a Wall St Cheat Sheet Premium Watch List ‘Buy’ Selection on July 9th at $10.85 per share.

Much of the rage these days has been about “how to get businesses to spend.”  Watching CNBC, one would easily conclude that we are in the midst of a supply side slump, in which businesses curtailed production due to uncertainty in policies from Washington.

With the US Chamber of Commerce unleashing a wave of negativity on the present policy landscape, I think it’s important to take a step back and look at what is fundamentally taking shape in our economy. Economics has become so politicized to the point that discourse has become detached from the source of the problem.   Let’s analyze where we are and where we came from in an apolitical manner, focusing solely on the simplified economic elements.

What is the problem?

In a nutshell, the problem is debt.  We are in the middle of a rolling credit crisis.  It all started with the private sector accumulating far too much debt–the leverage ratios in the financial and residential sectors reached unprecedented heights–and has now transitioned into one in which the US government has accrued a substantial fiscal debt.  The following chart, borrowed from Steve Keen’s Are We “It” Yet paper (definitely worth the read for those who enjoy more advanced economics), offers a great illustration of exactly what has transpired.  As you can clearly see, when the lines representing finance and business turn downward, the government’s line accelerates upwards.

Once the first shock (sub-prime trouble started in 2006 and heightened throughout 2007) hit debt markets, the shock sent ripples throughout US debt markets.  When Lehman Brothers collapsed in September 2008 and AIG required a bailout just to meet its collateral requirements, debt markets completely froze and finance essentially came to a halt.

In the meantime, as the financial sector of the economy collapsed, and the unemployment rate rose, the cycle of defaults and increasing unemployment continued to accelerate in pace.  Demand in the economy took a shift to the left.

In the short-run, the aggregate supply is a vertical line, as production capacity itself is static.  One can clearly see that when demand shifts left, both price and total production also take a corresponding shift to the left.  This is rather different than your typical post-Great Depression recession.  In fact, it is the first time since the Great Depression that we have seen such a shift.

What this means for monetary and fiscal policy?

When aggregate demand takes a leftward shift the remedy called for is different than what has worked in other recent recessions.  In the past, cutting interest rates would induce firms to increase production, as a supply-side recession led to a shortage in production.   We saw this play out as the Fed rather quickly moved interest rates to the zero bound, and sure enough there was no uptick in economic activity. Fiscal policy, on the other hand, could be implemented to fill some of that “demand gap” that results from a shift in aggregate demand, and this is exactly why our government pursued a stimulus plan.

The common thread through all of this is that the problem started as one of too much debt in the private sector.  As a result, demand for dollars increased–demand for dollars is equivalent to saying that firms and households cut consumption in order to save and/or pay down debt.  Debt was (and is still) getting capitalized far faster than the money supply was increasing.  Essentially, we are in the midst of a massive debt to equity conversion in the private sector.  In order to soften the landing, the government lent a helping hand and took on more debt itself so that the private sector could afford to capitalize.  And perhaps most importantly, Helicopter Ben Bernanke unleashed a massive wave of quantitative easing and drastically increased our money supply in order to accommodate the increasing demand for dollars.

Where are we now?

Well now, the government’s deficit has expanded rather quickly.  This is not a bad thing.  Meanwhile, private sector balance sheets have continued to improve, to the point where people are now complaining that companies have too much cash.  This too is not a bad thing.  The next step is to get us into a position for demand to start increasing in the private sector.  Clearly there is demand for investment (as opposed to consumption goods), as is evidenced by the fact that even since the Federal Reserve stopped purchasing mortgage backed securities, interest rates on 30 year mortgages continue to plunge to new record lows: demand outweighs supply in that market.

Why is that?  Well what bank wouldn’t want to lend when they could borrow from the Fed at next to no interest and lend that money out at about 4.5%.  That’s a healthy profit margin right there!  The problem is that demand for mortgages is incredibly low, as over levered households are in no position to take on more debt in buying new real estate (hat tip to Hedgeye for the chart):

Is investment light right now?  Sure it is,  But, while we’re not seeing investment in increased production capacity, we are seeing investment in increased productivity.  Companies are spending large quantities of money investing in the new technology infrastructure.  Intel’s (NASDAQ: INTC) earnings highlight this trend on the supply side, as does Federal Express’s (NYSE: FDX) on the demand side.  Intel beat on account of increased demand from the cloud computing trend, while Federal Express invested in improving the company’s efficiency infrastructure.

