A Summary of Q1 Bank Earnings: World, You Just Got Hustled 64 comments
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Co-written by Qasim Khan
Part One:
On March 10, a Citigroup (C) memo from CEO Vikram Pandit “leaked” and its content– about Citi’s “capital strength and earnings power”– sparked a massive rally in financials that carried over six weeks.
The Financial Times issued (justifiably so) suspicious sentiments toward the “leaked” letter. More forecasts of profitability followed from JP Morgan Chase (JPM), Bank of America (BAC), and General Electric (GE) (whose finance arm GE Capital is eating away at the parent company’s equity and faces the same problems as the big banks). The announcements caused financial stocks to surge, yet the legitimacy and sustainability of these forecasts were called into question by bears everywhere, especially considering JPM’s announcement was merely a reaffirmation of an earlier release.
Then on March 29th, Zero Hedge published an alarming piece on the role AIG CDS trade settlements played in the profitability of these banks. Here are some fascinating tidbits from the CDS trader he referenced:
During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent – these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were “we have never done as big or as profitable trades – ever“.
I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period.”
What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner’s (and thus the administration’s) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.
I received an email from an anonymous reader after the AIG trade unwind news came out, who pointed out that the ISDA, the sole regulatory body of the OTC derivatives market, issued an amended close-out protocol less than a month earlier. This protocol allows for essentially retroactive trade settlements at non-market close-out prices, as admitted by the ISDA:
The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades.
Zero Hedge also received a reader tip a day later about the ISDA’s new protocol and how it allowed the AIG fiasco to occur:
Thanks to an intrepid reader who pointed this out, a month ago ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not aligned with market bid/offers.
News of the AIG CDS trade settlements for counterparties echoed the sentiments of Eliot Spitzer in his terrific piece for Slate entitled The Real AIG Scandal (as well as in his follow-up Slate article The Real AIG Scandal: Continued, in which he delves into the $12.9B Goldman Sachs (GS) received as an AIG counterparty in AIG’s bailout:
Everybody is rushing to condemn AIG’s bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG’s counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?
On April 7, Neil Barofsky, inspector-general of the government’s Troubled Asset Relief Program (TARP) launched an investigation into the AIG trade settlement scandal. In his memo to the Treasury and Federal Reserve, entitled Review of Payment of Counterparty Claims Settled by AIG, Barofsky states:
SIGTARP has received a request from 27 members of Congress to review the counterparty payments made by AIG. The requestors raised concerns over whether the payments were made in the best interests of the taxpayers. The objectives of the review are to determine:
- To what extent did AIG pay counterparty claims at 100 percent of face value and was any attempt made to renegotiate and close out these claims with “haircuts?“
- To what extent were assessments conducted of the health and total exposure of risks to the counterparties?
On April 2, the Financial Accounting Standards Board (FASB) yielded to Congressional pressure and changed its FAS-157 Regulation to ease mark-to-market rules and allow for dodgier accounting practices. This occurred right before a string of bank earnings that greatly benefitted from the regulatory amendment.
To start it all off, Wells Fargo (WFC) issued a press release on April 9 announcing record earnings Q1 2009, stating its expectation “to report record net income of approximately $3 billion for first quarter 2009.” But Paul Jackson of HousingWire.com offered a compelling argument against the sustainability of Wells’ earnings assertions in his piece A Game of Credit Cost Smoke & Mirrors at Wells Fargo?. Here are the highlights:
Wells Fargo reported that they will absorb just $3.3 billion in charge-offs on bad loans for the quarter, and just $4.6 billion in loss provision expense; both numbers are well below most analyst estimates, and are the primary reason Wells will report earnings trumping earlier Street estimates.
“The shocker was that they only had only $3.3 billion [in] charge offs,” said Whitney Tilson of hedge fund manager T2 Partners, in a CNBC interview Thursday afternoon. “It’s weird, because in Q4 Wachovia and Wells Fargo together had $6.1 billion in charge-offs, and then in a quarter in which things were terrible, those charge offs fell by 50 percent … They’re going to have a lot of losses over the next couple of years, [and] anyone baselining at $3.3 billion in charge offs per quarter is crazy.”
And as a Yahoo! Finance article noted:
Wells Fargo saw its non-performing assets as a percentage of total assets jump by 40 percent over the previous quarter, yet it only increased its reserves by 5 percent. So even though more of its loans are past due or face foreclosure, it isn’t setting aside significantly more cash to deal with potential losses.
