Blogs & Comment

Rally gone overboard?

Bull markets climb a wall of worry, they say. Thats the old rule of thumb that leads many investors to buy stocks when a few green shoots appear under the black clouds. The fact that stocks historically turn up several months ahead of time also provides reassurance.
But what a wall or worry it is this time. Did those buying really do their due diligence and check the fundamentals carefully? Or are they simply letting Mr. Market tell them its the time for climbing the wall of worry? Or worse, are they caught up in a buyers panic and motivated by the fear of being left behind?
These were the questions that came to mind when I found some more time to resume the mash-up of highlights from the stream of data/commentaryon the current/future state of the economy and financial markets. When you step back a bit and listen to some other voices besides Mr. Market’s, there seems to be a rather wide disconnect between the two.
What follows pertains to just the financial sector, which has been mainly responsible for the stock-market rally in the U.S. I hope to cover other aspects in subsequent posts.
Highlights from thedata/comments flow
Green shoots are appearing and we will be watching for more signals that will herald the economic recovery. For now, it is not self-sustaining economic growth yet. Stability in the financial sector, with clean balance sheets of banks and a working credit machine, will be necessary for self-sustaining economic growth. Northern Trust economists.
Some of the largest mortgage companies are stepping up foreclosures [they] had stopped foreclosing on borrowers as they waited for details of the Obama administration’s housing-rescue plan [and for other reasons] now, they have begun to determine which troubled borrowers to move through the foreclosure process . The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off. Wall Street Journal.
U.S. foreclosure activity was up 46 percent in March from a year earlier, hitting a record high as programs stunting the torrid pace of failing mortgages expired. RealtyTrac.
More than 2.1 million homes will be foreclosed in 2009, up from about 1.7 million in
Credit offered by the 21 largest banks receiving TARP funds fell 2.2% in February compared with the prior month. U.S. Treasury Department.
Like the other US banks that reported first-quarter earnings this week, Citigroup was desperate to appear as healthy as possible ahead of the Treasurys stress test results, which are now just weeks away . But Citi will have $80B of tangible equity versus assets of $2,000B that is still worryingly geared. LEX, Financial Times of London.
It does not help that many banks have not set aside enough reserves for credit losses –Wells Fargo holds an array of assets at rose-tinted values and may need another $25 billion in capital on top of the $25 billion it has already taken from the Treasury. Few banks hold their commercial-property portfolios anywhere close to 50-60 cents on the dollar. Economist magazine.
The banks will face more pressure because their legacy loans have not been marked to market losses on the banks loan portfolio are likely to rise to 3.5% by the end of 2010, which would exceed Depression Era losses the banks arent factoring those losses in yet. Mike Mayo banking analyst for Calyon Securities.
The banks will not see profits after the first quarter home prices will fall another 30%. banking analyst Meredith Whitney
Home prices will fall 22% to 27% from their January levels. Ronald Temple, a director of research at Lazard Asset Management.
The negative dynamics between the real and financial sides of the economy have created severe downside risks [financial markets remain highly stressed, making them an impediment to recovery] While we’ve seen some tentative signs of improvement in the economic data very recently, it’s still impossible to know how deep the contraction will ultimately be. Janet Yellen, president of the San Francisco Federal Reserve.
My latest estimates are $3.6-trillion in losses for loans and securities issued by U.S. institutions . It is said that the International Monetary Fund will announce a new estimate of $3.1-trillion for U.S. assets By this standard, many U.S. and foreign banks are effectively insolvent . Nouriel Roubini, Professor of economics at the Stern School of Business.
The Obama plan to fix the banking system is destined to fail The people who designed the plans are either in the pocket of the banks or theyre incompetent . TARP isnt large enough to recapitalize the banking system weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders. Nobel prize economist Joseph Sitglitz
More representative of the state of the banking system arguably is Capital One Financial, which reported late Wednesday a surge in credit-card losses in March, to 9.33% from 8.06% just a month earlier. Randall W. Forsyth in Barrons
Financial stocks leading this rally have run 26% above their 50-day averages — the widest gap in almost two decades. Kopin Tan in Barrons
More blows are coming. Banks worldwide have written down their assets by $1.1 trillion. The final tally is expected to be double that, or more. The pain is only now starting to spread through commercial property and commercial loans. As a result, the first-quarter reprieve will turn out to be a head fake, says Chris Whalen of Institutional Risk Analytics. Economist magazine.