We need to add a little more context to what is going on.  Business cycles are just that–cycles.  There are peaks and there are troughs, but all in all, changes take time.  Subprime “popped” in 2006, totally crashed in 2008 and bottomed in 2009.  That was a good three years of negativity there.  We are just through year one of the recovery in equity markets.  Anyone who expects the economy back at full capacity at this point has some sort of agenda.  It’s just impossible and unrealistic.  The key is to remain cognizant of where we came from and where we are, and to continue implementing effective policies to mitigate the deflationary pressures coming from households and financials and to encourage investment in innovative ideas.

In April we were all clear and May-June the world was ending.  There are inherent emotions that contribute to the fluctuations of market prices.  As investors and traders, it’s important to look at this through an unemotional lens.  The market will do its thing (check out Ben Graham’s Mr. Market to get an idea), and the economy will do its own thing.  Now is one of those times to take a step back and put things into perspective.

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The Hypocrite of the Day Award goes to … drumroll please … criminal and former Tyco (NYSE: TYC) CEO Dennis Kozlowski. I had all to do to keep from bursting into cardiac arresting and laughter when I just read the letter the imprisoned Kozlowski sent to Fox Business Network (NYSE: NWSA). Here are some really fun and delusional excerpts:

“I’m amazed at the decline of our free-enterprise system. Failed businesses received bailout money and then bonuses were paid to those who failed – all at taxpayer expense and no one has been prosecuted….”

“In 1976, we began a strategy to grow Tyco. We focused on a few basic industries and ultimately created tens of thousands of jobs for manufacturing people, pipefitters, electronic technicians, foundry workers, health-care employees, engineers, salespeople and many other blue-collar and white-collar workers.

“We raised capital, invested the money acquiring companies and improving them and provided superior returns for well over 20 years. A look at the state of business in America today leads one to conclude it would be impossible to achieve similar growth and related job creation.

“Back in 1976, we (Tyco) were a small company seeking to buy another company (Grinnell Fire Protection) about four times our size. We did our diligence, tested our assumptions, anticipated what could be improved and purchased the company (the first of many). We knew we were putting our jobs at risk if we failed. There were no bailouts for a mistake or just plain luck.

“Today if we were a small company seeking similar opportunities we would be stopped in our tracks. We would have to assess the cost of a 2,300-page health care bill that we could not decode or price. New regulations as a result of stimulus bills and unknown tax policies would make cost too uncertain. The tens of thousands of decent paying jobs we created, in industries some believed could not be competitive in America, would not happen.

“The small business managers seeking to grow – the true creator of jobs – has now been set up for failure. (We grew our revenue from 20 million dollars to 40 billion dollars and employees from less than 1,000 to well over 200,000.) Today there are too many unknowns with a government addicted to spending , revenue extraction from business and individuals, and overreach policies.”

For Kozlowski’s next act to, he might entertain us with his very own Declaration of Independence from jail. Happy Fourth of July!

American Enterprise Institute President Arthur C. Brooks might be an emerging leader of the intellectual side of the Tea Party movement (Cf. the emotional side). He raises an interesting point I have been hearing a lot lately by people in states with massive public pension liabilities: “The disparity [between public and private sector benefits] is so large and so unfair, a day of reckoning is coming.”

When I was recently visiting family in New Jersey, all they could discuss was their animosity toward police officers retiring in their 40′s with full pensions, teachers receiving 4% a year raises despite the economic recession, and politicians who keep signing contracts for more unsustainable and unfundable public sector compensation programs. Given the anger coupled with their very reasonable insights, I could easily see how this issue will reach an ugly head.

However, one thing Brooks and many private sector employees fail to also consider are the ~10 million private pensioned people lobbying hard for a government bailout. And I don’t think anyone has yet forgotten the Trillions in liabilities we are all sharing for the private finance sector bailout in 2008 and 2009.

Thus, I don’t think this is a public versus private sector issue as much as an issue of people incorrectly believing that 1) there are guarantees in capitalism, and 2) taxpayers can sustain irrational retirement benefits for public sector retirees.

There are NO Guarantees in Capitalism

I repeat: there are no guarantees in capitalism. If the US is to recreate one of the greatest economies in the world, we must end the practice of aiding businesses and programs which would otherwise go bankrupt without government subsidy. Once guarantees are offered to a privileged group of people, a society ends up in the current tit-for-tat gameplay currently reaching elevated heights in the US.

