Illusory Markets Create Confidence
Rising rates… Government bond yields are on the rise, offsetting much of the narrowing in mortgage and investment grade corporate (though not high yield) spreads.
Mounting Layoffs… The corporate response to declining revenues, i.e. savage headcount reduction, will lead to further reduction in demand and yet weaker sales.
Last week’s employment report evidenced that average hourly earnings rose at their slowest monthly pace in eight years.
Excluding government transfers, U.S. personal income is falling on a year-on-year basis for the first time in at least 50 years.
Consumer Spending… Smith Travel Research reported that U.S. hotel occupancy in April 2009 was down 11%-13% from April 2008.
The drop in occupancy combined with lower room rates resulted in a 19%-21% drop in RevPAR (Revenue Per Available Room.)
Economy hotels, with a 14%-16% drop in RevPAR, held up better than higher-end formats.
Earning through Accounting… with new accounting flexibility granted under the Financial Accounting Standards Board (FASB) rule 157…
it seems likely that many of the larger banks being evaluated by the government will be viewed as able to ‘earn their way’ back to respectable capital levels.
Some regional banks with heavy exposures to commercial real estate loans may be pressed to bolster their capital positions in the months ahead.
Who’s stressing??? Bank of America has the biggest shortfall, at $34 billion.
Citigroup’s requirement for deeper reserves to offset potential losses over the coming two years is about $5 billion.
Wells Fargo requires about $15 billion, while GMAC’s need is $11.5 billion.
All told the nations 19 largest banks will need over $74 billion to “stay afloat” under stressful conditions.
All of these banks will raise capital through stock sales, diluting the existing shares further, the markets applauded this great news for the existing shareholders.
On life support… JPMorgan Chase owes about $25 billion to TARP and $37 billion to the bond-guarantee plan...
and Bank of America with $45 billion of TARP funds and almost $42 billion of government- sponsored debt.
Zombie Banks Reporting Profits… Q1 results for Bank of America and Wells Fargo topped Wall Street expectations...
56% of financials that have reported have either been in line with or ahead of forecasts. But what’s the real story??
Sillybank… Citibank reported Q1 net income of $1.6 billion, after a loss of $5.11 billion in the period a year earlier.
The results were also helped by an accounting adjustment that allowed the bank to post a one-off gain of $2.5 billion on its derivative positions.
It could have been worse? A $9.9 billion Q1 net loss, pushed Freddie Mac’s net worth below zero for the third straight time.
Fortunately, Freddie was able to partially offset $7.1 billion in security impairments with $3.8 billion in net mark-to-market gains on its derivative portfolio.
The Name is Bond… #1 bond insurer MBIA reported Q1 net profit of $696.7 million, compared with a loss of $2.4 billion in Q4.
MBIA said its results were boosted by a $1.6 billion unrealized gain on credit-default swaps.
The gain mainly reflected the opposite accounting result of the expenses banks must recognize in earnings when they believe MBIA may not pay out on guarantees.
The quarterly results would have been $4.2 billion weaker without that effect, according to the filing.
Making money the old fashioned way, through accounting… from Wells Fargo’s quarterly report:
“The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008.”
The bulk of the improvement was due to the early adoption of FAS FSP 157-4, moderating the need to use excessively distressed prices in valuing securities in illiquid markets as Wells had done in prior periods.
Netting a $4.4 billion benefit form the rule change, given that the bank only made a net profit of $3.05 billion, that more than explains the whole thing.
The Nattering One muses… with the wave of a hand and the use of an accounting magic wand... POOF!
You are profitable again! And maybe no one will pay attention to the ugly details hidden in the fine print?
The current rate at which unemployment is rising may prove the adverse bank system stress test scenario not to be stringent enough.
The better than expected quarterly results being reported aren’t sustainable as the surprises are coming entirely from…
creative book cooking (legally reporting losses & write downs as gains) one-off gains and watering down mark-to-market rules to hide losses...
leading to a misconception of profitability and improved credit quality, while credit losses continue to mount.
This dead cat bounce could gain more legs if institutional buyers capitulate and follow what looks to primarily be a short-covering relief rally.
