Traderbill's Financial Markets Weblog

But if you combine the two days gains (+147 and +118) it only cancels the one day 239 point loss on Monday! …still -3.1% since yearend, but better than the -5.1% level on Monday. But, remember that by 12/31 we were already in decline and by Monday we were -7.1% just from 12/26! Worse yet, since the Dow was up just 6.4% (but 8.9% with reinvested dividends) for all of 2007, we had about obliterated those gains. Furthermore, TB has frequently commented on the Dow Transports which peaked way back on July 18 (which is almost exactly one year from when the rally began, and on Monday wiped out the entire cycle gains, taking out the 8/10/06 cycle low!), and then again on Dec 10 and is down 12.8% just since then. For all of 2006 the Transports returned just 0.3% (1.4% with reinvested dividends) and since the July 19 high is down 21.3%…since then we have had two lower lows and highs and just established the third low (Transports never confirmed the last stage of the Dow rally!), and are -6.5% since 12/31 thru yesterday, -9.3% on Mondays close, so if we fail again Dow Theorists will have a ball…for the record the venerable Dow also just requires another fail to confirm a bear market…forget the percentages they keep yappin’ about. Of course, rising energy prices have been a big factor in the Transports but do you think that will change soon?…do you think freight volumes and passenger loads will gain or slow? What always amazes TB is the ability of the strategists to use historical data when it is to their advantage and throw out all to the contrary…and Dow Theory is very effective over longer cycles. So this will be the third strike and TB believes we will see it…why not when there is so little transparency on the bad loans and derivatives. 

The Financial Sector is a case in point as it rallied 1.4% yesterday…on the BofA/Countrywide story, but combined with Tuesday’s 1% gain it is still just slightly positive over the past 3 days and you all know how badly it has performed since August…still over 25% of the S&P 500 too!

Now let’s look at that BofA/Countrywide deal…officially BOA is now buying CFC for $4 billion…that is on top of the $2 billion they injected into CFC late last year (TB mistakenly wrote $5 billion yesterday but also had predicted then that BofA would own it by yearend…pretty close!). Now this is funny: Just a week ago BofA said they would make no more acquisitions for a while…the same as they said before buying Fleet and then again after…and they were going to focus on customer satisfaction. Now it looks like they are countering investors dissatisfaction since they stood to lose the $2 billion…are they now throwing double the good money after bad? The storyline is that it will be revenue neutral in 2008 and add to revenues by 2011…does this make you want to invest in BofA stock…for the long run? Decades ago TB erred when he thought Wells buy of Crocker was a bad move but it was revenue additive the very next year…but what did they get?…a retail bank got a commercial bank, something Wells had been trying to do for years unsuccessfully…TB had that straight from the CFO, and also from the former CFO at Crocker that they simply had a mismatch of assets and liabilities due to the CEO who overrode the CFO on that policy after they had spent years trying to correct the problem and finally succeeded. See the difference? Crocker was a good bank poorly managed. CFC is a rats nest of bad loans. Also, BofA is largely bricks and mortar…as is Countrywide…think of the leases they will have to write off…AND the bad loans are going to keep growing. To TB this is a bad buyout done merely to save an embarrassing $2 billion dollar loss…in less than three months…but it is making Angelo Mozillo even richer…can you believe this?

Now there is a story that JPMorganChase is looking to acquire Washington Mutual. True there will be problems there but JPM doesn’t have a huge branch system and WAMU provides an entire new territory, not just loan originations as Countrywide provides BOA. A bit of history…Chase was always a volatile bank…then they acquired the stronger Chemical Bank which disappointed a lot of folks…then they merged with JPMorgan…the strongest and most profitable bank in the country. TB believes old JP would have rolled over in his grave on that one. But what made it for Chase was credit cards!

JPM proudly declared no CDS exposure…which is true…but  …they have hundreds of billions of derivative exposure as counterparty which has not become a problem yet but will as no one knows who holds the risk. If your counterparty defaults your hedge just evaporated…and in a bankruptcy, judges have the right to ‘lift’ the profitable leg of a hedge and make the other counterparty a general creditor…

Watch BAC and JPM closely today for signs of how this is being viewed. CIT, a retail lender, sees big losses…including student loans. Also note the warning yesterday that credit card losses and delinquencies are rapidly escalating…it is also interesting that Bernanke said that foreclosures are rapidly rising even though the data showed a slowdown…but with rising delinquencies…we are nowhere near the bottom…there is seldom just one cockroach!

As for Gentle Ben, let’s look at what happened. Not only did he give us a virtual playbook of what the Fed is thinking…what is he thinking???…but his speech leaked out even before he started to speak. That is why the market rose sharply then declined as they thought about what he said. Still they were convinced that meant they would ease sharply…was the failure of the BOE and ECB to ease yesterday in coordination to reduce pressure on the Fed? As much as TB thinks Greenspan caused both bubbles, his opaque statements allowed the Fed to do things that shocked the market…not so with Ben and that will be his downfall! Transparency is a very good thing…the most important thing…for a financial institution but a very bad thing for a central bank.What happens when they have to change course again?

He discussed at length the subprime borrower program…but sounded less sanguine than Paulson who is sounding less sanguine too. These guys have more information than anyone on Wall Street and they are concerned? Is this a reason to be bullish on stocks? What he failed to mention is even though this is all a voluntary program, the loan originators, now servicers only, are powerless to alter the terms of the loan, or face lawsuits…and as TB has said before the lawsuits are already beginning to fly. Stay tuned.

As for the economy we just learned that the trade deficit unexpectedly widened…and also that China will no longer be a source of deflating import costs…this further pressures them to revalue their currency and will add to the risks of stagflation…remember that is real growth increasing at a lower rate than the inflation rate and a relatively high rate of unemployment…we just hit 5%…and that is excluding discouraged workers who have dropped out of the workforce and remember the high percentage of those employed part time for economic reasons…watch out for the benchmark revisions to employment, as the birth/death of small businesses created more jobs than the entire number of jobs that were created last year…in this environment do you think businesses…especially financial ones will be hiring? Do you think BofA will cut a huge number of jobs at Countrywide with 60,000 employees?

Closing on a brighter side…somewhat…Merrill according to the NY Times is taking another $15 billion writedown…Thane is essentially saying that all those CDS securities are worthless  …which they may well be. This is a good first step, but before you buy remember those asset ‘fire sales’ the new CEO has been doing…selling off good businesses to raise capital. Where will the replacement revenues come from? TB has asked this before and while he lauds this move which should spur others to come clean (except the banks who cannot writedown loans on expectations, only actual losses…yep, that archaic loan loss reserve again that allowed them to keep drawing down the loan loss reserves thru the second quarter even though they knew delinquencies are rising…that means you have to discount those earnings in calculating the expected P/E ratio, right? So let’s see how this all plays out today for a clue to the future.