Unforgetable: the week in pictures

A failed shoulder-head-shoulder set-up was the most important event for Technical Analysis aficionados this week.
This failure is opening the door to a rally, they tell us now.

In he mean time we will not forget the following pictures.
The ramping up of Goldman Sachs on Wednesday.

After a reversed split FAS and FAZ are the darlings of the pro’s again: just look what happened in the last minute of the session on Wednesday….

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Another blow for banks

Moody’s Investor Service announced that they are going to modify the rating methodology applied to structured finance securities insured by financial guarantors aka monolines. From the FT

New York, July 14, 2009 — Moody’s Investors Service is modifying the rating methodology it applies to structured finance securities insured by financial guarantors. Specifically, starting September 1, 2009, Moody’s will withdraw the ratings on those structured finance securities insured by guarantors that have financial strength ratings below Baa3 (that is non-investment grade) if either of two conditions are met: Moody’s is unable to determine an underlying rating (i.e., absent consideration of the guaranty) on the security or the issuer has requested that theguaranty constitute the sole credit consideration.

Below is a list of securities impacted by the new policy whereby their ratings will be withdrawn on September 1, 2009 unless prior to that date Moody’s is a) provided sufficient information to determine the underlying rating or b) informed by the issuer in the case of GMAC Certificados Bursatiles UDIS MXMACFW 07-5U to no longer rate the security solely based on the guaranty.

The aforementioned list is deals mostly insured by monolines like MBIA and Ambac.
We remember that these structured products got a credit enhancement in the form of a guarantee of payment of principle and interest to bond issuers.

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The financial sector

If you look to this chart of the banking stocks, you would thing everything is ok.

However it isn’t.
The bullish percent indices make clear that everything is not quite well.

Let’s have a peek to another ETF breaking down. July 8th the P&F chart of the Financial iShares (ticker IYF) broke through a triple bottom.

Looking to the renko charts we got confirmation:

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Preferred shares less preferred?

Preferred stocks pay a dividend but do not participate in upside growth or extra profits. The advantage, historically speaking, is that they paid a nice dividend yield. An interesting aspect is to look to the hierarchy in the event of a company's bankruptcy. Bank debt is at the top of the structure. Then comes secured debt, unsecured debt, accounts payable, preferred stock, and then, last and least, common stock. Usually there is nothing left over by the time it gets to preferred and common.

The exchange-traded fund PGF owns preferred stocks from financial companies, both foreign and domestic, that all qualify for the 15% qualified tax rate.
What it does: PGF tracks the Wachovia Hybrid & Preferred Securities Financial Index. The underlying basket currently includes 40 holdings comprised of U.S. listed preferred stocks.
Who it's for: Investors looking for a high-yield option in the financial sector. Preferred shares have both debt and equity aspects, and PGF is likely to be more volatile than other regular equity financial ETFs. Preferred stock securities, like those found in PGF's portfolio, are taxed with the same 15% rate as common dividends. This 15% rate compares favorably to the rate that investors would pay on fixed income or bond interest payments, which are taxed as ordinary income at the maximum tax rate.
Top 10 holdings: (coupon rate, rating). Bank of America (BA, 8.20%, BB-/B3), Barclays(BCS Quote) (8.13%, BBB+/Baa2), JPMorgan Chase (8.63%, BBB+/A2), Wells Fargo (8%, NR/B2), Allianz (ALL.PA) (8.38%, A+/A3), HSBC Holdings(HBS Quote) (8.13%, A-/A1e), Metlife (6.50%, BBB-/Baa1), ING(ING Quote) (8.50%, BBB/A3), Bank of America (8.625% PD 8.63%, BB-/B3), Credit Suisse(CS Quote) (7.90%, NR/Aa3).

For one reason or another, the preferred stock of financials is a nice tracker of the market. In doing this, it’s flashing a warning: it seems to break down.
A correction – after the consolidation – seems not to far away for the coming days while we’re nearing the end of the first half-year.
The first line of defence – the 20 day moving average - seems to be in danger.

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Figures and more figures

From Bloomberg.
More than 150 companies raised 82.2 bln USD this second quarter in new equity. A faster pace of equity issuance than at the height of the bubble in 2000.
The biggest issuer is the financial sector.
All these new shares are diluting shareholdership, the value of the existing shareholders and the earnings per share.
If the S&P500 is taken as a benchmark then the new shares have diluted corporate earnings by 3%. Total shares in this index have grown with 3.4% since March 31.

