Market internals remain bearish. The rush to cut portfolio risk remains intact. Here is a two-year chart of the S&P 500 (in red) and the iShares High-Yield Corporate Bond ETF (HYG):
The Return of Risk Aversion and the Market’s Next Move
June 17, 2010 By Leave a Comment
Forecasting Bank Earnings
June 4, 2010 By Leave a Comment
Foreclosure activity is crucial to the outlook for bank earnings. Mortgage losses will continue to be a growing problem for bank stocks in 2010.
Since the suspension of mark-to-market accounting, banks have gained much more control over timing their credit losses, but they cannot get away with completely ignoring them when the evidence is overwhelming that credit losses are real.
[Read more...]Put On Your Selling Shorts This Summer
May 24, 2010 By Leave a Comment
Weve seen an almost complete reversal of market momentum, with the deflation trade of late 2008 once again growing popular:
Lessons from the Market Plunge
May 7, 2010 By Leave a Comment
Yesterdays roller-coaster market, made it even more apparent that quant, or computerized, high-frequency trading exacerbates swings in the market.
Rather than supply cash to the market during panics, and supply stock inventory to the market during melt-ups, it appears that these funds do the opposite. Quant trading relies on the same garbage-in-garbage-out models that created such wonders as AAA-rated CDOs.
[Read more...]Inflation Up; Stocks Down
May 5, 2010 By Leave a Comment
Weve opened earnings season with a market reaction more erratic than usual. Some stocks got pounded after missing earnings estimates by a hair. Other stocks drifted upward, despite nosebleed valuations and unimpressive earnings.
Banks are making out like bandits…at least on paper. They simply post whatever earnings they feel like reporting, because loans and securities no longer have to be marked to market. So why not mark down bad loans at a glacial pace? Doesnt matter that they might be in non-performing status and arent producing cash flow. Some banks have even lowered their credit-loss provisions because they feel theyve adequately reserved for what will be the biggest credit loss cycle in history. Such banks may surprise to the downside next quarter if they re-accelerate their provisioning.
[Read more...]A Free Market in Chains
April 22, 2010 By Leave a Comment
If left to its own devices, a truly free market would have already corrected many of the imbalances of the late, great credit bubble. Instead, US policymakers at the Federal Reserve and the Treasury Department have been trying to re-inflate the credit bubble by pumping trillions of dollars of fresh credit and currency into the financial system. The Fed is still maintaining these Keynesian tactics, despite the increasing possibility that inflation and other adverse outcomes will result.
[Read more...]Emerging Market Inflation: Brace for Turbulence, Part II
April 8, 2010 By Leave a Comment
History shows that when the governments grow desperate to finance deficits, they get creative.
During WWII, the US government needed investors to buy an unprecedented amount of Treasury bonds. Commercial banks loaded up on Treasuries, which limited the amount of credit that could be granted to the private sector. It may have been the patriotic thing to do, but the real returns from war bonds were very poor. Napier said, Thats the type of society [the US and the UK] had to run to sustain our government debt. And Im suggesting to you that these are exactly the sorts of things we have to look out for in our future.
[Read more...]Examining Stock Market Valuations: Brace for Turbulence
April 7, 2010 By Leave a Comment
The last time that [America] had no government debt, you had a Scottish president. His name was Andrew Jackson. Not only did he pay off the national debt, he also abolished the central bank and tried to close down all the commercial banks.
CLSA Strategist (and Scotsman) Russell Napier, March 24 CFA Society speech
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Avoid Banks Stocks
Credit risk always seems to come out of nowhere. But usually it comes out of somewhere…like the dirty, little recesses of a bank's balance sheet – the places where bankers hide all their unrecognized losses.
Ever since the suspension of rigorous mark-to-market accounting rules one year ago, banks have gained the ability to “time? their credit losses. This development does not feel like progress. Banks now possess the ability to defer embedded credit losses for a very long time, in the hopes that a “typical? postwar rebound in house prices and employment comes to fruition. But that's not happening. In fact, housing and employment conditions are worsening. As a result, the US banking sector has been piling up an enormous stash of unrecognized credit losses.
[Read more...]