DaviesTown.com/blog

I haven’t posted anything in quite a while.. So I decided to post a fun game:

How many words do you NOT fully understand in this article? I’ve highlighted words that may give you trouble.

AP
Washington Mutual posts 2Q loss of $3.3 billion
Wednesday July 23, 1:24 am ET
By Sara Lepro, AP Business Writer

Little cheer for Washington Mutual as it posts 2nd-quarter loss of more than $3 billion NEW YORK (AP) — Washington Mutual, the Seattle-based bank known for its buoyant advertising slogan, “Whoo hoo!,” had little to cheer about as it reported a staggering $3 billion loss — the biggest quarterly loss in its history.

The nation’s largest savings and loan increased its loss reserves to more than $8 billion to cover souring loans in its mortgage portfolio.

The bank also said Tuesday it will be cutting up to $1 billion in expenses by the end of 2009.

For the April to June period, WaMu reported a loss of $3.33 billion, or $6.58 per share, compared with a profit of $830 million, or 92 cents per share, in the year-ago period.

Results include a previously disclosed, one-time reduction of $3.24 per share related to the company’s $7.2 billion capital raise in April. Excluding the reduction, the loss per share was $3.34.

Analysts polled by Thomson Financial, on average, expected a loss of $1.05 per share. Analyst estimates typically exclude one-time, unusual charges.

WaMu’s total loan-loss reserves increased by $3.74 billion to $8.46 billion, as it set aside a total of $5.91 billion during the quarter to cover bad loans. The increase in loan-loss provision reflects falling home prices, increased delinquencies, reduced availability of credit and the weakening economy, the bank said.

Total net charge-offs, or loans written off as unpaid, increased to $2.17 billion, while nonperforming assets grew to 3.62 percent of total assets as of June 30, from 2.87 percent at the end of the first quarter.

The company now expects cumulative losses in its residential mortgage portfolio to total $19 billion, the high end of previous guidance, and said 2008 will be the peak year for provisioning.

In response to worsening credit trends, WaMu shortened the time used to evaluate default frequencies in its prime mortgage portfolio to a one-year period from a three-year period, which is reflected in the increased provision.

WaMu said the fastest rising delinquencies were among its “option” adjustable rate mortgage loans. The bank stopped originating the negative amortizing loans, also called option ARM loans, in June. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years.

Early stage delinquencies for the subprime and home equity portfolios, however, showed signs of stabilization, the bank said.

Net interest income, or income generated from loans and deposits, rose 13 percent to $2.3 billion from $2.03 billion. Noninterest income, or income generated from fees and other charges, dropped 68 percent to $561 million from $1.76 billion in the same quarter last year, due in part to the company’s exit from wholesale lending and the closing of its home loan centers.

During the quarter, WaMu announced plans to exit the wholesale lending business and close all remaining standalone home loan centers, resulting in 3,000 job losses. The bank said it would instead focus its mortgage-originating efforts in its retail bank branches and Web site, and by expanding its call center operations. WaMu announced an additional 1,200 job cuts in June.

The bank earlier this year also slashed its quarterly dividend to 1 cent from 15 cents, which will result in savings of about $490 million a year.

In total, WaMu expects these and other cost-cutting initiatives to result in annualized cost savings of $1 billion by the end of 2009. The company will record total restructuring costs of about $450 million, $207 million of which was recorded in the second quarter.

Steve Rotella, president and chief operating officer, said some of the cost-cutting actions initiated during the quarter will play out over the course of the year and into 2009. Rotella said WaMu continues to evaluate ways to increase productivity, but he would not comment on whether that includes additional jobs cuts.

WaMu ended the quarter with more than $40 billion of readily available liquidity, and its capital ratio increased to 7.79 percent, up from 6.40 percent in the first quarter.

As a result, WaMu said it has sufficient capital to ride out the remainder of the credit crunch and does not anticipate raising additional capital going forward.

WaMu became one of the first retail banks to seek outside cash in the wake of the credit crisis when it agreed to sell equity securities to an investment fund managed by TPG Capital and to other investors this spring, raising $7.2 billion in fresh capital.

“We think they are taking the right action in strengthening operations and reducing costs and supporting the franchise,” said Owen Blicksilver, a spokesman for TPG. “The losses they reported today were in line with what TPG expected when it did its underwriting for the investment.”

Late Tuesday, Moody’s Investors Service put WaMu’s senior unsecured rating of “Baa3″ on review for possible downgrade. A rating of “Baa3″ is one notch above junk status.

“Though liquidity remains sufficient, WaMu experienced some declines in its commercial and brokered institutional deposit balances in the second quarter of 2008,” Moody’s said. “This reduced financial flexibility makes it more difficult for the company to successfully navigate through unanticipated events.”

Stephanie Hall, senior analyst at Gradient Analytics, viewed the reserve build-up as a positive. “The firm has been extremely slow in provisioning for loan losses,” she said, adding that she expects the company to report additional provisions in the third and fourth quarters, but likely smaller than those in the first half.

WaMu shares surged in afternoon trading ahead of the earnings report, rising 34 cents, or 6.2 percent, to close at $5.82. Its shares fell in aftermarket trading, shedding 24 cents, or 4.1 percent, to $5.58. They are down about 57 percent for the year.

Yet another Bloomberg featured post! =)

Here, I will take notes while watching the video. I have separated the notes based on the “timeline breakdown” on the Bloomberg article. The notes are below the article. Here is the article.

