Financial Crisis vs Economic Crisis

goldman sachs earningsI hope everyone was able to enjoy the holiday weekend and that those who were on the wrong side of last week's rally were able to heal a bit over the weekend. Indeed, last week's financial flurry was quite the surprise and has, at the moment, seem to bring a new breath of life to what was looking to be the wind down of the rally for the banks. In my opinion, the response from Wells Fargo's earnings was far to strong, especially when you continue to look at the economic facts. I think such an announcement, coupled by short covering, caused for such an emotional reaction from investors, where many were found jumping back into the financial sector thinking that the worst is over for banks. This can be a very dangerous move, especially since we may be finding ourselves at the tail end of a 6 week rally that has shown big aggression. Although banks are crucial to the recovery of the economy, there are many other influencing factors.

After Wells Fargo's surprise, it seems that banks are feeling that this could be a good way to get a reaction out of investors as Goldman Sachs surprised investor's a day early with their earnings report. Once again, as expected, their headlines read profits better than expected. However, reading between the lines can cause for some concern for GS.

crash market stocks podcastAfter announcing their strong $3.39 earnings a share, GS surprised investors with also offering a $5 billion offering of common shares to the public. The offering is expected to assist in paying back the $10 billion worth of TARP funds that were received from the Federal Government. Of course, all of these "paybacks" are pending on the up and coming "stress tests" that banks will be experiencing, showing their ability to survive the coming months. I find this new urge to payback this TARP funding comical as many of these institutions just received the funds and are now so quickly able to pay it back (Thanks M2M). This offering should show the vulnerability that still remain for banks. GS, who continues to be a front runner for financials, showed today that indeed they need more money. Instead of knocking on the Government's door or trying to find another equity partner like Buffett, they decided to risk diluting their shares and take it to the stock holders. Their stock price is already down in after hours.

Wells Fargo and Goldman Sachs have been the strongest throughout this crisis and are no big surprise to their positive earnings report, especially with the recent government aid and accounting changes. The big question is what future lies for all the other banks and how will they do in undergoing the upcoming stress tests. If investors think we should expect these types of numbers for all the lending institutions, think again.

More and more as we continue to see financials recover, more people are jumping on the band wagon that the worst is over for the economy. Their argument is that Wall Street is a "forward looking" vehicle that investors trade at expectations 6-9 months ahead of the present time. Where there may be some truth to that statement, there is no concrete evidence to believe that we are 6-9 months out of recovery of this market, or even close to that for that matter. Unless your evidence is statements from President Obama, Summers, and Cramer, there still exists a lot of significant data pointing to continuing struggles ahead for the US economy, which by the way, many very educated financial analysts from top banks and companies also agree to.

As we saw this recession open up with the sub-prime mortgage financial crisis, we have quickly seen this recession turn into a economic crisis, which I discuss more in today's premium podcast (subscribe here). Even with the recent trillions spent by the Fed to help write off much of the toxic debt that built up as a result from the sub-prime markets and loose underwriting from the banks, the next stage in this crisis is the economic down spiral. These are the defaults and delinquencies that will be made due to the huge recent uptick in unemployment. With the millions who have just this year lost their job, there should come a very large increase in auto loan, credit card and even more housing defaults. This not being as a result from bank's loose underwriting, but as a reaction to the decaying economy. These reactions can be much more devastating and require much more aide than the economic turmoil we have seen in time's past and even in our recent months. The Great Depression was started by the failure of the banks, only to dig into it's worst numbers the following two years by the ongoing plague of massive unemployment.

I don't mean to only bring a negative sentiment to this site, but only bring a perspective of why I do not dare to jump in too early on this, what I strongly believe to be, a bear market rally. Indeed, a failure to bring back job security and profits to small businesses will, in my mind, continue to drag out this economic crisis regardless of what banks decide to announce about their balance sheets.

