Financials and TED Spread Could Signal a Bottom for Corporate Profit Declines 19 comments
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Corporate Profits for 2Q 2008 reached $1.361 trillion vs. $1.348 trillion. 2Q profits were up year-over-year 3.9% while 1Q profits came in -27.5%. On an annualized basis 2Q profits decreased -5.9% while 1Q was off -3.1% (see Chart #1 below). This is all pretty much common knowledge but it is worth noting that the annualized rate of profit declines is approaching a bottom not seen since 2001 - 2002. Whether profits will decline to the negative levels last seen in 1998 is unknown but recent historical patterns suggest a bottom could be nearby.
As financials represent a significant portion of the market weighted capitalization for equity benchmark indices, any positive revision in their projected earnings will have a tsunami impact on overall EPS estimates for the broad market. The stock market is still considered to be a reliable leading economic indicator, and despite the volumes of negative news out there, investors would be well advised to heed the monthly chart patterns of the Dow Jones Financials index. It has formed a major bottom and historically such patterns precede significant upward moves before another major correction occurs (see Chart #2 below). Will this happen again or is it different this time? Who knows…
Credit risks still remain unquantified but the Ted Spread has been on a downward descent. The TED Spread is the difference between the 3 month T-bill and 3 month Libor (Eurodollar contract) and is used to measure credit risk amongst commercial banks. Quite simply, when the spread is narrowing, credit risk is decreasing, and when the spread widens, credit risk is increasing. Since the 4Q 2007 peak in the TED Spread, it appears the market is gradually getting a better handle on credit risks (see Chart #3 below).
Summary: The challenges confronting the U.S. and global capital markets are of epic proportions, but just as manic greed contributed to the real estate bubble and the related subprime credit debacle, extreme fear may be leading some bears to overlook that surrender of the bear market is inevitable and soon approaching. Hillbent’s advice is to stop shooting, lay down your arms, and prepare for the impending bull market.
Chart #1
Chart #2
Chart #3
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This article has 19 comments:
Main Entry: im·pend
1 a: to hover threateningly : menace b: to be about to occur <the impending Senate hearings>
2archaic : to hang suspended
I agree this is a good time to plan but to suggest a bull market is immanent is absurd one-track reductionism. And any investment moves should intend to capture a cycle low range with expectations of growth from 18 mos. to 3 yrs. out.
Moreover, with the Eurozone and EM economics slumping in the 2H this year, we will see the profits going south in technology, energy and industrial soon. Bull market? I am pretty much sure that we haven't even seen the ugliest part of this recession yet.
I can't wait to see what you are writing about three months from now...
That's an increase of 30% in three months, and things look to get worse before they get better. The number of banks on the list is the most visible thing to consumers, but the amount of assets held by those problem institutions is more troubling still. The total assets of institutions on the problem list tripled. That means some pretty big players are in the additions.
While the FDIC doesn't give out the names of troubled banks on its list for fear of hurting them even more, we do know that Indymac Bank which failed in July was on the list. That bank alone had assets of $32 billion, so by deduction that's almost certainly the largest single bank on the list.
For investors, of course, the prospect of bank closings should be scary. When a bank is taken over by the FDIC, all available assets are first used to repay depositors. If anything is left, once all the debts are paid, it is divvied up among shareholders. It's almost always a small part of the pre-closure value of the bank's shares. Usually the risk of a bank failure gets factored into the stock price over time. Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) are two examples right now. While both institutions still claim they will not need a bail out, some important industry analysts are saying otherwise. Consequently the stock prices of both have fallen tremendously in recent months.
If you're an investor looking at or holding shares in financial institutions, it's buyer beware. Look closely at the balance sheets. Look also at loss reserves, most of the difficulty these banks are facing stems from unrecoverable loans, if sufficient loss reserves are not already in place, then adjustments can turn a positive quarter into negative very quickly. Loans to businesses as well as consumer loans are seeing a default rates that are increasing at a tremendous clip, according to the report. Banks are also tightening restrictions on new loans.
While that's smart and would have prevented most of the current problems had those restrictions been in place long ago, it does mean less new business coming into the banks at a time when they need it most.
So we'll end this entry the way we began it. The FDIC Quarterly Banking Report is out and things are definitely going to get worse before they get better for the financial sector."
The financials are performing their ABC conditions after a nasty 5 wave down. They have another 5 wave down coming soon that will take them to new lows.
Your article expresses perfectly the sentimentality during wave corrections which we have been in since july 15th. Hopeful that a new bottom has set in.
How many times were the analysts telling us that in the crash in 2000 onward?
When this writer finally writes an article that states all hope is lost, then you know the bottom is in.
We obviously have a long way to go...
With regards to comments that the recession has yet to materialize, you are being hoodwinked by distorted GDP and CPI data. Take out the smoke and mirrors in those numbers and we have been in a recession for more than 2 years now (see Gov't Stats: Perfecting the Art of Mass Deception tradesystemguru.com/co... )
Thirdly, the pattern you highlight in red in Chart 3 is a bullish flag pattern, a good indication that the chart will breakout to the upside and that would be decidedly negative for stocks.
No point in going on. There are so many holes in your argument that it is a waste time pointing them out to you...
Only time will tell if these indicators are correct - or not.
What I do find EXTREMELY interesting in these emerging articles, is the vigor and numerous posts of those seeking to contradict any positive outcome with projections of a continued multi-year down trend is yet to come.
IMHO - it adds credence to your statement:
"but just as manic greed contributed to the real estate bubble and the related subprime credit debacle, extreme fear may be leading some bears to overlook that surrender of the bear market is inevitable and soon approaching."
The down side greed has reached a fevered pitch ..... must be time to start buying ...