JBL: Banking on Financials' Earnings

I love earnings season. It's kind of like the Super Bowl; it's put up or shut up time. Also, just like the Super Bowl, there is all this hype and so many times you don't know the real story until it is actually played out.

My wife is a stock analyst; for her, earning season is a nightmare of long hours dissecting what exactly companies are reporting, and what they are trying to hide.

Every earning season generally has some telling events. This one didn't disappoint. However, it is always important to understand why certain companies surpass expectations and why some disappoint. So many times there are outside events that affect a company, and the prudent investor needs to recognize these events; in the current earnings season, that's particularly true for those who own financial stocks.

Bankruptcies Galore

In mid-October the U.S. finally got a more restrictive bankruptcy law. Going forward, it will not be as easy to run away from your debts as it was before. However, the Oct. 31 deadline left a window of opportunity for consumers so inclined to leave their debts with their creditors.

Meanwhile, outgoing Fed chairman Alan Greenspan was set to get the adjustable-rate mortgages out of the economy. The "froth" in the housing market was a direct result of this creative financing; more than one-third of mortgages had adjustable rates. I believe this has and will cause a segmented recession, and those that have already felt the pinch elected to take the easy way out before the new bankruptcy law took effect. I do not think this will cause a recession for the economy as a whole.

This combination of Greenspan's attack on ARMs and the bankruptcy-filing deadline hurt the banks across the board. Bank of America (BAC Quote), my current favorite bank, reported its pretax cost of this bankruptcy window at $667 million, including $143 million set aside for future losses as a direct result of this last opportunity for easier bankruptcies. According to CFO Al de Molina, the bankruptcy related charge-offs and provision accounted for 5 cents per share, just over half of Bank of America's 9-cent-per-share miss.

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