Looking through the company’s earnings I see nothing that makes me think the crisis has really ended or that credit is even close to expanding or delinquencies are subsiding. They have a very complex balance sheet so picking it a part is not an easy task and who knows what they have in off balance sheet items, I am sure it is pretty ugly whatever is sitting in La-La land in the Caymans.
Here is what I see, lending is down across the board, except for foreign lending. Total commercial lending is $318,886 vs. $333,484 which is clearly down, but not horrible but not good either. On the consumer side it is not much better as we see $450,784 vs. $458,036 which, again, is down and shows the direction of lending. The number is much better than the YoY number, but that is not surprising. However, are these numbers indicative of the rapid recovery that we keep hearing about on CNBC? Not a chance.
The other side of the credit story is the build is reserves for credit losses which look not so bad in WFC’s case of only an additional $1B. This is on top of billions already and the firm has a total of $24B in total loan loss reserves, not a good side. Remember the Pick-a-pay loan? That is the reverse amortization loan Wachovia screwed people over with? Yeah, they are modifying those like crazy, some 900,000+ and counting, but we know those modifications fail within 90 days so look for more defaults in the near future.
Not only that, but total nonperforming assets for 3Q equaled $23.45B for WFC, and CNBC can’t figure out why the stock down ticked on the earnings. Not only that, but those damn Pick-a-pay loans keep coming up and there was a negative change in the balance on these garbage loans, a negative adjustment in the value of $18B in fact. Of course, this did not impact the earnings of WFC because Congress and the FASB allow the company to lie to you. There is also a section in the report where it shows another $18B in loans that are 90 days late, whether this is the same item or not is unclear, but it is likely that it is. Either way, this confirms that the credit quality of all banks across the country is deteriorating.
Would I own WFC? Not a freaking chance, not even with your money. They have $57B in reverse amortization mortgages on the books that they are working like mad to modify, but we know the modifying these things still fail. Not only is the firm keeping $57B in the loans on the books, but the average LTV is 105% and the actual total carrying value out of that $57B is $37B, unreal. We are also seeing WFC take $6.5B in commercial real estate losses, yup that other shoe that is dropping or that we are told is not dropping, but it is dropping. Now, the PCI or nonaccrual PCI data in the WFC earnings do not impact the earnings, but the negative adjustments show what is to come.
Like I said, the WFC balance sheet is incredibly complex and we do not know what is held off balance sheet. However, what is on there, IMHO, is not pretty and even though much has already been written down, it does not look like it is getting much better. In fact, much of the problem assets seem to be getting worse, from what I can see. Piecing together from what other big and small banks have reported, credit is extremely tight and getting tighter and the quality is deteriorating which means more losses to come.
I have been saying that we have to watch the regional banks to get a feel for what is going on in the real local American Economy. So far, I have been right and it has been ugly. Of course, I have seen some great accounting as well, I need to track down some of these firms as I think they can save me a bunch of money.
Anyhow, we have seen heavy credit losses and more money being set aside for further credit deterioration. Not only that, but all this talk about a recovery and banks are lending is simply not true. I have yet to see a real expansion in any lending to consumers, and barely any to business, in any of the balance sheets I have looked at. Clearly, Goldman Sachs is not really a bank, they are a hedge fund, so they do not lend money out and their earnings are irrelevant, but a Zions, Hudson City, Regions, Key Corp, or Wells Fargo they are relevant to the economy as they, kind of, produce things.
As I said, there is little loan growth in these banks and no loan or credit growth means trouble for the economy. Take that credit away and government giveaways and we have an economy is very serious trouble and a stock market severely overbought. It’s no secret that that I am a bear, hey a 60% run with zero fundamentals just doesn’t do it for me, sorry, but if you take away government transfers then we have an economy that is -5.5% GDP or so. Positive stocks do not represent a healthy economy and government spending has a negative multiplier effect as the money has to be repaid, with interest, through taxes at some point.
We would have had far better returns by cutting taxes, but hey why rely on history when we have the myth of the New Deal on our side. Let’s not forget the last government report admitting that it cost us $70K plus to save 30K jobs thanks to the stimulus. I know, the stimulus will not kick in until 2010, that is a load of BS as most of the stimulus is pork barrel projects such as the monorail between So. California and Vegas along with other corrupt political endeavors. If the stimulus was working we would not have lost 53K government jobs last month, end of story and argument.
