Financial-Dip Buyers Forget To Ask What's Next

Bloomberg is reporting American Express Falls Most Since 9/11 on Net Decline.

American Express Co., the biggest U.S. credit card company by purchases, fell the most in New York trading since the Sept. 11, 2001, terrorist attacks after earnings missed analysts' estimates and the lender withdrew its 2008 forecast.

Chief Executive Officer Kenneth Chenault said yesterday in a conference call that the business climate was "much weaker" than earlier this year and American Express was hurt by rising U.S. unemployment and falling house prices in the second quarter. Profit from continuing operations dropped 37 percent to $655 million, or 56 cents a share, falling short of the 82 cent average estimate of 17 analysts surveyed by Bloomberg.

"Rapid growth of lending balances over recent years" in regions of the U.S. with the worst real estate declines caused greater-than-expected losses, Scott Valentin, analyst at Friedman Billings Ramsey & Co., said in a research note today. "At no point in history have consumers incurred as much debt relative to wealth." He rates American Express "underperform."

Record Loss At Wachovia

In other news

Wachovia Has Record $8.9 Billion Loss, Cuts Dividend

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Wachovia Corp., the U.S. bank that hired Treasury Undersecretary Robert Steel as chief executive officer two weeks ago, reported a record quarterly loss of $8.9 billion, slashed the dividend and announced 6,350 job cuts. ...

Wachovia, whose job cuts amount to about 5 percent of the bank's workforce, lowered the dividend to 5 cents a share from 37.5 cents and will leave 4,440 positions open, according to a presentation to analysts today. Steel, 56, also said the company is moving to "sell selected non-core assets" and reduce the number of business customers who only use the bank for loans rather than other services. Wachovia expects to cut expenses during the second half of this year by $490 million and then reduce 2009 spending by $1.5 billion.

"The entire organization is focused on protecting, preserving and generating capital, reinforcing Wachovia's strong liquidity position and reducing risk," Steel said in the statement.

Bad News Buyers

The bad news buyers were all over Wachovia (WB) today. The stock was about 10% down at one point is now about 10% up. The market is apparently cheering the dividend cut and job cuts.

Bank of America (BAC), the second biggest US bank, is up another 7% at one point today after reporting yesterday it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after taking over the mortgage lender. "There is no assurance that any such debt would be redeemed, assumed or guaranteed," the bank said in an April 30 regulatory filing.

The short squeeze in Fannie Mae (FNM) and Freddie Mac (FRE) may be over although both are significantly higher than the morning lows. The day is still young and the dip buyers are out in full force but this is all noise anyway.

What is American Express (AXP) going to do for an encore? Wachovia (WB)? Citigroup (C)? Washington Mutual (WM)? Lehman (LEH)? Wells Fargo (WFC)?

Wells Fargo "beat the street" last week only because it made a policy change to write off home equity loans after 180 days instead of 120 days? What's next Wells Fargo, 210 days?

Wachovia now effectively has no dividend. Can it go negative?

Citigroup wants to sell $500 billion in assets. To who? At what price? Other than eliminating its dividend inquiring minds are asking "Then what?"

Every company above is already hiding ever-increasing amounts of garbage in level 3 "marked to fantasy" assets. Will investors overlook this forever?

SEC manipulation during options expirations week in conjunction with "beat the street" games triggered a short squeeze that may or may not be fizzling out, but fizzle out it eventually will. And looking ahead to next quarter earnings (and the quarter after that), what are all those companies going to do for an encore?

Comments

[fatcat:]

Mish,total agreement...But I've been saying this for 6 months to anyone who would listen.I have puts I bought last week on several banks that popped on crappy earnings and I thought today would be cash-in day,but nooo!

2008 Jul 22 12:43 PM

[investor88:]

Agree poor fundamental outlook so we can trade with defined stop loss/tailing sell stop if there is profit. This way we can control portfolio risk. Alternatively go on vacation until the fundamental outlook is safer then re-assess.

2008 Jul 22 12:52 PM

[pshah:]

Stating the obvious that the market is overlooking. This is deja vu again - just like the previous two quarterly earnings seasons. Remember in Nov-Jan when banks were proclaiming the damage was limited just to subprime? And then in April when banks reported dilutive fund-raising along with 'better than expected' earnings? Both times shares were bid up and 'experts' on CNBC proclaimed the next great bull run.