————————————————–

Wire: BLOOMBERG News (BN) Date: 2008-06-03 17:55:24
Bernanke, Trichet, Shirakawa on Inflation, Rates, Dollar: Video

     June 3 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke, European
Central Bank President Jean-Claude Trichet, Bank of Japan Governor Masaaki
Shirakawa and Bank of Spain Governor Miguel Fernandez Ordonez speak about the
outlook for inflation risks, monetary policy and global economic growth. They
speak at the International Monetary Conference in Barcelona. Bernanke and
Shirakawa speak via satellite. Josef Ackermann, chief executive officer of
Deutsche Bank AG, moderates. (Source: IMC/Bloomberg)

00:00:00 Bernanke: economic “strain” on markets
00:01:15 Bernanke: U.S. housing, credit markets
00:05:13 Bernanke on regulatory action to curb turmoil
00:06:19 Bernanke: subprime loans, “vulnerable” to oil
00:09:17 Bernanke: growth outlook, risks and demand
00:11:24 Bernanke: inflation risks, commodity prices
00:12:55 Bernanke: Fed mandate, acted “proactively”
00:13:51 Bernanke: “attentive” to weak dollar effect
00:14:49 Bernanke: efforts to boost market liquidity
00:16:45 Ordonez: Spain’s economy, banks and risks
00:27:48 Shirakawa: global economy, inflation pressure
00:29:14 Shirakawa: Japan economy, business sentiment
00:30:25 Shirakawa: exports, economic “resilience”
00:32:04 Shirakawa: inflation risks, growth outlook
00:33:28 Shirakawa: BOJ’s “accommodative” policy
00:34:24 Shirakawa: Japan’s financial markets
00:37:20 Trichet on commodity prices, food costs
00:44:53 Trichet: “firmly focused” on price stability
00:47:49 Trichet: credit crunch, liquidity injection
00:51:44 Trichet on cooperation between central banks
00:53:26 Questions: Trichet on Europe bank supervision
00:59:06 Shirakawa: asset prices and monetary policy
01:02:57 Ordonez discusses Spanish banking system.
01:04:23 Bernanke: assessing asset “bubbles”
01:08:01 Bernanke: need to strengthen financial system
01:16:59 Trichet, Bernanke on oil and trade “shocks”

     To watch this report now, click {1 <GO>}. For more Bloomberg audio or
video reports see {AV <GO>}. — Bloomberg Multimedia +44-20-7330-7180 (Chris
Hewitt/Sen)

Running time 01:22:33

Jun/03/2008 17:55 GMT

————————————————–

Here are my notes:

————————————————–

00:00:00 Bernanke: economic “strain” on markets
- financial markets in US + other industrial countries = strain
- issue: cost and availability of credit
- most discussion of problems are regarding financial instruments
- in retrospect, turmoil has been sometime in the making
- severity of stress apparent in August 2007
- several longer term developments have served as prologue

00:01:15 Bernanke: U.S. housing, credit markets
- housing boom (began in mid 1990s and picked up steam in 2000)
 - between 2000-2005, house pricing increased 60%
 - starting in 2006, boom turn to bust
 - over past two years building activity fallen in half
- broad credit boom (lenders/investors took credit risk even though risk premiums contract)
 - explosive growth of subprime credit lending over the past two years
 - responsible sumprime lending is good to achieve social goals
 - but most of 2005, 2006 subprime credit lending was not responsible lending
- emerging market growth - double edged sword
 - PRO: low prices imports help inflation
 - PRO: increased demand for US goods help offset
 - CON: however, strain on resources has increased commodity prices
- net supply of saving increased
 - rapid growth of high saving asian countries
 - high profits in oil countries
 - led to lower long term interest rates for world
 - US received most of these flows
 - which = good, provided they invested inflows wisely
 - however, it created questionable practices

00:05:13 Bernanke on regulatory action to curb turmoil
- example: new guidance on non-traditional mortgage/real estate lending
- fed reserve encouraged improvements for risk management practice (for derivatives, etc)
- despite these measures, financial companies failed to manage risk properly

00:06:19 Bernanke: subprime loans, “vulnerable” to oil
- housing boom ended because rising prices make buy house unaffordable
- this increase undermined Adjustable Rate Mortgages
- ended the preconception that you can lend more and more as your house appreciates more and more
- when this proved to fail, investors took their money out
- this forced credit rators to downgrade
- this reversed investors sentiment
- this affected Asset Back Securities and a variety of other structured products
- fortunately, most financial companies were in good financial position when it started
- some able to raise new capital
- reveals weaknesses in risk management

00:09:17 Bernanke: growth outlook, risks and demand
- functioning of financial markets have improved
- some borrowers, highly rated corporations, retain good access to credit
- some areas generally restricted — real estate
- residential construction retract
- consumer spending has held up
 - but face lots of headwinds
- business face rapidly increasing cost of materials
- overall economic growth = slow but position
- activity for current quarter should be relatively weak
- reflecting stimulus
- reduced drag from construction market
- solid demand from abroad
- improved financial markets
- UNTIL housing market (and particularly house prices) shows significant signs in stabilization, growth risk remain to downside

00:11:24 Bernanke: inflation risks, commodity prices
- inflation = high reflect rising commodity prices
- futures markets continue to predict (albeit w/ uncertainty) that commodity prices will level out
- prices of number of commodities have continued up even though dollar and expectations has remained stable
- possibility of continued rise in inflation is risk to inflation forecasts
- high headline inflation, if sustained, may lead the public to expect higher rates in future (self-fulfilling prophecy)

00:12:55 Bernanke: Fed mandate, acted “proactively”
- fed mandate => max employment with price stability
- to achieve — must support concerns of market’
- fed thinks gradual rate reduction would not have been enough

00:13:51 Bernanke: “attentive” to weak dollar effect
- FED carefully monitor FOREX markets
- FED is attentive to inflation and inflation expectations

00:14:49 Bernanke: efforts to boost market liquidity
- to improve market liquidity
- FED…
- has allowed access to central bank’s liquidity
- help promote ordily resolution of market dislocations
- has coordinated with other central banks to ensure everything is well
- takes the regulatory role to put changes in place to increase transparency and resilience

00:16:45 Ordonez: Spain’s economy, banks and risks
- Economic develpments = show some slowdown
- slowdown preceded recent turmoil (in 2005)
- slowdown eroded consumer confidence
- seen signs that credit conditions are tightening
- expect internal demand to continue weakening over 2008
- seeing sharp increases in headline inflation
- spanish economy more vulnerable to second round effects
- how firms and consumers deal with shocks
 - should not believe shocks are permanent
 - should not believe wage increase demands expect to stop inflation
- fiscal policy in Spain is sound
- Debt to GDP in Spain = ~35%
- pretty good
- Financial Sector in Spain
- impact has been limited (low exposure to main problems)
- STOPPED NOTES ON SPAIN SINCE HE ONLY TALKS ABOUT SPAIN (i’m not interested in Spain but I’m listening)
- Bottom Line: Spain was not affected and they’re alright.

