JP Morgan Analysts Say "Worst is Over" For Banks

Bank stocks are experiencing a dead-cat bounce today on an analyst note issued by JP Morgan claiming that the worst of debt-related losses and write-downs are over for European banks.  Hmm, that refrain sounds awfully familiar, but I can't quite put my finger on where I've heard it before.  But since a bank analyst said it, it must be true.  Those guys are never wrong about anything.  Incidentally, analysts are currently predicting an earnings increase of 7% for S&P 500 companies for the full year of 2008 over 2007.  This would imply a very large bounce in earnings in the second quarter.  Even my one year old thinks that is a bit farfetched, and she spends most of her day repeating her mantra: "gum gum gum."  

In other bullish banking news, UBS Chairman, Peter Kurer said the bank won't be asking investors for new funds.  Well, that's a relief.  If the Chairman says they won't raise anymore money then it definitely must be true.  After all, UBS hasn't screwed up anything important in the past six hours or so.  Maybe Mr. Kurer has yet to factor in any of the cash the company is going to have to shell out to cover the settlements with the various regulatory agencies it is entangled with.  Even bear markets experience the occasional bounce, so I'll let the Bulls take over for the morning.  We'll see how long this rally can last. 

Paulson Reiterates Views of Other Wall Street Talking Heads

Treasury Secretary Hank Paulson continued the recent PR blitz begun by Wall Street CEO's, claiming that as far as the credit crisis is concerned, "we're closer to the end than we are to the beginning." He hedged a bit by saying that even with "headwinds and despite some of the things that we're going through, this economy is still growing, albeit modestly." When asked about concerns over whether the economy will fall into recession, he said he didn't want to "enter into a technical debate" about the term. That is a very interesting response, and I have no idea what it means. Furthermore, Paulson claimed that he supports a strong US currency. "I'm a strong dollar man, we have a strong dollar policy." It's funny how our government officials think that stating that they support a strong dollar will somehow offset the policies they enact that continue to debase our currency. Maybe Paulson means that he is emotionally supportive of the dollar? Perhaps the dollar will actually strengthen if the Fed is serious about no longer easing to prop up the banking system during a period of increasing inflation. The market seems to believe this is the case as commodities are getting crushed and the stock market is rallying today. Maybe the general public is buying into the belief that the "worst is behind us." As an anecdotal example, here's a story in the Dallas local news about a guy who tried to cash a $360 billion check. This guy definitely thinks the credit crisis is over.

Ambac CEO Claims "Worst May Be Behind Us."

In an attempt to calm investors' nerves after posting $1.6 billion in losses on $3 billion in write-downs, Ambac CEO Michael Callan jumped on the bandwagon with all of the other financial company CEOs by implying that the credit crisis was past its nadir. "The worst may be behind us," Callan stated during the company's conference call. He further clarified his point by saying "Worst is a big black bear that is chasing us so everybody RUN FOR YOUR LIVES!" This last quote is actually not true, but that should not take away from the comical nature of the CEO's actual comment. Ambac has a $400 million credit line that is currently in violation of its net worth covenants. Furthermore, the company is seeking shareholder approval to increase its shares by 350 million in order to raise cash to shore up its balance sheet. However, given that the stock is now trading at $3.50, the capital infusion may not be enough. According to the Bloomberg article, the CDS on Ambac has widened by 90 basis points to around 793 but my inside sources claim it is actually trading at 1018 right now, meaning the bond market has its doubts about Ambac's ability to remain in business.

In a related article, Ambac's lawyers are investigating the contracts on 17 transactions. The company is attempting to figure out how losses on underlying collateral with Bear Stearns that were originally projected at 10% morphed into 81.8% default rates. Sort of makes me wonder how bad Ambac's projections are on the rest of its deals. The worst is behind us? That had to have been a joke. But shareholders aren't laughing.

Goldman's Blankfein Says End to Credit Crisis is Near..

Blankfein claims we are in the third or fourth quarter of the credit crisis, although he hedges by saying that the fourth quarter of most sports events tends to be the longest. Separately, yet totally related, Goldman punted $500 million of Chrysler bonds for $.63. So, let me get this straight, the credit crisis is almost over, yet GS is puking bonds at $.63. That's a mighty big discount if this credit crisis is really just a mark-to-market phenomenon and not indicative of future defaults. In Blankfein's defense, it is his job as CEO to try restore confidence at a meeting of GS shareholders. Furthermore, I'm certain that every dealer involved in the bond syndication of this deal knew it was a turkey at the time, but the capital markets shut down abruptly before they could offload any of the bonds.

Just how big of a turkey this deal would turn out to be didn't start to dawn on anyone until, oh I don't know, maybe three days after the deal closed. Was it the $2.7 billion in losses that Chrysler reported immediately following the buyout that gave it away? Or maybe it was the move by Cerberus, the PE firm who took Chrysler private, to hire Robert Nardinelli, a non-car-industry executive to run Chrysler? Robert Nardinelli, for those who don't recall, is the genius who was sacked from Home Depot after six years of below average performance (the stock declined while rival Lowe's rose significantly), because he wouldn't take a pay cut. I guess no CEO can be expected to live off of less than $200 million. At any rate, if I were GS, I'd be looking to hit the next bid behind that $.63...