Editor's note: Todd Benjamin is CNN's former financial editor.
London (CNN) – Now that we know who's won the election, the real uneasiness can begin. There's only one issue that matters to financial markets, and that's if President Obama and Congress can cut a deal on the looming budget crisis, the so called fiscal cliff. It refers to the $600 billion of tax hikes and spending cuts that are suppose to take effect on January 1.
LONDON, England (CNN) - Just over a year ago, the heart of the financial system nearly stopped beating. The collapse of Lehman Brothers triggered a massive collapse in confidence, the worst economic downturn since the Great Depression, and an unprecendented response by governments and central banks.
Now given J.P. Morgan's best earnings in two years and the announcement of massive profits at Goldman Sachs, one has to ask: Crisis, what crisis?
Especially if you look at compensation levels. According to the Wall Street Journal, staff at major U.S. banks and securities firms will make as much as $140 billion this year - a record high - more than the previous peak of 2007.
Now there's nothing new about big amounts of money being earned on Wall Street. But given that we the taxpayer funded the bailout of Wall Street, and will be paying for it for generations, it does beg the question about sharing the pain with Main Street.
To be fair to J.P. Morgan Chase, it didn't get caught up in some of the reckless behavior that other big players on Wall Street did.
Goldman Sachs is another extremely well run bank, but has become the poster child for Wall Street's perceived greed, what one writer described as "a giant vampire squid wrapped around the face of humanity."
Its expected bonus pool this year, some $23 billion, hardly seems like a chastened Wall Street. It's a fair target because it was bailed out by government, and that makes it fair game for criticism.
Business may be rebounding smartly for Wall Street but until Main Street's pain is over, Wall Street may want to think twice about paying hefty compensation.
What do you think?
LONDON, England – Based on fundamentals, the markets shouldn't be at the levels they've reached. Some hard cold realities have been reminding investors that the long awaited recovery may turn out to be more anemic than anticipated.
Have markets over-heated?
Take last week for instance. U.S. stocks fell worst than expected on monthly manufacturing numbers and a horrific employment report.
The number of U.S. workers on payrolls fell by 263,000 in September - much worse than expected - and the unemployment rate rose to 9.8 percent, a 26-year high. To make matters worse, the average workweek fell to a record low of 33 hours, hardly encouraging to those who have been buying stocks on recovery hopes.
Nouriel Roubini, who predicted the financial crisis, is bearish on the market. "Markets have gone up too much, too soon,too fast," he said in an interview over the weekend with Bloomberg.
"I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped, that might be in the fourth quarter or the first quarter of next year," he said.
Roubini is not alone in his thinking. The head of global bank HSBC, Michal Geoghegan, is worried the economic recession could be worst than some anticipate.
"Is this a V recovery or a W?" Mr Geoghegan asked in an interview with the Financial Times. "[I think] it’s the latter. [If I’m right] we have to be very careful we don’t grow the balance sheet so far before the recovery has come only to write it back into the impairment line later on. I’m cautious about growing too fast."
And economist Lena Komileva of Tullet Prebon said the weak data, specifically referring to the manufacturing data out of the U.S. last week, "do challenge the market's optimism that this year's capital markets rally is the bellweather of a V-shaped economic recovery and it forces a negative revision of future quarters growth projections, which challenges current valuations."
In simple talk, the markets are ahead of themselves. The global equity rally has added about $20 trillion to the value of stocks worldwide since this year's low on March 9, according to Bloomberg.
Governments have spent about $2 trillion on stimulus, while central banks have taken extraordinary measures to try and get growth moving again.
All that liquidity and hopes of a global recovery have pushed stocks substantially higher, more than 50 percent for the S&P 500, and nearly 50 percent for Europe's Dow Jones Stoxx 600 index from their March lows.
While markets are off their best levels, they are still too high based on economic reality. I suspect the disappointing economic numbers last week, won't be the last. If Roubini and some others are right, markets have much further to fall.
Do you think the markets are too high?
LONDON, England – On a quiet summer day in August, when many in London's financial district are away, or wishing they were away, comes a lightning bolt from the head of the Financial Services Authority.
Adair Turner proposes the idea of a special tax on financial transactions.