More figures. After paying back 68 bln USD in exchange for bonuses, there is still a long way to go. Western governments own roughly an estimates 450 bln USD in banks. Central banks provide generous collateral rules for borrowing in an effort to provide banks with liquidity. But the system needs to refinance some 25.6 trln USD of wholesale finding by 2011. No matter what happens, they never gonna succeed if there is no government back stop.

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Snippets

Some quickies.
The Financial sector seems to crack. The 60-minutes renko chart is not eying very well.

Although the daily uptrend is still intact.

Palm (ticker: PALM) is not looking well neither. The rally of last week came to a standstill en the short term trend is down

We close with the bullish percent index of one index and some sectors. Slowly some sectors are turning south.

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Relaxing

Chart of the Day publishes a chart a day. The most recent one was very interesting. This chart depicts the earnings growth. We know that earnings of one quarter always are compared with the earnings of the same earnings twelve months earlier.
The stocks of the S&P500 – Americans finest – have imploded over the last 20 months (almost two years). Real earnings (adjusted after inflation, that is) have dropped to a record low.
The ‘better than expected’ mantra is very deceitful if we look to a longer time frame. And of course, it is the financial sector responsible for this huge fall.
But anyway…

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Ireland: not a bright spot for the moment

Everyone has his unemployment worries, these days. Most well known are the US, but if we look to the Irish unemployment rate than the Emerald Isle is in nothing short of their American counterpart.

Share prices are going bonkers over here. Thank you. AIB and Bank of Ireland stock prices quadrupled over the pas few month. Everybody is telling in the pub that this is due to the planned bail-out of the government. Maybe, but I rather think shorters covered their positions. As everywhere else in Europe.

What if the government ends up with 70% of AIB shares?

Time to buy. These guys are not so weak as everybody assumes.

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On the move...

Banking stories are floating around…
Interesting article in the FT: more than 50 analysts, traders and to salespeople left the building of Dresdner Kleinwort last week. Did they go to the pub. Maybe but definitely they went to Evolution and Nomura.
This is what we call a mass movement. Is it also the beginning of a new trend?
Now, this is bad news for Commerzbank, just in the process of pulling out of London and looking for a buyer for Kleinwort Benson.
Here’s another one: Friedman Resigns as NY FED chairman of the board of directors. Stevie is a former Goldman Sachs employee, who loaded his account with GS shares in December 2008 and January 2009. What’s wrong with that? the FED board is asking in some comments…
That’s where these guys are good in: asking stupid questions.

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No more bears

It’s like waiting for rain.
In the desert.
And it is not coming.
So are we waiting for the bear market in financial stocks to resume.
But it’s like waiting for Godot.
The FAZ is unraveling and soon we will be able to buy it without any risk.
Where are the bears?

The renko chart is not pointing to any recovery soon.

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Bear - part 3

More short ETF’s are pointing to a (temporary?) change.
The Financial Bear 3X Shares (ticker: FAZ) is gaining momentum.
On the 60 minutes renko chart we see that the trend – CCI followed by the SAR – is turning positive.

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USO and FAZ

Will the oil price rebound anytime soon?
As far as the oil ETF is concerned (ticker: USO) not. The modest rebound of the last week is not met with stronger volume.
On the contrary.

The renko chart of the Financial Bear 3x Shares ETF (ticker FAZ) seems to be bottoming. Does this mean that good news from banks have lesser and lesser impact?
Now, in recent days more than 125 million shares were traded in the FAZ. That’s a lot. That’s more than the combined trading volume of Microsoft, Intel, IBM and Exxon combined. Without any doubt this fact is influencing the prices of the underlying bank names, because this ETF is constructed as a derivative in order to generate the three times leverage.
It’s clear that a lot of trading power is hooking up here.

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The missing month and Goldman

In the good old days, investment banks of the like of Lehman, closed their books at the end of November. They don’t longer exist. The survivors turned themselves in commercial banks, normally celebrating their year-end at 31st of December.
Now, this is funny: Goldman Sachs reported for the first quarter of 2009. From January till the end of March.
The question is: where went December?

From the FT:
Floyd Norris of the New York Times noted that Goldman Sachs used a more prosaic trick having nothing to do with mark to market accounting - the company moved its fiscal year up a month and simply left out its losses from December, which is now known as an ‘orphan month’. Is the rule that says a year has twelve months also open to subjective judgment?

