economic situation is dire

[tonyh29]

Seems it is still dire after all ??

Hopes that Britain pulled out of recession during the summer are in doubt following a shock fall in manufacturing output.

The economy suffered a 1.9% slide in August, the biggest dip since January, rather than the 0.3% rise experts had predicted, the Office for National Statistics said.

The figure dragged down overall production to its lowest level since 1987.

Data to be released this month was expected to show Britain's economy returned to growth between July and September, meaning the country was no longer in recession

But today's data have thrown that in to doubt.

[Awol]

Give me a W!

[shambles]

Seems it is still dire after all ??

Hopes that Britain pulled out of recession during the summer are in doubt following a shock fall in manufacturing output.

The economy suffered a 1.9% slide in August, the biggest dip since January, rather than the 0.3% rise experts had predicted, the Office for National Statistics said.

The figure dragged down overall production to its lowest level since 1987.

Data to be released this month was expected to show Britain's economy returned to growth between July and September, meaning the country was no longer in recession

But today's data have thrown that in to doubt.

Not suprising really seeing as most of the large manufacturing companies closed for 2-3 weeks through august.JCB, Land Rover, Perkins.....

We're 50% down on last year.

[tonyh29]

No wonder the world economy is dire

Elinor Ostrom has become the first woman to win the Nobel prize for economics since it began in 1968.

Ms Ostrom won the prize with fellow American Oliver Williamson for their separate work in economic governance.

back to the kitchen you and leave the real work to the men

[snowychap]

Nothing dire in the world of JP Morgan et al:

JP Morgan bankers on course for bumper bonuses

JP Morgan Chase signalled today that City firms are preparing to make huge bonus payments after it kicked off the US bank reporting season by smashing profit expectations.

The bank revealed it had set aside $7.3bn (£4.6bn) in the third quarter to pay staff, taking the total remuneration pot for the first nine months of the year to $21bn, 23% more than at the same time last year.

The admission by JP Morgan Chase that it was preparing to raise bonuses came as Goldman Sachs was expected to report that it too was enjoying a bumper year and its bonus pool could reach $22bn.

Mounting expectations that bankers are looking forward to huge pay cheques barely a year after the banking system was bailed out by governments across the world have forced the biggest payers in the City to capitulate to government demands to adopt the G20 principles on pay.

After a meeting with City minister Lord Myners in the Treasury yesterday a dozen international banks agreed to support the reforms to pay structures that would require bonuses to be spread over three years and clawed back if profitable deals turned sour later.

Three European banks which are not regulated directly by the Financial Services Authority but which have large City operations – BNP Paribas, Deutsche Bank and Société Générale – also agreed to sign up to the principles.

The banks, which included Goldman Sachs, JP Morgan and Bank of America Merrill Lynch, issued a joint statement in which they pledged to "work with the FSA and regulators in our home countries in adopting the reforms, recognising that all G20 nations have also committed to their implementation to ensure a level playing field".

But this does not mean that the banks will cap the size of payouts. The figures from JP Morgan showed that the bonus pool from which staff would be paid was being hugely inflated by revenues from the bond markets, spurred by the need of governments to pay for bank bailouts.

Research by the Wall Street Journal showed that employees at JP Morgan were expected to earn an average of $133,971 this year. At Goldman Sachs the estimate is even higher, with average pay expected to be $743,112.

Jamie Dimon, chief executive of JP Morgan, insisted that the bank's guidelines already followed the G20 strictures. "We're committed to treating each individual properly," said Dimon.

The prospect of big financial services payouts has infuriated unions. Speaking at a London conference on private equity today TUC leader Brendan Barber said: "I would question the 2% management fee and 20% cut of profits that has allowed an elite in the industry to do very well.

"There is also a question of tax. It was one of private equity's senior figures who said he paid less tax than his cleaner. It is still the case that private equity people pay capital gains and that represents less tax than a cleaner pays.

"This is not just about the industry improving its public relations. It is also about substance and how much the industry has really changed."

JP Morgan was the first of four major US banks to report third-quarter figures this week. Goldman and Citi report on Thursday and Bank of America Merrill Lynch on Friday . JP Morgan's net profits of $0.82 a share in the three months to 30 September were much greater than Wall Street's expectations of $0.49-$0.51.

