Banks May Have Peaked, Part 2

I mentioned this yesterday, and lo and behold I get more confirmation today. BofA announces a loss of over $2B:

The results, released Friday, worsened to a $2.24 billion loss after the bank paid dividends to preferred shareholders, including the federal government, which gave Bank of America $45 billion in taxpayer lifelines during the financial crisis.

It doesn't get any better than this for an observer like me who's been crowing about an insanely overvalued market. It can and probably will get worse for investors who've bought into the hype about a nascent recovery.

Nota bene: Anthony J. Alfidi has no position in BAC at the time this commentary was published.

The Haiku of Finance for 10/15/09

Banking profits up
Lots of shiny coins to count
Until more loans fail

Banks May Have Peaked

The golden boys and girls at Goldman Sachs rarely disappoint . . . that is, until just about now:

Goldman Sachs Group Inc. reported a surge in third-quarter profit driven by trading and investments with the firm’s own money. The shares declined as earnings fell short of the bank’s record.

GS is a roulette wheel disguised as a bank holding company; it is one big moral hazard. Other banks are also successfully disguising their problems:

Citigroup Inc., the lender 34 percent owned by the U.S. government, posted a $101 million profit, defying expectations for a loss as the company added the smallest amount to loan-loss reserves in two years.

Watch out, Citi, those pitiful loan loss reserves aren't going to help much when CRE really starts cratering in 2010. And in a surprise development, the market responds rationally to this news:

U.S. stocks dropped, dragging benchmark indexes down from their highest levels in a year, as Goldman Sachs Group Inc. and Citigroup Inc. fell on earnings that disappointed some investors.

If the banking sector's health is peaking, a renewed downturn in the larger economy may not be far away. That's why I continue to add to my cash pile.

Housing Crash Redux 2009

This is it. No, not Michael Jackson's posthumous album. I mean the beginning of the second part of the housing bailout:

Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout.

That says it all. I don't think I have to quote any more from the NYT for you to get the picture. I'm so glad I went on record last year with my opposition to the housing bailout. I knew that if America started down that path it would spell the end of our status as a great power. A second mortgage bailout will cement our national decline and ensure that any hope of reversing it will be monumentally difficult within the remaining lifetime of Generation X.

I'm gradually building cash that I can use after the market tanks to buy equities. I don't think I'll have to wait very long for another real estate-related implosion to bring that on. If both FDIC and FHA need simultaneous bailouts . . . hello 1932 all over again.

The Limerick of Finance for 10/11/09

The Fed's worrying about cash
Because they've printed up quite a stash
It's just sitting there
Not going anywhere
Once devalued, it will head for the trash

California's Interminable Fiscal Crisis

I predicted back in July that California's financial outlook would be shaky. That post was specifically about an unwise investment philosophy for CalPERS. Sure enough, California's financial stupidity isn't limited to investment (mis)management. It also includes budget (mis) management:

Revenue in the three months ended Sept. 30 was 5.3 percent less than assumed in the $85 billion annual budget, state controller John Chiang reported yesterday. Income tax receipts led the gap, as unemployment reached 12.2 percent in August.

The Golden State is seriously tarnished due to the lingering effects of the housing bubble. It will prove increasingly unable to meet its fiscal obligations, including interest on its muni bonds. The article above mentions the state's inability to sell all of the G.O. bonds it needed, and I suspect we'll see more partial bond sale failures in the months ahead. Why any investor would want to buy debt from this state is beyond my ability to understand. I will not take a position in Cal munis until I am convinced the state is NOT a bankruptcy risk.

The Haiku of Finance for 10/08/09

Cal bond yield rises
State fiscal woes yet to come
Junk status assured

The Haiku of Finance for 10/06/09

Reverse mortgages
Another bad idea
Greed will never die

Reverse Mortgages Are Another Sucker Product

In the darkest corner of every super-salesman's heart is a bottomless pit of greed and depravity. Stories like this make me shake my head:

Some of the same U.S. lenders that helped drive the real estate boom with loans to home buyers who couldn’t afford the payments are now targeting seniors, the center said. Brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers, according to a report titled "Subprime Revisited,’’ that was released today by the Boston-based NCLC.

