The one billion dollar surprise

Everything just seemed so nice during recent weeks: after a beautiful trend of rehiring people in large companies and banks, the stock market was constantly increasing and precious metal prices skyrocketed. Now however, the third quarter results of several financial institutions where published. On top of the list is the Bank of America with the tremendous loss of 1 billion dollars. Share prices dropped by 4.25% in the first 10 minutes after the announcement - just as if nobody could have predicted it. Well, how could you have when looking at the headlines during the last weeks? Selling immediately was today's reaction of numerous, unprofessional investors. They were waiting for yet another boost of profits while sitting on a big pile of shares but instead experienced a bad surprise.

To blame is in part financial media that spread the believe that everything was going well and a kind of 'the-earlier-you-buy-the-more-you-take-home'-philosophy. So people were buying, possibly before the results got published, especially after the announcement of an over 3 billion dollar profit made by Goldman Sachs two days ago. However investment banks are not the same as commercial banks. Some people understood how financial markets work and knew that in this financial and economic environment no commercial bank could have possibly made a profit. They thus wisely sold yesterday already. The days or week before the announcement of Bank of America's results a lot of trading was going on, and a lot of controversies about what will happen. This can been seen when looking at the stock charts in the Morning star: an almost unchanged share price but much larger trading volumes compared to other days.

Now several different articles from newspapers like the Wall Street Journal, Reuters and the Financial Times can all be put in the same box. What I believe to be important when analysing this week's financial media is to note that they all give the same numbers, facts, statements by Bank of America's CEO - Kenneth Lewis - and don't use any particularly subjective or critical language. There is nothing that really differentiates these rather neutral and objective articles. The one published by Reuters however was a little more detailed then the others, included 'credit worries' subheading with a forecast and is thus considered to be the most useful for an interested reader.

As predicted already in my last week's analysis, people have to be informed well in order to be calm and thus able to make reasonable decisions. In calm times investors tend to do the same things and thus stabilize the market. The speculation in different directions combined with the large trading volumes during the last days as well as the degree of difference among financial news ranging from billions of profit to billions of loss are very likely to generate volatility. In this period of uncertainty in the market with nobody (!), not even the big players, being really sure about anything, it is better for investors to be cautious. Newspapers should have this kind of readers' reaction as a goal in order to avoid further disasters. It is now important to tell people that there might be more losses for banks to come: commercial real estate going down and thus affecting the banks' assets, cash withdrawals from its accounts that have been made for future loan losses tied to credit cards and nobody caring about the bank's reserves instead etc; these are all facts forming the perfect storm to hit banks hard. They should also not forget to mention record deficits of companies and businesses, record borrowing and the plunging dollar. These are only suggestions that are based on my personal opinion and that I am hoping to see in financial media. But for now: the recession remains over.

Sources:
http://quote.morningstar.com/Stock/s.aspx?t=BAC
http://online.wsj.com/article/SB125568868735889619.html?mod=article-outset-box#articleTabs%3Darticle
http://www.reuters.com/article/newsOne/idUSTRE59F1TJ20091016?pageNumber=1&virtualBrandChannel=11618
http://www.ft.com/cms/s/0/263220e0-ba43-11de-9dd7-00144feab49a.html