Of course, there must be exceptions for certain programs which provide legitimate social value for the statistically small percentage of people who genuinely need it. But insofar as guaranteeing survival in the private marketplace or irrational retirement benefits in the public sector, the government must end these practices now before we follow the same path as ancient Rome.

The death spiral is as such:

First, public sector employees see private sector companies receiving generous taxpayer aid for all types of unfair reasons. Then, the private sector sees public workers retiring after 15-20 years with full pensions at insane rates based on trickery (e.g., padded time sheets with unnecessary overtime), paid-up medical with zero to infinitesimal worker contributions, and other outrageous benefits which seem like they were added to the public budgets during a real life trip through Tim Burton’s Alice in Wonderland.

After that, the private sector lashes back because there’s no justice in using tax dollars to provide one set of workers with a better standard of living than another set of equally deserving workers. This game goes back and forth until the parents step in and quash the childish nonsense.

Taxpayers Cannot Sustain Irrational Public Sector Benefits

In addition to getting back to Adam Smith’s authentic version of capitalism — not crony capitalism or corporate socialism — the public sector must recognize that 1 + 1 = 2. Therefore, public budgets must be based on realistic tax burdens. No one I know debates whether we need teachers or police officers. However, they do question whether a 40-year old police officer really needs so much tax payer support as to have a Hummer, live in the wealthiest neighborhood in town, etc.

Moreover, there is a major problem with military officers marrying friends simply so the tax payer will send benefits to the new “spouses”. Anyone who has spent any time around the military knows there is a huge cancer of scams such as this being perpetrated against the taxpayers. Rather than nickel and dime our nation’s protectors, let’s take care of the honest ones more generously while rooting out those who are stealing from the system.

Those Are Fighting Words

Arthur C. Brooks’ new book The Battle: How the Fight between Free Enterprise and Big Government Will Shape America’s Futureis gaining a head of steam. If the anger continues to spread on both sides, I would agree that our nation’s workers are on a path to war.

As if authentic capitalism hasn’t been mauled enough, Congress is now considering a bailout of private pensions. Excuse me for asking such a simple question, but since when did a pension come with an explicit guarantee?

For those unaware: every investment — even US Treasuries — possesses risk. Hell, there is no guarantee the Earth will exist tomorrow. So when exactly did people become disillusioned that their pensions would pay out 100% on the dollar? Social security — the largest Ponzi Scheme in history — may not even pay out in full.

We have a problem of the masses misunderstanding risk. This was also evident in 2008 when money market funds “broke the buck” and the masses believed money markets were risk-free. Well spread the word: there is no such thing as risk-free. Risk-free is a fairy tale character living in the same Platonic realm as unicorns, Santa Claus, and zero calorie chocolate cake.

As lawmakers lay the groundwork to bailout private pensions in an effort to win favor among ~10 million Americans, let’s pause and meditate on three horrible consequences:

1) Taxpayers will now be on the hook for “make-whole” payments on private sector investments and companies. And we’re not talking about payments that are needed to save us from the Great Depression. We’re talking about bailing out people who don’t want to accept they do not have a Constitutional right to investments (i.e., pensions) working out as planned. Beyond diversified portfolios underperforming, everyone must also understand there is no Constitutional guarantee that a company exits forever. If your pension contains 10% of your former employers stock, and that company goes out of business during the natural evolution of capitalist society, then the stock goes to zero. That’s the cold hard reality.

2) Pension fund managers will increase risky betting with the knowledge the taxpayer will step in if things go badly. Wall Street already has a problem with managers taking huge risks in order to shoot the moon for extraordinary bonuses. We need to fix this, not make it worse.

3) As usual, the small and medium size business owner will get shafted and have less reason to be entrepreneurial. Small business owners get screwed compared to larger businesses which lobby for tons of legal favoritism. These hard working and job creating Americans don’t have implicit guarantees for their retirement savings. So why should their competitors?

A 2009 Moody’s Investors Service (NYSE: MCO) study estimated the country’s largest multi-employer plans have long-term deficits of ~$165 billion. That is the natural result of living in a universe full of unknowns. Why should taxpayers pay that bill to assuage the delusions of those who don’t believe they too live in a world full of risk?

If we truly want to save capitalism, this is not the path to prosperity …

If you’re living outside Europe and looking for an inexpensive vacation, your time may be coming. This morning the Euro reached a 4-year low in early trading as investors continue to show little confidence in the currency.