As you can see from below, Reuters is also not very optimistic, especially dealing with earnings, about future state of the economy. Reuters has been continually revising their earnings expectations since the beginning of the year, which now is an expected fall of 37.8% compared to its original projection at the beginning of the year of a 12.5% decline. These continual alterations in projections gets overlooked many times between the earnings announcement, so that when earnings season does indeed come, they see the 37.8% expected decline, when in reality it began at a 12.5% expectation, lessening the "shock value" of the result. It is very important to pay close attention to these "revisions", as they continue to show the negative sentiment that exists in the market.
S&P earnings revisionsI still believe it is only a matter of time until the bear is back in the market. Tomorrow may result in mixed trading, especially in the financial sector, due to the "surprised" offering from GS. Financials have a big vulnerability to retrace huge gains, so going long on financials is nowhere near my investment thoughts at this point. As we have now passed which will probably be the strongest bank's reports and progress further into earnings season, I would expect a bearish sentiment to return. I am still waiting for the right time when I feel a tremendous upside trading opportunity and I believe that time is near. This can be a big assistance to your stock research, the free trial is great: Morningstar Investment Research: Free Online Trial. 4,000 In-Depth Reports, Ratings. Data on 20,000+ Stocks and Funds. Happy Trading.

9 comments:

  1. Anonymous Says:

    Hi FF,

    Thanks again for your daily posts and your podcasts. I always appreciate your insight and your cautiousness, especially these days. I wanted to ask you a question. At the end of today's post, you said that you feel there will be a tremendous upside opportunity pretty soon. Could you please elaborate a little bit on this to me? What exactly you believe will go up? Also, don't you believe that the market will go back down after this month, and after all the financial news wearing off and after the all banks post their earnings? Aren't you a believer that the market will not be sustainable as long as there is lack of fundametals in this economy? So, I was curious what you were referring to at the end of your today's post.

    Thanks a lot for your reply! As I really do appreciate very much your honest and great insight we all need in this ever changing market.

    Your daily daily CMS fan,
    Tim

  2. Anonymous Says:

    Yeah, your suggestions seems to be confusing. You mentioned it may come back to bearish soon, and later you mentioned upside trading opportunity. What is your true guts feeling?

    Can you also comment on Retail sector, M and JCP are flying without any bases that I can see. Please advise.

    Thanks.

  3. Anonymous Says:

    He's saying he's waiting for a further upswing so that he can enter a short position.

  4. hatemonger Says:

    GS earnings are a complete and utter joke. It's all government money when you think about it. Had AIG been allowed to fail think about how much GS would have lost. The fact is the government bailed out AIG and AIG gave money directly to GS. They got 100% return from AIG. I could go on, but it's pointless. No one cares. Everyone is just looking to make money and they don't care what harm they cause to acheive that goal. It's been the downfall of our society and eventually one day we will end up suffering.

    I hate banks. I hate the government. Yes, I am full of hate. What an awful thing to be.

  5. hatemonger Says:

    Why is it that all everyone on the chat talk about is FAZ and FAS. Really. There are a thousands of other stocks and ETF's. Real stocks, good ETF's out there. Please people, stop chatting about FAZ and FAS. Such loosers. I hate FAZ and I hate FAS. They are the devil.

  6. Finance Fanatic Says:

    Sorry for the confusion, in my stating of my upside trading opportunity, I did mean upside for opportunity on the downside of trading. I see how it can be confusing. Bad choice of words.

    Indeed there are many other funds and stocks besides FAZ/FAS. I assume many on the chat are gamblers and day traders and enjoy the volatility. But trading options is another choice as well.

  7. Craig Says:

    FF,

    Do you think on a downturn (if happens from now), GDX, GLD will go up? I am a bit confused about gold, I thought it should have gone up today with market being down. Do you think we should also stay away from gold for now?

    Thanks

  8. Newbie Says:

    Craig,
    The reason gold dropped today is because it became more evident we are still in a delaftionary downward spiral. PPI was down. Therefore worries of inflation were abated for the time being. When the PPI rises you should see gold follow suit.

    This is mostly psychoogical than fundamental. Fundamentally, the mere fact the governent is increasing the money supply is downright inflation. No one really understands that.

    You should use this and any pullback in the price of gold as a buying opportunity.

    When the inflationary indicators pop up you will see gold rise fast an furious. Until then we are likely rangebound.

    I realize you directed this question to FF, so take my analysis with a grain of salt.

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