From Discussion To Earnings: Financials Face The Fire
A: Well, if you didn't believe in the credit crisis or the macro environment, you surely do now! Stocks are now in full blown correction mode after falling some 11% over the past 4-5 weeks as the reality of the housing slump, credit crisis w/ all its tentacles, bank/brokerages mbs write-downs, ratings' farce, etc.. all come to a head. I have discussed the situation in depth with the hopes of explaining to you what is going on, but now we have to face the music. And the music is going to be as ugly as Elaine's dance moves.
A week ago I wrote a piece how bonuses will be more affected in 2009 due to the game being over for how many banks/brokerages have generated billions in revenue over the past few years; "Bonuses: It's 2009 That Will Hurt More":
Bonuses are generally calculated using generated revenue, not income, which leads us to what happened in 2007! For the first half of 2007, revenues generated by the investment banks, brokerages, trading desks, and banks were very high! My point, bonuses will be granted this year; its 2009 that we will have to worry about!Today, there is an article out on CNN Money discussing this exact topic, "Investors Brace For Bad Bank Earnings":The derivatives trade of securitizing loans and selling them off in pieces on the secondary mortgage markets generated billions in revenue for these banks & brokerages. Now that the housing bubble popped nationally, risk has been re-priced, secondary mortgage markets are not functioning properly, liquidity dried up for mortgage backed securities, and the announcement of billions in losses and potential insolvencies, THE GAME IS OVER! How will these banks and brokerages generate the kind of revenue that they got used to generating the past few years?
Sometimes when it rains, it pours on Wall Street. And next week, forecasters are calling for a flood. Beginning next Monday, Wall Street will most likely find itself drowning in a torrent of dreary earnings news from some of the nation's biggest banks, marking yet another grim milestone for the troubled financial sector.Now, from trading equities for over 10 years I have learned that news is interpreted differently based on the current environment in the overall market. What I mean is, bad news will be interpreted differently if the DOW is at 13,800 right off record highs, than it will if the DOW is at 12,600 following a 11% correction. Obviously, we are in the latter environment so it's very possible the street reacts favorably to the bad news; but that remains to be seen as we don't know how bad it will be and one thing investors hate is uncertainty and quarter after quarter of more write-downs!"It's not going to be a pretty sight," said Frank Barkocy, director of research at the investment advisory firm Mendon Capital Advisors in New York, which owns shares of a number of large banks including Bank of America and Washington Mutual. The worst news is expected from Citigroup and Merrill.
In the coming weeks, the financial sector will be releasing earnings reports and write-down updates. We will start to see how bad it really is out there. For those hoping for a new bull market, all I can say is that is virtually impossible if the financials do not participate!
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Comments (6)
We may be missing something important here. With the banks and brokers being weak, there WILL be job losses, but these losses are generally going to be suffered by those involved in all phases of originating and processing loans.
How does this relate directly to the housing market in Manhattan? Simple.
It doesn't.
Those losing jobs were generally "back-office" types processing documentation and other paper work around loans. These individuals earned 40, 50, 60 grand. I'm not being a snob here, but these weren't the people looking for condos in the east 60's.
I was a real estate bear in Manhattan for a long time, but I finally realized, supply is just tiny, and this city is just too small for supply of 2, 3 and 4+ bedrooms to ever rise to the level where prices will suffer significantly.
Will it hit Staten Island? Jersey? Parts of long Island? Absolutely!!! But not in Manhattan.
Will bonuses suffer? Maybe…If you are trading MBS. But I guarantee those trading rates and other products, and had a solid P&L, will get paid. The banks are still tripping all over each other in an attempt to keep their big swinging dicks & rain makers buying expensive cigars, Thomas Pink Shirts, meals at Le Cirque...and YES...Manhattan Real Estate.
Posted by More Cowbell | January 9, 2008 11:56 AM
what about the psychological effect that job losses and a recession in general will bring to buyer confidence? Are you saying it will not have any effect and that inventory will never reverse course?
I think you need to be a bit more creative with your thinking and consider all possibilites that a recession or an environment with job losses may bring to confidence/affordability.
Posted by Noah | January 9, 2008 12:02 PM
Noah - thanks for the insightful posts. As for the first comment above by "More Cowbell", I find it hard to believe that that person works in the financial sector or has even been speaking with people who do.
I can assure that person that, unfortunately, the pain on Wall Street is being felt broadly and deeply and will continue to do so in coming weeks/months barring an economic miracle. As a senior M+A banker, I can tell you that bonuses are lower this year, aside from star performers. The M+A pipeline is dismal, owing in large part to the lack of financing coupled with an increasingly dour outlook on economic growth by CEOs. This year (at a minimum the first half) is turning out to be much like 2002.
Posted by anon | January 9, 2008 2:18 PM
To #3 anon:
I've always been curious, what price range of properties would you say the junior, medium, senior M+A bankers look for?
Just trying to get an idea of what type of profession/salary range purchases at various price points..
Thanks!
Posted by uwsider | January 9, 2008 3:12 PM
Uwsider - obviously tough to generalize, but you can probably assume that on average junior bankers (associates/jr vp's) go after starter apts (studio to 2BRs), VPs and above go for 2BRs+ once they start having kids, and MDs go for trophy props or live in the burbs.
Posted by anon | January 9, 2008 4:35 PM
This is far from statistically significant but I work in IT and was contacted by a recruiter from a top tier i-bank just yesterday who informed me that certain sectors remain very profitable and are actively recruiting for six figure type jobs. My current company (non-finance) still has plenty of openings some of which are in that same salary range.
Forgive my ignorance of macroeconomics, but are job losses usually a leading indicator of recession? If so, we've had a setback, but not a crash as far as I can tell.
Posted by anecdote | January 10, 2008 4:37 PM