From MMG Weekly
Last Week in Review
"The fact that an opinion has been widely held doesn't mean that it's not utterly absurd." Bertrand Russell True words - and last week was one that was full of opinions that moved the financial markets - here are some highlights.
The week began with bank analyst Mike Mayo spewing out a negative forecast, which included his thoughts that loan losses by financial institutions would ultimately exceed levels from the Great Depression. This was followed by word from hedge fund giant George Soros that the US banking system is insolvent and that the economy won't recover in 2009.
However, as mentioned in many previous newsletters, the recent changes to mark-to-market should prove to have a positive impact on the economics and overall operations of financial institutions. Why? Because the recent ruling to look at mark-to-market accounting in a more relaxed light will free up the banks' capital ratios and allow them to do more lending, which will help their profitability, as well as ultimately help the economy unlock as businesses and consumers are once again able to borrow and use credit in a more normal fashion.
Lo and behold...as earnings season began last week, there was already evidence of this playing out as true, when Wells Fargo said Thursday that it expects record 1st quarter earnings and that their Wachovia acquisition was exceeding their expectations. In addition, the New York Times said Thursday that the US banking system overall may be in better shape than most people think.
As you can see in the chart below, Stocks hit an all time high in October 2007...until mark-to-market accounting practices were instituted. And notice also that Stocks reversed course, and have been on a strong rise since early March of this year, buoyed simply by the speculation that there would be a change in mark-to-market, which was finally announced on April 2nd by the Financial Accounting Standards Board.
Chart: Dow Jones
Last Week in Review
"The fact that an opinion has been widely held doesn't mean that it's not utterly absurd." Bertrand Russell True words - and last week was one that was full of opinions that moved the financial markets - here are some highlights.
The week began with bank analyst Mike Mayo spewing out a negative forecast, which included his thoughts that loan losses by financial institutions would ultimately exceed levels from the Great Depression. This was followed by word from hedge fund giant George Soros that the US banking system is insolvent and that the economy won't recover in 2009.
However, as mentioned in many previous newsletters, the recent changes to mark-to-market should prove to have a positive impact on the economics and overall operations of financial institutions. Why? Because the recent ruling to look at mark-to-market accounting in a more relaxed light will free up the banks' capital ratios and allow them to do more lending, which will help their profitability, as well as ultimately help the economy unlock as businesses and consumers are once again able to borrow and use credit in a more normal fashion.
Lo and behold...as earnings season began last week, there was already evidence of this playing out as true, when Wells Fargo said Thursday that it expects record 1st quarter earnings and that their Wachovia acquisition was exceeding their expectations. In addition, the New York Times said Thursday that the US banking system overall may be in better shape than most people think.
As you can see in the chart below, Stocks hit an all time high in October 2007...until mark-to-market accounting practices were instituted. And notice also that Stocks reversed course, and have been on a strong rise since early March of this year, buoyed simply by the speculation that there would be a change in mark-to-market, which was finally announced on April 2nd by the Financial Accounting Standards Board.
Chart: Dow Jones
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve. And this is exactly what happened in the early part of the week when Stocks were plagued by the negative opinions mentioned above. However, Stocks rallied on the good news that ended the week, causing Bonds and home loan rates to give back some of the gains they had made, ending the week unchanged to slightly worse from where they began. The Bond market closed early Thursday and both the Stock and Bond markets were closed Friday in observance of the holiday weekend.
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