Stocks Rally on Financial Writedowns: Overly Optimistic?

Stocks rallied yesterday as UBS (UBS) (33.01 +4.21 +14.62%), Switzerland’s largest bank announced a further writedown of $19 billion and that its chairman will resign. It also announced that it would be raising a further $15 billion in capital. This, along with the strong demand for Lehman Brothers’ (LEH) (44.34 +6.70 +17.80%) convertible shares offering, convinced the stock markets that the worst could be over, and that banks will be able to survive the crisis. All of this and a further writedown of $3.9 billion from Deutsche Bank (DB) (117.75 +4.70 +4.16%), pushed the S&P 500 (SPY) to have its best first day of the 2nd quarter since 1938.

What a day like yesterday shows is that what might otherwise seem like bad news can be interpreted as good news under certain market conditions. Imagine what would have happened to UBS stocks a year ago if they would have made an announcement of a similar writedown, but today writedowns seem to be the order of the day and investors are looking to get them out of the way so that banks can continue “business as usual”.

Investors might want to ask themselves though if that might be a little overly optimistic, or if the economy will recover as soon as they would like it to. A particular case in point is the statement from Deutsche Bank saying their writedown is due to worsening market conditions. So at least for them, the market isn’t improving as they would have hoped.

Comments

[swissstocks]

It is sadly true that investors are no more so much impressed by write-downs and consider them as "normal" (as when it was "normal" to value Internet companies by the number of visitors...) I think we should expect more write-downs and perhaps anohter capital increase from UBS this year. These guys just don't seem to be able to evaluate their exact financial situation.

[phinsuntanning]

the exact financial situation is main banks and investment banks lost their capital. "Good" news is the FED will pay for it in the US,
and probably ECB will do the same in Europe, insane...

March 31
Fiscal Year 2007: Capital/Assets
US
Bear Stearns 3,0%
Morgan Stanley 3,0%
Merril Lynch 3,1%
Lehman 3,3%
Goldman Sachs 4,5%
Citigroup 5,2%
JP Morgan 7,9%
Wells Fargo 8,3%
Bank of America 8,6%
Wachovia 10,2%


Europe
UBS 1,9%
Barclays 2,6%
Commerzbank 2,6%
BNP Paribas 3,5%
Credit Suisse 4,4%
Royal B Scotland 4,8%
BBVA 5,6%
HSBC 5,8%
Santander 6,3%

[taxfreelife]

Of course UBS would have fallen a year ago if they announced a $19bn writedown the stock was at $65, it has been cut by 60% on the expectation of losses.

As for swissstocks comment that UBS does not know their financial situation, this maybe true a year ago, but not now. They are limited on what they can writedown each quarter you have to mark to market and cannot just write down everything to where you think the bottom might be. This is why the writedowns have come in 4 stages.

[p2pvoice]

Why go back a year? Just last quarter, AAPL stock fell; even with "better than expected" earnings.

And mind you, it is not just write downs with banks, they also have losses for the quarter.

I am stunned with the market's steep rise yesterday and it forces me suspect a newly hatched conspiracy among the large investment banks around the world.

After LEH press release, its shares fell 5% that evening they waited to announce after the quarter end). Than at about 1:30 am, the wires flashed the UBS story and Asian markets fell. By 8:30 am everything was hunky-dory. By the end of the day, "everyone" had a logical rationale that big write downs and big losses are good for banks, especially IBs.

[gaucho]

I agree this is a april fools rally. It should run its course in about 1 week then start to fall once again. Pump and dump on a massive market scale. I plan to redistribute my short position as soon as I feel the top is in.

[ItsJustMe]

taxfreelife is correct that the banks cannot just write everything down to where they "think" the bottom might be. They have to evaluate where they are each quarter based on the present loan delinquencies, conditions and trends.

If the worldwide economy continues to sink into recession as it appears, the writedowns will continue each quarter. Many reputable economists (and the banks themselves) are predicting that $1 trillion will be the eventual worldwide writedown of mortgage, business and credit card debt so as you can imagine, $19 billion is just another baby step on the way down.

There are so many investors that know this and are shorting the banks that as soon as any positive development hits (I guess $19 billion is better than $20 billion), they get caught in a short squeeze and the banks skyrocket as they scramble to get out.

What they should do, is simply buy some 9 to 12 month puts and wait patiently as the banks replace their current profit equity with billions of new shares until their book value per share is finally diluted down to a fraction of what they're showing now.

Bear Stearns value of between $2 and $10 per share is about right for most of the banks but the Fed is keeping the other banks liquid long enough that they can reach that value in an orderly systematic manner which could take a year or two...

[NoFate]

Imagine what will happen to UBS stock a year from now when they will still be making additional writedowns!

It will probably take another 2 years for housing prices to bottom ...at which point they will finally be able to "mark to market" all their mortgage backed securities ...and take their final writedowns (if they are not off-balance sheet on SIVs)!

[venividivici]

A smart person should have made a lot of money in the last five years and now be sitting on the sidelines watching all of this carnage.

I'm building a couple of townhouses and waiting for the smoke to clear.

[JIM]

Wishful, hopeful fools.

UBS, supposedly capable of creating/protecting wealth, pisses it away and is rewarded.

RIMM grows at a slowing rate and is rewarded.

Apple makes a great profit and gets slammed.

Disgusting.