For future reference, here is the headline on Nationalization.
FDIC says regulators not pursuing bank nationalization Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said federal banking regulators are not planning to nationalize troubled financial institutions. "Nationalization means different things for different people, but nationalization is not the route we're pursuing now," Bair said. The FDIC and other regulatory agencies are working on a bank rescue that includes capital injections and aid to millions of struggling homeowners. Reuters (26 Feb.)
Thursday, February 26, 2009
Wednesday, February 25, 2009
US Housing Price Update
The S&P/Case-Schiller Index fell 18.5% year over year as of December 2008. This marked the fastest decline on record.
As of December 2008, average home prices were at levels similar to that of Q1 2004. From the peak of mid-2006, the 10-City Composite dropped 28.3% and the 20-City Composite dropped 27%.
Stabilizing home prices is paramount to recovery. For the first time that I can think of, I am agreeing with Jim Cramer's plan to solve the housing issue. Offer government sponsored refinancing to every homeowner. Loan details are still under discussion; but Jim's plan starts with an interest rate of 4% with a 40 year amortization. I'd suggest dropping the required appraisal and just refinance the current balance due.
I'd offer different terms and rates appropriate to the terms, some thing like the following:
20 year 3.25%
25 year 3.5%
30 year 3.75%
Just a thought.
As of December 2008, average home prices were at levels similar to that of Q1 2004. From the peak of mid-2006, the 10-City Composite dropped 28.3% and the 20-City Composite dropped 27%.
Stabilizing home prices is paramount to recovery. For the first time that I can think of, I am agreeing with Jim Cramer's plan to solve the housing issue. Offer government sponsored refinancing to every homeowner. Loan details are still under discussion; but Jim's plan starts with an interest rate of 4% with a 40 year amortization. I'd suggest dropping the required appraisal and just refinance the current balance due.
I'd offer different terms and rates appropriate to the terms, some thing like the following:
20 year 3.25%
25 year 3.5%
30 year 3.75%
Just a thought.
Tuesday, February 24, 2009
From the desk of Ed Yardeni
I was starting to compose something similar to the following piece from Ed Yardeni. After reading his piece I decided it was best to yield to the master and share Ed's thoughts. His are very similar to mine. I strongly encourage rearders to go to yardeni.com.
Credit derives from Latin, credere, “to believe.” Apparently, investors don’t believe that the government has done what it takes to fix the credit system. Indeed, there is widespread speculation that many banks will have to be nationalized. They already are on a de facto basis. Yesterday, Joe and I observed that since February 2008, the S&P 500 Bank Composite’s market cap has tumbled from $508bn to $111bn on Friday last week. Think about that: The government can buy the entire banking system for chump change. It can buy the entire S&P 500 Financials sector for $598bn at yesterday’s close. Stock investors seem to be resigned to bank nationalization. In effect, they are telling Washington, “Go ahead, you damaged them, you can have them.” Why should the government waste any more money on programs to provide capital injections to the banks? Take them all. That way all bank deposits and bank debt will be government guaranteed. Barney Franks can make sure they lend money to his friends and relatives. Chris Dodd can refinance his mortgage. Wouldn’t it be a great big joke on us all if the government suspends mark-to-market accounting for the banks it nationalizes? All this time, the Capital Kleptocrats refused to do so to protect investors in bank stocks. Now that they’ve wiped out those investors, who cares whether the nationalized banks’ books add up!
Of course, nationalization doesn’t guarantee that the bleeding will stop. AIG was taken under protective custody by the Feds on September 16. The firm's Q4 results, which may be announced next week, will probably include $60bn in writedowns on assets including securities tied to commercial mortgages. AIG’s rescue package was expanded to about $150bn in November from $85bn in September as regulators tried to reduce losses at firms that did business with the company. This strongly suggests that the additional $200bn allocated on February 18 to Fannie and Freddie by the administration won’t be available for making additional mortgage loans, as was implied, but never explicitly stated. Fan & Fred were placed under house arrest on September 7, and provided with $200bn in living expenses, i.e., fresh capital, by the Feds.
