Sunday, April 19, 2009

Why The Markets Are Rallying

Seven short weeks ago the markets were preparing for the nationalization of America’s four largest banks – Wells Fargo, Citigroup, JPMorgan and Bank of America. They were insolvent and everybody knew it (they still are any everybody knows it but the accountants).

Then the FASB (the rules agency in charge of determining accounting standards) changed the rules and presto – these banks are now “profitable”. They made it so banks could legally lie about the way they price the assets they hold. I am not bitter. I make a hell of a lot more money when stocks are going up than I do when they are going down – and make no mistake about it, these rules changes were designed to do one thing – increase stock and bond prices. The consequences of these changes will be felt later, when either through massive taxpayer losses or massive inflation.

Let’s review the recent earnings releases by some of the banks and the impact of these rules changes –

Citigroup“Trading Profits” went from a loss of -$6.8 billion in Q1 2008 to a gain of $3.8 billion in Q1 2009. This is a direct result of the marking up of the assets held in the trading account. They were “profitable” for the quarter.

JPMorgan“Fixed Income Markets revenue was a record $4.9 billion, compared with $466 million in the prior year.” That is mostly gains from the repricing of their Mortgage Bond portfolio. Their “Net Income” rose about $4.3 billion in the quarter. Guess where most of that came from?

Goldman Sachs
Because Goldman became a “Bank Holding Company”, they were forced to move their reporting period from a Fiscal Year to the Calendar Year. This allowed them to have a 4-month quarter. But to keep comparison periods equal, Goldman was able to take December 2008 and list it only as a footnote. They stuffed $1.6 billion in losses into this month and were able to post a “$1.8 billion Profit” for the quarter. Your government at work, folks…

http://norris.blogs.nytimes.com/2009/04/14/the-case-of-the-missing-month/

Wells Fargo
They preannounced a massive gain, but will not release earnings for another week or so, so nobody has a clue how they achieved these “earnings”.

Insurance Companies are now cooking the books the same way the banks are cooking their books.

Rules changes allowing REITS to extend financing terms from 3 to 5 years will soon be put in place to bail them out from a massive round of required refinancing in 2010-2012. This will save them from defaulting – for the time being.

Financial Earnings
What you need to realize is that the Financial Sector represents 35% of the Earnings of the S&P 500. So a huge increase in earnings from Financials will result in a major upwards revision in earnings for the S&P 500. Whether they are real or not is not the issue. The issue is that the S&P 500 will be repriced to reflect this increase in earnings.

The Greater Fool Theory
Welcome to Banana Republic accounting and a Banana Republic stock market. You will now have to make investment decisions based on bullsh*t numbers. Stocks and Bonds are now a game of hot potato – think Internet Stocks 1998 - 2000. With the Quant Hedge-Fund model now applying to the entire economy – buy what is going up, because it is going up and use as much leverage as you can to do so.

I don’t think that was the “change” Obama intended to bring to the economy. But then again, Goldman and its employees did donate almost $1 million to Obama…

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis1F4tOsmdZX1bmb-uoCgt_cLJy2SCks3e__zlaQaqxgydpxUG1Tp5osfziwBDi7xJ78LDgdoELJIJBjmHMtj9i3oKmR64raB8lWnxMHDiwC1xORm4g8Icd7K2DplSkvkBCKec4RCt-vhc/s1600-h/goldmanrecipients.jpg

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