Raging Bull or Just full of it

The resiliency of the markets has many investors, both retail and
institutional, playing catch up. Opportunistically stepping in to buy any
weakness, making all corrections thus far, shallow in depth. There are many
reasons for optimism as there are a number of reasons for the wise to show
caution. Which is natural when exiting a recession. The Bear case: We've
rallied significantly off the March lows, top line revenue growth is hard to
come by, the continued excess liquidity being forced into the market, and
the lack of a cohesive exit strategy all are valid arguments for a pause.
The other side of the coin, global stimuli is gaining traction both
domestically and internationally, we're witnessing a stabilization in the
housing industry, the strong evidence of progress made in credit and
lending, the rate of job losses has ebbed, inflation is under arrest, and it
appears the recession has ended and a resumption to growth for the US
economy should be reflected in the current quarter. I remain cautiously
optimistic, but respectful of the fragile recovery we are currently
experiencing. I have one nagging concern that refuses to go away and keeps
me from being a blind raging bull. That concern remains the bank balance
sheets, and how we "healed" them so quickly and effectively. One of the
many cures we treated this patient with was merely an accounting gimmick.
An amendment to the so called "Mark to Market" account rule, FASB 157. But,
it turned out to be a miracle cure. (As you all know, I was very vocal and a
proponent of repeal during the financial meltdown) I don't want to be a
hypocrite now that the hurricane has move out to sea, but many of those same
assets still reside on bank balance sheets. Many of those same assets are
still tied to Real Estate, both commercial and residential that continues to
lose value. The program designed to remove those "legacy" (toxic has such a
bad ring to it) assets, PPIP has stalled, for now. This poses the following
dilemma for the PPIP. If banks no longer need to mark down the valuations
of those assets and can continue to hold them at fictitious valuations why
would they sell them at a severe discount to carrying values? How can banks
do that? Simply by moving these assets from one column, being "Held For
Trading" to the other side of the ledger, "Held For Investment". Now under
the new accounting rules, you no longer need to mark them at say .60/100,
since you plan on holding these securities until they mature, you carry them
at $1.00. That would be similar to you or I with our 5 year old autos,
since we don't wish to sell them today, can continue to count them as assets
at the original purchase price and not the blue book. As you can see,
looks great on paper, until we need to sell or trade in our car for a new
one. Now, banks, due to the steepness of the yield curve are generating
huge cash flows. They have also raised fees and are using those enormous
cash flows to aggressively build loan loss reserves. Are they
over-reserved? Perhaps and there is mounting evidence this is correct. And
I come down on this side of the equation. However, just this last week we
heard from State Street they may have potentially under-reserved against
future losses. There are many smaller regional banks that are still
battling a deteriorating loan portfolio and delinquencies that don't have
the massive deposit base to bail them out. We most likely will need to
recycle those early TARP repayments back to these smaller neighborhood banks
that require assistance. Plans are being worked on to do just that.
We'll need the following, more time, more TARP money, stabilization in
housing and jobs to help heal these smaller non-systemically critical
financial institutions heal. We've certainly bought ourselves the time by
printing up the money.



Now I'm on Bernanke watch for the next 45 minutes. Actually I know what he
looks like, I want to see his statement, which is most critical.

Yours, still a bull, just not a blind one.