The problem with financials / Hussman

It is not hard to understand why common sense from Hussman is obviously not good for the business of Wall Street. I wanted to add another point that doesn´t makes thing better. I think if the financials would be forced to account conservatively the lots of the earnings would fall apart. If you want an example of how "creative" this process has become make sure you read Wells Fargo Gorges on Mark-to-Make-Believe Gains

Es ist aus nicht weiter verwunderlich das der gesunde Menschenverstand der jede Woche von Hussman unters Volk gebracht wird nicht gut für das Geschäft von Wall Street ist. Ich habe noch einen Zusatz zum Report zu machen. Ich bin mir ziemlich sicher das die Gewinne schon jetzt deutlich geringer ausfallen würden wenn die Finanzkonzerne konservativer bilanzieren würden. Als anschauliches Beispiel wie weit die "kreative" Auslegung der Bilanzvorschriften inzwischen gediehen ist bietet sich dieser Link an Wells Fargo Gorges on Mark-to-Make-Believe Gains

The problem with financials
We continue to carry a very low weight in financial stocks. Though the recent weakness in these stocks has prompted a great deal of interest in “bottom fishing,” my impression is that such efforts are based on the same untempered assumptions of high and growing earnings in this sector that existed months ago. P/E ratios ought to be well below historical norms when those P/Es are based on record earnings and record profit margins. In my view, existing valuations are based on untenable assumptions of permanently high profit margins in this sector, with optimistic growth assumptions as well.

In 2000, this was the essential problem with the technology sector. It was some time before Wall Street's expectations caught up with the reality that profit margins are cyclical and that early declines off of overvalued peaks do not constitute bargains.

I expect that in the next year or two, we will observe at least one quarter, and more likely a full year, in which the entire profit of the U.S. banking sector is consumed by loan losses.

Consider, for example, the latest FDIC Banking Profile, which was published based on June 30, 2007 data (before the recent liquidity crisis emerged). In that report, the FDIC noted that the ratio of loan loss reserves to total loans remains at a 32 year low. As for the portion of those loans that are in trouble, the FDIC notes “for the fifth quarter in a row, reserves failed to keep pace with the increase in non-current loans.” The industry's “coverage ratio” of reserves to non-current loans fell to the lowest level since the third quarter of 2002, while non-current loans posted the largest quarterly increase since the fourth quarter of 1990. Recall that 1990 and 2002 were periods when recessions were already well underway. If we're already seeing these signs of credit stress at the peak of an economic expansion, the figures we observe in a recession are likely to be a lot worse.

> Make sure you read Is WaMu the Next Countrywide? to see how ugly the situation and the quality of earnings already is.

> Ich kann jedem empfehlen Is WaMu the Next Countrywide? zu lesen um zu verstehen wie übel die Lage selbst bei einigen großen Instituten inzwischen aussieht.

> The impact on total S&P 500 earnings is if you take this table from Bespoke already over 30 percent. I have seen charts that include the impact of the financial arms from companies like GE, GM, F, Harley etc and the number is closer to 30 perecnt and 40% of the profits. Either way you look at it this number is going to decline significantly.

> Der Gewinnanteil an den gesamten S&P 500 Gewinnen liegt wenn man nach der Übersicht von Bespoke geht bei über 30%. Ich habe auch schon Aufstellungen die zusätzlcih die Finanarme von GE, GM, F, Harley usw miteinrechnen. Dann verschieben sich die Zahlen Richtung 30 und 40 Prozent. Wie man es auch dreht und wendet diese Anteile werden sich in den nächsten Jahren massiv gen Spüden bewegen.

> Here Bear Stearns as an example. I´ll bet that the real number for 07 and 08 will be much lower. How can any Analyst come up with another conclusion is a mystery to me. They should know that Bear is viewed as the most vulnerable as it generated 44 per cent of its revenue from its fixed-income business, according to Bernstein Research. It also has least exposure to less troubled markets outside the US. Here is another good story why a slump in earrnings is very likely American Investment Banks "Shots In The Dark" Economist

> Nehmt Bear Stearns als Beispiel. Ich gehe jede Wette ein das die tatsächlichen Gewinne in 07 und 08 deutlich niedriger sein werden. Wie ein Analyst hier zu einer anderen Meinung kommen kann ist mir schleierhaft. Ich gehe davon aus das denen der Fakt bekannt ist das Bear 44% seiner Umsätze im Anleihebereich macht und fast ausschließlich auf die USA beschränkt ist. Hier ein guter Link der zeigt warum dei Gewinne aller Investmentbanken wohl demnächst deutlich niedriger ausfallen dürften. American Investment Banks "Shots In The Dark" Economist

EPS Trends	Current Qtr Aug-07	Next Qtr Nov-07	Current Year Nov-07	Next Year Nov-08
Current Estimate	2.32	3.19	12.73	13.62
7 Days Ago	2.78	3.48	13.43	14.47
30 Days Ago	3.36	4.05	14.69	15.76
60 Days Ago	3.39	4.04	14.72	15.78
90 Days Ago	3.50	4.21	15.28	15.95

> And when you look at this table of pending LBO deals via the NYT it should be clear that the investmentbanks are also facing "loan" trouble.....

