Earnings Quality Part XXIII........

Another example why you should read the earnings news especially from financial with great scepticism......Add this to the list of "creative accounting" like Negative Amortisation, Level 3 " Mark-To-Make-Believe Gains", Level 2 "Mark-To-Model", "Preferred Measurements Of Income", loan loss "politics" Part 1 & Part 2 etc.......

Einmal mehr Beleg dafür das man besonders die Ergebnisse der Finanzinstitute mit einer gewissen Portion "Skepsis" betrachten sollte......Hier ein paar weitere Beispiele die belegen das nicht wirklich "konservativ" bilanziert wird Negative Amortisation, Level 3 " Mark-To-Make-Believe Gains", Level 2 "Mark-To-Model", "Preferred Measurements Of Income", Risikovorsorge Teil 1 & Teil 2 etc.......

Brokers' Head-Scratcher / WSJ

Still, some investors remained concerned about earnings quality, in part, because the firms all benefited from a tumble in the value of their own debt. Accounting rules require firms to take a gain on such declines if they are applying market values to some forms of debt or financial instruments.

At Bear Stearns, the already dismal quarter would have been even worse without about $225 million in such gains. Morgan Stanley, which also had a rocky quarter, said it booked $390 million in such debt-related gains, while Goldman said it benefited from nearly $300 million in this way. Lehman didn't specify its gains, but said they helped lower to $700 million the hit the firm took from markdowns on loans and securities.

Hat tip to Barry Ritholtz

Keep this in mind when Wall Street is pointing to low pe´s......They also often forget to mention that financials are the biggest sector of almost every major US index....

Behaltet all das im Hinterkopf wenn der nächste Analyst mal wieder auf die niedrigen KGV´s verweist....... Zudem wird nur zu gerne unterschlagen das Finanzwerte der mit Abstand wichtigste Sektor aller US Indizes sind....

Surprising Trends in Federal Reserve Data / Minyanville

Minyanville Peter does an excellent job of digging trough the details of financials. And with the financials accounting for over 30% of S&P earnings and also the largest component of almost every broader index this sector key for the further direction of the market. And until recently nobody from Wall Street finest saw this coming. And they are still far behind the curve ( see comments)..... I also highly recommend The problem with financials / Hussman with lots of additional details, charts and tables.

Hier sorgt Minyanville Peter mal wieder für Durchblick im Datenwust der Finanzkonzerne. Und da die Finanztitel der mit Abstand wichtigste Bestandteil des S&P 500 sind und bisher für knapp 30% der Gewinne verantwortlich sind sollte man diesen Sektor immer ganz genau beobachten. Die Finanztitel dominieren ebenfalls fast alle anderen gängigen Indizes in den USA. Und bis vor kurzem war für die "vorausschauenden" Analysten die Welt noch in Ordnung. Und auch jetzt noch sind Sie immer noch meilenweit hinter der Realität zurück (siehe Kommentare)... Ich empfehle zu diesem Themenkomplex noch The problem with financials / Hussman mit weiteren Details, Charts, Links und Tabellen.

Thanks to Bespoke

Minyan Peter, who has become quite popular around the 'Ville with readers and professors alike, here continues his informative series on banks. Previous entries were Bank Earnings 101, Bank Earnings 102, and Bank Earnings 103.

In Bank Earnings 103: Reading Bank Balance Sheets, I emphasized the importance of bank balance sheets as a predictor of future bank earnings. ....

Over the weekend I spent some time reviewing Friday’s H-8 to see what trends I could uncover. To make it simple for myself I looked at annualized growth trends from February to July – “the best of times” - and compared them to the annualized growth rates for the most recent four weeks reported - August 8 to September 5.

So what did I find?
The contrast in asset growth trends between small and large banks is startling. Large bank balance sheets have ballooned since early August – rising at an annual rate of almost 73% versus a 5.5% annual rate from February to July. I have written previously that credit growth in this cycle was built on an “originate for sale” business model. You really see that in these balance sheet growth statistics. With secondary markets very tight, large banks are clearly being forced to hold assets they would have previously sold.

Since early August, while large bank balance sheets are bursting, small bank balance sheets, having been flat for most of the year, are now shrinking – and at an almost 18% annual rate. The biggest declines appear to be coming from real estate related lending activity, particularly revolving home equity lines.

Large bank net assets (a Fed proxy for total capital) appear to have peaked in May and are down almost 7% since then. Small bank net asset capital, however, continues to be growing – although I would caveat that many small banks do not finalize loan loss reserves until the very end of the quarter and this may push net asset values down. As a result of balance sheet growth and lower net capital, large bank capital ratios have dropped from 12.7% of assets in May to 11.3% - still very strong, but a material decline.

The growth in large bank balance sheet assets has been largely funded through non-core deposits. Since early August large time deposits ($100,000+) have been growing at annualized rate of more than 75% (versus flat from February-July) while non-deposit borrowings are growing at a near 100% annual rate. It also appears that large banks are pulling off-shore liquidity on-shore. Net due to off-shore affiliates has grown dramatically.