If you’re interested in an in depth look at the sovereign debt crisis and how it may affect your investments, click here for a free copy of our most recent issue of  our Wall St. Cheat Sheet Premium newsletter.

In his morning note, Gluskin-Sheff economist David Rosenberg continues to sound his skeptical note.

He lists 10 reasons you should be nervous, which range from terrorism to housing to Goldman Sachs:

The Greek Bailout

“Markets were unimpressed with the size of the just-announced $145 billion rescue package or the ability of Greece to meet the terms.  A bailout of all Club Med countries would, according to estimates I’ve seen,
approach $800 billion.  This is bigger than LEH.”Source: Gluskin-Sheff

China tightening

“China raised reserve ratio requirements 50bps for the third time this year (to 17%).  A decisive slowing in China and the U.S.A. is a crimp in the near-term commodity price outlook.”Source: Gluskin-Sheff

Australia

“Australia just unveiled a massive new mining tax.  This is weighing on material stocks overnight.”Source: Gluskin-Sheff

Goldman Sachs

“Possible criminal probe on Goldman weighing massively on the stock price; financials being re-rated by rising spectre of financial re-regulation.  Shades of Sarbanes-Oxley.  There has never been a financial crisis that
was not met afterwards with regulatory reform — it’s how the SEC was created in the first place.”Source: Gluskin-Sheff

The Current State Of The Economy

“ECRI leading economic index just slipped to a 38-week low.  With the restocking phase complete and fiscal stimulus waning, prospects of a second half slowdown loom large.  Buy the recovery story when ISM is at
30 and policy stimulus in full swing (13 months ago); fade it when ISM approaches 60 and stimulus subsides.  Market Vane sentiment is pushing towards 60% too — yikes!  Too much priced in.  As for the macro scene, the U.S. economy is barely growing at all, net of all the federal stimulus (+0.7% SAAR in Q1).  And net of housing impacts, neither is Canada … should set us up for a fascinating second-half.”Source: Gluskin-Sheff

Terrorism

Image: http://commons.wikimedia.org/wiki/New_York_City

“Attempted terrorist attack in Times Square a reminder that geopolitical risks have not gone away. “Source: Gluskin-Sheff

The bond market

“Treasury yields have collapsed nearly 35bps from the nearby highs and are not consistent with the recent move by equities to price in peak earnings in 2011.  Junk bonds trading back to par for the first time in three years.”Source: Gluskin-Sheff

Deflation

“The U.S. implicit GDP price deflator receded to its slowest rate in 60 years in Q1 (+0.4% from +2% a year ago) in a sign that this profits recovery is still being underpinned by cost cuts, tax relief and accounting shifts than by anything exciting on the pricing front.”Source: Gluskin-Sheff

Housing

“The latest Case-Shiller house price index confirmed that we are into a renewed leg down in home prices.  Financials, retailers and homebuilders are not priced for this outcome.”Source: Gluskin-Sheff

Jobs

“Initial jobless claims, around 450k, are not consistent with sustained employment growth, notwithstanding what nonfarm payrolls tell us this Friday.  A new peak in the unemployment rate and a new trough in home
prices stand as the most pronounced downside surprises for the second half of the year.”Source: Gluskin-Sheff

<br /> The Goldman Sachs (GS) hearing was frustrating because at times the Senators tripped over their questions and got nowhere when really, the Senators could have “won” the debate.

It’s our thinking that Goldman shouldn’t have been questioned so intensely about say, their taking $2.5 billion of AIG’s bailout dollars or how Sparks “got comfortable” with trading positions. Language like getting “comfortable” is vague and confusing.

What Sparks did is precise and sketchy: A client asked him, what’s Goldman’s position on this trade? Sparks answered: We’re long. Really though, they were also short.

Assuming there were no parameters around what they could and could not ask…

Do you create markets for yourself (prop trade) with the same clients you make markets for (client trading)?

Image: Defenseimagery.mil

We have no idea, but most likely, yes.In fact, the same manager, Jerry Ouderkirk, manages both Goldman’s CDO client trading and Goldman’s CDO prop trading desks.

Goldman’s clients would probably like to know whether or not the firm sometimes hopes that the deals they do together go bad.

How do your clients and counterparties know the difference between when you are prop-trading with them and when you are making a market for them?

