Month: April 2009

He makes some great pointsTranscript:
Henry Groppe: IEA to blame for $100 oil spike

Disclosure (“none” means no position):

Read yesterday post on Bank of America (BAC), then come back.
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Wells Fargo (WFC) reported today and again, at first blush, great news.

Here are the basics:

• Record profits reflected business momentum across the newly combined Wells Fargo-Wachovia
• Record Wells Fargo net income of $3.05 billion
• Record net income applicable to common stock of $2.38 billion
• Earnings per common share of $0.56, after merger-related and restructuring expense of $206 million ($0.03 per common share) and $1.3 billion credit reserve build ($0.19 per common share)
• Preferred dividends of $661 million included $372 million paid to U.S. taxpayers on the U.S. Treasury’s Capital Purchase Program investment
• Record pre-tax pre-provision profit of $9.2 billion
• Revenue of $21.0 billion reflected growth in both net interest income and fee income resulting from diversified business model
• Record legacy Wells Fargo revenue of $12.3 billion, up 16 percent from prior year
• Best mortgage origination quarter since 2003
• Net interest margin of 4.16 percent, highest among large bank peers
• Total core deposits of $756.2 billion at March 31, 2009, up 6 percent (annualized) from $745.4 billion at December 31, 2008, despite maturity of $34 billion of higher-rate Wachovia certificates of deposit (CDs)
• Consumer checking and savings deposits up 31 percent (annualized) from December 31, 2008

Now, the deposit and checking news is indeed very god news because it is cheap (almost free) capital. The net-interest margin at over 4% is fantastic too. Although, with the new refi boom going on at Wells at lower rates, we ought to expect that to fall down the road. There is a lot to like in the report, a lot, but much of it is a longer term story.

So, what is my problem? This little paragraph :

The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.

In other words, Wells booked a $4.3 billion “mark-up” on these assets due to the accounting change. There was no material change to the quality of the assets nor was there a material change to the market at which they were being marked to. Because of this, Wells also sees it capital ratios boosted, artificially many would say.

This is problem for the market as a whole. If the FASB wanted to, they could change the rules even more to allow more ambiguity so that Wells ,B of A, JP Morgan (JPM) and Citi (C) would be able to just wipe out these losses all together.

Now, I have railed against the mark to market rules as they were and for what they did to the banks. But, in this case, the solution to the problem is worse than the original problem. It’s sort of like taking 50 aspirins for a headache, sure the pain is gone but look what you have now. Now, nobody believes banks earnings (at least I hope not) and the marks on these assets are even less trusted than they were before (did not think that was possible).

Why not mark them all to cash flows? After all, isn’t that what anything is really worth? Who cares what the market is selling something for if I am not selling it and it is performing 100% or 90%? Mark it to its production. Simple, no ambiguity, no judgment, no “impaired markets” etc., etc., etc.

Frustrating.

I am holding my shares because we need banks and I think it is very possible Wells Fargo and JP Morgan shareholders are the only major banks shareholders left standing when this is all over. My position is small relative to the whole and I can wait it out no problem.

Still does not make what is going on right…

Disclosure (“none” means no position):Long WFC, none

Atlas Shrugged, Rand, Peak Oil, CRA

– Since Rand’s classic is back on the bestseller list, here is what the author said in 1964:
Ayn Rand Interview

– About the book:
Ayn Rand

– Interview with Dr. Cambell

– So maybe the Community Reinvestment Act was a problem after all?

Disclosure (“none” means no position):

Here is Bank of America’s Q1 results.

Here were the headline’s:
• 1Q09 net income of $4.2 billion
• Diluted EPS of $0.44 after preferred dividends
• Record revenue and pre-tax pre-provision earnings of $36.1 billion and $19.1 billion on a fully taxable equivalent basis

Great right? Well, thanks to a recent FASB change, it was not because of operations. Of course you have to dig a little to find it.

Bank of America Q1 2009 Earnings

Go to page 5 and check out the fine print (bold emphasis mine):

• 1Q09 included the following items, all recorded in our corporate treasury/other unit:
– $1.9 billion pre-tax gain on sale of partial ownership in China Construction Bank
– $2.2 billion pre-tax FVO positive adjustment on Merrill Lynch structured notes
– $1.5 billion gain on sale of debt securities

Now, was it stated that “mark up” in Merrill notes was due to the recent relaxing of mark to market rules? No. But, when we consider in all areas Bank of America increase reserves for eventual charge offs (CRE, RE, consumer credit) and warned of more deterioration, one would find it hard to believe that the actual value of these notes increase from Q4 to Q1 by over $2 billion.

What is the far more likely scenario is that due to the rules change, B of A was able to account for the value of them differently.

Again, I say, “why invest in banks right now when the rules are changing constantly and it alters the value of the assets”. How can we believe the value of anything they give us? This is especially true when the recent FASB rules changed only introduced more ambiguity into “valuation” of assets than it anything else.

This earnings report is proof of that..

Disclosure (“none” means no position):None

This piggybacks on a post here last week that said the threat of damaging inflation is being under appreciated by those making policy today.

I don’t see how we just put the genie back in this bottle…..

