The Tasgall Group

Here’s a bold prediction for you.. RealtyTrac will release their foreclosure report on Thursday, and I’m going to predict that the number of foreclosures will decline.

Alas, the prediction is not that bold… and the lower foreclosures is not a bullish phenomenon, but rather a result of the changing rules. California, as well as two other states are changing the minimum amount of time required before foreclosure hearings can begin. Lenders now have to wait a full 90 days from the first missed payment before they can begin foreclosure (it used to be 60 days).

Banking, and the banks’ potential losses from mortgages are still very far from transparent right now. The only way things look like they’re improving is if the numbers don’t reflect reality. We can expect more than a few people will point to the lower foreclosures as a reason “the bottom is in”, but I, for one, won’t be listening.

Edit 8/14 @ 10:00 AM: Oops, guess I was too optimistic.  “U.S. foreclosure activity in July increased 8 percent from the previous month and 55 percent from July 2007, according to the RealtyTrac Foreclosure Market Report released today.”  Even with the rule change, things sucked.

They do have pretty graphics though…

Making the rounds…  Still President Bush says Wall Street “got drunk” and “has a hangover”.

The comic is from McClatchey.

On the lighter side… Just found, and thought it was interesting enough to share…  Stock Twits.  Just in case you want an even more spastic view of the markets…  but it might be useful to watch the rumor flow or day-trading junkies.

Also useful is BreakingNewsOn which attempts to identify breaking news.  There are a few news stories, including the passing of Tim Russert, that have supposedly popped up on Twitter well before any mainstream media.

Apparently T. Boone Pickens wants to solve our energy dependence issues…  and he thinks Wind is a good way to do it.  At right is an image of the wind potential of the world, including the “wind corridor” of the midwest.

Go to PickensPlan.org for more details of his plan.  Of course Pickens is a private investor and has put his own money into building wind farms, but the whole effort seems remniscient of Al Gore’s global warming campaign…  perhaps Pickens is thinking about his legacy as well as profits?

If you believe wind is a growth industry (which it will be if Pickens is right), you should know about a new ETF with the ticker FAN.  It’s only been trading for two weeks, but plans to track the growth in wind power by investing in ~50 companies active in wind.

Sorry to keep bringing pessimism to the forum, but that’s just what stands out for me as I absorb news and such.  There’s a future post in what I perceive to be a large asymmetry in naive perspectives amongst the bullish lot.  Anyway, on to a quote from Paul Volker via Marc Fleury’s blog:

Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place.” Paul Volcker, April 8 2008

What’s the fallout?  Why is it not just about write downs and losses?  The current financial situation have not only caused losses, but they’ve also taken away the most profitable business for most banks and brokers.  From Nouriel Roubini (emphasis mine):

So how will mortgage brokers, banks, broker dealers, monoline insurers, rating agencies generate revenues and profits now that this slice & dice scheme has unraveled? The current market delusion that the worst is behind us for financial institutions is based on the view that most of the writedowns of the toxic assets have already been done. But this is not just a balance sheet problem. Now financial institutions have a more severe P&L problem, i.e. how to generate income and earnings from now on when they cannot originate junk any more. The entire income generating model of financial institutions – make income out of securitization fees rather than by holding the credit risk - is broken now that the generalized credit bubble (not just subprime mortgages) has burst; thus, how will these financial institutions generate earnings over time? Capital losses are one-time problems; but destruction of the income generation process is a more severe and persistent problem that will require banks and other financial institutions to rethink their overall business model of credit risk transfer.

I know Quicksilver will respond with some comment about how Roubini is always bearish, but Nouriel also happens to have hit on an important point here.  Where will the income generation come from for banks?  If the Fed and Treasury really are trying to give the banks time to grow their way out of the current mess, where will that growth come from?

This is a little old (June 2, 2008), but worth sharing…  John Hussman reviewed the FDIC Quarterly Banking profile…  here’s what he found.

“Industry earnings for the fourth quarter of 2007 were previously reported as $5.8 billion, but sizable restatements by a few institutions caused fourth quarter net income to decline to $646 million.”

Note what the FDIC is saying here. The banking industry reported $5.8 billion in earnings to its investors, but restatements took that total down by 89%. Stop and think about that - only 11% of the earnings that were reported to investors survived after the restatements. And yet, investors seem naively willing to take recent earnings reports, guidance and charge-off levels at face value, as if these reports can be trusted. Unfortunately, all that seems to matter to investors over the short-run is whether earnings-per-share can beat estimates by a penny, regardless of whether they are massively restated later.

Quite an indictment…  and the whole article is worth reading if you want to understand the state of banks today, and why they’re still not as cheap as one might think.

Marketwatch is leading with a headline this eveing saying “WaMu bucks bank trend“.  And indeed, the stock is up over 8% in after-hours trading…  but that’s hardly the whole story, despite a sensational headline…  Which one of the following details do you think is the most important for WaMu today?  The one where it “leaped” by 9% after hours, or the one where it went down over 34% earlier in the day?

From John Hussman, when talking about recent prices in the Crude Oil market:

Geek’s Rule o’ Thumb: When you have to fit a sixth-order polynomial to capture price history because exponential growth is too conservative, you’re probably close to a peak.

You’re usually in unusual territory when exponential growth is too conservative.

If you’re wondering where the next rally will begin (whether you beleive it will be a bear market rally or the next bull market), it is a good idea to watch the VIX index.  As you can see from the chart below, medium-term lows for the SPX (S&P 500 Index) coincide with upward spikes in the VIX.  At current levels, we don’t have a spike, though this isn’t a precise indicator of timing.

You can track the VIX at the usual places.