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| Daily Jurojin - Tuesday, April 21, 2009 |
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Tuesday, April 21, 2009 Last man standingAs we noted in Monday's Daily Jurojin before the market even opened, this week is likely to be marked by jitters ahead of next week's stress test results on the bigger U.S. banks. Monday turned out to be a free for all with bankers trading punches in the hope that the spotlight wouldn't end up catching them on the canvass.Bank of America's top-man, Ken Lewis is being chased by investors trying to oust him. He reckons that American unemployment won't even peak at 10% this year and painted a generally optimistic picture as the bank announced earnings. Given that the U.S. economy is already at 8.5% and that there are nine more months of data to be released, his observation looks way out of line with a deteriorating economy. Meanwhile the bank revealed that it had set aside 57% more reserves, or $13.4 billion for future loan losses compared to last year. In the first quarter BoA said that the amount it wrote off from loans gone bad more than doubled to $6.94 billion. It would set aside $8.2 billion for credit card losses compared to $4.3 billion one year ago, while provision for bad loans at its home-loan unit also just about doubled to $3.4 billion. The news was bleak enough to ensure that of the 18 analysts following its shares, 14 retained a 'sell' or equivalent rating. Citigroup last week announced an addition of $1.6 billion to its quarterly profits, but when Goldman Sach's analyst, Richard Ramsden dug deeper he uncovered a core 38 cent per share loss. Somewhere deep beneath the surface the bank took a large accounting benefit, given its status as a company in distress, and reported glowing trading gains from padding out margins available since fewer participants are willing to compete. Citigroup still reported higher loan delinquencies and credit-card writeoffs, but unlike BoA didn't set aside a larger loss provision. That's odd given the fact that unemployment continues to rise and house prices will remain on a downward trajectory. Investors remain wary of the stock, which saw losses limited to 3% after it tried to persuade preferred stock holders that a dividend would be just the tonic. Meanwhile JP Morgan Chase predicted that banks would need more government funding because they aren't fully disclosing losses on loans gone bad as the housing slump accelerates beyond its original direction. The banker said that banks haven't set aside nearly enough on loans that are likely to go sour. That's because the current accounting rules only require them to put their hands up for about $85 billion - the amount set aside as at the end of 2008. Already the estimated $1.4 trillion worth of toxic assets written down by the U.S. banking system has been increased at the IMF to $2.2 trillion thanks to ongoing economic weakness, which is sending the lending debacle spiraling out of control. Because the banks haven't been forced to show this yet, or worse still haven't realized precisely what they are on the hook for, JPM estimates a weaker outlook still. That all resulted in a nasty day for financials with an 11% decline in the financial select sector SPDR (Ticker: XLF). It's hard to envisage a better rest of the week on Wall Street with many investors realizing that a positive outcome from the stress tests is likely to be swallowed only by the gullible. As your reading this loyal subscribers to Jurojin Weekly are wading through this week's issue including our top recommendations on how to play this bloody mess in the futures market. The Supreme Council of the Secret Order of Jurojin |
