All I can say about Wachovia is ouch! There is a lot going on in the markets today even though we are pretty much flat on the day. Oil is down, financials are struggling after Wachovia/Amex, and bond yields are rising.
Paulson is again out flapping his gums about Fannie and Freddie again today. Is everyone as tired of listening to this clown as I am? He realizes the economy goes down the toilet without Fannie And Freddie. As you can see below, the costs of backing these two bloated pigs are already seeping out even though Paulson refuses to admit it will cost the taxpayers anything. Yeah right.
GSE bailout $25 Billion and Counting
From Bloomberg:
"July 22 (Bloomberg) -- Treasury Secretary Henry Paulson's rescue package for Fannie Mae and Freddie Mac would probably cost taxpayers $25 billion, the Congressional Budget Office" said.
Quick Take:
I wonder what this number will look like after this housing crisis is over. I know one thing, its going to cost us a lot more than $25 billion!
Wachovia's Stunning Loss
This loss is much worse than I expected. They also slashed the dividend to .05/share. This loss rivals Merrill Lynch's $10 billion dollar hit last week. Remember folks, banks are leveraged much less than investment banks. Its hard to lose $8.9 billion in a quarter when you are a bank. You almost have to try to lose that much money.
This tells me Wachovia's underwriting had to have been horrific. Of course buying a subprime lender at the peak of the housing bubble sure didn't help these clowns.
Here is the Wachovia Story:
"July 22 (Bloomberg) -- Wachovia Corp., the U.S. bank that hired Treasury Undersecretary Robert Steel as chief executive officer two weeks ago, reported a record quarterly loss of $8.9 billion, slashed the dividend and announced 6,350 job cuts. The stock slumped as much as 10 percent in New York trading.
The second-quarter loss of $4.20 a share compared with net income of $2.3 billion, or $1.23, a year earlier, the Charlotte, North Carolina-based company said today in a statement. The loss included a $6.1 billion charge tied to declining asset values.
The writedown, job cuts and second dividend reduction in three months reflect Steel's response to the worst housing market since the Great Depression, which cost former CEO Kennedy Thompson his job after eight years. Wachovia has dropped more than 75 percent since it spent $24 billion two years ago to buy Golden West Financial Corp. just as home prices were peaking."
Quick Take:
Granted, these losses are terrible. However, you need to be careful here if you are trading financials. Many of these stocks are down 70-80%. Shorting them at these levels is a dangerous trade. You basically have to place bets that they are going to be zero's.
I would simply stay away from them at this point. There will be a time to go long on these stocks but I still think its early to be jumping in on the long side.
However, my estimation is the next trade on financials will be going long unless housing totally unwinds. This is why patience is needed here. The housing story is not played out yet as Fannie and Freddie hang in the balance.
When it is time to jump in, I would only go long by buying pools of banks because some of these dogs aren't going to make it.
Fed's Plosser: Fed needs to raise rates sooner rather than later
Plosser is out again today talking about fighting inflation. This is the second Fed president in the last few weeks warning of higher interest rates. As you can see below, the Fed is in a really tight spot:
"July 22 (Bloomberg) -- Federal Reserve Bank of Philadelphia Charles Plosser said the central bank should raise interest rates ``sooner rather than later'' to lower inflation and prevent price expectations from getting out of control.
``We will need to reverse course -- the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later,'' Plosser, who argued against cutting interest rates in two Fed decisions this year, said in a speech today in King of Prussia, Pennsylvania. ``It will likely need to begin before either the labor market or the financial markets have completely turned around.''
Plosser joins Minneapolis Fed President Gary Stern, who also votes on rate decisions this year, in making the case for raising borrowing costs, a move Fed Chairman Ben S. Bernanke avoided discussing in congressional testimony last week. Record oil prices and rising food costs this year have increased investor expectations for the Fed to raise the benchmark interest rate."
Bottom Line:
We are pretty flat today as the market digests all of the earnings reports from the last couple days. Some companies did well last quarter. Caterpillar had a blowout number and far exceeded estimates.
