Source: Unknown
The above graph is a little dose of reality that I thought telling during a week where Wells Fargo is trumpeting the wonders of their quarterly earnings and the Wall Street Cheerleaders bang on their "buy buy buy" drum. The graph was included in the excellent, weekly newsletter from John Mauldin. So, in the context of earnings seasons, let's remember a couple of key points. The earnings projections are based on operating earnings not as-reported earnings. In short, operating earnings are earnings before interest and negative stuff. As-reported earnings are the numbers actually reported for tax purposes. For some ridiculous reason, banks are projected to account for all the rebound in Q4.
As the graph above shows, mortgage resets have declined in 2009, but next comes the wave of so-called Alt-As and Option ARMs in 2010- 2011. Different surveys say different things, but it remains a fact that foreclosures will continue to increase which only dumps more supply onto a market all ready overwhelmed with supply and very few qualified buyers. How willing will the banks be to unload more inventory of homes as prices continue to decline? Delinquencies on home equity loans are on the rise, unemployment is likely to continue to rise, consumer and small business credit is being contracted and eliminated outright in some instances, and commercial mortgages are the next real killing field in the aftermath of this real estate bubble.
The 10 biggest banks in the US hold $327.6 Billion in commercial mortgages. Commercial property loans in default or foreclosure increased 43% in the Q1. Consumer spending as we have come to know it in recent years (fueled by borrowed money on unaffordable homes) is gone. American household debt remains near all-time highs. Savings rates are increasing and likely to continue to do so. That creates a problem for an economy whose GDP is based on 70% consumer spending. No consumer spending- no increasing corporate earnings- no matter what infrastructure schemes the Government concocts.
Now to the fun part- The largest tax increase in history in 2010 thanks to Obama and Congress and the continued devaluing of our purchasing power (the Dollar) by their unrelenting money printing.
Bloomberg noted this week that analysts overestimated bank profits for at least six consecutive quarters. So, I wonder where the proposed 74% increase in financial profits the analysts (other than Meredith Whitney) are calling for in Q4 will come from? Magic Beans??
