Farrell: Et Tu, Nouriel?
First it was the Divine Miss M with a few kind words a couple of days ago when she recommended Goldman Sachs . Then there was a report Thursday afternoon that the renowned bear, Nouriel Roubini, had a more gentle view of the world. That gave the market an excuse to rally when it was having trouble with JP Morgan's earnings report and some positive news regarding unemployment claims.
Professor Roubini issued a clarifying statement in the eveningremarking that his views were unchanged. He has been saying for quite some time the current recession would last two years. In that we are 19 months into it, that would imply it ends the end of this year. The market decided this was a positive change of heart, when it was actually a reiteration of his long held beliefs. He went on to say in his evening missive that a "recovery will be weak and at risk of a double dip." That would be due to the enormous debt overhang in all sectors of the economy and also due to the "massive deleveraging" taking place.
The market wanted to like JP Morgan's earnings reportthat came out before the opening since the headlines showed a clear outperformance on the earnings versus expectations. But, as our Carole Berger pointed out in a timely email, credit quality left something to be desired. To paraphrase the bard Carole, we were disturbed by a continuing acceleration in nonperforming loans (up 30% in this quarter against last, which was up 27%), nonperforming assets up 20% when last quarter was up 15%, and net charge offs increased 31% this past quarter versus 28% the prior period. Still, Tier One capital was a more than healthy 7.7% even after paying back the TARP. Book value is $37.36 and Carole thinks the stock will be range bound between $30 and $40 for a while.
Initial unemployment claims were better than expected at 522,000, a drop of 47,000 from last week. The four week moving average we like to look at fell to 584,000 and that is down from the peak of almost 650,000 a few months ago. Continuing claims fell a whopping 642,000 to 6.3 million. I don't see how that number could be correct so we'll wait before getting excited. Part of it could be due to the depressing fact that some people have been unemployed so long their benefits have run out and they drop off the rolls.
While RealtyTrac reported national home foreclosures rose to an all time record, up 15% from the first half of last year, home prices in California were up a good amount and sales volumes are at a 30 month high. The news at turns in the economy is always mixed and often seemingly at odds.
I liked the article in the Wall Street Journal reporting some 250 economists had signed a petition telling Congress to lay off the Fed, that they were putting "the independence of U.S monetary policy at risk." Amen to that, but I do remember that over 1,000 economists begged the Congress not to pass the infamous Smoot- Hawley tariff in 1930 which led to world trade declining some 60% in three years. Nobody said you had to be smart to be in Congress.
Earnings reports on balance are a good bit better than expectations, but we are very early in the game. IBM had a wonderful quarter and very positive guidance. But I am troubled by the continued mediocre volume and the fact that an incorrect interpretation from an economist can move the market. To me it shows a lack of conviction and a desire to try to grab a trade. If we get a few disappointing earnings reports, and we will, watch for the opposite reaction.