Now, December is not completely missing.
Page 10 of the bank’s 2009 Q1 earnings statement is pretty clear. The net loss in December was £780m after writedowns including some $1bn on credit activities and $625m in commercial mortgage loans and securities (Footnote 19).


However, how would the first quarter profit have been if GS had included December?
Sure, everything you have to know is there, but did you knew?

Of course also JP Morgan is beating the analysts’ expectations.
And so will GE and Google, later this week.

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More about Goldman

Well done Goldman. Shorting AIG when the price imploded while this was your most important counterparty on the other hand.
Enclosed you find a link to the transcript of the Goldman Sachs Q&A they held with analysts yesterday.
Worth to notice is the following:

Question: Thanks, and cleanup on the exposures David. Could you provide us a where marks and exposure levels stood in March versus November for the hot spots, commercial real estate, leveraged loans, residential real estate, ALT-A, subprime.

David Viniar: Let me give you a couple of those and anything I don't answer, ask he into if I haven't given what you need. The commercial real state, we had at the end of the quarter market value of-- round numbers I'll give you, about $8.5 billion and about $1.5 billion was CMBS security sots real loan portion was about $7 billion and our average mark across there was something in the high 50s. The residential real estate for us, we just have a trading position at this point. We have nonagency residential real estateWe have roughly $4 billion split equal, roughly equally between prime ALT-A and subprime, and that is really a trading position. You know, it's going to go up or down over the course of any quarter at this point. I wouldn't call them legacy. Our leveraged loans, from the $52 billion of legacy loans that we had at the end of the third quarter of '07 which is when the credit crisis really hit, we're down to a market value of about $2.3 billion. So the exposure there is pretty minimal this point and the average mark on that 2.3 billion is in the range of 50 cents.


Please can somebody explain to me, why the US Treasury/FDIC wants to pay between 80 and 88 cts on the dollar when these structures are priced at 50 cts in the books.

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FAZzzzzzz

Three weeks ago FAZ (the bearish leveraged financials ETF) was worth more than 100 USD.
Now it'ss under 10 USD.
Things can change fast these days.
Let’s party with the crowd.
And keep an eye on the huge volume. Taking profits or new short sales?

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I don't like Mondays

A sell-off in Asia this morning is causing ripples in the European markets as we are closing down the first quarter of 2009. Profit taking before month end.
Reuters reported that GM and Chrysler would not receive more aid, resulting in the ousting of the CEO Rick Wagoner of GM and the warning that Chrysler has to form a partnership with Fiat within 30 days.
UBS has more writedowns and the G20 jamboree motivates some activities in the streets of London not seen for a while.
Part of the leaked G20 communiqué is that the IMF is urged to accelerate their gold sales.
From FT: "Hundreds of Russian banks are likely to go under by the end of the year as the amount of bad loans surges, potentially hitting as much as 20 per cent of credit portfolios, a senior Russian banker has warned. Pyotr Aven, president of Alfa Bank, one of Russia’s largest private banks, called on the government to move swiftly to recapitalize the top 30 banks and name the institutions that will receive assistance to help kick-start the flow of credit, which has almost dried up amid growing fears over bad loans."
A spiral of fear caused by diminished expectations is bringing the economies down. After a full year of a serious banking crisis, the economy is still waiting to experience the full consequences of the shock real estate combined with a financial crisis caused.
It is Paul Kedrosky using the term ‘The New Normal’. And it’s not normal. It’s an economic recalibration which is not going to restore our consumption economy, but bring us down to a new level of more savings, less debt and less spending.
There is an article in the NY Post that Citigroup and Bank of America have been buying toxic securities, paying more than the market price. Could it be possible they gonna sell this stuff in the new PPIP program.
Wait a second: the taxpayer is going to subsidize this plan for hedge funds and bank and these guys are once more screwing up the system.
Was this the intention of Tim Geithner in order to deal with the banks’ toxic debt?
It gets even better: there are plans that banks could take equity stakes in the public-private partnership funds. The banks would pay for these stakes with the loans they are selling to the partnerships. The difference between the market price of this toxic waste and the price these funds are going to pay for is subsidized by the government.

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And the winner is...

From Bespokeinvest we learned this about the rally of last week:
Below we highlight sector performance during the current rally that started last Tuesday. As shown, the Financial sector is up a whopping 50% since the close on March 9th! The S&P 500 as a whole is up 17.4%, and Telecom, Materials, Industrials, and Consumer Discretionary are all outperforming. Consumer Staples, Health Care, Energy, Utilities, and Technology are underperforming the S&P 500.

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