Strange Days Indeed

It is a strange day indeed when I agree with strategist Dick Bove', but it happened today. Mr. Bove', formerly of Ladenburg Thalmann, formerly of Punk Ziegel and now of Rochdale stunned the markets when he announced that bank stocks have not risen on substance and that will not do better in the second half of 2009. In fact, he later told Larry Kudlow that most banks, including some very large banks, will probably lose money in the second half of 2009.

This is big news because Mr. Bove' has been a bank cheerleader, specifically singing the praises of a bank which is now essentially nationalized. However, just when I thought Mr. Bove had returned to reality, he told Larry Kudlow that that his favorite bank pick was the one which is a ward of the state and has memoranda of understanding with both the Comptroller of the Currency and the FDIC (which mean that the bank;s management can't do much more than order lunch without the approval of its regulators.

Here is a bit of news for you all. If you really looked (I mean really looked) at the assets which are on the books of the two largest, most troubled banks, you would faint from the shock of how bad they are. In fact, if not for the government, one large bank would not be here. Some argue that with a steep yield curve and nearly 0.00% short term borrowing rates, banks can make money. They can, if they have enough qualified customers needing credit. Unfortunately, the demand for credit from those who should receive credit is not great enough for some banks to earn enough to offset the constant drain caused buy assets which rival Chernobyl in terms of radioactivity. So much for mark to market reform. Most toxic assets are held on balance sheets in the form of loans, not securities. Loans are not subject to marking to market when on bank balance sheets. Many, if not most, toxic loans on bank balance sheets have been marked little if at all.

I had previously warned the those looking for foreign investors to abandon U.S. treasuries that foreign central banks are committed to investing in dollars. Today's three-year treasury note auction was for a record $37B with record interest from foreign central banks. Expect strong foreign demand from foreign central banks in tomorrow's 10-year note auction and Thursday's 30-year bond auction.

I expect no surprises in tomorrows FOMC statement. It is status quo for now.