2008 Jul 22 01:14 PM

[spot0:]

Want to make a comment on WFC - the change in charge off time from 120 to 180 days did NOT affect their posted net. This was all included in the $3 bn provision for the quarter.

To quote the press release:

"As previously announced, the Home Equity charge-off policy changed in the second quarter from 120 days to no more than 180 days to provide more time to work with customers to solve their credit problems and keep them in their homes. The Company has helped nearly 900 customers, and approximately $90 million of Home Equity loans have been modified due to this change. The policy change had the effect of deferring an estimated $265 million of charge-offs from the second quarter, but did not reduce provision expense in the second quarter since this loss content was included in the $1.5 billion credit reserve build."

As Morningstar said, banks that are strong are gaining market share, increasing margins, and "printing money". Losses are going to be high but the incremental gains are huge.

2008 Jul 22 01:27 PM

[Brian A. Davis:]

All of these banks in general, and mortgage exposed in particular (like BAC) are praying that the House and the Senate can stamp out a bill that will make the Federal government responsible for their trashy loans... Sounds more like the "moral hazzard" that was sounded off time and time again last week. Remember House members up up for re-election every other year... Who wants to be the guy who increases the national debt...bails out the big corporations...and weakens the dollar?

Soon the euphoria will be over and the financials will not be allowed to celebrate "lower than expected losses"... and be treated like winners...

Let's not forget that credit cards are teh next shoe to drop...and BAC has the highest exposure in that area!!!

2008 Jul 22 01:33 PM

[bearfund:]

Sentiment, sector rotation, and squeezes. Those are all that matter. Earnings? If the market is determined to go up, it will. If it is determined to go down, it will. There's always something in an earnings call that can be spun whichever way the wind is blowing. Just remember, we've seen this movie before.

2008 Jul 23 12:35 AM

[Emerald:]

Puts on financials are very risky these days. Consider shorting via the SKF. No time decay and you can keep a tight expense stop.

2008 Jul 23 10:33 AM

[nyka:]

Try...to whom, not, to who

2008 Jul 23 06:12 PM

[bill d:]

I see I am not the only one to burn you on your juvenile, idiotic attempt at your grammatical attacks.

Here's another one you wrote that kind of hoists you on your own petard:

"Lots of "meat" here for the knolwedgeable investor to digest. For all others, it's meaningless."
What is "knolwedgeable" ?

Like most anal self aggrandizing half wits - sooner or later you reveal to the world your own moronic display of elitism.
Try to enjoy the site for what it is or go to the library and help the needy.

2008 Jul 23 07:15 PM

[bill d:]

Gee - here's another:

I think it's related to misstatment, manifesdos and outsoursing. Speaking of delusional.... Reply. commenter. nyka. Apr 14 05:22 PM ...

Wow -3 in one sentence - amazing.

2008 Jul 23 07:33 PM

[Kinabalu:]

This is the third article I've seen claiming that Wells Fargo beat the Street profit numbers by accounting trickery. How can people get jobs or claim to be proficient in finance without any knowledge of accounting? What Wells Fargo did they described as deferring chargeoffs from 120 to 180 days. As spotO notes above this does not increase net earnings. The entry for posting a chargeoff is very simple. 1) debit Loan Loss Reserve (a credit balance account); 2) credit Loan Asset . Thats it. Both of these accounts are balance sheet accounts. There is no income statement effect. What you end up with if you defer this entry is a higher LLR, which is appropriate because you still have the nonperforming asset on your books. To call this moving the goalposts is ridiculous. It is changing the rules but it is not creating income or capital by trickery.

A sophiscated analyst will look at something like the ratio of LLR to Nonperforming Loans. In Wells Fargo's case, because their ratio is greater than 1, the change actually makes this ratio look worse. For Wachovia or Washington Mutual, whose ratios are 84% and 87% respectively, this type of change would be more properly criticized, because it would have improved this widely reviewed ratio.

2008 Jul 24 02:25 AM