Thursday, March 19, 2009

Bank Rally: A Temporary Bear Market Bounce

The reason why so many investors have been skeptical about the recent rally in stocks has to do with the role of bank stocks, which have been at the heart of both the drop as well as subsequent 20% rebound. The question is whether this recent dramatic move up in financials is sustainable or is merely a temporary blip, as the market reevaluates the inherent risks. I present a good summary by Goldman, arguing that all signs point to the latter. I particularly draw your attention to exhibit 9 showing the number and magnitude of some bear market rallies in the context of an overall declining market.

Rally in context

Bank stocks have staged a big rally and investors are now asking is this a bear market bounce or have we seen the bottom. In our view, this is a bear market bounce as:

(1) Non-performing assets are still accelerating: The fundamental data is not getting any better on consumer credit. Master trust data on credit cards points to a significant deterioration in consumer credit quality – losses increased 90 bps month on month which is the highest increase since the cycle started. Moreover, we are likely to see a resumption of writedowns in March given the “X” indices have fallen by 8% so far this month.

(2) Reason for rally: Part of the rally has been driven by comments from several banks that they have been profitable in the first 2 months of the year. However, we expect that some of this performance is driven by one-off factors such as write up on debt, mortgage origination fees, strong capital markets activity in Jan and Feb, which may fade in coming months and limited reserve builds despite our expectation that NPAs will continue to grow.

(3) Next catalyst: The next major catalyst in the banks sector will be stress test results, which will most probably come out in the middle of April. We cannot rule out banks unexpectedly failing this test and being forced to either raise capital from investors or take government capital. We expect that some banks that pass the test will look to issue equity to pay back government TARP. Either way, we expect significant equity issuance.

(4) Valuation may not provide a floor. We are now back to 0.8X tangible book, up from 0.5X two weeks ago. Both are low relative to long term averages. That said, when we look at prior severe regional home price depressions both in the US and globally, we find "trough" valuations within the range of 0.2X - 0.7X tangible book.

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Anonymous said...

Be my guest. Keep posting. I know who you're spinning for.

No one that I know has ever heard of you but you have some really good scoop.

First I thought that you were with the Fed, then I thought maybe Freddie/Fannie, or Pimco, but then it came to me. JPM...

Keep spinning Jethro.

Tell the Rothschilds I said "Hey".

EconomicDisconnect said...

I have no idea how you can post high quality content at such a prolific rate but keep it coming!

I was wondering, are you posting form Lou's basement? Did you get permision?

Anonymous said...

Funny how you release this story prior to options exp. Nice. Don't you think the boys at JPM and Golden Slacks have done enough damage? Greed has not limitation in your book.

Funny how GS called bottom at ~650, and also advised on March 11th to be a S&P seller during the day and buyer at night. (Google "goldman bear by day bull by night"). Not very good for the S&P day trader, huh?

I think it's time that you tell us who you are "Tyler".

EconomicDisconnect said...

Who are YOU "anon"? Who am I? Biggest questions in the universe.

Anonymous said...

Suck a cock-a-doodle-doo

Anonymous said...

Tyler didnt time this release, this came out at about 7am central time. I read it way before the open.

Advant Guard said...

Didn't Goldman mention that any rally would be capped because banks are most likely to raise capital when the stock price is at the top of its range?

And what's up with CitiGroup doing a reverse split? Are they anticipating getting de-listed when the stock goes back below a dollar or do they just like the idea of the stock being able to fall even farther than it is currently capable of?

Anonymous said...

Listen Advant Guard,

There is no way Citi is going back down there! We hit a generational lows @ S&P 666. I know this cause I watch CNBC. We hit the Haines bottom and we are not going back. This is the greatest bull that you will ever witness.

Anonymous said...

on the contrary, methinks some things are better left a mystery...

but then again, maybe one of the battle lines being drawn between us now is between those who are:

(a) those willing to put their 'name' on the line.


