Ben Bernanke’s testimony before congress today included this:
We continue to expect economic activity to bottom out, then to turn up later this year. Key elements of this forecast are our assessments that the housing market is beginning to stabilize and that the sharp inventory liquidation that has been in progress will slow over the next few quarters. Final demand should also be supported by fiscal and monetary stimulus. An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment.
Contrary to popular belief, equity prices are not an indicator of a “repaired” or healing financial system. Many point to reductions in Libor or to residential mortgage rates as indications that the financial system is healing, but as Brian Pretti at Contraryinvestor.com makes abundantly clear, these so called indicators all appear to be healing due to continuous, unrelenting FED intervention. (ht Zero Hedge) IF the FED stops their intervention for even a brief period in these credit markets, the market reverts immediately back to crisis mode. The FED has no exit strategy! The only credit market without significant FED intervention is the corporate bond market where it can be seen that risk spreads are at all time highs. These spreads will likely rise even further as it becomes apparent that if the obligor firm is one which will be allowed to file for bankruptcy, the bondholders need an addtional risk premium to compensate for the Chrysler/Lehman/administration going concern bankruptcy shenanigan.
Satyajit Das writes in RGE to review the recent history of the banking crisis and attempts to mitigate it, concluding:
“Banks have gone from catastrophic to just awful. By most standards, that condition does not constitute a necessary and sufficient condition for a recovery in the global economy.”
We are still not sure whether “awful” is better or worse than “catastrophic”
According to the WSJ, the sacrificial lambs will include B of A, Citi and a few regionals:
Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital based on early results of the government’s so-called stress tests of lenders, according to people familiar with the situation.
Industry analysts and investors predict that some regional banks, especially those with big portfolios of commercial real-estate loans, likely fared poorly on the stress tests. Analysts consider Regions Financial Corp., Fifth Third Bancorp and Wells Fargo & Co. to be among the leading contenders for more capital.
No way could GS or JPM need capital, not with crony Geithner at the helm…and… B of A and Citi have not finished squirming out of it yet…
The IMF’s recent report on Global Financial Stability:
“Without a thorough cleansing of banks’ balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks’ problems will continue to exert downward pressure on economic activity. Though subject to a number of assumptions, ourbest estimate of writedowns on U.S.-originated assets to be suffered by all holders since the outbreakof the crisis until 2010 has increased from $2.2 trillion in the January 2009 Global Financial Stability Report (GFSR) Update to $2.7 trillion, largely as a result of the worsening base-case scenario for economic growth. In this GFSR, estimates for write downs have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $4 trillion, about two thirds of which would be incurred by banks.”
Simon Johnson writes in Economix for the NYT that with the FDIC having unlimited drawing power from the FED in case of emergency and also with online banking, a depression era, consumer-type run on a bank in which people lined up to withdraw their money is no longer likely. However, a new kind of run where investors run from a bank’s equity and perhaps debt securities is a very real possibility.
Mike Mayo formerly with Deutsche Bank, now with CLSA’s Calyon Securities, has rated 11 US banks at sell or underperform, according to CNBC and Bloomberg. Bloomberg says bank futures are down this morning on the news:
“U.S. stock futures fell as analyst Mike Mayo said bank loan losses will exceed levels in the Great Depression… . Wells Fargo & Co. and JPMorgan Chase & Co. slid more than 1.4 percent after Calyon Securities’ Mayo gave an “underweight” rating to banks and said new government actions to shore up the financial system may not help as much as expected.”
The XLF financial sector ETF is trading in pre-market down about 2.5%. All this makes us wonder how the government’s PPT will play the market today.
So…after Pandit and other bank executives blatantly manipulated their stock price by commenting about how they “made money” in January and February, now they start backpeddling. Here’s a sheepish Jamie Dimon of JP Morgan with Erin Burnett (about minute 6:40) on CNBC after the Bank Oligopoly’s meeting with the president to plan future cheer leading activities:
On Wednesday FT points out that:
“Amid the general euphoria over Tim Geithner’s plan to tackle toxic assets there is one note of caution: while bank stocks have rallied strongly on the plan, the underlying toxic assets have not.
…the liquidity risk premium – the price discount imposed by difficulty obtaining financing – in these Âmarkets may not be as big as policymakers hope, implying that prices may not rise very much when government financing comes on stream, leaving banks with still large capital holes.”
But, if the the fix is in, then the PIMCO’s and Blackrocks, while appearing to be studiously analyzing the underlying assets, really plan to pay whatever price the banks ask. Then, while they will lose their small equity investment in the bank assets as parts of them eventually default, they recover more than enough to profit from the CDS’s they purchase “as insurance”. Meanwhile, taxpayer money has been given to bank stockholders…but this is another issue. See the Giethner plan explained at FT.
Even so, Roubini is right: if the bank is, at the time of these transactions, insolvent, then turning assets to cash at book value does not change this fact and these pricing activities may make it more obvious. See the previous video of Roubini.
Mark Hulbert, at MarketWatch has an excellent piece out on the nature of the rally we are seeing right now. His idea is that this rally is so violent that it is probably not a new bull. Below are a couple of pastes, but read the whole peice here.
According to them, bear market rallies are almost by their very nature powerful and impressive. If we were to endow the bear market with intent, we would say that the very purpose of a rally is to draw as many gullible investors back into the market before the next leg down commences.
It turns out that the recent rally has been markedly more powerful than the average beginning of prior bull markets. Over the last two weeks, for example, the Dow has gained 18.8%. The Dow’s average gain over the first two weeks of past bull markets, in contrast, has been 8.4%, or less than half as much.
We want to stay clear of traps, yet, bull or bear rally, there’s a profit to be made in all this volatility.
If you can keep your head when all about you suckers are buying bank stocks based on smoke the Dimon’s and Pandit’s blow…
If you can watch Tangible Common Equity when all about you suckers accept the Tier 1 Capital fantasy that FASB wants to allow…
If you can focus on Comprehensive Income when all about you suckers fall for whatever the bank wants to report for Net Income…
Then, while all about you suckers are asking for bailouts from FED, Treasury or SIPC, you’ll be rich, my son, and then some.
copyright J.D. Swampfox, March 20, 2009
