Tuesday, May 26, 2009

Morning Update/ Market Thread 5/26

Good Morning,

Futures are down after having dipped significantly but finding a “V” recovery this morning… Why the sudden change? I don’t know, perhaps the manipulators will tell the world that North Korea is simply shooting off bottle rockets in celebration of their world isolation? I don’t know (!) but the dollar is up, bonds are up, and the /ES is sitting right around the 880 area… Here’s the overnight action:

Let’s talk technicals a little first, before I go on another rant about the freaking banks…

Friday we had another small movement in the McClelland Oscillator, so expect a large price move today or tomorrow, direction unknown by that indication. The short term stochastics would imply higher, then lower, as the 5 and 10 minute are oversold, but the 30 and 60 minute are just leaving overbought (doesn’t have to happen that way and we’re going to open lower).

We also closed below the mid-point of the daily Bollingers, so the odds favor coming down to the bottom Bollinger. Doesn’t HAVE to happen, but the odds went up.

Here’s a chart of the daily SPX. You can see that the 880 area is offering support, but once it falls, there’s not much until the bottom Bollinger band. Note that the fast stochastic is about to reach oversold:

On the 20 minute chart there is a textbook Head & Shoulder pattern setting up. We did dip below the neckline in overnight trading, but to be valid the neckline needs to fall during the light of day. If it does, this pattern is worth about 45 S&P points and would target about the 835 area which is beneath the lower bollingers and is just about where the 100dma is located. Volumes were lighter on Friday, but it was a holiday weekend thus lower volume would be expected:

The VIX has yet to break upwards from its descending bullish wedge. Right now the line is a little over 33. Break above 34ish and that would be bearish for the market.

A lot of analysts are turning more bullish, even some of the “bears” such as Peter Schiff who hinted this weekend at a possible two year bounce, then decline, and also Marc Faber who also thinks equities are going higher. Maybe, but I highly doubt it. I am still thinking the highest odds scenario is that we move a lower in the short term, then bounce again, possible lasting as long as late summer, but in the Fall, forgetaboutit! That’s IF we don’t just head on down here and now.

But keep in mind that the game players are playing their ABSOLUTE WORST BULLSHIT GAMES. Remember that JPM sucked in the “assets” of WaMu… you remember, those toxic wasteland pools of option-arm mortgages with delinquency rates that would scare the hell out of Mother Teresa? You bettcha… those loans are still there and they are not getting better. In fact, the expensive homes that are financed by those loans are in far worse shape, value wise, than the subprime homes that have caused so much havoc. And the value of the loans that are up for reset in the next 2.5 years dwarfs the value of subprime.

Good thing for JPM and their ilk that they strong-armed the politicians and accountants at the FASB, because that way they are able to take those loans and mark them to anything they damn well please, thank you very much!
JPMorgan $29 Billion WaMu Windfall Turned Bad Loans Into Income

May 26 (Bloomberg) -- JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.

Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-called accretable yield, the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce.

Faced with the highest U.S. unemployment in 25 years and a surging foreclosure rate, the lenders are seizing on a four- year-old rule aimed at standardizing how they book acquired loans that have deteriorated in credit quality. By applying the measure to mortgages and commercial loans that lost value during the worst financial crisis since the Great Depression, the banks will wring revenue from the wreckage, said Robert Willens, a former Lehman Brothers Holdings Inc. executive who runs a tax and accounting consulting firm in New York.

“It will benefit these guys dramatically,” Willens said. “There’s a great chance they’ll be able to record very substantial gains going forward.”

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

Purchase Accounting
The purchase-accounting rule, known as Statement of Position 03-3, provides banks with an incentive to mark down loans they acquire as aggressively as possible, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine.

“One of the beauties of purchase accounting is after you mark down your assets, you accrete them back in,” Cassidy said. “Those transactions should be favorable over the long run.”

JPMorgan bought WaMu’s deposits and loans after regulators seized the Seattle-based thrift in the biggest bank failure in U.S. history. JPMorgan took a $29.4 billion writedown on WaMu’s holdings, mostly for option adjustable-rate mortgages and home- equity loans.

“We marked the portfolio based on a number of factors, including housing-price judgment at the time,” said JPMorgan spokesman Thomas Kelly. “The accretion is driven by prevailing interest rates.”

Wachovia ARMS
JPMorgan said first-quarter gains from the WaMu loans resulted in $1.26 billion in interest income and left the bank with an accretable-yield balance that could result in additional income of $29.1 billion.

Wells Fargo arranged the $12.7 billion purchase of Wachovia in October, as the Charlotte, North Carolina-based bank was sinking from $122 billion in option ARMs. As of March 31, San Francisco-based Wells Fargo had marked down $93 billion of impaired Wachovia loans by 37 percent. The expected cash flow was $70.3 billion.

The Wachovia loans added $561 million to the bank’s first- quarter interest income, leaving Wells Fargo with a remaining accretable yield of almost $10 billion…

Hey, anyone who believes that sufficient writedowns were taken on those toxic acquisitions has holes where they don’t naturally belong. Thus we are back to make believe financials… an economy of the banks for the banks. Meanwhile, down on Main Street we still don’t manufacture hardly anything and unemployment is still climbing.

Speaking of unemployment, did you hear that some people are calling an end to the recession already?! It’s true! They are saying that since 1970 every time weekly unemployment claims have dipped, that was THE dip and they never went back up! LOL, I love claims like that by people who, like Bernanke, don’t look far enough back in history to have any clue. 1970! Give me a break. What’s occurring now is absolutely nothing like anything seen in this country EVER. Never has the population been so saturated with debt, never has our government had so much debt while at the same time their revenues are collapsing, NEVER has there been such a credit bubble in the history of mankind!

So, while the banks mark their assets to fantasy, you and I and the people on Mainstreet must mark our portfolios to reality! And thus the rule of law is a one way street! And speaking of one way rule of law, I chuckle tremendously at the couple who deposited $10k into their account and the bank credited them with $10 million! Another recent graduate of our school system who can’t do simple math, no doubt! Anyway, they saw the mistake and took the money and ran! Now there’s a “world-wide manhunt” underway! LOL, love it that the media would get so worked up over such PENNY ANTE theft, meanwhile the biggest theft in the history of mankind is occurring right under everybody’s noses – see the article above! People are NOT stupid, they see this one way rule of law and will CHEER this type of lawless behavior that is against the banks – I know I do! And there’s yet another example of moral hazard when the rule of law is not followed by all, it degenerates into a free for all. Look for more of that as people get fed up down on Mainstreet:

Bob Seger – Mainstreet:

ADMINISTRATIVE NOTE: I will be traveling to my son’s State Golf Championship this evening and will not be posting articles until I return later in the week. Before I leave this afternoon I will post a couple of these daily threads so that people can communicate with one another. I appreciate everyone keeping the posts going and sharing information. There’s a bunch of economic data coming later in the week along with a lot of bond auctions and I appreciate posting the results, it’ll help me and everyone else out too! Thanks in advance, and I’ll have more information later…