Market Update, Friday Night Edition: Commodities, Global Markets 16 comments
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<< Return to Part 1, Pondering the Data
As promised, I stayed after school today and posted a summary.
The charts reflect bulls are betting heavily a recovery is at hand. This will have to be borne out by earnings and job growth. So far we don’t have much of either.
Have a great weekend!
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US Treasury sell off is way over done and we are going to get a 10 point rally in the long bond over next few weeks. I am buying TLT calls. next week. Got short gold and silver last week.
Looks like the NDX (QQQQ) turn turtle after a high on Monday
You would think the industrial ETF, XLI would be a total dog these days, yet, one if its larger components is Boeing. I had pretty much forgotten that BA existed, focusing on oil, gold, emerging markets, AAPL, RIMM, etc.
Boeing bottomed at 30 in March, and has quietly made its way to 52. Sometimes its just that "easy" to make 60%, lol. But have you heard anyone talk about Boeing lately? Me either, until Cramer chimed in a couple nights ago on Mad Money.
But Jim, its up 60% in 3 months....could we be a smidge late? Await a retracement to get in? I say yes lol.
The figures presented by the government were all lies. They did their usual tricks by changing the statistical methods in counting the numbers (similar to FASB market to market rules they changed until November):
Jobs Rumor Refuted
“The rumor was false,” U.S. Labor Secretary Hilda Solis told reporters in a conference call, helping spur a 1.4 percent rebound in the equity benchmark before the declines in banks and commodity shares pulled it lower.
The Labor Department adjusts its count of jobs lost for a so-called birth-death model that estimates businesses formed or folded during the month and therefore not counted in its survey. The model increased today’s report by 220,000 jobs, a “statistical fluke,” according to Miller Tabak & Co. equity strategist Peter Boockvar. The unemployment rate increased to 9.4 percent, the highest since 1983.
“There are, as always, questions surrounding the birth- death model estimations and as that talk continues, people are focusing in on the unemployment rate and the other negative parts of the report,” said Dan Greenhaus, equity analyst at Miller Tabak, in an e-mail.
June 5 (Bloomberg) -- Big banks in the U.S. say they’re on the mend. The five largest were profitable in the first quarter, rebounding from record losses for the industry in the fourth quarter. Share prices have jumped, with the KBW Bank Index doubling since March 6.
Treasury Secretary Timothy Geithner, after “stress testing” 19 banks on their ability to withstand a worsening economy, declared in early May that Americans can be confident in the banks’ stability and resilience. Wells Fargo & Co. and Morgan Stanley were among banks raising $43 billion in new capital since then through share sales.
“With our capital and assets, stressed as they have been, we can go back to focusing all our attention on managing our business and restoring value,” Citigroup Inc. Chief Executive Officer Vikram Pandit said after Geithner’s examinations were completed.
The revival may be short-lived. Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are.
The government probably wants to win time for the banks, keeping them alive as they struggle to earn their way out of the mess, says economist Joseph Stiglitz of Columbia University in New York. The danger is that weak banks will remain reluctant to lend, hobbling President Barack Obama’s efforts to pull the economy out of recession.
‘Bogus’ Profit
Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”
Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.
The accounting rule changes that matter most for the banks came on April 2, when the Financial Accounting Standards Board gave companies greater latitude in how they establish the fair value of assets. Lawmakers, including Representative Paul Kanjorski, a member of the House Financial Services Committee, had complained that existing mark-to-market standards worsened the financial crisis.
Debt Valuation
Along with that change, FASB also let companies recognize losses on the value of some debt securities on their balance sheets without counting the writedowns against earnings. If banks plan to hold the debt until maturity, they can avoid hurting the bottom line.
At Citigroup, the recipient of $346 billion in fresh capital and asset guarantees from the government, about 25 percent of the quarterly net income came thanks to the debt securities rule change, the bank said.
Another $2.7 billion before taxes came from an accounting rule that lets a company record income when the value of its own debt falls. That reflects the possibility a company could buy back bonds at a discount, generating a profit. In reality, when a bank can’t fund such a transaction, the gain is an accounting quirk, Weiss says.
Citigroup also increased its loan loss reserves more slowly in the first quarter, adding $10 billion compared with $12 billion in the fourth quarter, even as more loans were going bad. Provisions for loan losses cut profits, so adding more to this reserve could have wiped out the quarterly earnings.
