Financial Dip Buyers Forget To Ask "What's Next?"

Bloomberg is reporting American Express Falls Most Since 9/11 on Net Decline.

American Express Co., the biggest U.S. credit card company by purchases, fell the most in New York trading since the Sept. 11, 2001, terrorist attacks after earnings missed analysts' estimates and the lender withdrew its 2008 forecast.

Chief Executive Officer Kenneth Chenault said yesterday in a conference call that the business climate was "much weaker" than earlier this year and American Express was hurt by rising U.S. unemployment and falling house prices in the second quarter. Profit from continuing operations dropped 37 percent to $655 million, or 56 cents a share, falling short of the 82 cent average estimate of 17 analysts surveyed by Bloomberg.

"Rapid growth of lending balances over recent years" in regions of the U.S. with the worst real estate declines caused greater-than-expected losses, Scott Valentin, analyst at Friedman Billings Ramsey & Co., said in a research note today. "At no point in history have consumers incurred as much debt relative to wealth." He rates American Express "underperform."

"We are seeing very affluent people who have had historically very, very strong spending history with us cutting back," Chenault said.

American Express, Capital One Financial Corp. and Discover Financial Services lost more than 33 percent of market value in the past year as consumers struggled to repay debt of all types.

Record Loss At Wachovia

In other news Wachovia Has Record $8.9 Billion Loss, Cuts Dividend.

Wachovia Corp., the U.S. bank that hired Treasury Undersecretary Robert Steel as chief executive officer two weeks ago, reported a record quarterly loss of $8.9 billion, slashed the dividend and announced 6,350 job cuts.

"Steel is clearly trying to get his arms around this," said Joseph Gordon, president of Gordon Asset Management in Durham, North Carolina, which owns Wachovia shares and manages more than $200 million. Even so, "We aren't advising any clients to buy until they fess up and go full transparency on Golden West and their commercial lending problems."

Wachovia, whose job cuts amount to about 5 percent of the bank's workforce, lowered the dividend to 5 cents a share from 37.5 cents and will leave 4,440 positions open, according to a presentation to analysts today. Steel, 56, also said the company is moving to "sell selected non-core assets" and reduce the number of business customers who only use the bank for loans rather than other services. Wachovia expects to cut expenses during the second half of this year by $490 million and then reduce 2009 spending by $1.5 billion.

"The entire organization is focused on protecting, preserving and generating capital, reinforcing Wachovia's strong liquidity position and reducing risk," Steel said in the statement.

Bad News Buyers

The bad news buyers were all over Wachovia (WB) today. The stock was about 10% down at one point is now about 10% up. The market is apparently cheering the dividend cut and job cuts.

Bank of America (BAC), the second biggest US bank is up another 7% at one point today after reporting yesterday it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after taking over the mortgage lender. "There is no assurance that any such debt would be redeemed, assumed or guaranteed," the bank said in an April 30 regulatory filing.

The short squeeze in Fannie Mae (FNM) and Freddie Mac (FRE) may be over although both are significantly higher than the morning lows. The day is still young and the dip buyers are out in full force but this is all noise anyway.

What is American Express (AXP) going to do for an encore? Wachovia (WB)? Citigroup (C)? Washington Mutual (WM)? Lehman (LEH)? Wells Fargo (WFC)?

Wells Fargo "beat the street" last week only because it made a policy change to write off home equity loans after 180 days instead of 120 days? What's next Wells Fargo, 210 days?

Wachovia now effectively has no dividend. Can it go negative?

Citigroup wants to sell $500 billion in assets. To who? At what price? Other than eliminating its dividend inquiring minds are asking "Then what?"

Every company above is already hiding ever increasing amounts of garbage in level 3 "marked to fantasy" assets. Will investors overlook this forever?

SEC manipulation during options expirations week in conjunction with "beat the street" games triggered a short squeeze that may or may not be fizzling out, but fizzle out it eventually will. And looking ahead to next quarter earnings (and the quarter after that), what are all those companies going to do for an encore?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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