Dimon credited "broad-based growth" across JP Morgan's investment banking, asset management, commercial banking and retail banking operations. But he also warned that consumers were finding it increasingly hard to repay loans, particularly on credit cards, where the bank expected to lose "a lot of money".

"While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue," said Dimon, who repaid government bailout money three months ago.

JP Morgan set aside another $2bn to cover future losses on personal loans. Provisions for credit card losses grew to $5bn, more than double the amount put aside a year ago. Its retail banking arm made a bad-debt provision of almost $4bn to cover consumer loans that turn sour, up from $3.85bn three months ago.

The overall strong performance was partly due to a $400m "write-up" on the value of JP Morgan's legacy leveraged lending and mortgage-related assets.

JP Morgan's investment banking arm made net profits of $1.92bn, while commercial banking made $341m. However, the large provisions against credit losses meant that retail banking made a net profit of just $7m, while the credit card arm lost $700m.

[tinker]

How can you make this type of money and produce nothing? The world has gone mad and we do not seem to able to put the brakes on, another economic crash is in the wings. Might sell my house and buy gold.

[shambles]

How can you make this type of money and produce nothing?

Whole problem in my opinion. We've come round full circle again though it seems.

[LondonLax]

How can you make this type of money and produce nothing? The world has gone mad and we do not seem to able to put the brakes on, another economic crash is in the wings. Might sell my house and buy gold.

Financial Services are like the oil that keeps the economy turning and company's like JP Morgan and Goldman Sachs making profits is a positive story that the economy is moving in the right direction again.

Neither of these companies recieved bailout money from the government of either the US or UK and by all accounts were well run allowing them to weather the economic crisis and come out the other side in good shape.

A positive news story on the economy for a change. I'd much rather be hearing these stories than headlines about these companies needing government bailout money.

[tinker]

How can you make this type of money and produce nothing? The world has gone mad and we do not seem to able to put the brakes on, another economic crash is in the wings. Might sell my house and buy gold.

Financial Services are like the oil that keeps the economy turning and company's like JP Morgan and Goldman Sachs making profits is a positive story that the economy is moving in the right direction again.

Neither of these companies recieved bailout money from the government of either the US or UK and by all accounts were well run allowing them to weather the economic crisis and come out the other side in good shape.

A positive news story on the economy for a change. I'd much rather be hearing these stories than headlines about these companies needing government bailout money.

I understand your point of view, but can't understand the principles of making vast amounts of money, but producing no goods, no raw materials, just money making money. IMO the system is fundamentally flawed. Only time will tell who is right, but I have a nasty feeling about an economy built on the principles of using money to make money, and no hard goods produced.

[snowychap]

Vultures do tend to thrive on carcasses.

Massive profits are no doubt helped along by mythical accounting. Weren't Enron by all accounts well run until we all learned it was a con?

But yes, a positive news story; let's not question it at all; let's celebrate the excess; let's not learn any lessons.

[LondonLax]

Vultures do tend to thrive on carcasses.

Massive profits are no doubt helped along by mythical accounting. Weren't Enron by all accounts well run until we all learned it was a con?

But yes, a positive news story; let's not question it at all; let's celebrate the excess; let's not learn any lessons.

You think JP Morgan and Goldman Sachs are involved in Enron style fraud?

[snowychap]

You think JP Morgan and Goldman Sachs are involved in Enron style fraud?

I have no idea.

The mythical accounting reference was about mark to market/mark to myth.

[LondonLax]

The Rolling Stone Magazine's take on the Goldman's empire: here

The Great American Bubble Machine

Matt Taibbi on how Goldman Sachs has engineered every major market manipulation since the Great Depression

Vs

The Times columnist's take on Goldman's bonus payouts: Here

You ain’t seen nothing yet at GoldmanIan King: Business Commentary

The people at Goldman Sachs are only human. They want you to know they feel your pain. They accept that, as an investment bank, they will be among the first to benefit from any economic recovery and, accordingly, know they must handle the bonus issue sensitively. Continues...

[ender4]

You think JP Morgan and Goldman Sachs are involved in Enron style fraud?

I have no idea.

