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Tuesday, April 14, 2009

Will Be Travelling...

I will be travelling today. Meetings everywhere. I will post end of day.

I love how Retail Sales "Unexpectedly" Fell. So, now that the unemployment rate has gone parabolic and with such hints as falling same store sales at giants like Wal-mart whocouldanode that retail sales would fall? This is all so unexpected.

Oh, and deflation is here. Officially now. Surprise.

U.S. Retail Sales Unexpectedly Fell in March as Jobs Evaporated
U.S. Producer Prices Fell 1.2% in March; Core Rate Unchanged

Monday, April 13, 2009

Wells Fargo: Earnings Quality


FN: Some more color on the miraculous monster profit over at Wells Fargo (WFC) last week that so inspired the markets.

Wells Fargo May Need $50 Billion in Capital, KBW’s Cannon Says: “Wells Fargo & Co., the second- biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.

KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.”

FN: So, apparently WFC may need $50 billion more in capital. As of today’s close, WFC has a Market Cap of $82.89 billion. $25 billion would is 30% of $82 billion. Raising that much money in a secondary offering would be hugely dilutive and severely punish current shareholders. Raising another $25 billion to pay back TARP money early would be next to impossible.

“First-quarter net income rose 50 percent to about $3 billion, Wells Fargo said last week in announcing preliminary results that topped the most optimistic Wall Street estimates and sparked a 32 percent jump in the stock. The bank attributed the profit to a surge in mortgage originations and revenue from Wachovia Corp., acquired in December. Full results are scheduled for April 22.

“Details were scarce and we believe that much of the positive news in the preliminary results had to do with merger accounting, revised accounting standards and mortgage default moratoriums, rather than underlying trends,” wrote Cannon, who downgraded the shares to “underperform” from “market perform.” “We expect earnings and capital to be under pressure due to continued economic weakness.”

Wells Fargo raised its provision for loan losses by $4.6 billion in the quarter, below Cannon’s estimate of $5.4 billion. FBR Capital Markets analyst Paul Miller wrote after the announcement last week that he expected a $6.25 billion increase.”

FN: Basically accounting gimmicks and low loan loss provisions gave the earnings a good old fashioned pump. On top of that, default moratoriums (which have since expired) skewed the numbers a bit.

New bull market? Or rip your face off bear market rally?

“Net charge-offs were $3.3 billion in the quarter, compared with $2.8 billion in the previous period at Wells Fargo and $3.3 billion at Wachovia. The current numbers are artificially low because consumers received tax refunds and a there was a moratorium on some mortgage defaults, wrote Cannon, who predicts a “re-acceleration” of charge-offs in the second quarter.

The ability of Wells Fargo and 18 other U.S. banks to withstand further economic deterioration is being determined by the government’s stress tests, which will be completed by the end of April. Treasury Secretary Timothy Geithner expects that some lenders will require “large” amounts of capital.

While Wells Fargo is likely to pass the test, regulators may “push for higher capital levels,” wrote Credit Suisse analyst Moshe Orenbuch in New York, who initiated the shares with a “neutral” rating today.

“Given rising unemployment, continued home price declines and general macroeconomic headwinds, WFC’s consumer and commercial portfolios remain at risk for meaningfully higher credit losses over 2009 and 2010,” Orenbuch wrote.

Wells Fargo fell 36 cents, or 1.8 percent, to $19.25 at 2:22 p.m. on the New York Stock Exchange. It has dropped 35 percent this year. Wells Fargo trails only Bank of America Corp. in U.S. home lending.”

Goldman Apparently Walking the Market Up...

[ HT Mongoose ]

FN: That dirty pig Goldman Sachs (GS) is apparently walking the markets up… They seem to doing it very cheaply too.

The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan of Black Swans: “Following on the circumstantial evidence track, as Zero Hedge pointed out previously, over the past month, the Volume Weighted Average Price of the SPY index indicates that the bulk of the upswing has been done through low volume buying on the margin and from overnight gaps in afterhours market trading. The VWAP of the SPY through yesterday indicated that the real price of the S&P 500 would be roughly 60 points lower, or about 782, if the low volume marginal transactions had been netted out. And yet the market keeps on rising. This is an additional data point demonstrating that the equity market has reached a point where the transactions on the margin are all that matter as the core volume/liquidity providers slowly disappear one by one through ongoing deleveraging.

Unfortunately for them, this is not a sustainable condition.”