> Und wenn man sich diese Übersicht der noch zu finanzierenden LBO Deals von der NYT ansieht kann man sich leicht ausrechnen das die Investmentbanken ebenso wie die gewöhnlichen Banken einige "Kreditprobleme" zu lösen haben....

James Grant put it this way – “Benjamin Graham and David L. Dodd, in the 1940 edition of their seminal volume ‘Security Analysis,' held that the acid test of a bond or a mortgage issuer is its ability to discharge its financial obligations ‘under conditions of depression rather than prosperity.' Today's mortgage market can't seem to weather prosperity.”

As of June 30, 2007, the net income of all FDIC insured banking institutions totaled $36.8 billion. At an annual rate, that represents about 2% of all loans outstanding. Meanwhile, net charge-offs for bad loans were already running at an annual rate of about 0.50% in June. That's in a strong economy, before the recent problems, and loan loss reserves didn't even budge from a 32-year low. Net charge offs could easily quadruple in a mild recession.

Importantly, the problems go far beyond sub-prime. In its June 30 report, the FDIC noted “all of the major loan categories posted both increased net charge offs and higher net charge off rates.” Overall, net charge-offs jumped by over 50% from year-ago levels, with a jump of over 60% for consumer loans and over 70% for industrial loans. These percentage jumps are so high because they are off of such a low base, which underscores the extent to which observed profits in the financial sector have been unhindered by loan losses in recent years. Charge-off rates have not soared as much for credit cards, but this is because the existing level of charge-offs is already high (representing over 3% of the total amount volume of credit card balances, year-to-date). In short, the problems are in all categories, and given the thin coverage of the banking system for such losses, rising charge-offs and loan loss reserves are likely to bite deeply into earnings.

For some financials, relatively high dividend yields are being touted as a measure of safety and quality for investors. The difficulty is that if earnings come under pressure, a greater share of earnings will be required to cover those dividends.

> Let us hope that the Analysts are not so far behind the curve as they were with the homebuilders Number Of The Day ....Earnings Estimates for Homebuilders..... But as i said before....Common sence isn´t good for business......

> Bleibt zu hoffen das die Analysten in diesem Fall nicht ganz so daneben liegen wie bei den Buildern Number Of The Day ....Earnings Estimates for Homebuilders..... Wie ich aber schon vorher angemerkt habe ist der gesunde Menschenverstand nicht förderlich um Geschäfte an Wall Street zu machen.....

Now the bust is taking a brutal toll. In January, industry analysts predicted that the 10 biggest builders would have average earnings per share of $3.69 for 2007; the latest forecast is for a loss of $1.18.

Of course, the long-term return is equal to the dividend yield plus the long-term growth rate of dividends. Though I don't expect forced dividend reductions for major U.S. bank stocks, I do believe that the growth rates assumed by Wall Street here are overstated. And while a well-covered dividend can produce a lower “duration” and therefore a smaller sensitivity to broad market fluctuations, it does not in itself produce an undervalued stock. ....

In any event, my impression is that the problems for financials are just beginning, and that the risk premiums demanded by investors are likely to rise. As investors have seen throughout market history, stocks having rich valuations, weakening fundamentals, and rising risk premiums typically don't constitute great bargains.

> Now compare this to the "call" from Wall Street finest.... They obviously didn´t use any realistic earnings estimate. The only way they can justify this target is probably the "Fed Model". But as Hussman also has pointed out in "Fed Model"Knowing What Ain't True every body that has to use this argument is at best clueless (try to stay polite)........

> Nun vergleicht diese Aussagen mal mit den unvermeindlichen Zielen und Prognosen für den S&P 500. Anhand von realitischen Gewinnschätzungen sind diese Ziele sicher nicht erstanden. Die einzige Erklätung wäre das das brüchtigte "Fed Model" eine gewichtige Rolle gespielt hat. Wie abermals Hussman in "Fed Model" Knowing What Ain't True geschrieben hat ist jeder der dieses Argument heranzieht im besten Fall ahnungslos ( höflich formuliert).......

Disclosure: Short KBW Mortgage Finance Index