From the FT

The unprecedented explosion of the US fiscal deficit raises the spectre of high future inflation. According to the Congressional Budget Office, the president’s budget implies a fiscal deficit of 13 per cent of gross domestic product in 2009 and nearly 10 per cent in 2010. Even with a strong economic recovery, the ratio of government debt to GDP would double to 80 per cent in the next 10 years.

There is ample historic evidence of the link between fiscal profligacy and subsequent inflation. But historic evidence and economic analysis also show that the inflationary effects can be avoided if the fiscal deficits are not accompanied by a sustained increase in the money supply and, more generally, by an easing of monetary conditions.

The deep recession means that there is no immediate risk of inflation. The aggregate demand for labour and goods and services is much less than the potential supply. But when the economy begins to recover, the Fed will have to reduce the excessive stock of money and, more critically, prevent the large volume of excess reserves in the banks from causing an inflationary explosion of money and credit.

This will not be an easy task since the commercial banks may not want to exchange their reserves for the mountain of private debt that the Fed is holding and the Fed lacks enough Treasury bonds with which to conduct ordinary open market operations. It is surprising that the long-term interest rates do not yet reflect the resulting risk of future inflation.

Jim Grant also had thoughts on the subject here

Disclosure (“none” means no position):

Banks, Horses, FAZ & FAS, Battery

– Of course they failed, if they hadn’t the results would be out already

– This is odd…

– I thought it was the other way around?

– Could mean something

Disclosure (“none” means no position):

Oil has “peaked” (peak oil pun intended) my interest again, especially after the fall today and the way it has risen with an irrational market.

Today T. Boone Pickens said:

Texas oil billionaire T. Boone Pickens on Monday reiterated his prediction that crude oil prices would hit $75 a barrel this year as producers scale back production. Pickens said about OPEC producers: “They told you they want $75 by the end of the year, I would count on that, I believe them.”

OPEC has scaled back output to help support crude prices, which have dropped from record highs over $147 a barrel in July to around $47 a barrel on Monday.

“I think you are going to clean up the stocks because the people who have the oil are cutting supply,” Pickens said at an alternative fuels and vehicles conference, referring to the nearly 19-year high on U.S. inventories of crude oil reported last week by the federal government. The United States would likely burn through its supply overhang in three months, he told reporters.

Now, I know Boone was also very wrong last year on oil and it cost him dearly as he was caught long with options as prices cratered. I also know he has made billions in oil so he clearly has been right far more than he has been long.

For all issues oil I tend to turn to Gregor.us for information. He recently posted the following information:

World oil production for the past 4 years has remained stagnant at essentially 73.5 mbpd. If the production of any item has not risen over a 4 year span despite demand for it continuing to do so and a historical price spike, it isn’t ever going to and thus the long term price trend must be up. Period

That information followed this from Gregor:

Each barrel of oil contains about 5.8 million BTUs. Each American uses about 25 barrels of oil every year. Considering that it takes an adult one hour of work to generate about 300-500 of their own BTUs, our lives are clearly transformed each day by a “helper” known as oil. That oil is dirt cheap even at 100.00 dollars a barrel is pretty obvious.

But when oil was trading at 35.00 earlier this Winter, the price barely reflected the global average costs of extraction and transport. This average cost level often appears to some as a complex issue, because oil comes out of the ground so cheaply in the Middle East, and more expensively elsewhere. But it’s frankly not that complicated. The journey to 35.00 dollar oil was part of a supply crash that caused voluntary cuts in OPEC, and involuntary cuts in non-OPEC production. When the world offers 35.00 dollars for a barrel of oil, that is simply not enough value-in-exchange to keep global oil production at a steady level. Let alone growing.

Because I regard 35.00 as the level where oil is essentially free–the level where the supply chain recoups its costs and then hands you 5.8 million BTUs of black stuff as a free stub–it’s now appropriate to mark the oil price from that starting point. Should there be a new dislocation in the purchasing power of the USDollar, this could change my 35.00 dollar level. Probably to high side. Until then, you should generally view the spread between 35.00 and the trading price as the price of oil.

The price of oil has no place to go but up, long term. The math is pretty simple, we will have stagnant production and increasing demand, that means higher prices. That being said, over the short to mid term, it can drop, significantly especially in our current manic markets (witness today’s 7% fall) .

I think oil is something I have to own again. I first owned it from Jan 2007 to May 2008 through USO and it was a spectacular play. The last time I did it was Dec. 2008 to March 2009 and while it was again nicely profitable (I averaged down), using DXO (the 2X monthly price change ETF) was stressful for me and caused too much anxiety for a trade destined to be profitable.

With all that being, I expect the current general market rally to subside and fall and when it does, take current $48 oil prices down with it. For a long term play, I will use USO again as a vehicle to hold oil for a year or two and then use DXO to play the occasional dips as a far shorter term play. Holding the 2x or 3X ETf’s long term is a losing game in anything but a spiking market.

What price? I think we could see oil near $40 again. At or near those levels would have me be a buyer again of USO this time.

Disclosure (“none” means no position):none

YouTube, HOPE, Hate, GE

– Now watch TV shows on it

– $300 billion program saves 1 home

– It is a good thing there is no hate from the left

– CNBC should be “pro-business”. Unfortunately that sounds today like “anti-Obama”. Did execs tell folks to tone it down?

Disclosure (“none” means no position):