Based on their answers yesterday, the panel would have answered unanimously that the client doesn’t know the difference and doesn’t care, and they shouldn’t care.But actually, having managers like Jerry Ouderkirk manage both Goldman’s CDO client trading and Goldman’s CDO prop trading business probably confuses the firm’s clients about what is happening when. And maybe that’s on purpose.

When they ask for your position on a trade, what do you tell your clients or counterparties?

In at least one instance yesterday, we found that Sparks told someone that Goldman was long when Goldman was also short.(Then Sparks said he didn’t say he was short too because there were might have been other trades that he didn’t know about.)

We think that’s interesting. Because….

Based on your explanation that they shouldn’t care, why don’t you tell your clients, “no comment?”

Instead of saying “no comment,” Goldman has, in the past, told its clients half-truths. No need for that if they don’t care, just tell them nada.

Could you detail the long/short position Goldman took on the subprime market, each quarter, from 2006 Q1 – 2008 Q3?

It wasn’t illegal for Goldman to short the housing market and we actually think too much time yesterday was spent discussing how short or long Goldman was. Especially because the only clear document we’ve seen shows that Goldman’s “directional” bet against the subprime housing market was tiny ($0.1 billion) and just for one quarter pg. 59.But the Senate was freaking out about how short Goldman was so now we’re curious about those numbers.

(Details may be in this huge 901-page doc, but we couldn’t find them.)

Do you “flash trade” based on the trades your clients have on the book with you? (Push a trade through faster than a client’s huge block trade, so that you are able to buy low before his block buy pushes the price higher?)

Image: http://commons.wikimedia.org/wiki/File:Thomas_Bresson_-_Eclairs-1_(by).jpg

This is completely off yesterday’s main topic but it shows Goldman’s free use of practices that are clearly a conflict of interest.Of course it’s perfectly legal to “flash trade” and yes, Goldman flash trades.

(Just Tourre) Why wasn’t ABACUS marketed without the statement “selected by ACA?”

Image: CNBC

There’s been so much discussion about who actually selected the portfolio that clearly there is plenty (too much) room for confusion and the statement that ABACUS was “selected by ACA,” probably should have been “more accurate” (Tourre’s words) or should have been left off altogether.The real answer that we’d never have gotten out of Tourre is that Goldman needed ABACUS to just say “selected by ACA” so that people would buy it.

Tourre stumbled all over the Senate’s ABACUS questions yesterday.

Could you explain your personal role in the credit crisis?

If you didn’t play any role in the credit crisis, say it.We’re sick of hearing every bank and employee spread the blame around. If you played a role that a bunch of other people played too, explain it.

Were the loans inside the MBS you sold were fraudulent?

This should be interesting.Some of the loans Goldman sold kind of were fraud. Like Kaufman pointed out in the first panel, 50%-90% of the loans inside some mortgage backed securities Goldman sold were stated-income loans or some other kind of loan that should never have been granted.

Does the panel consider these loans fraud now?

If everyone on the panel said “no, we didn’t consider any of those loans fraud,” it’s good to know the kinds of shady products Goldman is totally cool with selling to people.

Did you know they were fraudulent? Did you know they were not fraudulent?

We’re curious. Let’s say everyone on the panel said, “yes, I consider some of those loans fraud and I would never sell them again.”First question – They’d say no, they had no idea the loans were fraud, of course, because it’s illegal to sell something that’s fraudulent. They wouldn’t admit to doing something illegal.

Second question – (Still assuming they all said “yes,” we consider some of those loans fraud.) They’ll have to say, no, we weren’t sure if the loans were not fraudulent (ie we don’t look into those kinds of things at Goldman).

Got more questions? Let us know in the comments below …

German Chancellor Angela Merkel said she would not provide a final decision on bailing out Greece “until the International Monetary Fund works out a plan of cuts with Greek government.” Merkel said Germany’s bailout of the defaulting Greece is contingent on Greece’s acceptance of “tough” budget cuts and fiscal policy.

Is this a foreshadow of what China and Japan will demand from the United States? Although the US has not defaulted on their incredibly high debts to the nation’s largest creditors, both China and Japan hold a similar power as Germany when it comes to threatening to diversify out of inflating US dollars.

The US faces major monetary issues with 0% interest rates, trillions of dollars of debt, and an imminent crisis with Social Security and Medicare. If you want a glimpse of the back room negotiations between the US and its larges creditors, play close attention to the demands Germany makes on the Greece.