Teri Buhl, also of HousingWire.com, uncovered even more shocking disingenuous accounting in her article Wells Fargo Q1 Profits Packed with Accounting Gain:
It appears, however, that as much as nearly one-third of the bank’s first quarter earnings may be nothing more than the result of an accounting treatment; without such a move, tangible common equity would be 10 bps less than the 3.1 percent the Street expects.
The jump in earnings pertain to FAS 160, an accounting rule first announced in 2007 that became effective on January 1, 2009 … The effect of the new accounting rule allows certain liabilities to ‘jump over’ to the asset book as non-cash transactions via paid-in capital, thereby rolling directly into earnings and boosting reported equity. In the case of Wells Fargo, the bank found itself with up to $824m it could use this quarter as an accounting gain to earnings.
When it finally released earnings on the 22nd, Wells offered even more evidence refuting its own sustainability assertions:
The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.
The April 2 FASB change to fair-value accounting mentioned above allowed WFC to value its assets $4.35 billion higher than if FAS 157 retained its original methodologies. Taking out the asset revaluation the mark-to-market rule change allowed, WFC would’ve posted a $1.3 billion LOSS in Q1 2009, ceterus paribus. And that figure doesn’t include any of the various other accounting shenanigans mentioned above.
Next came Goldman Sachs’s earnings, starting with a day-early release of its Q1 earnings that corresponded with a $5 billion equity offering priced at $123/share (more on this later).
From its $1.81 billion in Q1 profits, its FICC revenues jump out right off the bat:
Fixed Income, Currency and Commodities (FICC) generated record quarterly net revenues of $6.56 billion, 34% higher than its previous record.
FICC is the unit in which Goldman’s AIG counterparty CDS trade settlements would’ve materialized, so it’s no surprise that record revenue streams came from this specific arm. Its investment banking unit, for comparison, did not bode so well:
Net revenues in Investment Banking were $823 million, 30% lower than the first quarter of 2008 and 20% lower than the fourth quarter of 2008.
Either Goldman’s traders suddenly got really, really good Q1 2009 or the “real AIG scandal” greatly helped Goldman’s big profits. In fact, in a Bloomberg interview (audio courtesy of Zero Hedge), Blackrock (BLK)’s managing director Peter Fisher affirmed his belief that Goldman’s record profits were “largely due to AIG unwinds” and “non-recurring in nature”.
Floyd Norris offered more insight into Goldman’s fishy Q1 accounting in his New York Times article The Case of the Missing Month:
Guy Moszkowski of Merrill Lynch wants to know if they made money from the now-famous government-financed American International Group transactions.
The answer is cautious. Most of the impact was in December. For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero.
So what was the A.I.G. effect in December? They did not say.Where’s December?: Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government’s clutches, if it can.
How did it do that? One way was to hide a lot of losses in not-so-plain sight.
Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. This leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.
The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.
More shenanigans were uncovered in its May 6 10-Q filing. GS was profitable in 56 of 64 days in Q1 2009, far above statistical norms and quite shady when taken in context with the increase in Goldman’s program trading (a correlation delved into very cleverly here by Zero Hedge).
And in perhaps the most blatant of all accounting fiascoes this quarter dealt with its choice to take an $850 billion writedown based on exposure to now-bankrupt LyondellBasell Finance Company in the “orphan month” of December:
(1) Includes one day on which the firm incurred negative trading net revenues of $859 million, principally reflecting a writedown of approximately $850 million related to the bridge and bank loan facilities held in LyondellBasell Finance Company.
It was a Zero Hedge article that alerted me to this and the article raises two very important questions:
i) the digital jump in value on this loan from something likely reflecting par to a value indicative of zero or just above, raising questions about just what the mark-to-market or otherwise methodology at Goldman is, especially since the underlying bonds in Lyondell did not demonstrate anywhere near to a comparable corresponding plunge.
ii) why did Goldman take the charge in December, when LyondelBasell did not file for bankruptcy until January 6, 2009? Just how did Goldman know to remark their position a week in advance of one of the biggest bankruptcies for 2009? As has been speculated elsewhere, the orphan month of December was used by Goldman as a garbage bag in to mark down all its underpeforming positions (and in some cases undermark existing assets especially in the commodities book).
And, just for kicks, more on the Goldman-AIG relationship here.
Part Two:
On April 17, JP Morgan Chase announced a $2.1 billion profit of its own. Again the fixed-income trading revenues were remarkably spectacular:
Fixed Income Markets revenue was a record $4.9 billion, compared with $466 million in the prior year.
If any readers have an idea of how a 1052% increase in fixed-income market revenue YoY can occur without some sort of shenanigans and how this is in any way indicative of sustainable cash flow in the middle of the world’s worst global financial (and soon-to-be monetary) crisis, I’m all ears.
