Yesterday was a tough Make Believe Monday as a double shot of reality hit the markets.

Another dose of reality hit as more fictional earnings were released.  It appears that the market is catching on and reading through the accounting tricks.  Both Wells Fargo and Citigroup were crushed yesterday.  Wells Fargo was hit because of disappointing revenues, despite beating estimates.  Most of the beat was because of additional releases of loan loss reserves. 

Citigroup used the same backwards accounting rules that allows them to take a profit when their debt loses value.  Without that adjustment Citigroup, like JP Morgan would have missed estimates.  Oh by the way, even though the market felt that Citigroup was at a bigger risk of default on their debt due to deteriorating lending conditions, the company once again LOWERED their loan loss reserves, another boost to the fictional bottom line.

This morning we are greeted with more sobering reality.  Moody's is threatening to downgrade France's debt as the country continues to put itself on the hook for other countries' debt.  Bank of America's earnings were released and would have been negative had they not sold off some of their units in a desperate attempt to raise capital.  They too used large scale accounting gimmicks to boost their bottom line, benefiting from the market's belief during the quarter that BoA was struggling to raise enough capital to stay liquid.

Goldman Sachs apparently could not find any gimmicks (probably because they aren't really a commercial bank even though they were allowed to become one in 2008 so they could get bailed out by the Fed and TARP).  Since they don't really make loans they can't lower their loan loss reserves to improve earnings.  They also could not use the Debt Valuation Adjustment because they have very little debt.

At its core, Goldman Sachs is an Investment Bank (bank that helps companies raise money in the public market) and a Trading Firm (trading on behalf of institutional clients as well as their own accounts).  They have no deposits like a commercial bank so they can't take advantage of the typical interest rate spread as they make loans.

Goldman reported their first loss since 2008 as investment banking revenue dropped 33% and their trading losses came in at $2.5 Billion.  It seems that without any Quantitative Easing taking place during the quarter, Goldman wasn't able to buy bonds from the Treasury Department and then flip them to the Fed for a nice profit.

Looking at the earnings releases it is clear that the banks are doing everything possible to hide what their balance sheets really look like.  They continue to say "trust us, we're fine", but are unwilling to show us.  Since they were telling everyone the same thing in 2007 and early 2008, you can see why the market has been so volatile with the problems in Europe.  Nobody knows how much exposure the Wall Street banks have, so they worry that should a solution not be found quickly, a number of Wall Street banks could run into serious problems. 

Then of course you have the Social Uprising we are seeing via the Occupy Wall Street movement.  The market may be able to shake off this over the short-run, but over the long-run it will be a problem for the Wall Street banks.  Despite the losses, Goldman employees made an average of $358,713 each.  This isn't going away.

As for us, our systems actually used the big sell-off yesterday to increase market exposure.  Volume was once again low, but Technology continues to outperform.  EGA increased it's exposure from 39% to 49%.  EPA remains 24% exposed to equities.

Keep in mind these are not long-term positions.  We could get a sell signal up here if the market is unable to break above the trading range it has been stuck in.

As always, we will be watching the market all day long on your behalf and will keep you posted on this page.

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