Math Problems at IMF?

IMF published their new Financial Stability Report, in which they claim that U.S. banks will have $250B drain on equity due to writeoffs in the next two years. The simple math they go through is follows: total write-offs on loans and securities over the cycle for U.S. banks will be $1050B. $500B of that has already been recognized, which leaves $550B remaining. They estimate after-tax pre-provision earnings in 2009-2010 at U.S. banks will be $300B. $550-300B=250B drag on capital. But what happened to applying a tax rate to write-downs, which would presumably reduce net write-down number to 360B, or result in only $60B drag.

This not so well-thought out math only adds fuel to the fire burning the bank stocks and shaking the confidence in the system. Lets hope Fed's stress test is more well-thought out, and somebody actually pays attention, rather than just saying 'they are all bankrupt, I don't care what numbers say', like many people seem to be prone to do these days.

Another "Gem" from WSJ...

WSJ should really refrain from trying to do any economic analysis of their own. This article claims bank lending keeps dropping, because February loan figures are lower that January ones by 4%, and October ones by 20%. Now, I am not going to dispute that bank lending is dropping - Thank God it is, American consumer needs to delever! But how can you look at February figures - the month, eh, has 10% less days than January? The data in the article is completely meaningless.

What's in Your Wallet - Delinquent Capital One Credit Card

Capital One charge-offs spiked to 9.3% this month, up 1% from last month. 1% is truly horrendous, but I wouldn't rush to extrapolating to other issuers - COF, vs AXP for example, is much more reliant on 0% ARPs, which once they roll-off from their grace period may turn into delinquents - potentially causing the increase.

Goldman Results - Another Nail in Shorts Coffin?

At least until the results of stress test come out... GS reported $3.23 EPS and $1.8B net income, and that's despite $2B write-off.

Banks and Fees

This graphic from WSJ's article on government investigating banks who received TARP funding charging higher fees is entertainingly empty-headed. Are we supposed to infer from it that if you received TARP, you're more likely to be an evil bank sucking your customers dry for every fee you could get. Or, perhaps, that you are a successful bank who has tremendously outgrown your competitors? Ah, those journalists.

Happy Holiday...

In a day of little news, Bloomberg reports that Fed tells banks to stay quiet about the stress test results (the article also has an awful picture of Geithner). This whole stress test business may be a disaster - just when the markets are getting more optimistic, Treasury will spook them out again by identifying 'weak' banks.

Freaking Out About Helicopters - GS Thinks that Hyperinflation is Unlikely

Fed's balance sheet expansion to 2TR+ has made many people worried about hyperinflation materializing as soon as this year. GS has recently published a report 'Hyperventilating about Hyperinflation', according to which the worry is hugely overrated. Here's the simple argument:
1. The reason why inflation comes in the first place is "too much money" chasing "too few goods". Inflation tends to lag output gap (potential - actual GDP) by about a year.
2. Output gap will average 7% in 2009 and 2010 according to relatively optimistic economic forecasts - still the worst performance since WWII. To close that gap in a year you'd need 10% growth rate - who thinks we'll be back to even 3% growth anytime soon?

And before the output gap closes, Fed will have plenty of time to unwind it's balance sheet, thus reducing the risk of hyperinflation massively. The key is understanding that most of Fed's facilities are short-term: TAF, CPFF, AMLF have maturities of 90 days and less, and account for $700B of Fed's balance sheet (or 2/3 of 1.1B expansion). Most of other money is in swaps to foreign central banks, that also can be unwound relatively fast if the economy actually starts heating up.

Thus buying double short treasury ETFs (like PST) because you hope for hyperinflation in the next couple of years is not the greatest idea. Hyperinflation will happen only with a) rapid economic recovery b) complete inability by Fed to unwind its facilities. You're much better off with just buying equities that will rally hugely if a) is indeed the case, but don't need b) to come true.

Trade Balance and Claims

Both trade numbers and claims came out better than expected: -$26B vs -$37B, and 654K vs 660K consensus. Exports actually grew moderately at $2B, while imports declined $8B month-on-month. On unadjusted seasonal basis balance of payments improved from -$44B to -$29B, and of that $11B came from Asian countries (6B from China, 2B from Japan). Chinese better be buying more cars. The claims data is not that interesting - it's basically flat from last week.

Morning Papers...

CVC close to buying Ishares for $4.4B from Barclays. The article says that the fund will get 2/3 financing from the bank, which implies 1.5B equity check from CVC - quite hefty given their total fund is ~10B euros, including 4B sidecar. Maybe the other chasers of the deal (H&F, Bain), will get a chance to invest after all.

Wells Fargo reported 0.55 EPS for Q1. On the one hand results are very strong, illustrating the earnings power of the franchise. Company's net charge-offs are up to 3.3B from 2.8B in last quarter, while they also added 1.3B to reserve, but the pre-provision earnings at 9B allow them to easily absorb those losses. Hoorah, all bank shares rallying. Two points of caution on the results though: a) NCOs are lowered as Wachovia's impaired 'Pick-a-Pay' loans are not in the charge-off number - they were written down on acquisition, and until losses on them hit the written-off amount, there're no new write-offs on them; b) WFC CEO Kovacevich has recently repeatedly ranted against the stress tests calling them 'asinine'. That makes you question whether WFC needs to raise new capital (their Tier 1 at 7.9% is the lowest among all major banks after all), in which case pre-announcing the earnings will give you a nice share price bump, that would allow to tap existing shareholders for capital with less dilution. We'll wait a couple of weeks to see whether this prediction will pan out...

And more on banks: NYTimes article says after conducting stress tests, officials say that "the banking industry seems to be in better shape than many people think"

China is buying more cars than U.S. for the first time. Long live Wen Jiabao.

And More on BAC - Fox Interview With Ken Lewis

In the interview with Fox, Lewis presumably (I haven't watched that part of the interview yet) said again that BAC doesn't need more capital. Given the fact that he's in conversations with regulators constantly, I don't understand how he'd make the statement if it wasn't actually true. If it's not true, he'll be given a boot in three weeks, and if it is, BAC is going to 10+ a share very shortly.

Bank of America Needs $36.6 Billion, Oppenheimer Says

Another analyst came out with their "analysis" of bank capital needs. Oppenheimer claims that Bank of America needs $36.6B of new equity. How do they get to this number? Simply saying that BoFA's TCE should be at 6%, or twice the current level, implying ~50% dilution for existing shareholders. You'd think the point of the stress test conducted now by the regulators is to assess future performance of loan portfolios and see how capital ratios that are already in place (aka Tier 1 - this is what UK regulators were looking at when doing stress test for Barclays). For example projected losses in excess of earnings in the stress case are $20B, and with this you get to 8% Tier 1, and we really want you to have 10%. In any case, if you do believe TCE is the way to go, short Wells Fargo (with their 2.3% TCE ratio including mortgage-servicing rights) and long BoFA if you're feeling lucky, or JPM.

Party Over for Russians Billionaires

Bloomberg article on deprivations of nouveau riche in Moscow... One of many great quotes: "You just can’t party when others are starving”. Indeed, for there was clearly no one starving in Russia before the crisis began...