The full article is definitely worth a read.

Sunday, April 12, 2009

Bear Market Rally Defies Fundamentals


“Is this the real thing, or just another Bear Market rally? So far, we’ve had 4 runs of about 20% each.” –The Big Picture, Bear Market Rally?

FN: Even as the market moved higher, the Put / Call Ratio has started moving in favor of puts. When coming off extreme levels such as these, this can signal an intermediate turning point.

83.57% of stocks on the NYSE are now above their 50 day moving averages. This is a truly ridiculous level for a Bear market and has always resulted in significant pull backs.

Read the following very carefully… notice the ‘leaders’ of this rally.

Russell 2000 Rising 36% Flashes Warning for S&P Rally (Update1):The Russell 2000 Index’s record one-month gain is sending danger signals to investors who remember how similar rallies in U.S. stocks came to an end.

The gauge of companies with a median value of $301 million is beating the Standard & Poor’s 500 Index, where stocks have an average market value of $6.5 billion, by 9.8 percentage points. Gains in the Russell 2000 are being led by an 11-fold jump in Spansion Inc., a bankrupt chipmaker, and a sevenfold rise for Hayes Lemmerz International Inc., a wheel manufacturer that hasn’t had a profit since 2006.

While small-caps tend to lead the way out of bear markets, when they have outpaced larger stocks by this much, both indexes erased gains and fell, according to data compiled by Birinyi Associates Inc. Increased trading and ratios of advancing to falling stocks have also risen to levels that preceded declines, boosting investor concerns that the S&P 500’s 27 percent advance since March 9 will end the same way as the 24 percent rally that fizzled in January.

This move is too explosive to be sustainable,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $60 billion. “None of the structural underpinnings of the market have really changed. It’s going to be a multiyear healing process.”

Profit Slump

Bank losses approaching $1.3 trillion spurred the first simultaneous recessions in the U.S., Europe and Japan since World War II last year, pushing the benchmark gauge for U.S. equities down as much as 57 percent from its October 2007 record. Profits among S&P 500 companies have dropped for six straight quarters and are forecast to decline for three more, the longest streak since the Great Depression, according to data from S&P and estimates compiled by Bloomberg.

Mistaking a temporary jump for a sustained bull market can be costly. In 41 so-called bear market rallies since 1928 -- gains of more than 10 percent that are later wiped out -- equities fell an average 25 percent after peaking, according to Birinyi, the Westport, Connecticut-based money-management and research firm founded by Laszlo Birinyi.

Soros Fund Management LLC’s George Soros and BlackRock Inc.’s Dan Chamby also say investors should be wary of the S&P 500’s rise. The surge between March 9 and April 9 ranks as the steepest 23-day advance since 1933, according to data from Howard Silverblatt, an S&P analyst based in New York.

Steeper jumps for small-cap stocks one month into a rally are signs of indiscriminate buying and usually come before equities fall, said Cleve Rueckert, a Birinyi analyst. The Russell 2000’s 36 percent climb since March 9 is its steepest since the index began in 1979, according to Bloomberg data.

No Reason

“It’s unusual for a new cycle to start with such an abrupt gain,” Rueckert said. “Bear market rallies are broad. Everything goes up really sharp, really fast and not necessarily for a particular reason.”

None of the bull markets tracked by Birinyi included small- caps outperforming after a month by the rate they are now. On average, smaller stocks are tied with the S&P 500 at this stage of a lasting recovery, the data show.

Small-caps were beating larger stocks before the end of the advance in January. The Russell 2000 increased 34 percent from Nov. 20 to Jan. 6, a stretch in which the S&P 500 index added 24 percent. The S&P 500 fell to a 12-year low two months later.

We’re not convinced that this rally will be sustained,” Chamby, who helps run the $23.5 billion BlackRock Global Allocation Fund, said on April 7 in an interview from New York. “We’re defensively positioned, so we are underweight equities.”

2009 Losses

The S&P 500 added 1.7 percent last week, extending its rebound since March 9 to 27 percent. For 2009, the index is down 5.2 percent, compared with a 6.3 percent retreat for the Russell 2000. S&P 500 futures lost 0.7 percent today.

Unprecedented stimulus measures may mean history is no guide for handicapping stocks, because the government’s $12.8 trillion of spending to revive the economy will lift earnings and keep stocks from retesting their March lows, said John Wilson of Morgan Keegan & Co. in Memphis, Tennessee. President Barack Obama has proposed a $3.6 trillion budget blueprint that he says will bring tax relief for most working Americans while making investments in energy infrastructure and education.

