All Hell Breaks Loose in the Financials

Sorry I couldn't get on sooner today everyone. My site was so overloaded with traffic that I couldn't sign in!

Wow where do I begin today. The financials were absolutely murdered this morning. I have been trying to warn everyone that the losses on the books of these banks were mind blowing, and it looks like S&P has finally decided to let the crap hit the fan with massive downgrades.

Here is the S&P news from Bloomberg:

"June 2 (Bloomberg) -- Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. had their credit ratings lowered by Standard & Poor's on expectations the securities firms will be forced again to write down the value of their assets.

Morgan Stanley, the second-biggest U.S. securities firm by market value, was lowered to A+ from AA-, S&P said today in a report. Merrill Lynch, the third-biggest firm, was cut to A from A+, as was Lehman Brothers, the fourth-biggest firm. The outlook on all three New York-based firms remains negative, S&P said.

``The negative actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters,'' Tanya Azarchs, an S&P analyst, said today in a statement.

S&P also said today that it revised its outlooks on Bank of America Corp. and JPMorgan Chase & Co. to negative. Citigroup Inc. was taken off review for a downgrade and given a negative outlook, while Wachovia Corp. was placed on review for a downgrade.

``The outlooks on the large financial institutions sector in the U.S. are now predominantly negative,'' S&P said in today's statement."


Quick Take:

My first reaction here is Duh!!! Where have these ratings agencies been during this whole crisis? It doesn't take a rocket scientist to look at the Level 3 assets of these institutions and conclude that they are in deep doo doo.

Housing is in the middle of capitulating, and these firms are in deep trouble if prices drop much further. The fact that S&P is downgrading all of this debt tells you that another round of massive losses are about to be announced in the 2nd quarter. It looks like S&P is finally trying to get ahead of this credit crisis versus sticking their head in the sand and hoping it goes away.

It will be interesting to see what happens to Lehman. This could very well be the next Bear Stearns. The PUT action on Lehman is overwhelming, and there was similar PUT action on Bear Stearns before they blew up.


Wachovia ousts their CEO

Another huge story this morning. I can only imagine what Wachovia's balance sheet must look like after telling their CEO to hit the road. Expect losses to be announced following his departure.

Here is the Wachovia news from Bloomberg:

"June 2 (Bloomberg) -- Wachovia Corp. fell to the lowest since July 1995 after the bank ousted Chief Executive Officer Kennedy Thompson, signaling the company may report a second- quarter loss.

Wachovia, the nation's fourth-biggest bank, dropped as much as 4.5 percent in New York trading, adding to a slide that has cost the lender more than half its market value in 12 months. Analysts speculated that the Charlotte, North Carolina-based company will be vulnerable to a takeover or other form of distress sale. Wachovia said today it isn't ``in crisis.''

``We figure since he's leaving there'll be a big loss provision for the second quarter,'' David Hendler, senior analyst at CreditSights Inc., said in an interview. ``They need to present a different picture on the company, which is, `We're in the restructuring mode.' ''

Quick Take:

Stay away from this stock. Consider this ousting to be a warning shot across the bow interms of what their earnings will look like over the next few quarters. Wachovia has always been one of the banks thats been rumored to be in trouble.


Washington Mutual's CEO also told to hit the road

Another banking CEO bites the dust this morning. Here is the Washington Mutual story:

"June 2 (Bloomberg) -- Washington Mutual Inc., the biggest U.S. savings and loan, said Chief Executive Officer Kerry Killinger will step down as chairman after shares dropped 80 percent in the past year and the company reported $3 billion of losses during the past two quarters.

Killinger will be replaced by Stephen Frank, an independent director who previously ran Southern California Edison, the Seattle-based lender said today. Washington Mutual shareholders voted in April to remove Killinger as chairman after the company cut its dividend twice and said it may lose as much as $19 billion through 2012 on home loans."

Quick take:

I bet these two CEO's are on the phone with each other right now sharing tips on how to build a banking resume. That must be hard to do when the stock price of your company has dropped 80% in the past year. I hear Walmart is hiring!


Quote of the day!

``Everyone's trying to pick the bottom in financials, and what the news flow is showing you is that we're not there yet,'' said Paul Kandel, a New York-based money manager at Sentinel Asset Management, which oversees about $5 billion. ``Certainly the changing command at Wachovia isn't helpful and the downgrades aren't helpful.''


Bottom Line:

The negative news flow on the financials shouldn't be a surprise today. The only surprise to me is the fact that Wall St. is finally owning up to the fact that we are in deep trouble and not out of the woods. The "generational buy" calls by the analysts on financials since March were simply foolish. I wouldn't be surprised if many of these financials end up in single digits. Jim Rogers predicted this a year ago.

Think about it. The banks have practically no way of making money going forward. Housing was their "golden goose" and its completely evaporated. Poof! Gone! In the end, its going to put many banks out of business.

Housing just reported its biggest price drops in history. Inflation is soaring. Gas is at $4 a gallon. Consumer sentiment is at 26 year lows. Unemployment is rising. The fact that the cheerleaders on CNBC can sit there and tell you to buy stocks is disgusting in my opinion.

Remember today's warning from S&P. This tells you some bad news is about to come out of the financials. The dumping of two major banking CEO's is another ominous sign.

Until housing prices stop dropping, the financials are going to continue to bleed red. I see no recovery anytime soon. Bank runs are not out of the question if housing continues to free fall. Most of their capital is tied up in bad loans, and as these defaults continue to soar, the risk of BK's significantly rises in the financial sector.

We have seen these troubles in the past, and history repeats itself. A bad consumer led recession is on the way. Be prepared.