It sure looks like tapped-out Baby Boomers who have no liquid savings for retirement are easy pickings for reverse mortgages. It will only take one big hiccup in the bond market to send rates skyrocketing and home values plunging, and then these seniors and their lenders will be wiped out.

No way would I go for this if I were a homeowner. I'll take the slow and steady approach to wealth building, thank you very much, and that requires little to no debt.

ISM's Service Sector Isn't So Rosy

You think today's ISM report heralding an increase in non-manufacturing activity is a bullish sign? Only if you don't read what really drove the increase:

Federal Reserve efforts to unlock credit and government measures such as “cash-for-clunkers” and a tax credit for first-time homebuyers are reviving demand and likely helped the economy grow last quarter. Nonetheless, last week’s report showing job cuts accelerated in September is a reminder that gains in purchases may not be sustained as incentives expire.

Come on, folks. Take away the stimulus and you take away the rosy economic results. I can't short the market while these stimulus measures are in place because average investors are piling into what they think is another great bull market. Scared to be left behind, reader? Here are some investment voices who aren't worried about being left behind:

New York University Professor Nouriel Roubini said stock markets may drop and billionaire George Soros warned the “bankrupt” U.S. banking system will hamper its economy, highlighting doubts about the sustainability of the global recovery.

If you don't believe them, believe this guy:

Nobel Prize-winning economist Joseph Stiglitz said unemployment is going to keep rising and should be the main focus for policy makers, and that gains in the stock market indicate investors have been “irrationally exuberant” about a recovery.

These guys are all on the same sheet of music. I'll add my voice to the same choir. IMHO this market is overvalued and headed for a decline, but I'm not going to bankrupt myself by shorting into an overbought rally.

The Haiku of Finance for 10/03/09

Stimulus won't help
Economy keeps sliding
Next year will be worse

Stimulus Continues While Recovery Fizzles

Policymakers know more than they let on. They are terrified of unwinding stimulus policies:

Treasury Secretary Timothy Geithner said signs of economic recovery are “stronger” and have appeared “sooner” than expected, while reiterating it’s not yet time to roll back stimulus programs.

They know that deviating from ZIRP will pull the plug on this non-recovery:

“Deflation is definitely a threat right now,” Nobel laureate Joseph Stiglitz, 66, a professor at Columbia University in New York, said in a Sept. 22 interview. “The combination of the deflation threat and the sluggish recovery should keep the Fed on hold for quite a while.”

This week's disappointing economic news is going to get worse and these experts know it. They know job losses will head skyward in 2010:

U.S. job losses unexpectedly accelerated last month and the unemployment rate reached the highest level since 1983, signaling any recovery in consumer spending and economic growth will be slow to develop.

Are you prepared for economic annihilation in 2010? I certainly am, thanks to my gold holdings and cash reserves.

The Haiku of Finance for 10/02/09

Non-farm payrolls down
Job losses even bigger
Sure you see green shoots?

No Jobs? No Recovery

Investors hoping to harvest some green shoots need to read about this really bad jobs report:

U.S. employers cut a deeper-than-expected 263,000 jobs in September, lifting the unemployment rate to 9.8 percent, according to a government report on Friday that fueled fears the weak labor market could undermine economic recovery.

If you buy stocks or indexes now for the long term, you're probably overpaying. I'm increasing my cash pile and waiting for bargains.

Sinking Data Finally Sinking In?

Perhaps some rationality is returning to this highly inflated stock market after all. Newly disappointing manufacturing data gives the market pause:

The Institute for Supply Management said its index of manufacturing activity in September slipped to 52.6 from 52.9 in August, well below analysts' expectations of 54. It was the second month in a row the reading came in above 50, which indicates growth, after contracting for 18 months.

That's not much of a drop but it's certainly indicative that orders aren't picking up in advance of an expected recovery. The stock market is headed down right now. I have renewed hope of being able to obtain SPY and EFA at decent prices by the end of the year.