Bear-market bounce, or 1 day spike?

DG said...
Do you think the rally today is a temp spike based on non-economic data?Kinda likea mini one day bubble....I mean Vikram Pandit had no choice but to say everything was fine and dandy right? Its not like he can tell everyone the sky is falling. Weren't Jimmy Cayne and Fuld saying the same thing way back when. I'm curious about your thoughts
March 10, 2009 9:49 PM


Response
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I've been writing a lot about follow-through over the past few weeks and believe that we'll see a bear market bounce (long overdue). Today's rally was just another statement from just another CEO who cannot possibly say that the world is ending. However, to me, it was powerful for 2 reasons.

1) Deferred Tax Assets (DTAs) - Citi has a very large portion of total asset in the form of DTAs on their balance sheet which would be used against future taxable income if they return to profitability. A bank's healthy is more frequently being measured by Tangible Common Equity (TCE) in this environment, and questions have been raised about the "quality" of Citi's TCE. If the bank truly exhibits a positive earnings quarter, this will greatly improve the viability of its TCE. Now we can question whether the earnings are "quality" and derived from continuing operations and not asset sales/discountinued operations. Let's crawl before we attempt to walk.

2) Banks can make money! A few notable financial institutions have announced positive early results in 2009 thus far and this is extremely encouraging. Deleveraging and risk reduction crippled banks, among others, in 2008 and perhaps we are seeing some signs of stability. Time will tell.

I see this as a bear market bounce, and believe that both the Dow and S&P500 close with 7-handles on Friday, March 13th.

TM