In the long run, the truth will eventually come from the quarterly numbers, when shareholders and the public realize this, another mass of selling will ensue.
Mounting Layoffs… The corporate response to declining revenues, i.e. savage headcount reduction, will lead to further reduction in demand and yet weaker sales.
Last week’s employment report evidenced that average hourly earnings rose at their slowest monthly pace in eight years.
Excluding government transfers, U.S. personal income is falling on a year-on-year basis for the first time in at least 50 years.
Consumer Spending… Smith Travel Research reported that U.S. hotel occupancy in April 2009 was down 11%-13% from April 2008.
The drop in occupancy combined with lower room rates resulted in a 19%-21% drop in RevPAR (Revenue Per Available Room.)
Economy hotels, with a 14%-16% drop in RevPAR, held up better than higher-end formats.
Earning through Accounting… with new accounting flexibility granted under the Financial Accounting Standards Board (FASB) rule 157…
it seems likely that many of the larger banks being evaluated by the government will be viewed as able to ‘earn their way’ back to respectable capital levels.
Some regional banks with heavy exposures to commercial real estate loans may be pressed to bolster their capital positions in the months ahead.
Who’s stressing??? Bank of America has the biggest shortfall, at $34 billion.
Citigroup’s requirement for deeper reserves to offset potential losses over the coming two years is about $5 billion.
Wells Fargo requires about $15 billion, while GMAC’s need is $11.5 billion.
All told the nations 19 largest banks will need over $74 billion to “stay afloat” under stressful conditions.
All of these banks will raise capital through stock sales, diluting the existing shares further, the markets applauded this great news for the existing shareholders.
On life support… JPMorgan Chase owes about $25 billion to TARP and $37 billion to the bond-guarantee plan...
and Bank of America with $45 billion of TARP funds and almost $42 billion of government- sponsored debt.
Zombie Banks Reporting Profits… Q1 results for Bank of America and Wells Fargo topped Wall Street expectations...
56% of financials that have reported have either been in line with or ahead of forecasts. But what’s the real story??
Sillybank… Citibank reported Q1 net income of $1.6 billion, after a loss of $5.11 billion in the period a year earlier.
The results were also helped by an accounting adjustment that allowed the bank to post a one-off gain of $2.5 billion on its derivative positions.
It could have been worse? A $9.9 billion Q1 net loss, pushed Freddie Mac’s net worth below zero for the third straight time.
Fortunately, Freddie was able to partially offset $7.1 billion in security impairments with $3.8 billion in net mark-to-market gains on its derivative portfolio.
The Name is Bond… #1 bond insurer MBIA reported Q1 net profit of $696.7 million, compared with a loss of $2.4 billion in Q4.
MBIA said its results were boosted by a $1.6 billion unrealized gain on credit-default swaps.
The gain mainly reflected the opposite accounting result of the expenses banks must recognize in earnings when they believe MBIA may not pay out on guarantees.
The quarterly results would have been $4.2 billion weaker without that effect, according to the filing.
Making money the old fashioned way, through accounting… from Wells Fargo’s quarterly report:
“The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008.”
The bulk of the improvement was due to the early adoption of FAS FSP 157-4, moderating the need to use excessively distressed prices in valuing securities in illiquid markets as Wells had done in prior periods.
Netting a $4.4 billion benefit form the rule change, given that the bank only made a net profit of $3.05 billion, that more than explains the whole thing.
The Nattering One muses… with the wave of a hand and the use of an accounting magic wand... POOF!
You are profitable again! And maybe no one will pay attention to the ugly details hidden in the fine print?
The current rate at which unemployment is rising may prove the adverse bank system stress test scenario not to be stringent enough.
The better than expected quarterly results being reported aren’t sustainable as the surprises are coming entirely from…
creative book cooking (legally reporting losses & write downs as gains) one-off gains and watering down mark-to-market rules to hide losses...
leading to a misconception of profitability and improved credit quality, while credit losses continue to mount.
This dead cat bounce could gain more legs if institutional buyers capitulate and follow what looks to primarily be a short-covering relief rally.
In the long run, the truth will eventually come from the quarterly numbers, when shareholders and the public realize this, another mass of selling will ensue.
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