Financial Times: “Banks rally in face of gloom”
For its part, Reuters was completely undone, and tried to ignore the stocks’ moves altogether: “Wachovia, other banks post dismal results,” it simply said, with no mention until the sixth paragraph that “dismal results” or no, Wachovia’s stock price was zooming. The stock closed the day up nearly 30%; the S&P Financials overall rose by 8.4%.
I’m confused why everyone is so confused. Of course stock prices will rise well in advance of any material evidence of fundamental improvement. That’s the way the stock market works. If anyone thinks a bell will go off at the bottom to indicate all’s clear at last, he’s in the wrong business.
Which is why I’ve been amused over the past few weeks as wags have begun to come up with their what’s-got-to-happen-before- I-turn-bullish-on-the-financials lists. They are comical. As I mentioned here earlier this week, OpCo’s Meredith Whitney says she won’t turn positive until the banks can demonstrate they can “grow again,” which no one doubts won’t happen until, oh, 2010 or so. Thanks, Meredith. Helpful!
All very sensible. There’s just one problem. By the time DSB’s laundry list comes to pass—two straight clean quarters from the banks, an overhaul of the rating agencies—the stocks will have long since begun a tear.
In the real world, it’s not unheard-of for cycles to turn when no hopeful evidence is apparent to account for the price reversal. Or if there is any, it’s so subtle that, by definition, it’s overlooked by the vast majority of investors. “Defaulting debt returns to normalized levels” doesn’t fit the bill.
Even so, there’s been no shortage of signs lately that the worst of the credit crunch is past, or soon will be. As we’ve talked about here for awhile, new delinquencies among the loans that make up the ABX subprime mortgage index have been declining for months, while delinquency roll rates have been improving. Lower delinquencies now mean fewer defaults down the road. Bingo! End of problem in sight.
The latest figures contained one surprise: defaults -- the first step toward foreclosure -- rose by just 6.6% in the second quarter, down from a 39% spike the previous period.
DataQuick President John Walsh said the reason was not immediately clear. Foreclosures may be "nearing a plateau," he said, but it could also mean that lenders are "swamped and can't handle processing any paperwork."
Sean O'Toole, founder of the data tracking firm ForeclosureRadar, thinks the leveling off may mean that defaults on subprime mortgages -- loans made to poorly qualified buyers -- are nearing a peak. [Emph. added]
Now, I’m perfectly willing to believe that defaults have stopped rising as a result of paperwork snafus. But I doubt it. Regardless, this is just the type of data point that, years down the road (after the stocks have zoomed and while Meredith Whitney is still waiting patiently for banks’ earnings growth to resume) people will look back on and say “Aha! That’s when we should have known.” And the news is certainly delivered the way this type of information arrives: tucked away in article that otherwise describes how awful everything is.
I have been struck these past two days that all the objections to my argument that the financial have bottom a) make no reference to the stocks’ valuation and b) repeat facts that have been widely known for months. (Some readers also basically say that c: it’s different this time.) That’s all interesting, but irrelevant. The fact is, signs have begun to emerge that incremental change on the credit front is happening, and is positive. No, the signs aren’t obvious. But that’s my point. They never are.