Bank of America...Then What?

bank of america earningsWell, we saw the week end with yet another day ending in the green for trading, giving us six weeks of consecutive positive trading. Indeed as each day of this rally continues, more and more are finding themselves crossing over the line to the belief that indeed we have seen the worst and that we can now prepare to position ourselves on the long side. I could not disagree more with this belief.

Indeed this rally has seemed impressive, seeing us retrace above 8000. However, when comparing the downturn we have experienced recently, the gains do not compare. I believe there could possibly be a little more left in this rally, however, for the most part I feel that we have seen the most of the rally and will soon retrace downward. For our current economic conditions, certain critical technicals indicate the good possibility of another strong downward push, with a good possibility of it being worse than the previous we've seen. I know much of the headlines read that the decline should decrease in severity. I disagree.

The massive housing foreclosures filed by the banks, indicates a still declining housing market, which with an influx of an enormous amount of bank owned houses into the market, should set a new standard in comparables. Also, with our ever increasing unemployment data, the delinquencies should continue to increase, as unemployment is the biggest cause of default. This causes problems in our real estate market, bank sectors, consumer spending, and GDP. With problems in all of these sectors, I would expect to see tougher times for our economy and for the stock market.

We know that indeed a technical rally was due, as I expected in the beginning of March. Let's break down what has kept this train moving. Let us not forget the multiple trillions of dollars which were announced just in March to help buy government bonds and toxic assets. Lately, it has been the surprising strong numbers from financials that has kept investors optimistic. However, how reliable and significant our these numbers in measuring our status in our current economic state?

Citi surprised everyone with announcing 1.5 billion of profits on Friday. There were many that took this as good news, since Citi was considered as a bank in risk of failure. However, when breaking down the numbers, it is quickly to see just how reliable these numbers are. $2 billion of revenues announced were due to an accounting change that gave them the possibility to buy back assets at lower prices, thus reporting it as a profit. Another 600 million was a result of the recent mark to market adjustment. When totaling these numbers indeed we see that if not for the alterations of the accounting we would have seen yet another loss posted by the bank, which would most likely bring more negative speculation to financials. Obviously, many saw this weakness as Citi traded down 9% on Friday after the announcement.

So indeed we can see that there is some manipulation with these recent earnings announcements in the financial sector and that it is hard to rely on their data as indicators for a bettering economy.

Tomorrow we see earnings from Bank of America, which I assume will follow suit with good numbers. However, this is the last of the big banks to report. What is left? Unless President Obama has something up his sleeve, I would expect to see a turn around occur shortly as the rest of earnings season should not be as optimistic as we have seen in the financial sector. I will wait until I see this change to enter some new positions. This week should be critical in defining the trends for the next few months. Have a great night and Happy Trading.

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  1. ___ Says:

    Do you think AMEX and the financials get a pop on the government coming in to police rates and probably kick in more aid to credit cards?

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