00:27:48 Shirakawa: global economy, inflation pressure
- Japan’s economy
- comments on slowing growth on advanced economies
- greater inflation pressures
- difficulty balance act of sustained growth and inflation

00:29:14 Shirakawa: Japan economy, business sentiment
- japan’s economy is slowing due to deteriotation terms of trade from higher import prices
- higher commodity prices
- business sentiment = cautious
- these are expected to stay for some while
- expect to have growth in Japan near potential over 1-2 years

00:30:25 Shirakawa: exports, economic “resilience”
- Japan’s exports will continue to be robust
- Although US slow, more than offset from resource rich countries and emerging economies
- Has also offset weaker terms of trade effects
- Japan’s financial sectors are healthy

00:32:04 Shirakawa: inflation risks, growth outlook
- Core inflation = 1%-1.2% highest in almost 15 years except in 1998
- CPI inflation projection 1.0% for 2008, 2009
- Monitoring how general inflation expectation is changing
- Growth expect to the downside
- Prices expect to the upside

00:33:28 Shirakawa: BOJ’s “accommodative” policy
- Will try to ensure price stability

00:34:24 Shirakawa: Japan’s financial markets
- Japan’s Financial markets are good
- Spreads are tight
- Reason? Low exposure to structured products
- BoJ is good for three reasons (.. left for you to hear on the video)

00:37:20 Trichet on commodity prices, food costs
- capital changing investments instead of investments changing capital
- science and tech making excellent progress
- commodity prices — drivers?
 - man is accustommming itself with the limited resources and liimited capacities of disposal land
 - improving living standards has put pressure in food prices
 - china’s diet has doubled in cost
 - growth in emerging economies have also pushed up energy prices
 - also has prompted alternative fuels - which has helped increased food prices
- pressure of global commodity prices are one of many factors affecting globalization
- a very multidimensional nature of this problem

00:44:53 Trichet: “firmly focused” on price stability
- inflation = monetary phenomenon in long term
- monetary policy should stay focused on price stability
- price stability over the medium term is necessary for sustainable growth

00:47:49 Trichet: credit crunch, liquidity injection
- OMO continue to try to smooth the functioning of commercial banks
- avg level of short-term rates has remained close to the minimum rate

00:51:44 Trichet on cooperation between central banks
- intimate cooperate and discussion with US and Swiss National Bank
- could provide, thanks to fed, US dollar liquidity in Europe
- important to understand the shocks and their relations is vital

00:53:26 Questions: Trichet on Europe bank supervision
- discuss: banks NOT too big to fail, but too INTERCONNECTED to fail
- lessons to do from financial sector view + economic policy view?
- Bubbles? How to detect?
— TRICHET—
** too convoluted to understand and type up notes =\

00:59:06 Shirakawa: asset prices and monetary policy
- asset prices contain valuable information for central banks
- in retrospect Japan’s inflation was quite subdued, even during bubble
- when bubble burst, it went down even more
- “we succeeded in maintaining price stability”
- why no deflation spiral? Because BoJ was able to act as a lender of last resort

01:02:57 Ordonez discusses Spanish banking system.
- …

01:04:23 Bernanke: assessing asset “bubbles”
- the experience of asset bubbles suggests we need to look into these issues
- skeptical about pricking bubbles
- how able to attack only bubbles through?
- how will bubble pop? BOOM? nice slow pop? what are effects on other industries?
- should look into further but doubt monetary policy could be effective
- work towards increasing resilience of financial system
- reduce sensitivity of financial system
- besides supervision and regulation (capital requirements/liquidity/risk management), should look infrastructure, transparency, party risk .. and other examples mentioned
- very central question
- but also very difficult question to resolve in the future

01:08:01 Bernanke: need to strengthen financial system
- financial system needs to be strong and ready to deal with stress
- must have adequate capital, liquity, and risk management systems
- currently, FED Reserve is working with SEC
- thinking about how to go forward
- it will be necessary that all significant institutions have the appropriate strengths to survive the financial stress
—DUBLIN question person: extent of concern with weakness of dollar, implications, and increase of oil price
- weakening of dollar has had some inflation impact
- some impact on commodity prices
- main factor = global supply and demand
- many growing countries
- limitations in supply due to inadequate investment, technology, and geopolitical problems
- even though oil go above $130, dollar pretty stable during then
- everything equal, if dollar goes down, commodities go up (to cancel the effects)
- US is significant importer of Oil
- current accont and trade deficit
- extent that oil and other commodities price rise, it will have adverse effects on balance of trade and lower dollar

01:16:59 Trichet, Bernanke on oil and trade “shocks”
- how are your central banks responding to what seems to be a large ongoing trade shock?
- what are reasonable inflation objectives in short and medium term?
- TRICHET:
- no weaponary to prevent shock
- BERNANKE:
- terms of trade shock (two dimensions)
- 1. change in commodity prices relative to US goods and services
- 2. longer term trade adjustment is the unwinding appreciation of the dollar to restore global balance of current account situation
- effects on living standards, prices and inflation (on short term)

After reading this story, a few thoughts come to mind:

WHOOPS, the guys at FASB didn’t really think things through
or maybe they were persuaded by the big investment banks a little too much from their lobbying efforts…

