Friday's Rally: Just a Short-Squeeze?

Includes: BAC, C, JPM, MER
by: Grace Cheng

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 (NYSE: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 (NYSE:C), JP Morgan (NYSE: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.