Meanwhile the charade goes on. The Treasury, the Fed, and the other banking regulators issued a statement yesterday (linked below) suggesting that they really don’t want to nationalize the banks unless they have to…yeah, right! Here are the sordid details:
(1) “The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses.” The Feds stood right behind the banks, TRAPed them, and pushed them right off the cliff.
(2) “We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment.” The Feds are certainly doing their best to make it more challenging, which means they will have no choice but to take all the banks into protective custody the way things are going.
(3) “Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers.” The Feds don’t explain how it can be that large losses require only temporary cushions, and how long is temporary.
(4) “Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion feature will enable institutions to maintain or enhance the quality of their capital.” How exactly is this different from stealth nationalization?
(5) “Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated.” Say what? Are the banks well capitalized, or are they insolvent? You and I don’t get to decide.
Who writes these official statements? Even Greenspan was easier to understand. Who was the sadist who came up with the idea to “stress test” the banks? Treasury Secretary Geithner announced the stress test plans on February 10, but initially provided little information. Yesterday’s statement suggests that the Feds will begin running banks through rigorous tests to measure whether they hold enough of a cushion to continue lending during the downturn. This morning’s WSJ warily observes, “The federal statement still stopped short of explaining what economic conditions the government would simulate to determine a bank's health. Officials said Monday they will likely consider a series of nightmarish economic scenarios, including drastically lower housing prices, rising unemployment and continued negative growth. They will ask some 20 banks to predict losses for these events against asset classes such as auto loans, mortgages and commercial credits.” I can easily predict the results of these stress tests: Cardiac Arrest! Then quadruple-bypass through nationalization.
In yesterday’s WSJ, William Isaac wrote that nationalizing the banks now would be a really awful idea. He should know: He headed up the FDIC when Continental Illinois Bank was nationalized in 1984. He argues that today’s large banks are too big and complex to be run by the government. Shrinking the banks now would only worsen the credit crisis. Replacing so many bank managers would be an impossible task. Sweden’s successful bank nationalization experience of the 1990s is almost entirely irrelevant to the United States.
The stock market isn’t coping well with the administration’s stress test. Investors see through the fog created by the Feds, and don’t like what they see.
Credit derives from Latin, credere, “to believe.” Apparently, investors don’t believe that the government has done what it takes to fix the credit system. Indeed, there is widespread speculation that many banks will have to be nationalized. They already are on a de facto basis. Yesterday, Joe and I observed that since February 2008, the S&P 500 Bank Composite’s market cap has tumbled from $508bn to $111bn on Friday last week. Think about that: The government can buy the entire banking system for chump change. It can buy the entire S&P 500 Financials sector for $598bn at yesterday’s close. Stock investors seem to be resigned to bank nationalization. In effect, they are telling Washington, “Go ahead, you damaged them, you can have them.” Why should the government waste any more money on programs to provide capital injections to the banks? Take them all. That way all bank deposits and bank debt will be government guaranteed. Barney Franks can make sure they lend money to his friends and relatives. Chris Dodd can refinance his mortgage. Wouldn’t it be a great big joke on us all if the government suspends mark-to-market accounting for the banks it nationalizes? All this time, the Capital Kleptocrats refused to do so to protect investors in bank stocks. Now that they’ve wiped out those investors, who cares whether the nationalized banks’ books add up!
Of course, nationalization doesn’t guarantee that the bleeding will stop. AIG was taken under protective custody by the Feds on September 16. The firm's Q4 results, which may be announced next week, will probably include $60bn in writedowns on assets including securities tied to commercial mortgages. AIG’s rescue package was expanded to about $150bn in November from $85bn in September as regulators tried to reduce losses at firms that did business with the company. This strongly suggests that the additional $200bn allocated on February 18 to Fannie and Freddie by the administration won’t be available for making additional mortgage loans, as was implied, but never explicitly stated. Fan & Fred were placed under house arrest on September 7, and provided with $200bn in living expenses, i.e., fresh capital, by the Feds.
Meanwhile the charade goes on. The Treasury, the Fed, and the other banking regulators issued a statement yesterday (linked below) suggesting that they really don’t want to nationalize the banks unless they have to…yeah, right! Here are the sordid details:
(1) “The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses.” The Feds stood right behind the banks, TRAPed them, and pushed them right off the cliff.