Adair Turner, the man in charge of regulating the City of London, has said that some parts of the financial sector have grown "beyond a socially reasonable size," and some of what it does as "socially useless activity."
In short he thinks financial services account for too much of Britain's output, robbing other sectors of some of the best and brightest.
To underscore his point, he looks at what “percentage of highly intelligent people from our best universities went into financial services." And then goes to say, "Unless you've got a theory that explains why financial intermediation suddenly needs all this extra resource, there is something of a conundrum. Is it really the case that financial intermediation today is a more complex thing that a decade or two back?”
He proposes the idea of a special tax on financial transactions.
His is not a new idea.
Originally, an economist named James Tobin suggested a special tax on foreign currency transactions to curb speculation. Then in 2005, then president of France, Jacques Chirac, placed a "Tobin tax" on financial transactions to deal with what he perceived to be the excesses of "liberal globalization."
"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit," Turner said.
It's clear that freewheeling capitalism didn't work, that policymakers need to devise ways to curb excessive risk taking. Higher capital requirements should be the first line of defense.
Unsurprisingly, Turner's possible solution and open questioning of whether the financial district is too large, is already provoking sharp debate and response. He even went so far as too suggest that London's competitive advantage as one of the world's premier financial hubs shouldn't be defended at any cost.
The head of the British Bankers Association Angela Knight, did not mince words in response. "I think that if we say we do not want to have an international, competitive industry here, then we will do to financial services what we have done to manufacturing and engineering in the past and that is have it as a minor industry and lose it to others," she said.
I agree with Knight.
Yes, there have been excesses and recklessness in the financial sector that will take decades to unwind, including eye-popping amounts of money bailing out a financial system that could have been put to much more productive use.
But haven't they acknowledged the excesses? Let's not further undermine an economy already on its knees by making it less competitive and attractive. Let's first start with better supervision.
Do you agree there should be global taxes on financial transactions as a way of curbing excesses? Would such taxes be effective?
LONDON, England – The nomination of Ben Bernanke to a second term as chairman of the U.S. Federal Reserve comes as no surprise. The surprise would have been if U.S. President Barack Obama nominated someone else. The financial markets are satisfied with the job Bernanke is doing. In the middle of a crisis, you don't want to be changing the man responsible for steering the economy back on course.
U.S. President Barack Obama has again nominated Ben Bernanke, left, as chairman of the U.S. Federal Reserve.
Does it mean that Bernanke has done everything right? No, of course not, he hasn't - and he has admitted that he was mistaken early on in saying that the subprime crisis would be contained. But once he recognized how severe the crisis was, he and the Fed acted with boldness and innovation.
Bernanke also came under criticism for, among other things, allowing the failure of Lehman Brothers. But he defends the decision, saying the failure was unavoidable, that a buyer couldn't be found and that Lehman didn't have enough collateral to meet the criteria for a large Federal Reserve loan to stay afloat.
One area of concern is the massive amounts of liquidity the Fed has pumped into the system and whether those will lead to a re-emergence of inflation further down the road.
Bernanke is acutely aware of those concerns, and today pledged to work to the utmost of his abilities to "help provide a solid foundation for growth and prosperity in an environment of price stability."
His nomination to another four-year term still needs to be approved by the U.S. Senate. He will receive some tough questioning at his confirmation hearings, including why the Fed didn't do a better job of supervising the banks that got us into the subprime mess to begin with. The Fed's exit strategy from its ultra-loose monetary policy will undoubtedly be another area of questioning.
But at the end of the day, Bernanke will be reconfirmed. He has steered the Fed and the U.S. economy through unchartered territory. It's a long way to a full fledged recovery, but at this point, Bernanke deserves the chance to finish the job.
But what do you think – should Bernanke be reappointed? What is your biggest concern regarding the Fed as it goes forward?
LONDON, England – Last week when I appeared on CNN to talk about earnings, I raised the issue of the quality of the U.S earnings.
Wall Street gains sent the Dow above 9,000 points for the first time since January.
Investors have been pushing stocks higher fueled by better than expected earnings. The Dow broke through 9,000 for first time since January, while the S&P 500 has shot up 11 percent in the past two weeks. The U.S. earnings season has fueled a global rally.