Not to mention that the primary goal of all of this, stimulus and Fed efforts, was to get banks to lend again and consumers to spend, both efforts failed because neither want to lend nor do they want to spend. This explains why banks bought some $1T in treasuries and why consumers are shedding records amount of debt. Sure banks are lending to each other again, great, but not to people who actually need the money which is the problem.
This might explain why regional banks are not loaning any money to consumers, but it does not explain why small business, who are desperate for capital, are not getting loans. This is a serious problem that needs to be addressed sooner rather than latter because if small businesses fail at any faster of a rate than they are failing now unemployment will climb faster than this bear predicts. If the regional’s keep coming in with weak earnings like we have seen you would be nuts to commit new money to this market. Actually, you would be nuts not to take money out of the market.
By the time we have a 60% rally, according to Dave Rosenberg, we are in year 3 of economic expansion and creating jobs, not losing some 2 million jobs. Never in the history of any recession have we ever had a 60% rally from the lows in 6 months while still losing jobs and experiencing poor economic numbers, never. The market has priced in perfection in GDP growth, some 5% positive growth, and $83 per share on the S&P. I highly doubt that is going to happen, if you think that is going to happen, then go nuts on the long side. In fact, maybe you should lever up on the 2x ultra bull ETF’s. I will take the other side of that trade as history is on my side and there is no new paradigm and every time someone makes the claim that there is a new paradigm, new economy, or new global liquidity it has always blown up in that certain someone’s face and the old timer, i.e. me, walks away right. The only variable is how much time there is before my prediction comes to fruition.
P.S. – I am currently Long SPY March 2010 90 puts, June 2010 puts and am opening a SDS long position.
Some mighty fine accounting going on with these earnings because I cannot find net earnings of $2.18B. Granted, I am not and never have been a great bank analyst, but piecing together their balance sheet is a piece of work. It was also funny to see Becky Quick literally, and I quote, “blah, blah, blah” their earnings announcement this AM. It looks like they hit their number, but at a pretty significant cost to the FDIC, as they used proceeds from the agency to reduce $4.1B worth of BB&T’s borrowing costs.
The bank also used a lot of “Goodwill” to the tune of $690M and core deposit intangibles of $176M, which are legit, but you can draw your own conclusions as I discount that type of behavior. Of course, credit was the biggest thing that stuck out on their balance sheet which explains why the blah, blah, blah occurred because there were major issues with loans going on. Here is what BB&T said in their press release about credit, this is soft peddled to:
“Early stage delinquencies and charge-offs stable; nonperforming assets increase
Nonperforming assets as a percentage of total assets increased to 2.48% at Sept. 30 (or 2.52% excluding covered loans and foreclosed assets), compared with 2.19% at June 30. Annualized net charge-offs were 1.71% of average loans and leases for the third quarter of 2009 (or 1.79% excluding covered loans), a decrease from 1.81% in the second quarter. Early indicators of problem loans were largely stable compared with the second quarter.
The provision for credit losses totaled $709 million in the third quarter, an increase of $345 million compared with the same quarter last year, and exceeded net charge-offs by $263 million. The higher provision increased the allowance for loan and lease losses as a percentage of loans held for investment to 2.29% at Sept. 30 (or 2.49% excluding covered loans), compared with 2.19% at June 30. The increases in nonperforming assets and the provision for credit losses were driven by continued deterioration in housing-related credits. The largest concentration of housing-related credit issues continues to be in Atlanta, Florida and metro Washington, D.C.”
Notice the use of stable to describe a decrease of.02%, but nothing to describe the near 25% rise in nonperforming assets, or foreclosures and leases? Not exactly a sign of prosperity in my book. That is a huge increase quarter-over-quarter in a “recovering” economy. The firm also allocated another $1.1B to further credit losses, which tells you where they think the economy is headed.
So, credit stinks right now, big surprise. We know that banks are said to be loaning money right? Not according to this earnings statement. I take that back, they are marginally lending to commercial, selected mortgages, but that is it. Total lending improved from -1.8% to positive .3% with the vast majority of the being commercial leases which went from –2.9% to +4.5%. Other than that there is nothing special, especially on the consumer side which is decisively negative.
The regional bank earnings will give you a look at the real economy minus the government intervention and the smaller the bank, the better the view. I wouldn’t call this report stellar, but I am a bear so I look for bad news. Overall, I would say it was more positive than I would have guessed, but overall the credit picture is horrible and we see some great accounting work here. Come on, goodwill, unreal, but traders aren’t buying it either. So maybe I hit it on the head, who knows. Do your own homework, but if we have more of this in store, which I am sure we do, I am doing all in short.
