Archive for the ‘Uncategorized’ Category
Great News: More People Out of Work
Posted by Jody Eisenman | Filed under Uncategorized
The much anticipated unemployment number was released this morning. Unemployment rose to 9.6%. However, private payrolls rose, which signaled to some that the recession may be easing. If it is, I don’t see it. The financial sector continues to lay off people. Investment banking has slowed dramatically. In addition, the underemployment rate (which includes part timers who can’t find full time work and people who have given up searching) increased to 16.7% from 16.5%.
However, the stock futures have soared on the news, reason being that analysts were expecting a complete collapse. So, the bad news is really not that bad, which means its’ good. Did everyone understand that? Currently, the S and P is trading at around 1100 in the pre market. This may be a key level, as a strong move through it could signal a great third quarter. However, the trend this year has been choppy, so anything is possible going forward.
Happy Labor Day to all!
The Banks: Bove versus Whitney
Posted by Jody Eisenman | Filed under Uncategorized
After the worst August in 9 years, stocks exploded to the up side yesterday, staging a 255 point rally. The stock market continues to follow a familiar pattern. Just when things look truly awful, and it looks like we are falling off a cliff, the market rallies. On the other hand, several days of rallies lead people to become bullish again, and then the market starts its’ decline. These trading cycles have frustrated trend traders, as no real trend can take hold for any length of time. As is often the case, yesterdays’ rally was led by the financials, most of which have been declining since July. The question is what’s next for this group?
There are two analysts who are frequent guests on CNBC who could not be more diametrically opposed to each other. On the one hand, we have Dick Bove from Rochdale Securities. Bove has been a major bull on the banks for years, including the 2008 debacle. Not surprisingly, he continues to be bullish, even stating that several US banks could actually quadruple in value over the next few years. He also believes that parts of the Dodd-Frank bill will be repealed.
On the other hand, we have Meredith Whitney. Whitney achieved her primary claim to fame in October of 2007, where she wrote a very negative report on Citigroup while she was employed at Oppenheimer. She then went on to be a very prominent bear on the financials as they collapsed. Whitney went on to found her own firm last year. Currently, she is very bearish on the financials and housing as well. She believes that European Banks have enormous exposure due to the overvaluing of sovereign (read: country) debt, while US banks continue to suffer from housing loans. She believes that a great deal of housing losses have not been factored into the banks’ earnings. As such, she stated “Avoid financials at all costs”.
I stand more in the middle. I can’t argue with Whitney’s loan analysis. On the other hand, bank profits are soaring. For the second quarter, the roughly 7000 banks under FDIC had profits of $21.6BB, as compared to a $4.6BB loss for the sector a year ago. In addition, as long as the Federal Reserve continues its’ Zero Interest Rate Policy (also known as “ZIRP”), banks can borrow money at virtually nothing. Therefore, unless they continue to make crappy loans, they should continue to have a very high spread between their cost of funds and their return on loans. However, I continue to believe that the leverage factor (which I have discussed numerous times) is still a potentially dangerous scenario. I believe that this leverage should be gradually reduced over time. Any time you allow banks to leverage their equity at up 35-40 times you give them rope to hang themselves. Unfortunately, as we have seen, their problems can become everyone’s problem.
Was Bernanke’s Speech a Game Changer?
Posted by Jody Eisenman | Filed under Uncategorized
Fed Chairman Ben Bernanke spoke Friday about the state of the economy and the role of the Federal Reserve. His basic credo was that even though the economy still is lagging, not to worry! The Fed has the tools to carry us through. Such tools might include increased monetary easing. While the bond market dropped somewhat on this news, the stock market finally staged a rally. The Dow surged almost 165 points, having its’ best day in a month. Was this the impetus for the long awaited rally?
Maybe, but I doubt it. I’m still of the opinion that the market is going to churn around, much like it has for most of the year. Despite the rally, the Dow is still down about two and a half per cent for the year. In addition, I still don’t see many positive signs of economic growth. For example, Intel (The worlds’ biggest chip maker) warned Friday that demand was slackening, and that third quarter revenues were going to be below expectations. The Feds’ next move will hinge on this weeks’ key economic data, especially Fridays’ unemployment number. Even President Obama has conceded that the economy was not growing as fast as was needed, and that he had no “magic bullet” to change things. Sobering words indeed.
Meanwhile, the yield on the S and P is currently 2.6%. That doesn’t sound like much, but that’s actually greater than the yield on ten year treasuries. I would have thought that this would make stocks appear cheap vis a vis bonds. However, as long the economy continues to slump, investor sentiments continue to favor the safety of US treasuries. Personally, I don’t see the great benefit of lending my money to the United States for ten years at 2.5%. It will be interesting to see what happens going forward.