(b) those who prefer to remain anonymous.

and i think we've determined that zero hedge is home who choose door (b).

of course, within door (b), there is another door choice, that of:

(a) those who use the opportunity to be 'anonymous' by taking a moment to be creative and selecting a pseudonym, even if the pseudonym builds a reputation on its own accord.


(b) those who choose to be lazy and be strictly 'anonymous' and thus placing upon the reader the further burden of establishing identity, even though being strictly anon provides you with no REAL anonymity (in google terms) over those who choose (a).

that is to say, those who live in 'anonymous' suits should be wary of throwing moths, lest those moths come to eat holes into their own pockets...

Anonymous said...

This site is fantastic. It's the first place I go to every morning. Keep up the good work.

I agree with Goldman that we've got a pretty steep hill to climb the next few months with economic data, earnings and its attendent credit issues.

Still, by end of summer, non-financial corporate America should be all fired out and the second derivative of earnings should reverse signs. That should be enough for a more sustainable rally.

It's usually not a great idea to rely on forecasts made during an exponential freefall (remember the call for $200 oil? who made that?). Despite Bernanke and Geithner frantically shoveling dirt into the hole the financial industry dug itself, the rest of the economy should be able to claw its way out by the end of the year.

Anonymous said...

and if there is truly a Tyler Durden hidden deep in Count Morgan's fortress (even though i highly doubt it), that would be a blessing that would yield tears of hope from mine eyes...

...which is why perhaps it all should remain a mystery...

note to Brad -- make sure you hide the identity well (there are ways).

remember always, paparazzi is hiding in the bushes.

Alex said...

The site is great. Keep up the good work.

If you are (like me) a currently unemployed ex-trader, then you should certainly stay anonymous. I figure that there is no way you'd get hired at any bank or asset manager if they knew you were Tyler.

Anonymous said...

Clues as to TDs raison d'ĂȘtre here...

Anonymous said...

Tyler, ignore the crowd and stay your course. Keep the posers guessing.

Sam said...

@Alex, why not? People like Tyler are exactly what we need: smart, able to think and articulate rationally and do it a dose of sarcasm. I certainly would hire him.

Anonymous said...

now we're talkin taggart.

had a funny thought while reading your link:

fight club ended with buildings going down into rubble and our current reality show began with such.

like the u.s. is living the movie in reverse...with the O as the narrator.

real question is how many choose to opt out of the system all together like the chief before the hole story snaps back at double speed.

when the survival rate of tyler's blog drops to positive territory will be a good sign that a new chapter is emerging.

will be frontrunning that trade fo'sho.

until then, where's the starburst?

Michael Krause said...

This is all very near-sighted. The fed has no mechanism to pull back in the liquidity it is injecting right now, and that means long run very high prices with no choice but to accept them. Have a read of a counterpoint:

Anonymous said...

Tyler, you are the man. This is one of the best blogs on the net; I check in at least a dozen times a day. I hope you made a ton of money over the last 5-6 years so we don't have to lose you to some desk somewhere and RISK managers. Ugh.

And, oh by the way, I sold to close a buttload of Citi calls today in my personal account. Your note on the Citi arb short squeeze was absolutely prescient. The only problem is you were right too soon. I wasn't even able to accumulate the entire position before the melt-up.

Keep it up!

Anonymous said...

Meanwhile some of us made nearly a 16% cash return from this "suckers" rally ;-, keep up the doom and gloom so we can find another entry point after the correction

Alex said...

Sam: because Banks are very afraid of bad publicity. So any publicity is severely frowned upon.

Anonymous said...

It should be clear to us that an important factor against owning large banks has entered the game. After AIG showed people who really were the recipients of the bailout money, I would conclude that Congress will refuse any more bailouts. It is politically impossible now so they are on their own to sink or swim. In this context buying banks now is stupid. There are other ways to make money unless you have a death wish.