The mythical accounting reference was about mark to market/mark to myth.

i work in accounting, and complete the accounts for 2 large companies.

I can easily & legally change the annual profit up or down by 10-20%, depending on what we want to show.

But a lot more would either need some very good accountants or some shady ones.

[snowychap]

I can easily & legally change the annual profit up or down by 10-20%, depending on what we want to show.

Really? Are you sure your auditors would allow that?

I'd be very interested as to what you fiddle around with in order to do that, which measure of profit and whether you do this on your satutory accounts?

It is a lot easier to eff around with profit figures (as may well have happened in the US banks :winkold:) if the asset accounting is based upon sticking a finger in the air.

[LondonLax]

There is another interesting article from Matt Tiabbi, like the one on Goldmans above, on one of the dodgier ways investment banks make money during financial crisis

On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — "like buying 1.7 million lottery tickets," according to one financial analyst.

But what's even crazier is that the bet paid. continues...

here

[leviramsey]

I can easily & legally change the annual profit up or down by 10-20%, depending on what we want to show.

Really? Are you sure your auditors would allow that?

I'd be very interested as to what you fiddle around with in order to do that, which measure of profit and whether you do this on your satutory accounts?

There are plenty of ways to do it, though it's easier to do if you cut down profit/increase loss now and increase profit/decrease loss down the road. Easiest way is to write the value of an asset down to zero and capture a gain when you sell it later on (admittedly the IRS doesn't let you do that, so you just keep two sets of books: one for the IRS and one for the shareholders). Alternatively you can expense losses years before they actually occur (which gives you the advantage of never having to place them in a specific year)... again, the IRS doesn't allow that, but if you keep two sets of books, it's quite easy to do.

This is a common practice in a bad year: the investors are expecting bad news, so lets try to get several years of bad news in one swoop and then subsequent years' profits, when investors are clamoring for profits and earnings growth, well you've made your job easier.

The Intelligent Investor (Revised Fourth Edition), chapter 12)"]

As this chapter is being written the earnings report of Aluminum Company of America (Alcoa) for 1970 appears in the Wall Street Journal. The figures shown are:

[table]

[mrow] [mcol]1970 [mcol]1969

[row]Share earnings (a) [col]$5.20 [col]$5.58

[/table]

The (a) at the outset is explained in a footnote to refer to "primary earnings," before special charges. There is much more footnote material; in fact it occupies twice as much space as do the basic figures themselves.

For the December quarter alone, the "earnings per share" are given as $1.58 in 1970 against $1.56 in 1969.

The investor or speculator interested in Alcoa shares, reading those figures, might say to himself: "Not so bad. I knew 1970 was a recession year in aluminum. But the fourth quarter shows a gain over 1969, with earnings at the rate of $6.32 per year. Let me see, the stock is selling at 62. Why, that's less than ten times earnings. That's pretty cheap, compared with 16 times for International Nickel, etc."

But if our investor-speculator friend had bothered to read alll the material in the footnote, he would have found that instead of one figure of earnings per share for the year 1970 there were actually four, viz.:

[table]

[row][mcol]1970 [mcol]1969

[row]Primary earnings [col]$5.20 [col]$5.58

[row]Net income (after special charges) [col]4.32 [col]5.58

[row]Fully diluted, before special charges [col]5.01 [col]5.35

[row]Fully diluted, after special charges [col]4.19 [col]5.35

[/table]

For the fourth quarter alone only two figures are given:

[table]

[row][col]Primary earnings [col]$1.58 [col]$1.56

[row][col]Net income (after special charges) [col]0.70 [col]1.56

[/table]

What do all these earnings figures mean? Which are the true earnings for the year and for the December quarter? If the latter should be taken at 70 cents -- the net income after special charges -- the annual rate would be $2.80 instead of $6.32, and the price of 62 would be "22 times earnings," instead of the less than 10 times we started with.

Part of the question can be answered quite easily. The reduction from $5.20 to $5.01, to allow for the effects of "dilution," is clearly called for. Alcoa has a large bond issue convertible into common stock; to calculate the "earning power" of the common, based on 1970 results, it must be assumed that the conversion privilege will be issued if it is advantageous for the bondholders to do so. The amount involved in the profit picture is relatively small, and hardly deserves detailed comment. But in other cases, the existence of conversion rights -- and the existence of stock-purchase warrants -- can reduce the apparent earnings by half or even more. We shall present examples of really significant dilution later. (The financial services are not always consistent in their allowances for dilution in their reporting and analyses.)