This is gonna make financial companies less transparent when looking just at their books…|
This will give the edge to hardcore investors but will give the regular investor yet ANOTHER barrier

—–Here’s the story—–

Wire: BLOOMBERG News (BN) Date: 2008-06-01 23:01:00
Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math
By Bradley Keoun
June 2 (Bloomberg) — Leave it to Wall Street to profit from
its own distress.
Merrill Lynch & Co., Citigroup Inc. and four other U.S.
financial companies have used an accounting rule adopted last year
to book almost $12 billion of revenue after a decline in prices of
their own bonds. The rule, intended to expand the “mark-to-
market” accounting that banks use to record profits or losses on
trading assets, allows them to report gains when market prices for
their liabilities fall.
The new math, while legal, defies common sense. Merrill, the
third-biggest U.S. securities firm, added $4 billion of revenue
during the past three quarters as the market value of its debt
fell. That was the result of higher yields demanded by investors
spooked by the New York-based company’s $37 billion of writedowns
from assets hurt by the collapse of the subprime mortgage market.
“They can post substantial gains as a result of a decline in
their own creditworthiness,” said James Cataldo, a former
director of treasury risk management for the Federal Home Loan
Bank of Boston and now an assistant professor of accounting at
Suffolk University in Boston. “It’s completely legitimate, but it
doesn’t make sense by any way we currently have of thinking of net
income.”
The paper profits have helped offset more than $160 billion
of writedowns taken by U.S. financial-services companies during
the past year. Now some investors and analysts say the winnings
are illusory and may have to be reversed.
“The piper will have to be paid eventually,” said Robert
Willens, a former Lehman Brothers Holdings Inc. accounting analyst
who left the New York-based firm earlier this year to become an
independent consultant.

Statement 159

The debate over what is known as Statement 159 adds to the
number of accounting techniques called into question as the U.S.
debt market unravels. Investors have criticized banks for booking
some writedowns in an accounting category called “other
comprehensive income” that bypasses their income statements.
Accounting rulemakers are now proposing changes to standards that
let banks use off-balance-sheet vehicles to juice earnings without
tying up precious capital.
Statement 159, formally known as the “Fair Value Option for
Financial Assets and Financial Liabilities,” was issued in
February 2007 by the Financial Accounting Standards Board, or
FASB, which sets U.S. accounting rules. It was adopted by most
large Wall Street firms in the first quarter of last year and
becomes mandatory for all U.S. companies this year, although they
have wide latitude in how to apply it, if at all.

Lobbying Effort

The rule was enacted after lobbying by New York-based
companies, led by Merrill, Morgan Stanley, Goldman Sachs Group
Inc. and Citigroup, which wrote letters to FASB arguing that it
wasn’t fair to make them mark their assets to market value if they
couldn’t also mark their liabilities.
“We do not believe it would be appropriate” to let
investors consider creditworthiness when valuing bonds if the
issuing company couldn’t do the same, wrote Matthew Schroeder,
managing director of accounting policy at Goldman, the largest
U.S. securities firm by market value, in an April 2006 letter.
Companies are allowed to decide for themselves which of their
outstanding bonds, loans and other liabilities will get mark-to-
market treatment. That’s an unprecedented degree of leeway, said
Willens, who is also an adjunct professor at Columbia University
in New York.
“It’s kind of a dumb rule,” Willens said. “In the entire
panoply of accounting, this is the most flexible and elective and
optional rule that we have.”

The Fed Objects

Here’s how it works, according to Richard Bove, an analyst at
New York-based Ladenburg Thalmann & Co. A company decides to
designate $100 million of its subordinated bonds as subject to
mark-to-market accounting. The price of the bonds drops to 80
cents on the dollar from 100 cents. So the firm books $20 million
on the “presumed savings that you have on your liabilities,”
Bove said.
“In the real world you didn’t save a dime,” he said. “You
still owe the $100 million. It’s another one of these accounting
rules that basically takes you further and further away from
reality.”
The Federal Reserve, Federal Deposit Insurance Corp., Office
of the Comptroller of the Currency and Office of Thrift
Supervision objected to the rule before its passage, saying in a
joint 2006 letter to the FASB that it would “have the contrary
effect” of increasing a bank’s net worth at the same time its
“financial condition is deteriorating.”

Split at FASB

The regulators remain so skeptical that they refuse to let
banks apply the phantom revenue toward minimum capital
requirements, according to reporting rules posted on the Web site
of the Federal Financial Institutions Examination Council. Deborah
Lagomarsino, a Washington-based spokeswoman for the Federal
Reserve, declined to comment.
Not even the FASB was united on the new standard. Two of its
seven board members — Thomas Linsmeier and Donald Young — voted
against it, according to the February 2007 statement. Linsmeier
said the rule “will provide an opportunity for entities to report
significantly less earnings volatility than they are exposed to,”
according to the statement.
The FASB tried to limit abuses by forcing companies to
designate their “fair value” liabilities when they adopt the new
standard. Subsequently, they can’t change their minds. Liabilities
added after adoption can only be designated at inception.
“The statement was thoroughly discussed with users and
preparers” in advance of its publication, said Neal McGarity, a
spokesman for Norwalk, Connecticut-based FASB. A March survey by
the CFA Institute, a Charlottesville, Virginia-based group that
administers a financial-analyst designation program, showed that
74 percent of investors believe the standard “has improved market
integrity,” he said.

Merrill’s Liabilities

Merrill designated about $166 billion of liabilities, or 17
percent of its total, as fair-value instruments subject to mark-
to-market accounting at the end of 2007, according to its annual
report. Included in the amount were $76.3 billion of long-term
borrowings and $89.7 billion of payables under securities-
financing transactions.
Prices for the firm’s bonds tumbled over the past year: Its
floating-rate notes due in January 2015 are trading at about 87
cents on the dollar, compared with about 100 cents last June.
Merrill has said its gains from the liabilities don’t add to
true earnings power. In a spreadsheet posted on its Web site,
Merrill says that investors who want a “more meaningful period-
to-period comparison” should exclude the $2.1 billion of revenue
recorded in the first quarter.
Merrill spokeswoman Jessica Oppenheim declined to comment.
The company owns a passive 20 percent stake in Bloomberg LP, the
parent of Bloomberg News.

