Monday, February 25, 2008

Don't Expect the Financials To Recover Anytime Soon

From CBS:

Analysts at Goldman Sachs cut estimates for the nation's top banks and brokers Monday and said these major institutions would likely report write-downs of between $1 billion and $12 billion for soured real-estate loans and related exposures.


"Although many of the write-downs in the back half of 2007 focused primarily on subprime and CDOs, we expect first-quarter 2008 write-downs to be spread across all aspects of residential mortgage-backed securities including subprime, Alt-A and prime, commercial mortgage-backed securities and leveraged loans. We forecast first quarter write-downs of approximately $1 billion to $12 billion for each of our large-cap companies across all of these categories," the Goldman analysts concluded.

This should come as no surprise, especially considering this:

One-tenth of U.S. homeowners hold mortgages that are larger than the worth of their homes, Moody's said on Friday.

Nearly 8.8 million homeowners, or 10.3 percent, are in over their heads, its chief economist, Mark Zandi, estimates.

As a result, millions of U.S. homeowners have the incentive to abandon their properties.

The bottom line is the financial sector is going to dealing with this for sometime.

First it was the mortgage lenders. 230 have "imploded."

Now it's the banks. 16 have imploded.

And the charts show the result of the damage.

On the 5 year chart, note the following:

-- The financial sector has clearly broken an uptrend after forming a double top in early 2007.

-- The sell-off happened on extremely heavy volume. This was a "get the hell out at all costs" sell-off.

-- Prices are back to late 2003 levels.

On the 6 month chart, notice the following:

-- Prices are 19% below the 200 day SMA

-- The 10, 50 and 200 day SMA are all moving lower

-- The shorter SMAs are below the longer SMAs.

This is an incredibly bearish chart.