Chris Lau - Seeking Alpha

Thursday, April 23, 2009

Repeat and Say it Again

I have written numerous times on My Notes on the Stock Market to avoid financials and to avoid real estate stocks. Does it make sense to say it again? I think it does. Say something once, and you hear, say it a second and third time and then you listen.

In Ken Norquay's column in TimingtheMarket.ca, Ken advises investors to simply avoid the financial services sector. In fact, his team has not touched this sector for two years. That viewpoint does not change today.

Here are the highlights:

  • Profits recently announced by Citibank have confirmed to many investors the “springing” to life of the financial sector. The sector had certainly been depressed—rather, compressed—more or less up until the time the Obama administration announced it would acquire bad debts from banks’ balance sheet
  • that Citibank’s surge in operating profit (which was instrumental in tripling its share price which had been under a buck) was largely due to the adaptation of an accounting standard that allows a company to book profits based on its ability to buy back its own debt at prices that is significantly lower those current reflected on their balance sheets.
  • Citi doesn't actually have to buy back their debt. They just have to be able to
  • Bank of America did essentially the same thing, only in it’s case its doubtful debt came over in the acquisition of Merrill Lynch. Separately, B of A booked at profit from its sale of a subsidiary, China Construction Bank.
  • All of these events are non-repetitive and hence are not indicative of any sustainable return-to-health of the banking sector, and, by extension, the economy.
  • Have you read any reports lately predicting an earlier-than-anticipated end to this recession, or of any upward revisions of economic activity?

Comments: I don't complain about much, but did so after reading about allowances in the changes of accounting rules to reduce transparency. The logic is correct, but the means is not. After all, It was the lack of transparency that was one of the many reasons this sector landed itself in trouble.

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