On the same day, Citi announced a $1.6 billion profit, with revenues of $24.8 billion. Guess how? You guessed it– more amazing trading:
In the Institutional Clients Group, Securities and Banking revenues were $7.2 billion, mainly due to strong trading results.
At the forefront of the huge trading revenues again was fixed-income:
Fixed income markets revenues of $4.7 billion reflected strong trading performance.
More than half of these revenues was due to the worsening of Citi’s own credit:
A net $2.5 billion positive CVA on derivative positions, excluding monolines, mainly due to the widening of Citi’s CDS spreads.
And add to that some one-time gains:
Closed sale of remaining Redecard position for an after-tax gain of $704 million.
The current quarter included a $110 million tax benefit related to the resolution of certain issues in an IRS audit.
Operating expenses were $12.1 billion, down 23%, reflecting benefits from ongoing re-engineering efforts, the impact of foreign exchange, and a $250 million litigation reserve release.
That is $3.56 billion strictly due to one-time gains and cash flow from Citi's own deteriorating credit, which when taken out of the equation would cause a more than $2 billion loss for Q1 2009!
But that’s not where it ends. Egan Jones had this to say:
Accounting and government magic – the recasting of FASB157 enables financial institutions to defer the recognition of losses with the result that C’s March trading profits swung from a $6.8B loss to a $3.8B gain.
Without the change in FAS 157, the >$2B loss calculated above becomes a more than $5 billion loss for Citi! So much for a great quarter.
And of course there is the issue of loan-loss reserves, for which every bank conveniently set expensed minimal amounts. A Reuters piece entitled Can Citigroup’s Results Be Sustained? had this to add:
Meanwhile, the bank’s allowance for loan losses is growing, but not as fast as the company’s nonperforming loans, leaving some investors to wonder if the bank is setting aside enough money to cover future losses, known as reserving.
4/20 saw BofA announce another $4.2 billion of record profits to add to the Q1 bank earnings train. $5.5 billion of trading revenue helped boost that figure quite a bit, however, quite better than the $4.1 billion loss from trading in Q4 2008.
Just like the other banks, Bank of America funneled AIG CDS close-out valuation-based settlement profits through its trading division to book massive one-time profits under the guise of sustainability. Or did BofA traders suddenly get amazing, like Goldman’s, JP Morgan’s and Citi’s, in the same quarter during the same financial crisis?
OptionARMageddon put together a terrific graphic representation of how Q1 trading profits drove BofA’s record earnings:
In an e-mail to Dealscape, BofA shareholder Jonathan Finger offered cautionary sentiments to the one-time nature of much of BofA’s revenues:
A good portion of the earnings are from non-recurring items – sale of some China Construction Bank shares and write ups on fixed income securities at Merrill Lynch.
Two days later, Morgan Stanley (MS) announced a menial $177 million loss, with $3.0 billion in revenues. Immediately Morgan Stanley’s treatment of December as an orphan month jumps out:
As a result of the change in the Company’s fiscal year end from November 30th to December 31st, the Company had a December 2008 fiscal month transition period. The results for this period, which reflected a net loss applicable to Morgan Stanley of $1.3 billion, are presented on page 19 of the financial supplement accompanying this release.
That wipes out almost half of Q1’s revenues right there and magnifies its loss by a multiple of over 730%.
And again the fixed-income revenues:
Fixed income sales and trading net revenues were $1.3 billion, compared with net revenues of $2.4 billion in the first quarter of last year. The decrease in net revenues reflected losses of $1.0 billion in the current quarter from MS debt-related credit spreads compared with gains of $1.0 billion in the prior year.
Taking out one-time events, Q1 2009 fixed income sales and trading revenues were $900 million better than Q1 2008, or an improvement of over 160%.
So why exactly is this happening? Simple. Banks need as much private capital as possible in addition to government bailout funds and going all-in with accounting shenanigans and AIG trade settlements of questionable legality causes a massive rally in banks that is essentially a Ponzi scheme. Private investors provide capital to banks on news of record earnings and the belief in their sustainability. But the earnings aren’t sustainable and the banks are in reality dependent on the capital provided by the investors in the first place.
Like I expected, banks raised tons of cash into this rally by selling equity (and debt, as well). After denying it would sell equity two months earlier, Bank of America announced its plan to sell 1.25 billion shares into these scam-inflated prices. Wells announced $6B in equity issuance and Morgan Stanley $2B, along with Citi adding $5.5B to its share-conversion plan. Goldman, as noted earlier, announced its sale of $5 billion in equity and $2 billion in 5-year bonds.