Lehman to Goldman

Lehman, the fourth-biggest securities firm, has reported $1.9
billion of gains related to a widening of its own bond spreads.
Citigroup, the largest U.S. bank by assets, has booked $1.7
billion; Morgan Stanley $1.7 billion; JPMorgan Chase & Co., the
third-biggest bank, $1.7 billion; and Goldman Sachs $550 million.
There may be more to come, JPMorgan analyst Kenneth
Worthington wrote in a May 28 report. Lehman may book $325 million
for the second fiscal quarter ended in May, and Morgan Stanley,
the second-biggest U.S. securities firm, may report $470 million,
Worthington estimates.
Spokesmen for Lehman, Morgan Stanley, Goldman, Citigroup and
JPMorgan in New York declined to comment.

`Shell Game’

“No one’s going out in the market and actually retiring this So far, most banks’ writedowns are “unrealized,” meaning
they’ve been unwilling or unable to liquidate distressed assets.
If prices reversed, the banks would record mark-to-market profits.
The same is true for the liabilities. Companies can’t
“realize” the mark-to-market gains on their debt unless they buy
it back at the discounted price. They’re unlikely to do so,
because the deterioration in creditworthiness means they’d have to
replace the debt with higher-cost borrowings, Willens said.
debt,” Willens said. “It’s a shell game.”
David Moser, Merrill’s managing director for accounting
policy, acknowledged that concern in an April 10, 2006, letter to
the FASB.
“It seems counterintuitive that when a company’s credit
spreads are widening, it would recognize a gain in earnings,”
Moser wrote. “The amounts are typically not realizable and
therefore less relevant.”
He nevertheless supported the new accounting standard because
it “mitigates some of the uneconomic volatility in earnings”
that results from marking assets to market without doing the same
for liabilities.

Market Reversal

Bear Stearns Cos., which adopted the new standard this year,
reported a $305 million windfall in the fiscal first quarter,
which ended in February, as bond spreads widened on concerns the
company might face a funding shortage. Then in March, after the
New York-based securities firm was forced to sell itself to
JPMorgan, Bear Stearns’s bond spreads tightened, resulting in a
$372 million loss, according to a regulatory filing in April.
Worthington estimates that similar tightening of bond spreads
at Merrill, Morgan Stanley, Lehman and Goldman Sachs may cause
them to reverse $5.96 billion of revenue by the end of the year.
“It could very well hurt earnings,” said Jeffery Harte, an
analyst at Sandler O’Neill & Partners LP in Chicago, in an
interview. On the flip side, a recovery may result in asset write-
ups, he said.
Standard & Poor’s, which relies on banks’ financial
statements to issue credit ratings, said in April 2006 that the
new rule might lead to “diminished analytical transparency.”
“Equity may be overstated as a result of these illusory
gains that may never be realized, hindering the analysis of the
equity cushion to absorb losses,” S&P Chief Accountant Neri
Bukspan wrote in a letter to the FASB.
If and when the “illusory” revenue is reversed as losses,
the banks and brokers may have to work harder to convince
investors to ignore them, Willens said.

For related news:
Merrill earnings: MER US <Equity> TCNI ERN <GO>
Top finance: FTOP <GO>
Credit Market in Turmoil: EXTRA <GO>

–Editors: Robert Friedman, Tim Quinson.

To contact the reporter on this story:
Bradley Keoun in New York at +1-212-617-2310 or
bkeoun@bloomberg.net.

To contact the editor responsible for this story:
Otis Bilodeau at +1-212-617-3921 or
obilodeau@bloomberg.net.
—————————–====================——————————
Copyright (c) 2008, Bloomberg, L. P.

################################ END OF STORY 1 ##############################

A nice and short 4 minute video of media coverage.

Taken directly off Yahoo!’s website…

Source: http://biz.yahoo.com/rb/080503/microsoft_yahoo.html

Reuters
Microsoft withdraws offer for Yahoo: source
Saturday May 3, 8:06 pm ET

SAN FRANCISCO (Reuters) - Microsoft Corp (NasdaqGS:MSFT - News) has withdrawn its offer for Yahoo Inc (NasdaqGS:YHOO - News) and does not plan to go hostile, a person familiar with Microsoft’s thinking said on Saturday.

Microsoft raised its offer by $5 billion to $33 a share, but Yahoo wanted $37 a share, this person said.

Microsoft Chief Executive Steve Ballmer has sent a letter to Yahoo Chief Executive Jerry Yang withdrawing the offer, the person said.

(Editing by Todd Eastham)

I believe Yahoo! is a broken company. That’s sure unfortunate for Yahoo! shareholders that Microsoft withdrew. Although not 100% official yet, it’ll be interesting to see the price action on YHOO on Monday.

[Posted @ 13:27:20]

13:28:42

Woo. SBUX earnings got me excited. I’m now waiting for AAPL to release earnings and I’m quite excited. I don’t even have positions in these two but SBUX’s comments are certainly helping my convictions a few days ago. I was beginning to think my beliefs were wrong but I’m feeling better now that those beliefs have been reinforced by SBUX. Thank you SBUX (current down 10.96% in after-hours trading @ $15.76 @ 13:30:06 PST)!

“The current economic environment is the weakest in our company’s history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers” says Howard Schultz, chairman, president and CEO of SBUX.

13:31:07

Boo… AAPL beat earnings by quite a bit. Records across products in units sold. I suppose people are holding back buying coffee to buy iPods haha. (AAPL up 1.13% @ 162.32 @ 13:39:00)

13:36:15

MSFT reports tomorrow. Looking at the trend across technology companies, MSFT should do fine tomorrow.

