The Worst Does Not Seem to Be Over for Financials

The UltraShorts Financial (SKF) is down less than 2%.

Why? The financials continue to degrade on an unprecentended pace. Much like UBS a few days ago, which forecast a figure for Q4, and then not 4 weeks later had to announce much larger write-offs. We are seeing the same throughout the system.

Bank of America (BAC)

• Bank of America Corp. said Wednesday in a regulatory filing it expects fourth-quarter writedowns of collateralized debt obligations to exceed the $3 billion it estimated a month ago, but that it expects to remain profitable in the period.
• In a Securities and Exchange Commission filing, the bank said it was unsure how big the writedowns would be for the quarter.
• "The markets turned down sharply in August and then many segments appeared to be recovering during the fall," Bank of America Chief Executive Kenneth Lewis, said in the filing. "However, in the past month, the markets have turned down again and will probably remain challenging into next year."
• Bank of America expects to set aside $3.3 billion in the fourth quarter to cover loan losses, about $1.3 billion more than the previous quarter. About one-third of the increase will cover traditional growth and seasoning of portfolios while the remaining two-thirds is the result of deterioration primarily in consumer real estate lending and to a lesser extend small business lending.
• The bank also expects trading revenue to decline sharply from the lack of business activity during the final quarter of the year.

Wachovia (WB)

• Wachovia Corp. doubled its expected loan-loss provision for the fourth quarter on Wednesday, and said the value of securities it owns that are backed by loans fell another $240 million in November amid a worsening credit crisis.
• Merrill Lynch downgraded Wachovia shares Wednesday morning to "Sell" from "Neutral," according to media reports.

PNC Financial (PNC)

• PNC Financial Services Group Inc. expects fourth-quarter earnings to decline due to weakening housing and mortgage markets, according to a filing with the Securities and Exchange Commission Wednesday.
• PNC said fourth-quarter adjusted earnings will range between $1 and $1.15 per share. Analysts polled by Thomson Financial, on average, forecast fourth-quarter earnings of $1.39 per share for the Pittsburgh-based financial firm.
• Earnings are expected to fall due to writedowns of a mortgage portfolio, rising loan-loss provisions and declining trading volume.
• PNC expects to take a writedown on its $1.5 billion commercial mortgage portfolio it is holding for sale. Deteriorating credit markets have led investors to stop purchasing loans. Without those investors, banks have been forced to reduce the value of their mortgage portfolios.
• As of Nov. 30, PNC estimates the portfolio's value declined $95 million, and warned it could still decrease further before the end of the quarter.

Sallie Mae (SLM)

• Sallie Mae on Wednesday slashed its profit forecast for the remainder of this year and all of 2008, as it hoards cash to offset bad loans and feels the effects of a new law that reduced federal subsidies to student lenders.

I am just wondering how much longer we keep repeating the pattern. Financials cut estimates, make writedowns, stock sink. A few weeks later, everyone assumes the coast is clear and drives these stocks up (and/or Fed cuts etc help drive the stocks up), then a few weeks later another round of cuts, earnings revisions, writeoffs happen. And they say this is the bottom, and people wade back into these stocks.

This is about the fourth round of this action happening. I don't get the bottom fishing in this group. Investors don't realize that even these banks cannot forecast their own losses/writedowns... yet we believe them each time they forecast a loss? Yet four weeks later they forecast an even worst loss? Why would you believe their accuracy in anything at this point? It befuddles me, but the market continues to run to these stocks every few weeks as the "worst is over" crowd shuffles in. This is like Pavlov's dog....

Edit: by the time I wrote this post - the Ultrashort Financial just turned green. How many bullets to the central banks have left in their gun? They will run out sooner or later and then what? We are left to fend for ourselves? The horror.

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