So not only did banks lure investors into providing them capital through scam-inflated earnings (from taxpayer-financed AIG trade unwinds, unsustainably low loan-loss reserve expenses, adoption of changed FAS 157 regulations, and various other accounting shenanigans), but they sold equity into these inflated prices to further expose investors to the bank’s equity depreciation. Multiple-sigma statistically significant trading profits (even if you choose to ignore the presence of the AIG “conspiracy”) are not sustainable ways to raise cash to deleverage exposure to toxic assets. The asset side needs to decline and equity needs to start rising organically through investment banking divisions and such for banks to have sustainable turn-arounds.
Like I said, it is little more than a Ponzi scheme. And like all Ponzi schemes, when the exponential organic return-on-investment necessary to keep the external cash flow coming and sustain the scheme dries up, it’s toast. No wonder banks are selling stock into this rally.
No wonder insider selling is at an all-time high (with $14 sold for each $1 bought-- compare that to the 7:1 insider selling/buy ratio at the all-time top in the stock market in October 2007). And no wonder the rally has gone parabolic.
Bernanke’s “green shoots” and CNBC’s second derivatives refer to a nominal recovery that hasn’t even occurred yet. Any financial recovery in banks is clearly because of government support, given the technical insolvency of many of the major banks (especially when off-balance sheet assets are counted), so any economic recovery is strictly nominal and should be met with a corresponding depreciation of the US dollar.
The Federal Reserve is providing massive liquidity to banks through printing money and lowering rates. This credit expansion (similar to the ones Greenspan used to cause the 90s tech bubble and crash and the 00s housing bubble and crash) does not necessarily represent a real (inflation-adjusted) recovery, so any sustainable rise in stocks caused by a sustainable recovery in bank balance sheets should correspond with an even better return in precious metals prices.
But that simply isn’t the case, as gold has remained quite stagnant through this whole rally. The point is, no stock rally is to be trusted unless it corresponds with a similar if not greater rally in gold.
Quick tangent: With the FOMC not announcing additional quantitative easing in its last meeting, you can bet that the impending equity sell-off will provide more than enough public justification to allow the Fed to continue its massive printing campaign so it can depress long bond rates and reflate the bubble into Treasuries through credit expansion.
This should be met with a nice ascent in gold prices, especially significant when the $1000/oz barrier is breached. Once the QE endeavor is complete, banks are sufficiently capitalized, and rates are sufficiently depressed to the Federal Reserve’s contentment, rates will start naturally rising, the Treasury bubble will implode, and gold will go parabolic ($15-20k/oz isn’t out of the question). That represents the forthcoming monetary crisis, probably occurring in 2010-2011, which essentially amounts to holders of Treasuries and dollars (most of which are foreign) financing the American recovery. Note: The real major currencies in crisis will be the Pound and Euro, however, because unlike the Dollar, Great Britain and Eurozone lack the political leverage and intrinsic safe-haven quality of the United States to prevent a systemic run on its currency. China trying to abandon its Treasuries positions would be economic and political suicide, but already British and German bond auctions are failing.
But back to the present. Besides the earnings, Goldman Sachs’s massively increased involvement in program trading, especially in principal shares traded, has been well-documented and discussed, and helped cause the great quant deleveraging that helped prolong and magnify the rally through positive feedback. And like all positive feedback mechanisms, it is unsustainable, yet quite spectacular in the short-run.
The rally has gone parabolic from a lack of liquidity (which is provided by the very funds forced to deleverage as crap stocks surge from unsustainable earnings reports), and once slower money starts deleveraging at a faster rate than fast liquidity, the massive large-block selling will be into a highly illiquid market, leading to a surge in volatility and fear, and a sharp drop in equity prices.
This is what happened in January 2008 when low holiday volume allowed for a parabolic blow-off top to a bear bounce, which was quickly reversed in the following days as volume returned. With the S&P 500 less than 25 points away from its 200DMA (institutional buy/sell point) and less than 15 points away from its January highs (significant technical resistance level), you can bet quant deleveraging is going to catch up with the rest of the market very soon and the impending reversal will be one for the ages.
The higher and faster we ascend, the stronger and quicker we’ll fall. And the public will be the one holding the hot potato at the end of the day. It’s time to liquidate those 401k’s and IRAs into gold (or an ultrashort ETF if you want to place some shorter-term bets).
World, you just got hustled.
Disclaimer: short GS, JPM, BAC, WFC, MS
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This article has 64 comments:
As always,timing is the key...intervention will continue unabated for a long while yet...but trading ops are ripe for the taking...just be nimble...
