Reasonably Thinking

Hussman’s commentary this week piggyback’s on last week’s column in that value of what assets are claimed to be contrasts to what assets are worth.  Recent earnings releases from JPM and BAC are his targeted examples.

…”favorable” earnings reported by J.P. Morgan and Bank of America in the first quarter were due to reduced provisions for credit losses – charges that are largely discretionary. ..the provision for credit losses [was] lower than it was a year ago (when delinquency rates and credit losses were running at a fraction of current levels)…

delinquencies, foreclosures, non-performing loans, commercial mortgage strains, and actual charge-offs reported by various sources have been either unchanged or accelerating…. provisions for credit losses are again falling short of net charge-offs, which is what we saw in 2008 before banks got into trouble.

http://www.hussmanfunds.com/wmc/wmc100419.htm

Similar to the trade I made last month, due to low broker inventory, I was forced to cover the remainder of my ITB short position.  To replace this exposure I purchased two October put options at the $20 strike.

Transactions details:

100 ITB bought to cover @ $14.21

2 ITB $20 Oct10 P purchased @ $6.00

This is one of the longer commentary that Hussman has published, and it’s great.

In order to avoid having to restate assets, banks have allowed an increasing gap to develop between the volume of delinquent loans and the volume of loans actually in foreclosure, creating a growing “shadow inventory” of impaired but unmodified and unforeclosed loans…

In short, my impression is that investors are deluding themselves about the solvency of the banking system. People learned in the 1930′s that when you don’t require the reported value of assets to have a clear and tangible link to the value that the assets would have in liquidation, bad things happen.

http://www.hussmanfunds.com/wmc/wmc100412.htm

Years ago I bought shares of the small pharmaceutical company, Gentium.  Gentium is pretty much a one drug wonder, Defibrotide, which is used to treat veno-occlusive disease (complications with graft versus hosts during organ transplants).

Last week, Gentium had positive quarterly results that sent the stock substantially higher.  In conjunction with the news, the company announced that the CFO was leaving the company to become a consultant to the company, which I view as neutral to negative.  This afternoon, the stock again moved substantially higher, for reasons unknown to me.  Given the news and recent price movement, I sold nearly half my position.  The remaining position I am keeping for tax loss purposes; I’ve given up on the trade, but am using the loss to dodge the tax man.

(image from Google Finance)