An Unexpected Cashflow for Banks: "Bear" This in Mind

The government manipulation of the banks’ stress tests reveals another nefarious aspect market participants should be aware. Things are shaping up such that 2nd quarter earnings from banks will be equal to or “better” than those reported 1Q. The Financial Times reported today some banks would reap financial benefit by providing assistance in capital raising efforts for weaker institutions. In particular, approximately “450 million in underwriting fees.” If you add to this amount the fees generated from expected divestitures, such as the $7.3 billion deal recently completed by Bank of America, these non-recurring fees could be a welcome addition to the coffers of some financial institutions. Given that there is no economic recovery in sight but rather continued deterioration, 3Q09 results have the high probability of being disappointing. The recent market run-up has been driven on the backs of bank stocks. The trend will reverse once investors realize that nothing but hot air has been pumping it.

I keep coming back to the theme that from September through December I expect the same dynamics that played out last year to repeat this year—perhaps to a greater degree. However, the macroeconomic and geopolitical landscape is covered by traps, which could bring a market collapse quite suddenly and before September. But these sorts of events are difficult to predict, since they are what Nassim Taleb categorizes as “black swans”. One such event is the tumbling of the U.S. Dollar, which could conceivably arise from the excessive public debt. The U.S. Federal Government for example will need to raise about $2 trillion to finance its deficit and at the same time needs an additional $2 trillion to roll-over some of its debt. These are staggering figures.

As always, be aware of your environment.