“I don’t think just because we’ve had a sharp move in the small-caps that it means it’s a bear-market rally,” said Wilson, who helps oversee $120 billion as co-director of equity strategy. “I don’t think you can throw caution to the wind, but you can be cautiously optimistic.”

Six-Year Low

Just 58 companies in the Russell 2000 have dropped since the index reached a six-year low on March 9. Sunnyvale, California-based Spansion and Hayes Lemmerz in Northville, Michigan, led the rebound.

The balance of rising shares is another sign stocks may fall, Birinyi data show. From March 9 to April 9, companies on the New York Stock Exchange posted almost 17,000 more single-day advances than declines, a record compared with past equity market rallies. So-called contrarian investors argue that too widespread a recovery shows investors aren’t paying attention to fundamentals such as earnings and economic growth.

U.S. stocks posted the broadest increase since at least July 2004 on March 23, when 21 companies rose for each that fell on the NYSE, according to data compiled by Bloomberg.

“We’ve run pretty far, pretty fast,” said Bruce McCain, chief investment strategist at Cleveland-based Key Private Bank, which manages $22 billion. “We would be looking more for an indication of a market that claws its way off the bottom in somewhat slower moves.”

Normally Bullish

Another normally bullish sign that’s increasing investor concerns is the rise in trading volume, Birinyi’s data indicate. Since March 9, the number of shares traded on the NYSE has been about 23 percent higher than in the preceding 200 days. That compares with an average 13 percent climb during the first month of bull markets.

Companies in the S&P 500 may report a 38 percent decline in first-quarter earnings and those in the S&P SmallCap 600 will post a 46 percent slump, based on analysts’ estimates compiled by Bloomberg and New York-based Brown Brothers Harriman & Co. More than 30 S&P 500 companies and at least 90 in the Russell 2000 are scheduled to release results this week.

The American economy contracted at a 6.3 percent rate in the three months ending in December and is forecast to decline 5 percent in the first quarter and 1.9 percent in the next, based on a Bloomberg survey of economists.

“It’s a bear-market rally because we have not yet turned the economy around,” Soros, the billionaire hedge-fund manager who made money last year while most peers suffered losses, said in an April 6 Bloomberg Television interview in New York. “This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”

Bulls Return for the Third Time

“Using common sense you know what that general trend is. We’re in a recession and this is not the start of a bull market.” –Martin Marnick

FN: No matter how often you warn them, the lemmings will still go over the cliff. The largest real estate and credit bubbles ever burst simultaneously all over the world. These bubbles and the consequent trade imbalances took almost ten years to build. To think that a rally on low volume off oversold levels in equities somehow constitutes a new Bull market is ridiculous… especially as fundamentals continue to deteriorate.

Return of Stock Bulls Signals Time to Sell: Technical Analysis:Investors turned optimistic for the third time since the credit crisis started last year, gauges of sentiment among individual investors in the U.S. show, a pattern that Helmsman Global Trading says is a signal to sell.

The difference between the American Association of Individual Investors Bull Index and Bear Index surged to 5.6 as of April 2. When the reading rose to 11.5 in November and 13.6 in January it coincided with the end of “bear-market rallies” of at least 21 percent by the MSCI World Index.

What that’s going to show is that people always want to look at the glass as if it is half full,” said Martin Marnick, head of trading at Helmsman Global Trading Ltd. in Hong Kong. “Using common sense you know what that general trend is. We’re in a recession and this is not the start of a bull market.”

The spread, which has fluctuated between 63 and minus 54 in the past two decades, has climbed above 5 in only three periods since the collapse of Lehman Brothers Holdings Inc. in September. It retreated to minus 8.6 according to data released yesterday.

The AAII gauges are compiled from weekly polls and track whether U.S. individual investors believe the market will rise, fall, or remain unchanged in the next six months. A negative number in the bull-bear spread indicates pessimists outnumber optimists.

The reading fell to as low as negative 51 on March 5, a level not seen since October 1990, when the MSCI World was at the end of a 10-month bear market that erased 26 percent of its value. The MSCI benchmark dropped 59 percent from its October 2007 high to a 13-year low on March 9. It has since rallied 22 percent.

The Organization for Economic Cooperation and Development said on March 27 its 30 members are likely to see their economies contract by 4.2 percent this year.”