Where we head going forward short term will depend a lot on how the Fannie/Freddie situation is handled. The bond market will have a lot to say about this.
One thing looks pretty certian. Interest rates are about to rise, and its going to hurt the economy as well as accelerate asset deflation. This is going to hurt, but its the only way out of this mess.
5 comments:
This is not really related to Wachovia news, however I want to share something from the past that closely resembles today's market situation:
In 1914, Federal Reserve Bank rates had dropped from six percent to four percent, had gone to a further low of three percent in 1916, and had stayed at that level until 1920. The reason for the low interest rate was the necessity for floating the billion dollar Liberty Loans. At the beginning of each Liberty Loan Drive, the Federal Reserve Board put a hundred million dollars into the New York money market through its open market operations, in order to provide a cash impetus for the drive. The most important role of the Liberty Bonds was to soak up the increase in circulation of the medium of exchange (integer of account) brought about by the large amount of currency and credit put out during the war. Laborers were paid high wages, and farmers received the highest prices for their produce they had ever known. These two groups accumulated millions of dollars in cash which they did not put into Liberty Bonds. That money was effectively out of the hands of the Wall Street group which controlled the money and credit of the United States. They wanted it back, and that is why we had the Agricultural Depression of 1920-21.
Much of the money was deposited in small country banks in the Middle West and West which had refused to have any part of the Federal Reserve System, the farmers and ranchers of those regions seeing no good reason why they should give a group of international financiers control of their money. The main job of the Federal Reserve System was to break these small country banks and get back the money which had been paid out to the farmers during the war, in effect, ruin them, and this it proceeded to do.
Continues:
First of all, a Federal Farm Loan Board was set up which encouraged the farmers to invest their accrued money in land on long term loans, which the farmers were eager to do. Then inflation was allowed to take its course in this country and in Europe in 1919 and 1920. The purpose of the inflation in Europe was to cancel out a large portion of the war debts owed by the Allies to the American people, and its purpose in this country was to draw in the excess moneys which had been distributed to
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the working people in the form of higher wages and bonuses for production. As prices went higher and higher, the money which the workers had accumulated became worth less and less, inflicting upon them an unfair drain, while the propertied classes were enriched by the inflation because of the enormous increase in the value of land and manufactured goods. The workers were thus effectively impoverished, but the farmers, who were as a class more thrifty, and who were more self-sufficient, had to be handled more harshly.
Art
Great piece. History repeats itself although I think this situation is a little different.
Those liberty loans sound like our treasury auctions today.
The big difference today versus then is the corporations don't have the money to increase wages in order to keep up with the inflation.
In the '70s inflation sequence the unions were able to crush corporate america and increase wages.
Wages are flat or decreasing right now according to the labor statistics.
When you have rising inflation with lower wages you end up with massive asset deflation and an economic disaster. the Fed's going to have to raise rates.
I see no way wages could increase and keep up with inflation in todays environment.
Chindia is taking many of our high paying jobs in manufacturing and engineering.
UH OH
The bond market is taking yields through the roof!
10 year up to 4.11% The Fed is trying to shove the Fannie/Freddie bailout down everyones throat and the bond traders are saying no way and taking yields higher!
The bond market is fighting the Fed. This is going to be interesting.
This could be a tipping point folks. 8-9% interest rates could be right around the corner.
Some more comforting news. 46% chance Ford and GM will go BK within 5 years:
July 22 (Bloomberg) -- General Motors Corp. and Ford Motor Co., the two biggest U.S. automakers, have about a 46 percent chance of default within five years, according to Edward Altman, a finance professor at New York University's Stern School of Business.
``Both are in very serious shape and the markets reflect that,'' Altman said in an interview with Bloomberg Television. He created the Z-score mathematical formula that measures a company's bankruptcy risk. ``The model is saying that this company is on the verge of bankruptcy,'' Altman said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aE5tO_wqZByw&refer=home
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