But are investors getting too euphoric? If you look at the revenue side of the earnings, not all is well. Take the 143 companies in the S&P 500 who reported last week. Revenues actual fell on average 10 percent from the same period a year ago, according to Bloomberg data.
Steven Ricchiuto, chief economist at Mizuo Securities USA hit the nail on the head when he spoke about the divergence between earnings and revenues.
"We know companies are cutting costs at a record pace, and that is helping earnings. But you can't keep on shrinking your way to profitability. Eventually, you do damage to your end users. You have to get revenues up to have a sustainable upturn."
David Rosenberg, chief economist and strategist at Gluskin Sheff, echoed similar sentiments when quoted by the Financial Times.
"Earnings may be beating low-balled estimates for the majority of S&P 500 companies, but there is no questioning the fact that we are also seeing a sustained decline in revenues."
"What we are still witnessing is a trading opportunity rather than a fundamental shift in the outlook. We must take into account what the risks are going to be once the buying momentum is lost," he added.
The bottom line is that companies can't indefinitely cut costs, they need to get revenues moving higher. But every time they shed a job, that means one less consumer spending as much money in the economy, undermining the prospects for recovery, which in turn of course, hurts companies earnings prospects.
In a research note this month, the economist Nouriel Roubini sounded a note of caution.
"Expectations of corporate earnings will have to be downgraded again. Demand will be weak, most prices will be falling, and companies will therefore have little pricing power and their profit margins will remain squeezed. The expectation that in these conditions profits will rebound strongly is quite far-fetched."
Roubini is worth listening to, because he's the guy who predicted the credit mess. As I've written many times before, any sustainable recovery is still far away.
But for now, investors aren't too concerned why companies are beating earnings expectations; that they are is enough. A closer analysis might make investors a little less euphoric.
Do you agree or disagree?
LONDON, England– In the past week, investor sentiment has turned decidedly more positive. On Monday, the Standard and Poor's 500 Index hit an eight-month high. Better than expected earnings from Goldman Sachs in financials, to Intel in tech, to Caterpillar the biggest maker of earth moving equipment, have all helped push the market higher.
Investment banks are raising their year-end projections for the S&P 500. Credit Suisse is advising clients to cut their bond holdings and buy stocks, reversing their advice from June. The bank has raised its year-end guidance for the benchmark index by 14 percent to 1,050, citing better earnings and economic conditions.
Goldman Sachs is also turning more bullish. It has a year-end target of 1,060 for the S&P 500. "Improvement in ex-financial earnings per share, stabilization in profit margins and higher forward EPS guidance all point to a rising market through 2009," its chief U.S. investment strategist, David Kostin wrote this week.
He also raised his 2009 and 2010 earnings estimates for the S&P 500 companies to $52 a share and $75 a share, substantially higher than his previous estimates (a 30 percent increase over his previous 2009 estimate and a 19 percent increase over his previous 2010 estimate.)
However, Kostin is hedging his bets, saying the biggest risk to his forecast is the possibility of a prolonged economic slump.
He also points to budget cutbacks from state and local governments, a higher savings rate, and a weak housing market as keeping consumer and business spending in check.
Goldman is among the most bullish of Wall Street investment banks on equities. Others include JP Morgan which has a target of 1100 year end for the S&P 500. At the other end of the spectrum, HSBC and Morgan Stanley both have a target of 900.
The S&P 500 has risen some 40 percent from its March low, and if the bulls are right, the rally has further to go. So far, some 79 percent of S&P 500 companies have beaten earnings forecasts, the best showing since 1993.
For the rally to continue, companies will have to continue to beat forecasts, and investors will have to remain confident that the economy will continue to improve.
Do you think the rally has come too far too fast?
LONDON, England - The stock market rally off the March lows, has been nothing short of spectacular.
The FTSE All World Index has shot up more than 60 percent. At several conferences I've attended, the majority of those I've asked, seem skeptical that the rally can be sustained, and for many they wouldn't be surprised if the market retests its lows.
Some don't believe it will, that the forced selling by hedge funds and others is past. But a Barclays Capital survey shows that six out of 10 respondents think the current rally is a "bear market rally." The survey includes asset managers, international corporate customers, hedge funds, and central banks.