The banks will recover. It's not like this hasn't happened in the past. Bank performance will continue to improve over time. BAC, Wells, JPM, GS, MS, etc. will all be powerhouses of the recovered economy. I specifically left out C, because I think that financial institution will be broken up and sold. It will also be removed from the DJIA along with GM.
The banks will recover, yes. But you have to understand HOW. Looking at current bank balance sheets, many are on the point of technical insolvency. Just absurd TCE/TA. To assert banks will just "turn arond" is a very generalized claim.
Banks will turnaround this year because of the government's capital infusions. The stock market will bottom (in nominal terms) this year. But it's all just blatant credit expansion. No rally in stocks is to be trusted unless it goes with a rally in gold.
Until the Dow can buy less than two ounces of gold, this will be the case.
banks win, taxpayers lose.
Also, a straight on headshot would be an improvement over you wearing a goofy Nationals cap, laying on a woman's lap. Just saying.
were u not short GS 2 weeks ago? Why, if you knew a "hustle" was coming?
great article though...
So why did u start shorting GS, JMP and MS on May 1st?
it doesn't make any sence, it's all about timing.
Now, shorting the pops is the trend
JAY BOY BILLY
On May 10 11:30 AM ebschor wrote:
> Looks like we got hustled and you got squeezed. The difference is
> we are full of cash and you are trying to write long, drawn out articles
> to hopefully get enough people scared to sell so you can make back
> some of your losses.
>
> The banks will recover. It's not like this hasn't happened in the
> past. Bank performance will continue to improve over time. BAC, Wells,
> JPM, GS, MS, etc. will all be powerhouses of the recovered economy.
> I specifically left out C, because I think that financial institution
> will be broken up and sold. It will also be removed from the DJIA
> along with GM.
Have you read the 94 page Dr. Weis white paper at the bottom of this link?
www.moneyandmarkets.co...
Naufal's rebuttals are even more proof that he's been squeezed and this article is his desperate attempt to scare people into selling so he can cover his ass.
Why not tear apart each part of the article point by point if your so sure of yourself. A blanket statement about negativity proves you a fool.
On May 10 02:19 PM jacob1 wrote:
> It's Sunday again, and that means another 5 or 6 ultra negative,
> ultra-short inspired headlines by Seeking Alpha. It's become so obvious
> already, that even my 14-year old niece sees and understands the
> same. What a transparent sham Seeking Alpha has become. I hope it
> quietly goes away -and soon.
Personally, I am more interesed in regional banks that will grow by acquiring the assets of failing/failed banks.
P.S. I cannot believe you shorted GS.
If you want to gamble let me suggest you go to Vegas, they could sure use the cash.
And as it happens I know about at least three of your scenarios and there are very straightforward answers to them, but you go ahead keep betting on red when it keeps turning up black.
As per those who trivialize this as just another permabear ultrashort article, I invite specific responses to specific parts of my article. Also please keep in mind I have been repeatedly stating the market will place a nominal bottom this year (though not inflation-adjusted for several years), so I'm not exactly a permabear.
There are far too many problems facing the economy (short term: large numbers of workers becoming unemployed, rising companies and individual bankrupcies and debt defaults, insolvent banks. Long term:massive national debt, unfunded pensions, peak oil production) to say that the recession is over is folly
Thanks for your article Naufal, lots of info to digest
Bulls vs. Bears...
Follow the trend, it's your friend...
You read a nice piece like this that puts facts together, and I get thumbs down for my conspiracy theories. Look, all this doesn't happen unless it is exactly what the government wants. it is the backdoor method of getting funds to the banks out of our pockets without oversight. The amazing thing is that our dear leader (pun intended for those in the know) has remained so popular. I thought the snow job Bush did in the Iraq war was good, but Obama has proven himself the master. The real beauty of true evil is that is is so smooth you never see it and you think it is helping you. For the first time in my 44 years I am actually scared about what is happening to this country. You could get people to protest the war, but protest what is going on right now and you are a anarchist. In fact this stuff isn't even on people's radar.
On May 10 02:19 PM jacob1 wrote:
> It's Sunday again, and that means another 5 or 6 ultra negative,
> ultra-short inspired headlines by Seeking Alpha. It's become so
> obvious already, that even my 14-year old niece sees and understands
> the same. What a transparent sham Seeking Alpha has become. I hope
> it quietly goes away -and soon.
Most of the arguments by bulls have been "we've been down but we've always come through before." To this, the bears respond "yeah, but it's different this time." Not withstanding how much money the bears have lost in the last 20 years, this time it really is different.
