Wednesday, May 6, 2009

Bernanke Not Smoking Yet

Bernanke Still Not Hooked in the XLF Green Shoot Bong

"We continue to expect economic activity to bottom out, then to turn up later this year....An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall"

"Investors seemed to adopt a more positive outlook on the condition of financial institutions after several large banks reported profits in the first quarter, but readings from the credit default swap market and other indicators show that substantial concerns about the banking industry remain."

Bernanke's concern arises from his own research published in a paper and his book about the great depression. He found significant statistical correlation between banking panics in the 1930's and collapses in industrial production and economic activity

Most of the Q1 earnings were either one-time items(like mortgage refis or capital gains from holding GSE debt), volatile hedge fund type profits('trading' revenues), gains from declines in the bank own debt or write-ups from bad assets using rosy assumptions. It doesnt take a genius to realize that a quarter where GDP went down 6% and unemployment jumped shouldn't bring out profits to businesses that are simply levered bets in the US economy

With home prices still in decline and unemployment headed higher its very likely bank earnings will dissapoint the now optimistic forecasts, beating Q2 estimates will be much more difficult because everyone is now passing the green shoot bong and optimistic expectations are setting their own downfall

Looks like BAC needs $30b+ in capital, C $10b and 8 other banks also need money. Keep in mind that this is using the government rosy assumptions about unemployment and accepting bank management rosy assumptions about pre-tax pre-provision earnings, plug-in more realistic numbers and the capital needs would certaintly soar. This suggests Bernanke's fears might became reality as the market will grow its concerns about bank capital and earnings in the coming months. The XLF has lead this market all the way down, unless housing and the labor market turns around its quite likely this will happen again

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