Wells Fargo
Without those accounting benefits, Citigroup would probably have posted a net loss of $2.5 billion in the quarter, Weiss estimates. In the five previous quarters, Citigroup lost more than $37 billion.
Wells Fargo also took advantage of the change in the mark- to-market rules. The new standards let Wells Fargo boost its capital $2.8 billion by reassessing the value of some $40 billion of bonds, the bank said in May. And the bank augmented net income by $334 million because of the effect of the rule on the value of debts held to maturity.
Wells Fargo spokeswoman Julia Tunis Bernard declined to comment, as did Citigroup’s Jon Diat.
The higher valuations Wells Fargo put on its securities probably won’t last, as defaults increase on home mortgages, credit cards and other consumer and corporate lending, Northeastern’s Sherman says.
Fed’s Optimism
“These changes will help the banks hide their losses or push them off to the future,” says Sherman, a former Securities and Exchange Commission researcher.
The Federal Reserve, which designed the stress tests, used a 21 percent to 28 percent loss rate for subprime mortgages as a worst-case assumption. Already, almost 40 percent of such loans are 30 days or more overdue, according to Tavakoli, who is the author of three primers on structured debt. Defaults might reach 55 percent, she predicts.
At the same time, the assumptions on how much banks can earn to offset their losses are inflated, partly because of the same accounting gimmicks employed in first-quarter profit reports, Weiss says.
“There’s a chance that it might work,” Columbia’s Stiglitz says of the government’s attempt to boost confidence. “If it does, then they’ll look like the brilliant general. But all these efforts also bank on the economy recovering and housing prices not falling too much further. Those are not safe assumptions.”
Indeed, while the government and accounting rule makers try to help the banks look their best, they may make the U.S. economy worse. As long as lenders are stuck with bad loans, they can’t provide new money to consumers or corporations to fuel a potential recovery. The banks may look pretty, but they’ll be zombies until they clean up their books.
(Published in the July issue of Bloomberg Markets magazine.)
To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net.
Last Updated: June 5, 2009 00:01 EDT
The Meltdownman
Thanks for your comments and analysis.
Wait didn't Hilda's husband a TAX CHEAT too?
www.usatoday.com/news/...
www.nrtw.org/en/blog/o...
Yep bunch of UNQUALIFED LIARS in charade...
I'm glad you noticed UNG and its questionably "worthless" movement. Can you or anyone else shed any light on the huge volume spike this past week?
Artistes
From latest Barron's on UNG by Santoli's Streetwise column:
THE IDEA THAT NATURAL-GAS PRICES might be bottoming as winter waned, aired here at the end of February, was premature, to say the least.
While the downward thrust has slowed dramatically, the exchange-traded U.S. Natural Gas Fund (UNG), which tracks the commodity, has dropped 15%, from 17 and change at the time, to 14.56 currently, yielding to an oppressive excess of gas in storage and continued weak industrial demand. Yet as most other commodities -- including crude oil -- have sprinted higher in the broader weak-dollar/asset-refl... trade, the relative cheapness of gas has become much more glaring.
The ratio of a barrel of crude to a thousand cubic feet of natural gas last week rose above 18-to-1, a rather elevated level not seen since the 1990-'91 period.
This reflects the way that commodities that travel easily across the globe -- oil, crops, copper -- have been bid up aggressively by investors betting on another go-round of the "gluttonous China" trade, in which free money and fast Asian growth fuels a boom in materials. Natural gas remains a mostly regional good, especially as captured by the traded futures and the ETF.
Bespoke Investment Group points out that each of the three times the oil/gas ratio topped 18 in 1990-'91, it proved a good time to bet on gas relative to crude. Twice, the subsequent outperformance of gas was dramatic, the other time merely impressive. This probably won't go unnoticed too long, which could mean that it makes sense to own UNG outright, or versus a short position in the U.S. Oil Fund (USO).
My take is that we will ride a bit higher. I'll get out a little over 1000.
G
On Jun 06 03:28 PM corley10 wrote:
> "easy money has been made" I see this all over the seeking alpha
> articles now. I did not see many articles BEFORE the easy money was
> made. All the way UP the articles were saying don't trust the rally,
> we will keep dropping etc. So how is it easy money?
wait till next year when the union start another Strike,
BA will be back to 30 again. Or, maybe 20.