(2) “We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment.” The Feds are certainly doing their best to make it more challenging, which means they will have no choice but to take all the banks into protective custody the way things are going.
(3) “Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers.” The Feds don’t explain how it can be that large losses require only temporary cushions, and how long is temporary.
(4) “Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion feature will enable institutions to maintain or enhance the quality of their capital.” How exactly is this different from stealth nationalization?
(5) “Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated.” Say what? Are the banks well capitalized, or are they insolvent? You and I don’t get to decide.
Who writes these official statements? Even Greenspan was easier to understand. Who was the sadist who came up with the idea to “stress test” the banks? Treasury Secretary Geithner announced the stress test plans on February 10, but initially provided little information. Yesterday’s statement suggests that the Feds will begin running banks through rigorous tests to measure whether they hold enough of a cushion to continue lending during the downturn. This morning’s WSJ warily observes, “The federal statement still stopped short of explaining what economic conditions the government would simulate to determine a bank's health. Officials said Monday they will likely consider a series of nightmarish economic scenarios, including drastically lower housing prices, rising unemployment and continued negative growth. They will ask some 20 banks to predict losses for these events against asset classes such as auto loans, mortgages and commercial credits.” I can easily predict the results of these stress tests: Cardiac Arrest! Then quadruple-bypass through nationalization.
In yesterday’s WSJ, William Isaac wrote that nationalizing the banks now would be a really awful idea. He should know: He headed up the FDIC when Continental Illinois Bank was nationalized in 1984. He argues that today’s large banks are too big and complex to be run by the government. Shrinking the banks now would only worsen the credit crisis. Replacing so many bank managers would be an impossible task. Sweden’s successful bank nationalization experience of the 1990s is almost entirely irrelevant to the United States.
The stock market isn’t coping well with the administration’s stress test. Investors see through the fog created by the Feds, and don’t like what they see.
Monday, February 16, 2009
Commercial Banks Lending
* Feb 13: Lending by domestic commercial banks, now at nearly $7,200bn, grew 5.3% during 2008 and at a 5.5% annualised rate in the fourth quarter, according to an analysis of Federal Reserve data by Treasury Strategies--> Lending at the largest US banks has grown in recent months in spite of criticism from lawmakers that they have not made billions of dollars of government capital available for consumers and businesses.
* Bank lending has declined at about a 10% annual rate over the past 13 weeks. 1) Recession brings less demand for credit; 2) Better access to credit from other sources especially as corporate bond issuance picked up again recently 3) Tighter bank lending standards. (JPMorgan, February)
Source: RMEmonitor.com
* Bank lending has declined at about a 10% annual rate over the past 13 weeks. 1) Recession brings less demand for credit; 2) Better access to credit from other sources especially as corporate bond issuance picked up again recently 3) Tighter bank lending standards. (JPMorgan, February)
Source: RMEmonitor.com
Friday, February 13, 2009
No Gas for the Economic Engine
Consumer Borrowing Plunges
Total outstanding consumer credit fell for the fourth time in five months. During December, total credit fell by $6.6 billion (an annualized 3.1% drop), which followed an $11 billion decline in November (which was the largest monthly decline since record keeping began in 1943!). We believe the already ugly situation will only get uglier. The best way to turn off the consumer spending spigots is to slash jobs, and that’s exactly what is driving the economy down today. With rising unemployment, banks don’t want to lend to risky borrowers, and consumers don’t want to take on additional debt. The pace of credit card, or revolving, debt fell an annualized 7.8% in December after tumbling 8.5% n November. The U.S. economy has hit a wall, and consumers have reacted accordingly.
Total outstanding consumer credit fell for the fourth time in five months. During December, total credit fell by $6.6 billion (an annualized 3.1% drop), which followed an $11 billion decline in November (which was the largest monthly decline since record keeping began in 1943!). We believe the already ugly situation will only get uglier. The best way to turn off the consumer spending spigots is to slash jobs, and that’s exactly what is driving the economy down today. With rising unemployment, banks don’t want to lend to risky borrowers, and consumers don’t want to take on additional debt. The pace of credit card, or revolving, debt fell an annualized 7.8% in December after tumbling 8.5% n November. The U.S. economy has hit a wall, and consumers have reacted accordingly.
