Some Great Bloomberg Articles

Bloomberg is just on fire today with a series of eye openers. I'll file these two under "oh I thought everything was fine in corporate profit land" (buy stocks) and "oh I thought banks had thrown in the kitchen sink - for the 7th time - and were finally forthcoming" (buy stocks).

I've had a serious issue with the latter story because 'off balance sheet' accounting (essentially hiding things away from the public view) seems to be against everything a transparent society is about. We saw it bring down the Enrons of the world and we were supposed to have new regulation (Sarbanes Oxley) that took care of this. Then we find out half a decade later many of our highest profile banks are playing the same tune? Stuffing junk into fancy acronyms like SIVs? Then in the biggest sham, our Treasury Secretary proposed a plan to fix this problem by creating his own off balance sheet entity - so basically this vehicle would take the bad product from 1 hidden spot to a new one... and *poof* like magic, all our problems go away? Back in October, I called this the "Super Bailout Fund" Here is how it worked....

If you had a company, and you had something to sell... and no one wanted to buy it, what would you do?

Did I mention that the product you want to sell is not even on your balance sheet, it's actually hidden off to the side in an off balance sheet area so it doesn't even really appear to exist. Wait, it doesn't appear to exist until it causes you problems.

But back to our story... what would do you?

Here is an idea - why don't you partner up with a few other fellow companies in your industry, and create a 3rd party entity. You and your friends will shuffle money to fund this 3rd party entity, and than said 3rd party entity will buy the product you cannot sell. So just like that, problem solved! There is a buyer for your product. The buyer is... yourself!

Now I don't know about you, but if a normal business did that, we'd call it a joke. Or worst. (fraud?) But in our financial hallways, we call it innovative and wonderful. In fact our Treasury Cabinet member is the one encouraging it. Folks, this is sad and a shell game at its worst.

Thankfully this hair brained idea failed - but to have our government proposing these sort of 'solutions' is simply embarrassing. But again, it is Cramerica - for the corporation by the corporation and when your Treasury head comes from Goldman Sachs....

So let's have a reality check, shall we? First, Banks Keep $35 Billion Markdown off Income Statements

• Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets, regulatory filings show.
• The balance-sheet adjustments are in addition to $344 billion of writedowns and credit losses already reported on the income statements of more than 100 banks.
  
• These companies have raised $263 billion from sovereign wealth funds, their own governments and public investors to shore up capital. The balance-sheet writedowns also reduce equity, which needs to be replenished. Adding the $35 billion leaves the banks with a $116 billion mountain of losses to climb.
• While some declines in valuations may reverse, most of the losses are permanent impairments caused by surging defaults on U.S. mortgages, said Janet Tavakoli, author of ``Collateralized Debt Obligations & Structured Finance,'' published in 2004 by John Wiley & Sons Inc.
• ``Of course we can't tell how much of a bank's portfolio may actually be good stuff that will pay back at maturity,'' Tavakoli said. ``But there's tremendous value loss that's fundamental, not just due to credit market gyrations.'' Keeping those markdowns off income statements just delays the realization of the losses
• ``The banks that have taken advantage of this accounting approach are going to have a price to pay later,'' said Hintz, the third-highest ranked securities analyst in an Institutional Investor magazine survey. ``You don't avoid the price. Those that have taken it all in their income statements will come out with clean balance sheets and move on.''
• Ignoring bad debt and postponing inevitable losses was one of the main reasons behind Japan's decade-long economic slump that began in the 1990s, (but we're not Japan - we are free, open, and transparent (cough)) Faced with new capital requirements and a weakened ability to meet them, Japanese banks deferred the recognition of their losses.
• ``U.S. regulators may be tempted to go soft on banks too,'' said Whitehead, who teaches securities regulation, in an interview. ``The new capital rules already rely significantly on self-modeling by the banks. So if anything, the risks may be greater in the U.S. today than they were in Japan in the 1990s.''
• A review of the balance sheets and regulatory filings of more than 50 banks showed that 20 of them chose to keep some subprime- related losses off their income statements. The marks were recorded instead on balance-sheet items labeled ``other comprehensive income'' or ``revaluation reserves.''
• Rosenberg said the next round of equity-strengthening probably will be in the form of common stock. ``It's like shampooing: lather, rinse, repeat -- write down, raise capital, repeat,'' Rosenberg said. ``How long can they keep doing it? Shareholders are in for a long ride.''

Looks like more kitchen sinks coming down the line - woo hoo. See this is the problem with bottom fishing in many financials - even AFTER they come clean (and many are still in denial or at least still in 'hiding the truth' stage), they will be required to raise capital which means more shares issues to the public. So companies that entered 2007 with X shares are going to exist 2009/2010 with X+ (some large number here) of shares. So your earnings PER share are hindered. For years. And this is why, after the dead cat bounces and heroic tales of why financials are such an excellent buy, told to us nightly on CNBC - for many in this sector you are going to see a long age of sideways as earnings gains are simply going to be sapped by a crush of near shares.... meaning EPS growth will be much more difficult to come by. But for now, our regulators are happy to play kick the can down the road - keep kicking, keep printing money, keep accepting junk loans from these banks for Treasury Bills and keep juggling the balls in the air hoping housing rebounds and/or this all was just a nightmare and will fix itself - and/or we find more and more suckers to buy new equity in said banks. (with money created from the Fed of course)

Conclusion: Buy financial stocks. They're cheap. CNBC told me.

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Over we go to the corporate earnings world - oh lo and behold we are told how wonderful things are - if you only exclude financials, everything is so rosy. And even more rosy in the coming 6 months (remember fourth quarter 2008 expectations for earnings are over 60% higher than fourth quarter 2007) - do you believe in this economy we are going to see that sort of rebound? No... so stocks are not cheap on forward earnings. And even if we look backward we can see, if you take out energy stocks, the S&P 500 had a bad half year. (We were told everything was fine if you only exclude financials of course) Anyhow that's the past - don't worry about it (other than to read what I type below) - let's look to the future - that's all that matters. So now we look forward to the era of 60% year over year growth coming later this year. Boo Yah.

• Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.
• Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor's 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998
• ``It's kind of a Catch-22,'' said Joseph Quinlan, 49, New York-based chief market strategist for the investment management unit at Bank of America, which oversees $643 billion in client assets. ``The better energy does, the weaker the rest of the S&P. It masks some of the weakness.'' (thank you, I've been trying to say that for months on end to no avail)
• Even after taking out financial firms and consumer companies that reported lower earnings, oil profits accounted for almost half of the overall gain of 11.02 percent for the S&P 500, Bloomberg data show.
• ``A lot of that margin which dropped to the bottom line, that's gone,'' Bank of America's Quinlan said. ``The easy money is behind us, for both the oil companies and investors.''

Conclusion: Buy US stocks; they are cheap on earnings, both in the past and future. The 2nd half of the year will be booming with 60%+ earnings growth. Malls will be packed. Houses will be flying like hotcakes. And stocks should gain another 50% in the next 7 months. Nevermind, that energy "tax" on all producers (and consumers) - it's all good. Just imagine how good it will be this quarter with oil in the $110-$130 range, when the last 2 quarters it was $80-$110. Business should be booming for non energy companies since inflation does not affect anything or anyone in America. Since we have none. As shall be revealed to you tomorrow at 8:30 AM. And even if we have any; it doesn't matter - because nothing in the real economy matters. Stocks only should go up.