We are on Hayak's road to serfdom because our government has expanded debt, already on an unsustainable trajectory, to a level that promises exponential acceleration of this trajectory. You can blame not having the discipline of the gold standard if you want, but this is short sited. Fiat money could have worked if we had the political will to prevent our government from the death spiral of the social welfare state.
We escaped death before because the computer revolution increased productivity to an astonishing degree, or more importantly, faster than the supply of money. Barring a revolution of similar magnitude, there is no escape this time. We are on the road to financial implosion.
The author hints that the banks earnings are phony. They are, but we are talking about a herd that up to 2000 valued "eyeballs" over earnings. The situation with the banks will be ignored like it was with the dot coms until it can't be. Banks will survive, but their equity will be drastically diluted. How long can they trade with P/E's 10 times higher than their 10-14 traditional range when the accounting tricks run out?
The banks, hopefully, won't be nationalized, but they might as well be. The government will have such high equity stakes that they will have effective control,and will push political, rather than business decisions against a debtor corporation that can't say "no." How quickly did the TARP banks roll over on the Chysler plan compared to non-TARPs who were trying to act in the best interest of their shareholders?
Just because the "doom and gloom" crowd has been wrong for the last 20 years, doesn't mean they are wrong this time.
GS and the brokers are spking the markets it is so obvious just looking at the gaps at start and end of day with low volumes. I hope the market falls quick so few people are trapped into this BS manipulation and let the real slow recovery being which will be more sustainable. People will then save and invest wisely and allocating capital to the right industries and real business rather. Keep your good work. I think when you short buying protection on th eup side will help atleast. I assume the author has done that so his short losses are limited.
My main thoughts and reflections concern the sustainability of all the financial engineering plans and the numerous acronyms for each and how one can hope to win any game in which the rules change so frequently and arbitrarily. I guess it might be more important to be lucky than to be good in this new economy. Although there certainly seem to be a number of participants in these markets that are quite good at manufacturing luck recently (ex. Goldman etc.) . Perhaps America can add the manufacturing of Luck to such long term manufacturing growth stories as the manufacturing of criminals and the manufacturing of legislation as the basis for growing the economy.
That being said, We do have three past days of weird market action. Wednesday was mixed in the IBD top 200. The first mixed read in this rally. The lp double inverted or the loosers outpaced the winners on Thursday and Friday. The IBD top 100 index dropped for the week yet the market was up. The press is telling everyone that happy days are here again but when you run the internal data through my spreadsheet you see that in fact the past three days have been largely bearish. Yet the triple short BGZ is crushed on Friday to a new all time low.
I know so many people who are getting crushed by this action. They are short waiting for the end of the world. When infact the interanl data has been bullish for the 107% run in the BGU. With this meltdown of internal data, and it is significant, I have to concur with the concept of taking long profits at this point in the cycle and have been telling all my readers to do just that.
For my own personal holdings, I have been cash for a large part of this rally and have only been day trading the bgu for 2% gains. Now that the data feed has been so bad the past three days, this week I will be waiting to see... Prudence is the perfect solution at this point in the market. It has moved parobolic I concur, yet when that ends has yet to be seen.
Just as the MZZ was parobilic in Sept Oct and Nov moving from $60 to $134 I am reminded the MVV dropped less to just $25 and then as the parobolic nature turned the MVV continued its drop to $13.87 while the MZZ just treaded water and made strong 2% day trades. That, in my view is where wea re at now. We are just biding our time for the next move and I do not think we can healthily trade above 942 based on the concept that the winning stocks with strong balance sheets and strong fundamentals are starting to roll over.
Additionally, my buiness and the business of my clients who one businesses are reporting to me that Business has NEVER BEEN SO BAD. That further concretes me to being in your camp.
It infuriates me to no end that so many only listen to the 630 news rather than actually taking the time to understand money and markets. It realy can be very simple. In my study of markets Theater Theory and Game Theory are the two guiding princples backed up with data mining. Religious macro model data mining. 2 hours of it per night rather than the national news! twitter at: investing1
That being said, I would not be surprised at all if Walls Streeet after raping the taxpayers like never before will do whatever they can to prevent a second term of Obama. The Moor has done his duty, the Moor can go. It's said, for all the hopes that were and still are hinging on this president and that will be nothing but shattered dreams a few years from here.
> You're a brilliant young man! ... thanks for sharing your knowledge.
Horsefeathers. He probably has a kid that age, just like 'Tyler Durden.' We're finally getting the straight story from very angry insiders. Probably ex-Lehman.