Let us turn to the matter of "special charges." This figure of $18.8 million or 88 cents per share, deducted in the fourth quarter, is not unimportant. Is it to be ignored entirely, fully recognized as an earnings reduction, or partly recognized and partly ignored? The alert investor might ask himself also how does it happen that there was a virtual epidemic of such special charge-offs appearing at the close of 1970 but not in previous years. Could there have possibly been some fine Italian hands* at work with the accounting -- but always, of course, within the limits of the permissible? When we look closely we may find that such losses, charged off before they actually occur, can be charmed away, as it were, with no unhappy effect on either past or future "primary earnings." In some extreme cases they might be availed of to make subsequent earnings appear nearly twice as large as in reality -- by a more or less presitidigitous treatment of the tax credit involved.

In dealing with Alcoa's special charges, the first thing to establish is how they arose. The footnotes are specific enough. The deductions came from four sources, viz.:

1. Management's estimate of the anticipated costs of closing down the manufactured products division

2. Ditto for closing down Alcoa Casting Company's plants

3. Ditto for losses in phasing out Alcoa Credit Company

4. The estimated costs of $5.3 million associated with completing the contract for a "curtain wall"

All of these items are related to future costs and losses. It is easy to see that they are not part of the operating results for 1970 -- but where do they belong? Are they so extraordinary and nonrecurring as to belong nowhere? A widespread enterprise such as Alcoa, doing a $1.5 billion business annually, must have a lot of divisions, departments, affiliates, and the like. Would it not be normal rather than extraordinary for one or more to prove unprofitable and be closed down? Similarly for such things as a contract to build a wall. Suppose that any time a company had a loss on any part of its business it had the bright idea of charging it off as a "special item," and thus reporting its "primary earnings" so as to include only its profitable contracts and operations? Like Edward VII's sundial, that marks only the sunny hours.

The reader should note two ingenious aspects of the Alcoa procedure we have been discussing. The first is that by anticipating future losses the company escapes the necessity of allocating them to a particular year. They don't belong in 1970 because they didn't occur in 1970. And they won't be shown in the year they actually occur, because they've already been accounted for. Neat work, but might it not be a little misleading?

The Alcoa footnote says nothing about the future tax savings from these losses. If the Alcoa figure represents pre-tax losses, then not only will future earnings be freed from the weight of these charges, but they will be increased by the tax credit of some 50% [(based on early 1970s income tax rates --LR)] thereof. It is difficult to believe that the accounts will be handled that way. But it is a fact that certain companies which have had large losses in the past have been able to report future earnings without charging the normal taxes against them, in that way making a very fine appearance indeed -- based paradoxically enough on their past disgraces.

The other ingenious feature of the use by Alcoa and many other companies of the 1970 year-end for making these special charge-offs. The stock market took a bloodbath in the first half of 1970. Everyone expected relatively poor results for the year for most companies. Wall Street was now expecting better results in 1971, 1972, etc. What a nice arrangement, then, to charge as much as possible in the bad year, which had already been written off mentally and had virtually receded into the past, leaving the way for nicely fattened figures in next few years! Perhaps this is good accounting, good business policy, and good for management-shareholder relations. But we have lingering doubts.

* Jason Zweig annotates: Graham is referring to the precise craftsmanship of the immigrant Italian stone carvers who ornamented the otherwise plain facades of buildings throughout New York in the early 1900s. Accountants can likewise transform even the simplest financial facts into intricate and even incomprehensible patterns

Obligatory sidenote: The Intelligent Investor is an amazingly good book and laugh-out-loud funny in a number of places.

[snowychap]

There are plenty of ways to do it....

I'm well aware that there are plenty of ways to cheat, mate. :winkold:

That wasn't the question I was asking - or the point at which I was hinting.

[leviramsey]

It's not cheating... the IRS rules contradict the SEC rules in a few places.

[snowychap]

It's not cheating...

It is in my book. :winkold: