Friday's Rally: Just a Short-Squeeze?

The sudden euphoria that gripped the markets on Friday seems to have died down somewhat, confirming what many traders thought of it being nothing more than a short-squeeze. Investors were once again pessimistic as Bank of America’s (BAC) profits fell 77% to $1.21 billion, or 23 cents per share, from $5.26 billion, or $1.16, last year. These losses included a a writedown of $1.47 billion relating to CDOs and $1.31 billion in trading losses. Bank of America also set aside $6.01 billion for credit losses, five times that of last year.

Since it generates most of its profits in the US, Bank of America has more exposure to the US economic crisis. For example, its consumer and small business banking profit fell by 59%, its corporate and investment banking profit fell by a whopping 92%, and its wealth and investment banking profit fell by 54%. Citigroup (C), JP Morgan (JPM), Merrill Lynch (MER) and other US banks have also given up some of Friday’s gains.

This shouldn’t come as a big surprise as more and more economists are pessimistic about the US economy. The 109 members who responded to The National Association for Business Economics were “notably downbeat” about near-term prospects and their first-quarter experience. Demand at respondents’ companies grew slower than at any time since the 2001 recession and reports of falling profit margins outgrew reports of rising margins for the first time in 5 years.

Comments

[steve west]

Grace,
what is surprising is your continued propaganda about this "bear market"
I love the way you try to downplay anything
first of all the fact that gains were held at all after the rally on Friday would suggest a follow through and NOT a short squeeze.
a Short squeeze would have much higher volume- besides speculating on if this was a squeeze or not is pointless.
now to your point on the 109 members who responded to the survey.
Funny how only 30% said we are headed for a recession. However you, like the AP tend to focus on the negative. I hardly call 30% dowbeat.. are the other 70% just not factored in.
As Dick Green noted last week:
The economic data this past week, apart from housing, were undeniably good. In what is supposedly worsening recessionary conditions:

March retail sales were UP.

March industrial production was UP.

The March leading indicator index was UP.

None of these were particularly strong. Retail sales were up just 0.2%, industrial production 0.3%, and leading indicators 0.1%. But each was DOWN in February.

It is very noteworthy that not only did a further deterioration not occur, the trends actually reversed. These data all fly in the face of concerns of a sharp downturn in the economy.

This raises the prospect that the economy will hang on in reasonably good shape until fiscal and monetary stimulus provides a boost.
specifically on BofA they reported this:
Like many of its peers last week, Bank of America's report was bad. Net income plummeted 77% and the company provided a cautious-sounding outlook. Still, it appears that the market continues to embrace the "better-than-fear... approach as shares of BAC are little changed in premarket trading.

Separately, it is likely to go unreported today -- or least be under-reported -- that Bank of America's total loans and leases increased 21% in the first quarter. We don't know about the media's take on that (well, actually we do), but that's not the sign of a true credit crunch.
my point is that you need to recognize when you are just wrong.
with a fed funds rate at 2.25 and profits meeting or beating and guidance notably better then expected your call for a beat market just is not happening.

[steve west]

last sentence should read bear market.. not beat market..
sorry- the charts in the background of your picture got me all flustered.

[WaveNet]

I don't know which "lagging indicators" you have been watching, but last week's recovery for financials was a lot more than just Friday.
Watching the breadth and the magnitudes, it is obvious that most investors see unprecedented value in all financials.
The biggest "leading indicator" of a recovery is that smart money, whether with Private Equity or Public Offerings, are now the vehicles of choice in shoring-up their balance sheets and not sovereign funds. Smart money sees a trend reversal before the general public or the media does: after the fact, the bulk of the upside is already behind.

[Kostya Tszyu's right hand]

Steve West - I thought you were a fan of Jack Kerouac.

[Sven Doe]

High Tech, I see unprecedented valuation in all financials...but I'm not so sure about *value*. I guess we'll see.

[User 143167]

"March retail sales were UP.

March industrial production was UP.

The March leading indicator index was UP. "

It seems that the FED's plan to inflate this country out of crisis works!

Everyone will be better off with a 8.2% nominal GDP growth with a CPI of 8%! NO RECESSION INDEED!

[SB-tiger]

Lot of bad news is still to come in financials, last week’s rally notwithstanding. Bear markets can (and do) have great rallies. Much more write downs/re-capitalizatio... etc yet happen in Financials - the problems are spreading to other parts of their business. All banks are actually painting a bleak picture. So where the optimism comes from beats me. Of course for reasons of optimism we have bubbles. The only thing we learn from history is that we learn nothing from it.

Thinking there is value in financials is trying to catch the proverbial 'falling knife'. The so called smart sovereign wealth funds (and lot of hedge funds) have been proven so very very wrong recently. So just stay away, or if you have the stomach just short - SKF. I am short and sleep comfortably.

[Ex15:26]

This is a great discussion, and frankly, I'm excited to actually see some bulls coming out here and arguing their side. It is no wonder that we had a relief rally because everyone, and I mean everyone has been negative --- so much so, I had to turn bullish for a week for MOS earnings and the subsequent run.
While I have been confounded by the performance of the banks, I am thankful for their new position which allows me to actually enter trades. SKF at 105 is a lot more comfortable than SKF at $142.

Grace, I'm not buying the short squeeze notion - Friday's volume was just average, I think everyone didn't want to sell and frankly didn't know what to do.

As far as the goldilocks economy coming back that Steve and High Tech seem to envision, let's remember the destruction of capital and bank assets, the dilution of s/o equity that everyone is so excited about, the rolling over housing, condo, and now commerical real estate markets, and I noticed that you didn't mention the jobless claims (which will be revised downward again!). Did I say anything about soaring food costs, riots overseas, and that black gold (oil), and gas prices? Those probably won't impact the consumer one bit nor usher in that non-reccession that we're not in. Why don't you buy JCP on that strong retail sales number?

To summarize, sell the rally boys and buy those puts. It's not for the faint of heart, but sure better than losing your shirt as we go to 11,600.

[drawdown]

The financials are already priced into the market. I'm long.

[StevenK]

If your thesis is correct, then high short interest and SHO stocks should have been outperforming the S&P 500. Have you verified this?

[vaduz]

i believe mor in bears - but only after a hefty rally. in that we ar e in.