>We escaped death before because the computer revolution increased productivity to an astonishing degree
Er, no. Gain from Third Wave was trivial (bar codes and back office automation) if you back out the cost of replacing hardware every two years and software licences. The enormous 'productivity gain' was offshoring -- exporting US jobs and whole factories to Mexico and China.
Great Article -- many thanks for all the details you won't find anywhere else.
If a bank does pay back TARP, then don't you believe they just want to go back to business as usual (ie: "empire building") with the gov't monkey off their back?
Great article -- I applaud your detail and research
Disastrously flawed software, a punitive learning curve, persistently bad hardware, esp. Hard Drives and latent flaws, (which continues to this day), outrageously high prices, and frequent replacements prevented productivity from being positive.
But it did get people to spend money and learn some skills, so it had some positive effects even back then . Also it advanced the state of the art faster than what it otherwise would have been.
Another plus was the incorporation of computer technology into a variety of products.
Did it increase net productivity in the early years, and "save us " from anything ?
Definitely NOT.
"But that simply isn’t the case, as gold has remained quite stagnant through this whole rally. The point is, no stock rally is to be trusted unless it corresponds with a similar if not greater rally in gold."
A few points;
If this were to be a true bull run in equities I would expect the gold price to go down as everyone comes out from the safe haven (gold) and invest heavily in equities, why do you think that gold price would shoot up?
US$/ gold price has remained stagnant for some time now, which actually means gold has gone down in value i.e. quantative easing has devalued the US$ but gold prices haven't shot up, perhaps there has been a gold funded equity move?
As for 15K-20K gold, that would have to be US treasury defaults! I cannot see QE pushing up gold that much, maybe $2-3K
The money laundering shell game and Ponzi scheme that has now reached conspiratorial levels with agencies of the Government and private enterprise will no doubt continue to wreak havoc for many years to come.
The author has given us much to research, chew on , and ponder, and my concerns are that much of it , and even much more hidden in the woodwork, will yet prove to be true.
On May 10 02:19 PM jacob1 wrote:
> It's Sunday again, and that means another 5 or 6 ultra negative,
> ultra-short inspired headlines by Seeking Alpha. It's become so
> obvious already, that even my 14-year old niece sees and understands
> the same. What a transparent sham Seeking Alpha has become. I hope
> it quietly goes away -and soon.
good read...more of a review of sorts
I'm representing a community of Danish shareholders. On behalf of my members, I would like to thank you for your thought-provoking and thorough evaluation of the economy. Unfortunately, writers with enough integrity to write what they really see are rare, but you are the exception. Thank you very much.
I couldn't disagree more. Great photo, Naufal. And I will add my praise to others' for a great article.
Also, in regard to productivity gains from the computer industry, it should be noted that the berserk "intellectual property rights" patent regime has progressively tamped down, and threatens to halt altogether, progress and productivity in this area. This on top of all our other problems. Being bearish and pessimistic is the only sane way to look at our situation. I will change my outlook when the country throws out the socialistic parasites and once again embraces free markets.
From the governments prospective, what is wrong with moderate inflation?
1) Tax revenue will go up as more folks are pushed into AMT territory.
2) With the exception of TIP’s it will be cheaper for the Fed and all the TARP borrows to payback debt.
Double-digit inflation would likely cause political trouble but 6-8% might fly. Housing values will start to rise, etc. Yes, I realize buying power will decrease but most people don’t understand the effect.
Does anyone have a good estimate of what level of inflation all the new money will cause?
You are correct in stating that their unrealized losses (net of gains) declined from $9.9 billion at 12/31/2008 to $4.7 billion at 3/31/2009. However:
1) Both before and after the implementation of new FASB rules on mark-to-market (FSP 157-4), changes in the fair value of available-for-sale securities do not go into earnings. WFC's net income did not benefit from this $5.2 billion improvement in their unrealized losses.
2) (Minor point) .. Excluding #1, you would need to tax-effect the number anyway and its impact would be $3.4 billion.
But the banking sector was able to have an 85.33% haircut going from $121 down to $17.75. What do you call it? It cannot be called half-full nor half-empty. It is more like a dry towel already. And this author is trying to short the financials again?
I bought the financials as it goes from 80% to 85.33% discount as it approaches my maximum target of $16.85. It is not so often that the glass becomes almost empty rather than just half-empty. Well, $BKX was not able to reach it's maximum lowest target but rather made a turnaround at $17.75. Now, it is still have a lot more room to run to the upside even at $42 or so price levels.
Do you know that $BKX was able to form a 1-2-3-4-5 pattern on the weekly and daily charts to the downside during the last sell-off iteration? It is a high probability bottoming process used by bottom fishers for precision entry.