Furthermore, fewer than five percent of those surveyed believe there will be a "V-shaped" recovery over the next year. That is, a sharp downturn followed by a sharp rebound in economic activity.
The majority - nearly 70 percent - think either you get a "W-shaped" recovery, that is a temporary rebound followed by weakness, or a "U-shaped" recovery, which means growth remains anemic for sometime before you get a gradual recovery.
As I mentioned in my last blog, many of those I speak with believe a sustained recovery is at least 18 months or further away. The Barclay's Capital survey would seem to reinforce this view.
Any sharp set back in the market would of course be damaging to consumer confidence, further undermining the timing of any economic recovery.
The bulls will argue that markets always anticipate recovery. But what the professionals in the Barclay's survey, and my own informal polling suggest, is that this rally may be ahead of itself.
What do you think - is this rally a bear market trap?
A lot has been made about the so called green shoots of recovery. And I'll be the first to admit it's a lot better than being in freefall.
But let's not get too excited here. There's a huge space between being out of freefall and getting to a sustained recovery.
When I think about recovery, I'm not talking about the end of negative growth. To me real recovery is one which growth rates are closer to longer term trends.
Don't get me wrong, the huge improvements we've seen in credit markets since the collapse of Lehman Brothers last September, and the sharp rally in stock markets off their March lows is certainly welcomed.
But my extensive travels over the last few months tell me, that there's still plenty of caution to go around.
I've been at several conferences, and when I ask people whether they feel the the sharp rally in equities is sustainable, many are skeptical and believe the markets at some point could retest their lows.
When I asked a group of chief financial officers and comptrollers when they expect a sustained economic recovery, a third of those who raised their hands believe it won't be until 2012 and beyond. And remember, these are the guys holding the purse strings.
As to the other two-thirds of that group, it was divided between next year and 2011.
I've been taking these informal polls since last November, and I'd say the majority of those I ask, believe any sustained recovery won't happen before 2011.
So what's standing in the way? Plenty. Unemployment in the United States and elsewhere continues to rise, consumers are focused on saving instead of spending, housing and commercial property in the U.S. and elsewhere remain under pressure, and banks continue to deleverage.
Confidence of course, is key to any recovery. Even once we get out of negative growth I fear we could bump along the bottom for a quite a while. I am not alone in this fear. I hope I am wrong, but I suspect I will turn out to be right.
What do you think?
LONDON, England - Alcoa, the largest U.S. aluminum producer, has kicked off the first quarter earnings season with a loss of nearly $500 million.
Markets haven't taken the news well. Alcoa is a nasty reminder that the sting of the recession continues to bite. There will be plenty of other reminders.
The U.S. earnings decline has now lingered for six straight quarters and it's not over yet. The expectation is that profits for companies in the S&P 500 will decline for three more quarters including the current one, according to Bloomberg data.
Marc Faber, a well-known analyst, predicted this week that the S&P could go back down to 750 - a fall of some 10 percent from its recent high - before rebounding in the summer.
Even though markets are supposed to anticipate recovery, there are still plenty of reasons to be cautious. Nouriel Roubini, who predicted the economic crisis we are now in, remains bearish, and expects the U.S. economy will continue to contract this year.
And Mike Mayo, the banks analyst, is predicting that loan losses at U.S. banks may exceed Great Depression levels.
Mayo, isn't a household name. But anyone who follows Wall Street closely knows his name well. He's the guy who correctly took a bearish stance on banks in 1999, when others remained bullish.
He thinks mortgage-related losses are only about half way to their peak. While credit card and consumer losses are about a third of the way from their worst levels.
George Soros expressed skepticism this week about whether the market rally had legs, pointing to problems in the real economy.
Soros says recently announced changes to fair value accounting rules will keep problem banks in business, and that in turn will only delay any economic recovery.
Confidence of course, plays an important role in any rebound. It was only a matter of time before the reminders of the depth of this downturn hit investors once again.
Alcoa is the first of those fresh reminders - it won't be the last.
Meanwhile, the problems of the banks persist, and as long as that continues, any real recovery will have to wait.
Do you think the recent rally in the market was a bear market trap?
When do you see the economy rebounding?
How much longer do you think it take to work through problems in the banking sector?
About Business 360
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