Financials ??? and is economy improving ???

First week of US Q2 earnings reports was good enough to drive global stock indexes surprisingly high and fast.
Financial sector announcements reveals a far more disturbing picture, for none of the heralded profits reflected results from any kind of predictable ongoing operations.

Goldman Sachs’ (GS) profits were primarily from high risk trading operations, which by nature can vary dramatically, especially with the recent theft of proprietary short term trading software. This business model is perhaps reckless but understandable, given that GS knows it can always hit the taxpayers to cover losses, but is worrisome for the markets, never mind American taxpayers.

Strong results from JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C) came from one-time capital gains from asset sales, not sustainable operations. While JPM did have strong results from its commercial banking and asset management business, it noted declines in other key areas of operations and increasing defaults and credit risk. The rest showed profits mostly due to capital gains, not sustainable ongoing operations, and also noted rising default rates and risks of much more to come. Indeed Citigroup shows a loss if you factor out its sale of Smith Barney to Morgan Stanley (MS).

Consider that current conditions are relatively good compared to what’s coming. To give the banks a chance to earn more than they lose, Washington has thus far:

-Allowed banks to borrow for next to nothing, lend out at far higher rates
-Allowed banks to overvalue assets
-Keep consumer interest rates relatively low in order to encourage spending and fee-generating mortgage refinancing
How careful will the big banks be in lending this money, knowing that if the past is any guide, any bad loans will be offloaded onto the taxpayers? There will be plenty more bad loans. Loan losses can only grow as unemployment rises, even if the rate of job losses declines. Bank stress test worse case scenarios were for 8.9% unemployment in 2009, and it’s already at 9.5% and rising.

Looking beyond earnings, at numbers that are harder to manipulate, we see a similar picture

-The Port of Long Beach shows container shipments down nearly 30% annually.
-Freight railroad car loadings are down 25% annually, as reflected in CSX’s report.
-Tax receipts, both personal and corporate, have plummeted.

While economic data this past week was secondary to earnings, it too showed mixed results at best, with both core retail sales and industrial production weak, which does not bode well for the coming GDP estimates.

In sum, it appears that this past week’s rally should be viewed with at least as much suspicion as relief, especially with stocks already so close to their 2009 highs, with no more real evidence of recovery than we had before the rally.