.. time to go do my math final.

[01:33:18] Excellent.

————————————————–

AP
Consumer Confidence Falls to New Low
Friday April 11, 3:46 am ET
By Jeannine Aversa, AP Economics Writer

Confidence Sinks to Lowest on Records Going Back to 2002 As Fear Tightens Hold on Consumers WASHINGTON (AP) — Americans’ confidence in the economy fell to a new low, dragged down by worries about mounting job losses, record-high home foreclosures and zooming energy prices.

According to the RBC Cash Index, confidence dropped to a mark of 29.5 in April, down from 33.1 in March. The new reading was the worst since the index began in 2002. It marked the fourth month in a row where confidence has fallen to an all-time low.

“Consumers are very pessimistic,” said Mark Vitner, economist at Wachovia. “There are not a lot of happy campers out there.”

Over the past year, consumer confidence has deteriorated significantly. Worsening problems in housing, harder-to-get credit, financial turmoil on Wall Street and lofty energy prices have put people in a much more gloomy mind-set. Last April, confidence stood at 85.4. The index is based on results from the international polling firm Ipsos.

All the economy’s problems are taking a toll on President Bush’s approval ratings, too. The public’s approval rating on his economic stewardship fell to a low of 27 percent, according to a separate Associated Press-Ipsos poll. Bush’s overall job-approval rating dipped to 28 percent, also an all-time low, the poll said.

Many economists believe the country has tipped into its first recession since 2001. Federal Reserve Chairman Ben Bernanke for the first time acknowledged last week that a recession was possible. It was a rare public utterance of the “r” word by a Fed chief.

“Consumer sentiment is tracking at levels we think are consistent with a mild recession at this point,” said Brian Bethune, economist at Global Insight.

A measure looking at consumer’s feelings about current economic conditions slipped to a 54.6 in April, from 54.7 in March. The new reading was the lowest in six years of records.

Rising unemployment and job losses are making people more uneasy.

The government reported last week, that employers slashed 80,000 jobs in March, the most in five years and the third straight month where the nation’s payrolls were cut. The unemployment rate jumped from 4.8 percent to 5.1 percent, the highest since the aftermath of the devastating Gulf Coast hurricanes.

Another factor blamed for eroding consumer confidence is high gasoline prices, which are socking people’s wallets and pocketbooks. That’s squeezing already strained budgets and leaving people with less money to spend on other things.

“Much of the angst we’re seeing from consumers is `Gosh, I’m working harder and harder, and all I’m doing is paying for my basic necessities. I don’t have anything left to have any fun,’” Vitner said.

Gasoline prices, which have set a string of records in recent weeks, climbed to a new record of $3.357 a gallon on Thursday, according to AAA and the Oil Price Information Service.

Anxiety also has grown as people wonder if there is any relief in sight for the troubled housing market. With the housing collapse, many people have watched their single-biggest asset — their home — drop in value. That has made them feel less wealthy and less inclined to spend.

Against the backdrop of all these concerns, another measure tracking individuals’ sentiments about the economy and their own financial standing over the next six months fell deeper into negative territory. This gauge dropped to a negative 48.3 in April, down from a negative 41.6 in March. The new reading was the worst on record.

A measure on consumers feelings about employment conditions fell to 97 in April, from 99.2 in March. The new reading was the lowest since early October 2003. Another gauge of attitudes about investing, including comfort in making major purchases, declined to 56.4 in April, from 56.7 in March. The new figure was the lowest on records going back to 2002.

Economists keep close tabs on confidence barometers for clues about consumer spending, a major shaper of overall economic activity.

Cautious shoppers gave most retailers their most dismal March in 13 years, according to sales figures reported by major retailers on Thursday. J.C. Penney Co., Gap Inc., and Limited Brands Inc. were among the merchants hit by a sharp drop in sales.

The RBC consumer confidence index was based on the responses from 1,005 adults surveyed Monday through Wednesday about their attitudes on personal finance and the economy. Results of the survey had a margin of sampling error of plus or minus 3 percentage points. The overall confidence index is benchmarked to a reading of 100 in January 2002, when Ipsos started the survey.

Pointing to the overall confidence reading of 29.5 in April, T.J. Marta, a fixed-income strategist at RBC Capital Markets, said: “What confidence? There is no confidence. It’s like 1929.”

To catch up on four/five days of no Bloomberg, I spent lots of time at Bloomberg today. Now I’m convinced the market is going to fall. The evidence is in the options activity and the charts that I have posted. Of course, it should be said that the evidence displayed before you are biased. I do not post weak evidence or bullish-looking-screenshots because I have already taken those into account. I am convinced the market will fall because the overall picture is bearish.

Looking at the S&P500 chart, we can see it’s near resistance. Also notice the declining volume. This signals that the trend is losing momentum.

Looking at major index ETFs (i.e., SPY, QQQQ, IWM), I see large put activity.

Looking at some active SPY May options contracts Trade Summaries for today, I see large put positions being taken indicating SPY may head as far down as 128 by the end of May expirations.

I will reiterate. US Market’s will fall! =) .. Here’s Alan Greenspan’s commentary on the economy (I coloured the parts I think are important):

Greenspan Says U.S. Home Prices May Stabilize Later This Year
2008-04-07 22:32 (New York)

By Scott Lanman and Lily Nonomiya
April 8 (Bloomberg) — Former Federal Reserve Chairman Alan
Greenspan said the drop in U.S. home prices will probably end
“well before” early next year as the number of houses on the
market diminishes, aiding an economic rebound.
“It will not be until early 2009 that we will get close to
having eliminated most of this” home inventory, Greenspan told
a conference in Tokyo today sponsored by Deutsche Bank AG and
co-hosted by Bloomberg LP. “But it is very likely that home
prices will stabilize well before that.”
The health of the U.S. housing market is tied to broader
financial markets that rely on bundling mortgages to sell as
securities, Greenspan said. His successor, Fed Chairman Ben S.
Bernanke, and other Fed officials have highlighted declining
home prices as a major economic risk that may further hurt
household wealth and consumer spending.
“Once the markets start to stabilize, especially if the
real economies don’t go into a severe recession,” then “we can
expect a recovery to begin to take place,” Greenspan, 82, said
via satellite from Washington. “It will be slow, it will be
hesitant.”
He said the extent of damage stemming from the collapse of
the subprime-mortgage market won’t be known for months.
“Have we reached a point where prices are stable? We
cannot know that for a couple of months,” Greenspan said. “It
looks as though we’re going to get a very large rate of
liquidation, but not until the second half of this year.”

