Thursday, April 9, 2009

"I have nothing to add"

Anyone who's made a trip to any of the annual Berkshire Hathaway shareholder's meetings will recognize that phrase (it's how Charlie Munger answers half the questions after Warren).

It is apt for today's market movements, including the 11% gain in the regional banking index. This all happened because of earnings guidance. Wells Fargo didn't release earnings today, they just released revised guidance. This means that I can't see where they're getting their numbers and can't really offer much analysis. I'll say again that it is no surprise that banks would be showing operating profits. They are borrowing money from you (as a taxpayer) at extremely cheap rates, and then turning around and lending it to you (as a customer) at fairly high rates. There is no way to screw that up and not run a terrific profit. What is at issue is the write downs that accompany those profits. The write downs are largely subjective, and thus so too are the losses (or profits) a bank shows. FASB's latest move to allow mark-to-fantasy accounting will help banks hide losses (some banks that were prepared to enough or going to be allowed to use mark-to-fantasy on their quarter one data althoug most will have to wait until next quarter).

I recently watched Meredith Whitney telling folks that they should short banks, but should do so after earnings come out and right before the stress test results are released, with the idea that banks will all show enormous improvements and then the stress test will give the real state of things. This is probably pretty good advice but it is a long way from making investments based on fundamentals and waiting. I personally don't like to play short term games because I have no idea where stocks will go short term, so I am choosing to keep my short positions. I operate under the model that I know stocks will be much lower in the future, so I will short them now. What they do in the mean time merely gives me opportunities or does not.

The only thing I'm really worried about right now is the stress tests themselves. There are a lot of murmurings from people I trust that the stress tests are a sham from the beginning. Consider this post from Naked Capitalism. If you don't want to read the whole thing, the gist is that it has already been decided that every bank will be shown to pass because the whole point of the exercise is to try to restore confidence. However, it won't look credible to pass everything with flying colors, so a couple of the really bad banks will be shown to be in a little bit of trouble. They still won't be shown to be insolvent, just that they need just a little bit more of your money and then they will be find (justification for yet another massive bailout). I think this is absolutely a realistic expectation for the stress test results. The government is absolutely in the pocket of the banking industry (with Tim "too much regulation caused this problem" Geithner leading the way).

Wells Fargo trades at an astonishing 28 times trailing earnings. Earnings all over the economy that aren't tied to subjective writedowns will be down. Eventually, stocks will be too. We still have a lot more people who have yet to lose their jobs, and a lot of spending to be curtailed.

I don't wish bad things to happen to my country, but I know them to be true and I act on what I know. I don't wish to have an additional 6,000,000 people lose their jobs so that I can make money. I would like to be wrong because long-term I will be fine anyway. But I know an additional 6,000,000 people (2% of the populace) will indeed lose their jobs, and the value of everything will go down.

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