Thursday, February 12, 2009
Value Investor Haven - Corporate Bonds
While investors – including the Federal Reserve – snap up Treasury bills and bonds, driving yields low, the spreads between corporate and government bonds remain extraordinarily high and are showing few signs of narrowing. Since 1990, the average spread between an AAA-rated bond (such as a Johnson & Johnson bond) and a government bond has been 126 basis points; the current gap is 248 basis points. For Baa bonds (one step above junk) the normal spread has been 216 basis points and the current spread is 547 bps. Investors are clearly anticipating numerous defaults in coming months. Industries that we think are particularly at risk include retailers, newspapers/media, restaurants and autos. Abnormally high-yielding corporate bonds in industries such as pharmaceuticals, medical devices or utilities could represent investment bargains.
Monday, February 9, 2009
Forward Looking S&P 500 Earnings
Argus Director of Market Strategy David Ritter notes that about half of 4Q EPS results are in and thus far earnings — excluding banks — are down 15% from the year-ago quarter. Overall, S&P 500 earnings are now estimated at $12 per share, down 25% from the previous quarter. Our 2009 S&P 500 EPS forecast had called for earnings to trough in the third quarter of 2009 at about $13 per share, and we are already on track to dip below that level. As a result, we have again reduced our 2009 EPS forecast. We now expect earnings of $50 per share in 2009, down from our previous forecast of $56. Our $50 forecast is just a bit greater than the fourth-quarter’s annualized run rate of $48. However, we believe earnings risks remain weighted to the downside. Earnings are on track for about $62 per share for 2008, down 25% from 2007. Earnings in 2007 were down 6% from 2006. So, we expect a third consecutive year of earnings decline in 2009. For 2010, our preliminary EPS estimate is $55, up 10% from 2009. The stock market is a leading indicator, and equity price trends should anticipate a rebound in earnings. Though David has reduced our 12-month target price for the S&P to 1100 from 1250, our target still implies a substantial rally in stocks over the next year.
Source: Argus Research
Source: Argus Research
Tuesday, February 3, 2009
Headline Financial News
Sad stats of the day. According to real estate data service Zillow.com, the U.S. housing market lost $3.3T in value last year, and $1.4T in the fourth quarter alone. Nearly one in six homeowners with mortgages owe more on their home loans than the homes themselves are worth. Home values have fallen for eight straight quarters. "Negative equity will trigger new foreclosures, and that will add to inventory and depress prices."
Personal income and outlays. Personal spending fell 1.0% in December, slightly worse than the -0.9% expected. Personal income was down 0.2% ($25.3B) vs. -0.4% consensus. Personal saving rose to 3.6%, the highest since May. But income and spending are worse than they sound, if you bear in mind December's data includes the Christmas shopping bump. Spending for the year increased 3.6%, the lost increase since 1961.
ISM mfg index. The ISM Manufacturing Index came in at 35.6 in January, the 12th consecutive month of contraction. The only industries reporting growth were textiles and petroleum & coal products. Nonmetallic mineral products and electrical equipment led the laggards.
Source: Seeking Alpha, Wall Street Breakfast, 2-3-09; Argus Research Market Movers, 2-3-09
Personal income and outlays. Personal spending fell 1.0% in December, slightly worse than the -0.9% expected. Personal income was down 0.2% ($25.3B) vs. -0.4% consensus. Personal saving rose to 3.6%, the highest since May. But income and spending are worse than they sound, if you bear in mind December's data includes the Christmas shopping bump. Spending for the year increased 3.6%, the lost increase since 1961.
ISM mfg index. The ISM Manufacturing Index came in at 35.6 in January, the 12th consecutive month of contraction. The only industries reporting growth were textiles and petroleum & coal products. Nonmetallic mineral products and electrical equipment led the laggards.
Source: Seeking Alpha, Wall Street Breakfast, 2-3-09; Argus Research Market Movers, 2-3-09
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