Inflation Contained

The yield on the 10-year Treasury note fell 2 basis points
to 3.52 percent as of 11:25 a.m. in Tokyo, according to bond
broker Cantor Fitzgerald LP.
Greenspan said inflation will be contained during the
current slowdown before picking up as the world economy recovers.
“It’s difficult to imagine any major breakout of inflation
as economic slack continues to increase,” he said. “What we
will see is gradually rising inflationary pressures that will
probably be subdued during the current period of slack, but that
will surely reemerge when economies pick up.”
Greenspan spoke via satellite from Bloomberg Television’s
studio in Washington, answering questions from Peter Hooper,
chief economist at the securities unit of Deutsche Bank, which
hired Greenspan as a consultant in August.
Greenspan, who retired in 2006 after 18 years as the U.S.
central-bank chief, has come under increasing criticism for his
policies as last year’s subprime-loan meltdown spread into a
broader financial crisis. One recent book, “Greenspan’s
Bubbles” by money manager William Fleckenstein, argues the
former Fed chief helped inflate stock and home prices.

Left to Bernanke

In response to the bursting of the Internet and technology
bubble and the Sept. 11 terrorist attacks, Greenspan lowered the
Fed’s key rate in 2001 from 6.5 percent to 1.75 percent, then
reduced it further in 2003 to 1 percent, a 45-year low.
He left the rate there for a year before starting to raise
borrowing costs in quarter-point increments, leaving it Bernanke
to decide when to stop. Some Fed critics, such as Bear Stearns
Cos. economist John Ryding, say rates were too low for too long,
encouraging the easy credit that helped inflate a housing bubble
and has now returned to burn investors.
Greenspan, who published his memoir “The Age of
Turbulence” in September, has taken to defending his legacy in
newspaper opinion articles.
Yesterday, in a Financial Times piece headlined “The Fed
is blameless on the property bubble,” Greenspan wrote that the
evidence is “very fragile” that Fed interest-rate policy added
to the U.S. bubble and that “it is not credible that regulators
would have been able to prevent the subprime debacle.”

Worst Credit Crisis

Greenspan said today that “the current credit crisis is
the most wrenching in the last half century and possibly more.”
Such remarks echo the assessments of economists including
those at the International Monetary Fund, and may add to
pressure on policy makers to strengthen their response to the
credit crunch. Fed officials last week acknowledged that capital
markets remain distressed even after the fastest interest-rate
cuts in two decades, and may be rethinking their aversion to
acting against asset-price bubbles.
After last month’s near-collapse of Bear Stearns,
Minneapolis Fed Bank President Gary Stern — the longest-serving
policy maker — said on March 27 that it’s possible “to build
support” for practices “designed to prevent excesses.”
Greenspan, in yesterday’s FT piece, reiterated his doubts
about taking a more active role in leaning against asset bubbles.
At least 14 banks and securities firms have sought cash
from outside investors in the past year after more than $230
billion of global markdowns and losses caused by the collapse of
the U.S. subprime mortgage market, Bloomberg data show.
Bernanke, 54, told Congress last week that the U.S. economy
may contract in the first half of 2008 and for the first time
acknowledged the chance of a recession.
Later today, the Fed releases minutes of its March 18
interest-rate decision and any other conference calls in
February and the first half of March. The Federal Open Market
Committee that day lowered its benchmark rate by 0.75 percentage
point to 2.25 percent, capping 3 points of cuts since September.

–With reporting by Toru Fujioka and Jason Clenfield in Tokyo,
Craig Torres in Washington and Vivien Lou Chen in San Francisco.
Editors: Russell Ward, David Tweed

To contact the reporters on this story:
Scott Lanman in Washington at +1-202-624-1934 or
slanman@bloomberg.net;
Lily Nonomiya in Tokyo at +81-3-3201-3423 or
lnonomiya@bloomberg.net

To contact the editor responsible for this story:
David Tweed at +81-3-3201-2494 or
dtweed@bloomberg.net.

Hmm. Think about it. Ask yourself one question, why did the markets rally this week?

It certainly did NOT rally due to good economic news. Poor unemployment numbers were released and unemployment numbers from January were revised from -22,000 to -76,000.February was revised from -63,000 to -76,000. So it makes me wonder what March numbers will be revised to… Bernanke also, for the first time, mentioned the possibility of a recession.

This leads me to ask: Why would markets rally? I can think of two reasons.

1) The market was expecting much worse this week, and/or
2) People are dumb enough to actually believe the talking heads on TV when they say we’ve hit the market bottom. As a result, they’re bidding up the market.

Unfortunately, for better or for worse, (2) is a highly probable reason. A few weeks ago, we hit a technical support area which initiated the bounce. Currently, the markets are near it’s technical resistance area (it can be seen on many many charts).

What are the chances of prices breaking through these resistances? Very low. I say, now is the time for us to drop back down to support. I’ll tell you why I think so.

1) The trend is our friend. We’re in a bear market. What’s the trend? DOWN!
2) Markets are near resistance. Incidentally, earnings season kicks off next week. [Contractionary Environment] + [Earnings Season] = [Sell Sell Sell]
3) Recession worries? I think worries will reemerge in the minds of irrational market participants once earnings start coming out. They’ll soon realize the US economy’s recession has just begun!