Large bank balance sheet growth has not been constrained to loan portfolios. Investment portfolio growth, particularly mortgage-related securities, has been enormous since early August (+68% annualized growth rate versus less than 6% for February-July).

It appears that systemic credit extensions have also grown significantly since early August. Having declined from Feb to July, broker dealer loans and interbank loans are now growing at 100% annualized rates.

While, admittedly, four weeks is a relatively short time frame, the changes in large bank balance sheet composition since early August are significant and warrant continued focus, particularly if reported capital continues to decline.

Further, the fact that smaller bank balance sheets are shrinking raises questions to me. I will be watching small bank earnings releases to determine whether their balance declines are a symptom of weaker loan demand, more strict lending standards, or fallout from tightened available liquidity. While none is positive, weaker loan demand would represent a more fundamental economic change.

Disclosure: Short KBW Mortgage Finance Index

This Rebound Can't Mask the Real Damage / Doug Kass

Looks like some people think that the worst is already over. No wonder that some of them work for CNBC ...... :-) . I´ll go with Kass.

Sieht so aus als als wenn mal wieder einige glauben es ist wieder Zeit die dips zu kaufen. Nicht verwunderlich das einige davon auf CNBC arbeiten...... :-). Ich sehe das ähnlich wie Kass

At about 5 a.m. EDT Wednesday, a well-regarded CNBC commentator suggested that, as in times past, the market has often recovered from abrupt and large down moves like we saw yesterday. (She seemed to be implicitly stating that buying the dip is a good idea.)

> especially when you hear statsictics like this from Rosenberg via Minyanville

> das gilt im besonderen wenn man Zahlen wie diese hört

• As many feared, auto sales were horrible in July, falling 12% in figures that encompass most major auto manufacturers including Toyota (TM), which saw a 7% decline.


• According to Merrill's David Rosenberg, other months where auto sales were down double digits include a 12% year-over-year decline in Dec. 2000; a 10.8% decline in April 1990; a 10.8%decline in July 1981; and an 11.1% decline in Dec, 1979.
• What do all of those months have in common? According to Rosenberg they were three months or less away from the official start of an economic downturn.
  

> The argument from the bulls is standing on a very weak foundation when you look at this chart that shows the pecentage of the financial sector vs. the entire stock market capitalisation.

> Das Argument der Bullen für einen weiteren Anstieg in den USA steht auf extrem schwachen Fundament wenn man sich diesen Chart ansieht......

And, Tuesday, many commentators on RealMoney.com and elsewhere suggested that investors were ignoring the positive news -- citing past earnings growth, past share appreciation, etc. (basically a lot of pasts were used in this analysis) -- and were saying that the market's selloff was unjustified. The short squeeze (which quickly disappeared) in IndyMac Bancorp was even used as an example of overdone negative sentiment that could have broad and positive market implications.

I disagree on all counts.

What is the favorable news? Why should stocks have a Pavlovian move higher and reverse this morning's weakness? And what bearing does one stock (i.e., IMB) have on the whole?

thanks to Cox & Forkum

The reality is that credit markets have (predictably) seized up and the credit cycle is in the process of normalizing. I have been concerned with this since December 2006, when I penned an editorial that described the bubble in credit availability in Barron's.

For a time, there was a disconnect between widening credit spreads and stocks. No more.

Risk is being repriced, the carry trade is being dissolved, illiquid assets are being forced to mark to market, hedge funds have started to be disintermediated and we are witnessing a worldwide margin call. And the folly of partial and conformational analysis of sentiment is being uncovered.

This is all occurring in what I have described as a tightly (and levered) financial system -- and why I thought on July 23 "It´s time to panic."

thanks to the Economist

The past levering up and current panic was importantly abetted by the fund of funds industry, the dominant investor in the dominant investment class (hedge funds), which failed to analyze how and why many hedge funds reported such consistent investment returns -- especially of a collateralized debt obligation and collateralized loan obligation kind.

The greatest risk is in our financial intermediaries that drank the credit Kool-Aid served up by the mortgage brokers, the investment brokers/bankers and the Fed, which kept interest rates too low for too long.

In looking at the dominant financial companies I have often written about and in quoting the lesson taught to me by my friend, bubby and pal, former Institutional Magazine's No. 1-rated bank analyst, Mark Biderman, during adjustments in risk premiums, it is not the "apparent" level of earnings (or net interest spreads) that are important; it is credit quality that is the culprit and, at times, the system's fundamental undoing.

Does this all mean that our investment world is coming to an end?

No, it does not. We could get a rally at any time. But the experience of the last two weeks should be a lesson learned. And that lesson is that a healthy amount of skepticism should provide the backdrop to all of our investment decisions -- in good times and in bad times

Disclosure: Short homebuilder, REITs, Russell 2000, KBW Mortgage Finance Index