Do you know that the $BKX has successfully broken out of a potential inverted Head and Shoulders pattern on the daily chart. Another high probability bottoming process used by those who try to chase the rally.
InvHnS has a probability rate of 65%. 65% probability rate is very high - you don't want to go against such an odd with your shorts more likely to be squeezed hard you might not be able to know what hits you.
Why not short AIG again at the current price of almost $2.00? It might go back down to 33 cents again and you will gain more than 80% profit on your trade. The trend is your friend, right?
Meanwhile, those contrarian traders who bought AIG at 33 cents are now up almost 500% on their trades.
Who is the greater fool getting hustled down here at these extremely depressed prices? The trend traders or the contrarian traders?
Or at the very least, post some intelligent rebuttals.
Sorry to hear you don't put much faith in your 14-year-old niece. Sometimes things really are so obvious even a child can see them.
On May 10 02:19 PM jacob1 wrote:
> It's Sunday again, and that means another 5 or 6 ultra negative,
> ultra-short inspired headlines by Seeking Alpha. It's become so
> obvious already, that even my 14-year old niece sees and understands
> the same. What a transparent sham Seeking Alpha has become. I hope
> it quietly goes away -and soon.
> Meanwhile, those contrarian traders who bought AIG at 33 cents are
> now up almost 500% on their trades.
> Who is the greater fool getting hustled down here at these extremely
> depressed prices? The trend traders or the contrarian traders?
Great day traders always make money. Some of us can't use stops, have to pay brokers, have money locked up in pension funds, can't trade after hours, can't stand much risk, etc. So, the question is fundamentals. Are we going down or up? Did the banks get a clean bill of health from the Fed stress test, or was it a pack of lies? Is AIG a going concern? What about General Motors?
Comment above by 'inflation' tells a big story: if you are a trader, you don't care whether it is a bull or a bear market. The retail chumps who save and invest are there to be driven like sheep and fleeced by the pros.
On May 11 02:15 PM Glen L. wrote:
> "Also, a straight on headshot would be an improvement over you wearing
> a goofy Nationals cap, laying on a woman's lap. Just saying. "<br/>
>
> I couldn't disagree more. Great photo, Naufal. And I will add my
> praise to others' for a great article.
>
> Also, in regard to productivity gains from the computer industry,
> it should be noted that the berserk "intellectual property rights"
> patent regime has progressively tamped down, and threatens to halt
> altogether, progress and productivity in this area. This on top
> of all our other problems. Being bearish and pessimistic is the
> only sane way to look at our situation. I will change my outlook
> when the country throws out the socialistic parasites and once again
> embraces free markets.
parties have gotten away with the crime so to speak. it may be rotten, but they had implicit help from the government and they survived and now are in a better position. if they pulled off such tricks, why can't they do it again in the future? is it wise to bet against the riggers?
If you think about it, it was a pretty neat trick, and all up its probably a win-win all round.
To me it shows the lengths the US Administration will go to. Maybe thats why Japan was in a banking crisis for a decade, they were too honest or not smart enough to use these tricks!!??!
The question is, what will Q2 look like? do they have any more tricks? Without a good Q2, the banks will drop again. Maybe they can take our some more AIG insurance!
On May 10 06:10 PM Naufal Sanaullah wrote:
> I see lots of broad and general assertions, I would love some insight
> as to how one determines the "fair value" of bank stocks when they
> have trillions in depreciating assets that have yet to be marked
> to any realistic price and are still overlevered > 15-20x.
>
> As per those who trivialize this as just another permabear ultrashort
> article, I invite specific responses to specific parts of my article.
> Also please keep in mind I have been repeatedly stating the market
> will place a nominal bottom this year (though not inflation-adjusted
> for several years), so I'm not exactly a permabear.
its very unlikely that Fed doesn't realize whats going on. Either they are in on the deal or else...thats their plan to get the stock market / economy moving.
We all know Fed is pumping in money with the intention of restarting the economy. I think AIG concessions and Accounting Rule change is intended. Buyers are back and in the worst case they will last till the support from Fed (in various forms) remains.
At the same time the history of banking crises suggested to me that many of the things mentioned above would happen. Down through history similar steps although not the exact steps have occurred.
It is not in the interest of any country to have a great economic calamity. The world financial leaders seem to have once again stepped in and continue to be prepared to intervene as required to stabilize international trade.
I am not suggesting a boom lies ahead. At the same time $15000 gold and a world economic freefall is not likely.
MAYBE THE WORLD GOT HUSLTED... BUT YOU GOT KILLED WITH THOSE SHORT!
SILLY ROOKIE