Here’s what Stock Tiger had to say…

The bad news jobs report on Friday confirmed the recession likelihood once again and the result was the market held its ground very well. Investors want to believe that this kind of bad news is priced in, as they think it is in the financial crisis and they look forward to a resumption of the bull market while calling this the bottom of the market.They are putting money to work in looking forward to the turnaround. After all, often by the time we see the weaker labor numbers the recession has been going on for some time and this makes some look ahead to the end of the recession.

As Butch Cooley, our weekly commentator points out, the housing market and financial problems may take a long time to unravel and repair so while a rally may be tradable it does not look like a long term bottom. In the Saturday Barrons they mention “..by the time the unemployment rate ticks above 5%, investors have begun anticipating a recession’s end, with the Standard & Poor’s 500 snagging an average return of 15.9% a year later.”

The buyers this week were not usual as they kept it up — even with bad news the sellers were not aggressive and pullbacks were bought. The problem was the light volume but this also suggests the shorts have yet to cover so a more aggressive rally may come after the the next pullback.

While the markets are over bought in general, at some point if this rally is to become more than a bear market one, we would expect to see much greater overbought conditions as bulls race to get on board and shorts scramble to cover.

With the greater than expected job loss report the headline unemployment rate went up to 5.1%. Economists were expecting an unemployment rate of 5%.

The largest losses were in the manufacturing and construction sectors. The goods-producing sectors lost 93,000 jobs, while the retail sector lost 12,000 jobs. Jobs at the professional and business services sector also dropped by 35,000.The services sector added 13,000 jobs compared to the 6,000 jobs it added in the previous month. Education & health services, leisure & hospitality and the government sector also added jobs

Thursday morning, the Department of Labor released its report on initial jobless claims in the week ended March 29, showing that jobless claims jumped to their highest level in well over two years. The household survey shows the number of unemployed people rose by 438,000. Job losses since December are now at 286,000 in the private sector

Conclusion: I would be building a short position. With earnings season starting next week, we’re in for another volatile ride back down to support!

Just a warning, I took these images BEFORE the close so the charts will not be representative of today’s ending data.

(No posts over weekend, going to focus on school) — WOOO! Eye opening day for me today. I suppose it’s because I’m still young, inexperienced, and vulnerable to be fascinated by new experiences! I was finally able to get some quality time with Bloomberg this afternoon and found some quite interesting information on MER. It can be seen that LOTS of front-month options (i.e., the closest month to expiration for an option contract) are being traded! Not only are they being traded, but Open Interest is high too! I found out why there has been the options spike. But first, let’s take a look at Bloomberg’s Equity ANR Function (the Analyst Recommendations page)

As we can see, under Analyst, we find Meredith A Whitney. This person put an underperform on MER on March 27, 2008. The day before, Charles W Peabody put a sell recommendation on MER. The focus based on my findings, however, are the actions of Meredith Whitney. This is a snippen of her note regarding MER on March 27th.

Merrill may post a loss of $3 per share and write down $6
billion of assets, Whitney wrote in a report dated yesterday.
Zurich-based UBS will lose $2.75 per share after writing down
about $11 billion, she said. Sanford C. Bernstein & Co. also
abandoned its prediction of a profit for Merrill today.
“We expect the brokers and banks to take another round of
writedowns on their mortgage-related positions,” said Whitney,
who correctly predicted two months in advance that Citigroup Inc.
would reduce its dividend to preserve capital.

“We believe Merrill Lynch will go through the disruptive
step of true structural reorganization or right sizing that will
dominate the bulk of 2008,” she wrote. Whitney has an
“underperform” recommendation on shares of Merrill Lynch, the
third-biggest U.S. securities firm.

The full article can be found here.

Anywho, it’s looking bad for MER with analysts views being negative.

Let’s take a look at Bloomberg’s OMST (Most Active Options function) to see which options are being heavily traded today. Notice the Open Interest Put/Call ratio. It’s currently at 1.65. Interesting.

Whoa. Do you see that? APR08 30 Puts and APR08 40 Puts are trading quite heavily. Let’s look into this to find whether traders are Selling the options or Buying the options. First, let’s look at the option that would most likely expire in-the-money (i.e., APR08 40 Puts). First and foremost, let’s look at the historical chart for this option to identify when, exactly, did interest begin with this particular option:

It seems as if the APR08 40 Puts started getting hot after the analyst downgrades. I suspect the previous dramatic increases in contracts traded was due large to the extremely large fluctuations of the underlying. Bloomberg’s VWAP (Volume Weighted Average Price) function is seen below. The VWAP, as the name implies, determines the average price of all the options traded in the period (indicated by the green line on the chart). This graph helps determine whether trades took place on the Ask (Buy) side or the Bid (Sell) side. If there are more Asks than Bids, then that almost always means there were more purchases of the option than sales of the options. In other words, for this particular option (MER APR08 40 Put), it is screaming a signal that MER will be heading down below $40 before April expiration comes around. What is interesting for me, is that OpInt (Open Interest) is currently above 70,000. That’s huge (for me at least.. iuno, I suppose I’m still in experienced). Anyways, here’s the VWAP (Volume Weighted Average Price):

Here are the trades that are included into the VWAP calculation:

It is pretty obvious that nearly EVERY trade is betting MER will, at the very least, dip below $40. Now let’s look at the most actively traded option today, the MER APR08 30 Put option.

Unforetunately, this set of data is not as clear as the APR08 40 Puts. Currently, open interest for this option is above 60,000. However, what makes this uneasy is the balanced buying and selling of this option. For me, this indicates resistance at $30. There are people on both sides willing to put down real money to bet MER will either stay above 30 or below 30.

It will be very interesting to see how MER will do on its earnings this first quarter. I honestly do not know if MER will release after April expirations. Smart Money says, “MER is going below 40 but it might go below 30.” Or at least that’s what it’s saying to me on this wonderful Friday afternoon (wonderful in terms of FXI’s locked gains).