Reply #57: Asterisks Abound

[Pale Blue Dot]

Last week's deeply oversold condition allowed Treasury and SEC to orchestrate what BIll King called the mother of all short covering rallies.

That looks to continues this week.

Earnings are coming in weak -- however, they are not as bad as the worst case scenarios. As we noted previous to the rally, we covered our shorts and are playing this for bounce. But beyond the bounce, we continue to have concerns.

Asterisks abound in many of these earnings, from Wells Fargo to Wachovia to Bank of America. Why asterisks? Consider how this game is being played:

• Delinquencies and Foreclosures were previously marked on a 120 day basis; the bank extended its charge-off policy to 180 days, eliminating or postponing enormous losses to the future;

• Some paper is being moved to Level 2 or Level 3, again forestalling taking the actual loss;

• Borrowing at a modest rate from the discount window artificially lowers costs;

There's lots more of these asterisks, and until the crowd figures this out, you should expect the financial rally to run.

http://bigpicture.typepad.com/comments/2008/07/asterisks-aboun.html