According to the group’s voodoo economics, or survey data, 80% of their group declares that the economy is growing again. However, I beg to differ since whenever the majority of economists agree on anything they are typically wrong. Case and point, 2002 and several other times all throughout history, not to mention that the vast majority of economists CNBC and the major media outlets parade have this recession confused with the typical inventory recession, which this is not. This is a credit collapse recession, not the typical recession that we have experienced most times all throughout our history.
In fact, the closest example I can draw upon for a correlation to what we are going through is the Great Depression. During other recessionary periods we have not suffered the same symptoms that we have today and anyone who claims we have is simply not looking at the facts. During the 2000-2003 recession did credit collapse along with major banks and investment banks? No. How about in the early 1990’s? Kind of, but that was limited to smaller, much smaller savings and loans and we still did not see the sheer size of institutions fail like we have over the past 2 years. In fact, the credit contraction is astounding if we examine this period to the early 1990’s and nullifies any real comparison.
Other than that period we literally have to go back to the 19030’s for anything close to what have seen in the markets or the banking industry. It was/is that severe and the global impact that profound. It is also vastly different from the consumer prospective because the consumer is so leveraged compared to the 1930’s, now we have credit cards, mortgages of all flavors and consumer debt like we have never seen. Back in the 1930’s consumer debt was limited to the wealthy or upper middle class, mortgages were much different than they are today and HELOC or home equity loans were basically non-existent back then. All of these newer things makes today’s problems actually much worse than the problems of 80 years ago. Not to mention the derivative dangers, according to some experts these products basically guarantees the worlds GDP almost twice over.
How these experts, and I use that term loosely, determine that the recession is over with consumer credit contracting at a record pace, home prices contracting, government stimulus supporting GDP, banks still on the government life support system, the suspension of mark-to-market still hiding major losses and a host of other painfully obvious items indicating there is much more pain to come is beyond me. We know that the market has gone nowhere in real returns when we look at it priced in gold or subtract the dollars losses from the S&P’s return’s, but then again the market is not the economy and should never be confused with the economy.
I think that is the disconnect that economists have as they view the market as the indicator of recovery. If the market is the great forecaster that everyone thinks it is and truly looks 6 to 9 months out then why in 2007 did it hit all-time highs? In fact, stocks are horrible indicators of the economy and history is on my side on this one. See 2002 when the ISM gave a false impression of a recovery and stocks rallied only to hit new lows a few months later, the same thing happened several times throughout history. Before the 87 crash, during the 73-74 decline, in the 1930’s there were spectacular rallies. The Nikkei has had 420,000 total point rallies during the 1990’s, the so-called “lost decade”, some of which we 60% plus rallies. Many of these events were correlated with economic recoveries when, in fact, they were technical events and had nothing to do with economics.
Rising stock markets are not always a measure of economic stability or recovery. In many cases it is simply technical’s or, in our case, HAL9000 buying, since volume is at an all-time low and fund flows suggest it is not the retail investor. This is a traders market and only a fool would buy to own this market. I am not even sure I would rent this market since we had weak volume today and the market could not even hold a 60 point rally with the second string traders in today. The economic data is weak, bank earnings are probably going to be mixed and we know commercial real estate is collapsing, $22B in defaults in August of 09 versus $3B in August of 08 come on that’s a problem.
I may have missed a few points, 60 on the S&P to be exact, but I have done OK this year. Not to mention I bought silver at $9, gold at $880, platinum at $900, and palladium at $225. I don’t do everything right, but I realized I could not fight the liquidity bubble and I do know that this same liquidity bubble will implode eventually taking the US dollar along with it.
JP Morgan released earnings this morning and as expected they were good. However, if they did not have their brokerage division they would have suffered with the rest of the banking industry. The fees generated by investment banking and trading had a very large role to play in the firm beating expectations and delivering the $.28 per share profit.
Defaults on loans, credit cards and mortgages continued to rise and were “offset by investment banking” according to the firm. Of course, getting rid of mark-to-market was also more than likely a reason for the strong showing. The earnings are good news, but you would have to be a fool to think they were not going to at least meet if not beat expectations.
I am sure Bank of America will also roll in with good earnings and Citi, well they will probably suck.
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