Wednesday, July 23, 2008

Follow That Lemming...

From the WSJ:

Five of the largest U.S. financial institutions, led by Wachovia Corp. and Washington Mutual Inc., reported combined quarterly losses of more than $11 billion. But their shares jumped an average of 14% on rising hopes that battered bank stocks have fallen about as low as they can go.

The buying frenzy, also fueled by short sellers covering bearish bets, was at odds with the mostly somber assessment by bank executives Tuesday of the shaky loans and struggling economy bedeviling the industry.

In a sign of the loan woes likely to haunt them for years, Wachovia, Washington Mutual, SunTrust Banks Inc., Fifth Third Bancorp and Regions Financial Corp. socked away nearly $13 billion in loan-loss provisions. Wachovia, Regions and Fifth Third also cut their dividends in order to conserve cash.

Financial stocks are up 31% in the past five trading days. The five big lenders that reported quarterly results Tuesday have climbed by an average of 60% over that period. Tuesday's gains increased their combined stock-market value by $11.6 billion -- almost identical to their total losses in the second quarter.

I think the short-covering is a very important part of this rally, especially in light of the SEC clamping down on some short-selling tactics.

But let's consider the news from a strictly analytical perspective.

Five of the largest US banks "reported combined quarterly losses of more than $11 billion." Yet somehow that means the bad news is over? In addition, the assessment of current conditions was "mostly somber". This from a group of people who are trained in media relations and will spin anything as good. In addition, the five added a combined total of $13 billion to their loan loss provisions which means borrowers are having harder times repaying loans. And finally, three banks cut their dividend to conserve cash. None of these development is positive. In fact, all of these are negative developments. Yet traders are buying these shares?