A quick comment prior to running to a meeting:
Last week’s deeply oversold condition allowed Treasury and SEC to orchestrate what BIll King called the mother of all short covering rallies.
That looks to continues this week.
Earnings are coming in weak — however, they are not as bad as the worst case scenarios. As we noted previous to the rally, we covered our shorts and are playing this for bounce. But beyond the bounce, we continue to have concerns.
Asterisks abound in many of these earnings, from Wells Fargo to Wachovia to Bank of America. Why asterisks? Consider how this game is being played:
• Delinquencies and Foreclosures were previously marked on a 120 day basis; the bank extended its charge-off policy to 180 days, eliminating or postponing enormous losses to the future;
• Some paper is being moved to Level 2 or Level 3, again forestalling taking the actual loss;
• Borrowing at a modest rate from the discount window artificially lowers costs;
There’s lots more of these asterisks, and until the crowd figures this out, you should expect the financial rally to run.
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If you have any other asterisks worth noting, use comments below . . .
>
Sources:
Second Liens Still Lurking at Wells Fargo
PAUL JACKSON
Housing Wire, July 16, 2008
http://www.housingwire.com/2008/07/16/second-liens-still-lurking-at-wells-fargo/
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Daily NYSE new lows on July 15th — around 1,100 — were among the highest ever. This is surely good for a bounce, just as were the elevated numbers of new lows in Aug. 2007 and Jan. 2008. But it doesn’t necessarily mean that the bear market is over.
Consider the 784 new lows set on 9/21/01. That was the Friday of the first week of trading after 9/11. Stocks fell all five days. Typically for this indicator, the highest number of new lows was set on the exact day of the index low. The next Monday, 9/24, the SPX blasted back above 1000 in a rally which lasted till end-year. But after March 2002, the market retraced the entire rally, and broke below the Sep. 2001 lows in July 2002.
Something similar could occur this time round. Most likely times for another downside move would be in Sep-Oct. of this year, or early 2009 (in the weak first year of the presidential cycle).
The BKX is leading the way up, and perhaps will give us a clue when the rally fizzles out.
I’d note that JPM lowered their reserves for loan losses from $5.1 billion in Q1 to $4.3 billion in Q2, in round numbers.
And it’s not a fudging, but BAC saying this morning that CFC will be accretive in 2009–that’s some turnaround plan!
Interested parties may also want to examine the amount of ‘Level 3 Assets’ on WFC’s books.
with you Barry, out of shorts and fully long for this bounce.
The 1 asterisk I would add is…
1) Spread to higher quality debt classes
This is BIG because JPM CEO fully acknowledged that ‘prime is horrible’ and delinquencies are rising fast there. We may be in the 2nd eye of the storm and shorts being squeezed may give sense of false hope but at same time, give these banks/IB’s some room to raise more capital.
With the fundamentals not getting better, unless housing turns around today, we will see more defaults in alt-a and prime, and we must question the value of securities of these assets held on books for future write downs.
Agreed Barry. I don’t short but had my money in short term treasuries. Sold before they bottomed out and put my money into international markets as I expected that an upturn was coming that will mostly last until late September / October. Then I will have to determine what my best play will be. As I said before, this market does not reward long term investors but short term traders.
Good call Jim. I am with you there. Hope that doesn’t mess up your roadmap as my track record is rather spotty when predicting the future…
Another notable ‘asterisk’ in today’s Bank of America earnings: The Countrywide acquisition isn’t factored into Q2 earnings yet… Hmm…
How about adding in the lowered liability as a profit?
That’s a great way to “produce” profits where none existed previously….
BR you really need to do a post about the SEC limit rules…how they are blatantly manipulating the bank shares upwards with that…or trying to.
Ciao
MS
or possibly reasons why you have not are contained in the last yahoo tech ticker….;-)
Ciao
MS
How about the fact that the American consumer is broke and all of these companies rely on the american consumer?
That stimulus package sure helped. Kicked the can almost three months down the road.
Dawn Kopecki
Intelligence Czar Can Waive SEC Rules
Now, the White House’s top spymaster can cite national security to exempt businesses from reporting requirements
President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye.
http://www.businessweek.com/bwdaily/dnflash/may2006/nf20060523_2210.htm?campaign_id=rss_daily
Direct quote from Nouriel Roubini’s latest commentary. It’s a damning endictment…wow. A direct accusation of deliberate reporting fraud.
“Most financial institutions are putting increasing numbers of assets in the illiquid buckets of Level 2 and Level 3 assets. While FASB 157 should prevent manipulation of the valuation of such illiquid assets, forbearance by the SEC, the Fed and other regulators allows a massive amount of fudging. An insider told me that in a major financial institution the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with the decided-in-advance amount of writedowns and losses. This is not earnings smoothing; this is active manipulation and falsification of financial results aimed at creating even more obfuscation of the true state of financial institutions. This obfuscation is actively abetted by the SEC, the Fed and all other regulators that are now in forbearance crisis management stage where the objective is to avoid at any cost anything that may trigger a financial meltdown. Thus, most of these earnings reports are not worth the paper they are written off.”
*** Option ARMs are to reset ealier than forecast, their defaults will compose with subprime’s default instead of following them. US measurements available trhough this article in french :
http://lacrisepourlesnuls.blogspot.com/2008/07/evasion-des-arm-nouvelle-menace-sur-les.html
*** “Prime is terrible” (according to what JPM’s CEO said when the bank published its results lately)… the one of JPM’s comments of the other day that the bulls choosed to ignore.
*** According to the macro readings of OPMC, the credit crunch trigerred the housing woes, not the other way around… :
http://dealbreaker.com/images/thumbs/Oppenheimer%20Note-US%20Banks.pdf
Did anybody give a causal explanation of that phenomenon, and a mesurement thereof, so that we know about its bottom?
*** IMHO, it seems that the US economy has been harmed for an amount that already goes beyond the most pessimistic forecast of subprime consequences of 1 trillion USD :
http://lacrisepourlesnuls.blogspot.com/2008/07/tropicalbear-alerte-gnralise-sur-le.html
For those of us who are not as ‘tuned-in’ to financial ins and outs, it is columns like this that make your blog required reading. Thanks.
EDF
Another asterisk:
Hedge funds still being used as off-sheet balance vehicles as the toxic sludge processing continues…
Of course the new batch of Prime Toxic Jumbo Sludge is already in the delivery trucks….
I am staying long for a while longer here. Selling stampdes seem to exhaust the markets and shorts once squeezed (and that was the mother of all squeezes) take a while to re-enter.
Absent a major catalyst on the down side I think we drift higher for a few weeks.