The stockmarket finished last week with a bit of a surprise.
National Australia Bank (ASX: NAB) dumped the news on investors Friday morning. No-one told shareholders National Australia Bank was coming. That heightened the impact.
Specifically...NAB boss John Stewart set aside an additional provision for credit risk. An additional provision of AU$830 million. That was the part where the leapt dove into the sleepy-eyed market's midriff. An extra credit provision tells us all that there may be more subprime losses to come. Oooff.
But get an eyeful of this:
"This is the bottom for us for housing in the U.S. because we are now cleared out." - John Stewart, NAB boss.
That's quite a statement. Especially seeing as Stewart considers the US to be less than half-way through this crisis. Total losses equal US$450 million. John Stewart sees the total topping US$1 trillion.
Of course, if the bank has cleared the table of those rotting subprime assets, it must be at the bottom. That would imply the bottom for share prices. In fact, if you're an efficient market fan, that would imply the bottom for share prices at some time in the past. The market likes to pre-empt things like this.
Well, the bottom isn't here. Not the way we see it.
It's useful to think of the credit industry as a web. There isn't one direct line between each Australian bank and "subprime". There are thousands of different mortgages, sliced and manufactured into more different securities, split between thousands of different institutions. Each firm is connected to many of the threads.
What National Australia Bank is talking about here are ten collateralized debt obligations (CDOs). Each CDO is a blend of different types of assets...packaged as one security. They aren't all 100% subprime. But they all contain subprime exposure.
That's one thread NAB has woven between itself and the subprime industry. It's direct exposure. But that's the very reason why the pain isn't over. Direct exposure isn't the only exposure.
NAB and banks like it have thousands of different loans spreading out in different directions. They provide exposure to other institutions that have exposure to subprime. They provide exposure to institutions that have exposure to institutions that have exposure to subprime.
It sounds a little pedantic. But all of it adds up. One financial firm drops a bit, and it tugs on the credit quality of thousands of others.
This means more credit pressure on big banks. If you need some tangible evidence, Standard and Poors lowered its credit rating on NAB Friday too. Please refrain from jumping on investors' beds in the morning.
So don't look at this at the bottom. National Australia Bank shares probably haven't finished the longer slide. And other banks? Well, if one is at risk, so are the rest. ANZ put out a statement today. Its EPS is likely to be
down 20-25% this year, thanks to larger provisions for credit losses.
Avoid the dip in financials. The bottom for National Australia Bank looks like one of the best ways to lose money in the market today.
Bank earnings, as you can see, aren't giving the market much inspiration. In fact, despite a good lead from Wall Street on Friday, they'll probably help push the market lower.
Aside from Earnings, there are two other market-moving Es to keep track of: Energy and the Economy.
But the Aussie economy isn't giving away any clues this week. Don't camp out for any big announcements. Not in Australia anyway.
Over in the US though, house prices and unemployment numbers come through on Wednesday and Friday. They might be good or bad.
Actually, scratch that. They will be bad.
But the Dow Jones doesn't care about quality...it only really gives a hoot or two if numbers surprise analysts. Be prepared for a chain reaction if that happens. A worse-than expected economy equals falling US stocks. Falling US stocks are, in the absence of anything important happening here, a bad omen for the ASX.
The All Ordinaries is sitting just above a key support line. That makes any big event more important than usual.
So we'd rather just watch the market this week. It doesn't quite have a clear direction yet. And those US releases have the potential to louse things up again.
Al Robinson
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by justin on 28 July 2008:
St George put out a statement today saying they had no exposure to CDO's or subprime loans so their assets are all in good shape.
Do you think this means they are about to announce major losses?
Comment by Robert on 28 July 2008:
I have been burnt a bit by NAB, but I ask that you examine the profit mix and exposure of second tier banks to securitised home mortgages and margin loans, both not healthy in a declining stock and house market. I think a way to go here as I thoght one would go last August, and Stocks are heading south again faster.
Comment by justin on 29 July 2008:
Following the NAB, is the Reserve Bank now going to write down the value of its asset portfolio, which includes credit derivatives that is has on 'loan' from the commercial banks and other financial institutions?
Keep in mind that the Reserve Bank's assets supposedly back its liabilities, that being the Australian dollar.