Monday, July 27, 2009

7/17/09 (Bank of America and Citi earnings!?)


Yesterday seemed flat and then late in the day Nouriel Roubini restated that he believed that the recession would end this year, ever since the economist had correctly called the “Credit Crisis” – he has become one of the most influential economists. He had mentioned a few months back that he had become more careful with his words because he didn’t want to influence the market, too late. We are the start of earnings season and some of the banks have top estimates (of course that was JPM and Goldman) – however Bank of America came out this morning and while it looks slightly better – they still have some problems. Google’s earnings after the close showed a drop in ad revenue. While Roubini is probably right that we will be putting in the bottom this year, he has also stated the longer term problem is the recovery.
The bombing in Jakarta has not caused too much jitters in the financial markets – but it a cause of concern as that region has been relatively stable for the last few years. Asian markets didn’t see too much volatility. My thoughts go out to the victims.
Bank of America and Citigroup Earnings

While Goldman and JPM looked great – mainly from the trading desk (their loan side still has problems), Citigroup and Bank of America do not have the horsepower on the trading desk to make up a big enough difference. Bank of America is setting aside more money for losses and the CEO (Ken Lewis) predicted a weak economy will persist into 2010. Net income fell 5.5%. Bank of America is also in a scuffle with regulators over the Merrill Lynch acquisition (finger pointing game continues). Additionally their acquisition of Countrywide has put serious stress on the balance sheet.

Citigroup has similar problems, but instead of acquiring a brokerage firm (like Bank of America) they sold their control of Smith Barney helping bringing in much needed cash. Additionally their consumer and commercial loan losses continue to mount. Without the massive trading desk that can make-up losses on the loan side – it’s going to be tight. Profit generated from unloading their control of Smith Barney is a onetime pop, but the company still needs to manage the debt on the balance sheet and reduce cost.

Bank of America (BAC) is down slightly in the pre-market.
Citigroup ( C ) is flat to slightly up.

Housing Starts

There is still mixed messages in the housing market and it is hard to determine if we have bottomed or not. Foreclosures continue to increase, mortgage rates are increasing putting pressure on lending, and delinquencies (more than 90 days late) are increasing in the residential and commercial markets. However, the Housing Starts reported this morning reports a positive sign as it increased 3.6% and brought the annual rate up to 582,00 (the highest level since last November). Certainly it is still low compared to what it had been over the last several years, but it is a sign that some construction is breaking ground. But in reality is it really the EXISTING home sales that really drive the market and that remains negative.

Still the data is mixed and it will probably remain too hard to tell if the housing market has bottom or not.

Futures Pre-market

The futures are down in the pre-market. But are seeing some volatility. The spread is small – with fair value a few points above. Expect a weak opening.

Support / Resistance

Possible Break-out?

INDU 8500 / 8750 (It has been a fast rally week from the support to resistance in a short time – over 7%. 8750 is a key area to watch, a break out could mean the first visit to 9000 this year.)

NDX 1450 / 1500 (The 1500 area was resistance and we saw a jump going into the close that looks like a break out. If we can remain above the 1500 line a move towards 1600 is in the cards. If we close at 1500 or below, the late session break-out could of just been a head fake.)

SPX 880 / 950 (Unlike the NDX the SPX is still short of that 950 area – if the NDX stays above 1500 and SPX breaks 950 we could be looking at a breakout.)

RUT 500 / 535 (Like the SPX the RUT has still short of the breakout area. Keep an eye to see if we can get one.)

Gold 900 / 950 (It seems like gold is just holding between 900 and 950 – it would seem like it is waiting to see how the dollar pans out.)

Silver 12 / 14 (Similar - but more volatile than gold – Silver seems to be in the range as well.)

OIL 60 + (Oil saw a big move down, but is now rallying back.)


We have had a solid rally back to resistance, the earnings seem to be great on the surface (beating estimates) – but the story seems to be the same, consumer and commercial loan losses continue to mount. Goldman and JPM were saved from their trade desks, but BofA, GE, and C are suffering from debt. The CIT story could be a large blow for small to medium size businesses and clearly shows that there is still serious problems with credit.
The housing market also seems to be finding some solid ground, but the foreclosure and delinquency rate still increases. It may see a bottom this year.

Nourirl Roubini (Dr. Doom) has not wavered from his view that it would be the end of this year that would possibly be the bottom of the recession, but he does also continue to convey concern about the recovery going forward.

At the end of the day it is the consumer the drives the wheel of the economy and that is what we really need to see change – jobs, income, credit availability before we can see the revenue increase on the business side. We are still in the mode of watching companies beat estimates on lower revenues because they have cut costs – but that can only last so long. Revenues have to eventually pick up – when we see that happen – the recovery will be in play.

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