Writedowns soar – stocks soar

It’s been done to death today, but a quick scan of the headlines tonight will make you think everyone is in on a huge April Fool prank.  UBS wrote down $19 billion and Deutsche Bank wrote down $4 bilion, so investors bought everything in sight, sending the market up almost 400 points to close at 12,654.

Everyone is once again saying that the worst is over, that they’ve finally accounted for all the losses, and that things are going up from here.  I hate to be the bearer of bad news, but they’re wrong – and it’s not the first time.

Most people probably remember the Bear Stearns meltdown, the AMBAC and MBIA fiasco’s, the comments from Standard and Poors about the worst of the writedowns being over – and the subsequent surges in the markets after each of them.  But you may not remember that this started last year.  A quick refresher….

Here’s a NY Times story from October 2nd, 2007 

The country’s biggest bank, Citigroup, will write off $5.9 billion in the third quarter, causing its profit to drop 60 percent from a year earlier. Europe’s biggest bank, UBS, said it had written down $3.4 billion in the value of mortgage-backed securities and would suffer a loss in the quarter. Other banks, including Merrill Lynchand Bank of America, have issued similar warnings.

Investors took the disclosures as a sign that the worst may be over for the banks and that any losses may be contained. 

The Dow closed at 14,087, and the S&P 500 closed at 1546 on October 2nd.  The Dow close was a record high.

Here’s another NY Times story from November 14th, 2007.  According to the story:

Investors were buoyed by comforting words from top executives at Goldman Sachsand JPMorgan Chase, who said they were confident their companies would emerge relatively unscathed from the subprime mess. Lloyd C. Blankfein, Goldman’s president, said his bank would not take more write-downs on mortgage-backed securities, sending the bank’s stock up 8.5 percent to $233.04 a share.Shares in JPMorgan rose 6.3 percent.

The Dow closed at 13,231, and the S&P 500 closed at 1470 on November 14th.

Now comes todays’ news.  Stocks Surge on Hopes Financial Woes Are Easing is the NY Times headline today.  Another big surge in stocks with everyone thinking that the worst is over….

It’s not over.  I don’t think it’s even halfway over.  All those ARM’s and Option ARM’s that were taken out in 2005 through 2007 have yet to reset from their teaser rates. 

When they do (throughout the next 2-1/2 years)  there will be more losses.  Many more losses.  Much bigger losses.  And stocks will need to fall to reflect those losses.

gk

 

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