The buck was hurt by the latest bailout move from Washington.

As reported by MarketWatch.com, “the U.S. Treasury announced it would inject $20 billion into Bank of America Corp. (NYSE:BAC) It also will provide a backstop against losses on some $118 billion in assets as the banking giant struggles to digest its acquisition of troubled brokerage Merrill Lynch.”

Of the bailout, Kathy Lien, director of currency research at GFT, said that, “The additional funds provided to B. of A. is the only reason why the dollar is rallying against the Japanese yen, and why we are seeing a recovery in all of the higher-yielding pairs such as the euro/dollar and pound/dollar.”

Across the pond, the Irish government said it would nationalize Anglo Irish Bank, the country’s third-largest lender.

That led analysts at HBOS (NASDAQ:HBOS) to write that such relief “is positive for growth-sensitive currencies and broadly negative for the U.S. dollar.”

Back at home, the Labor Department said the consumer price index fell 0.7% in December, the third monthly decline in a row. Core CPI was unchanged. Both numbers were in line with economists’ expectations.

Source: Dollar Backs Off Against Euro

In 1987, which is now more than twenty years ago, I published a book with James Dale Davidson. Some people still remember it for its title, Blood in the Streets, taken from a remark of Nathan Rothschild in 1815, at the time of Napoleon’s hundred-day gamble that ended in his defeat at Waterloo. “The time to buy,” said Rothschild, “is when blood is running in the streets.” The book arose out of our commentary in Strategic Investment.

The book attracted a good deal of attention at the time because it forecast the 1987 crash, which is still the largest fall in one day’s trading on Wall Street. I was in New York when the 1987 crash occurred. I remember an Australian broker observing that he had fought in a foxhole in Vietnam and that he found the 1987 crash more frightening.

Certainly we are experiencing a time of panic now, but there have been panics before. Some of them, like 1987, have had a benign outcome, with a recovery in the months following the panic. James Davidson and I did not forecast the post-1987 recovery; we expected a recession. The recession of the early 1990s duly came, but it was only a recession, not a crash. Even the ending of the dotcom bubble in 2000 did not produce a crash and certainly did not produce a depression.

The collapse of the U.S. housing and mortgage bubble has proved much more worrying and has already destroyed the independence of Bear Stearns, Merrill Lynch (NYSE:MER), A.I.G. (NYSE:AIG), Lehman Bros (NYSE:LEH), Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE), and, in London, Northern Rock and HBOS, with various levels of loss for the shareholders.

When we were writing Blood in the Streets, we did foresee the significance of the housing market. There is a section, in the book titled The Coming Real Estate Crash. Indeed we were able to identify in 1987 several of the weaknesses of the world’s political economy. It is not much help forecasting a crash twenty years ahead of its happening, but there are elements in the analysis we then made which turned out to be valid when the crash occurred. The 2008 crash comes as a natural consequence of long-term systemic failures.

Blood in the Streets was written fourteen years before 9/11. We did specifically refer to the threat to the twin towers in a subsequent book, The Sovereign Citizen. There is also a paragraph in Blood in the Streets in which I think we can take some legitimate pride:

“No V-day over terrorism. Disorder today is far more threatening because of the collapsing scale. As the margins of American power recede at the periphery, the raw power of these groups rises. So does their ability to disrupt arrangements they do not like. They cannot be stopped, as World War II was stopped, by forcing the surrender of a large-scale network of command. There is no single chain of command that has the authority to stop terrorism. Nor can anyone negotiate a compromise to meet demands of many of the small groups now wielding military force.”

We did foresee the significance of real estate and terrorism as factors that might undermine the stability of global finance. We also expressed concern about the reliability of the interbank market. “The danger of rapid deflation is more acute than it was in 1929. Why? Look no further than the geometric growth of the $700 billion interbank lending market. Each day U.S. banks are involved in interlocking transactions that total as much as $700 billion. This is the banking equivalent of having hundreds of trapeze artists swinging through the air — to what everyone hopes will be a safe landing. If even one bank failed to make good on its commitments, the whole criss-crossing show could come tumbling to the ground. This means that a liquidity crisis and a loss of confidence could contract credit almost instantly — on a far wider reach than in the past.” That is a fair description of what has been happening in the last thirteen months.

We correctly foresaw the bail-out of weakened banks, and the losses for their shareholders. “Remember that a bail-out of the banking system, which the authorities will surely attempt in the event of a debt collapse, does not necessarily mean a bail-out of bank holding companies or shareholders. Depending upon the political climate and administration at the time the music stops, there might even be a de facto nationalisation of major American banks — an outcome less far-fetched than it might seem. In a time of crisis, the government may be the only entity large enough to save the vulnerable banks.” Only the Federal Government was big enough to rescue A.I.G.

The U.S. real estate market, terrorism, debt, interbank lending and nationalisation of U.S. banks have all figured in the development of the present crisis. We did not get every issue right, but we did identify in 1987 the underlying insecurity of the global financial system. What we failed to foresee was the timing of the crisis. We saw its vulnerability, and pointed accurately to its weaknesses, but we did not see that so unstable a system could survive for twenty years of rapid economic and technological change. Will the Central Banks now be able to restore confidence after the events of last week? It will be some months, perhaps years, before we know the answer to that question.

Regards,
Lord William Rees-Mogg

Source: Forecasting the Crash

So far HBOS has posted nearly GBP£4 billion (about $7.95 billion) in writedowns from the Britain’s failing real estate market. And in lieu of selling chunks of itself to foreign banks to bring capital back into the company, HBOS’s shareholders just voted today to issue 1.5 billion new shares in a rights sale next month.

The stock is currently trading at 276 pence (GBP 2.76 or about $5.48), only one pence above the pricing for the rights issue. And the bank’s stock still has three weeks to run before the issue. If it slides below the 275 pence pricetag on the rights issue, investors won’t be very interested in buying up new shares at a premium to the market.

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And that may be the moment when National Australia Bank (ASX:NAB) makes a formal offer for the Australian branch of HBOS. NAB, the country’s largest bank, has already begun discussing the feasibility of an offer with advisory firms in London, but hasn’t yet approached HBOS with an offer.

HBOS Australia would be a logical expansion choice for National Australia. HBOS, headquartered in Perth, has capitalized on the mining boom in Western Australia, while National Australia is centered on the more populated east coast. And HBOS may be able to sell the subsidiary for as much as GBP 3.7 billion ($7.3 billion).

Now the question is, how much money does HBOS Australia make for its parent company, and how much is HBOS willing to sacrifice to stay afloat during the credit crisis?

Source: Is HBOS Selling to National Australia Bank (NAB)?

US hedge fund Harbinger Capital shorted HBOS stocks, revealing under new disclosure rules that it held a 3.3% short position, worth about 345 million pounds.

Lansdowne Partners and Meditor Capital Management also revealed short positions of less than 1% in the bank, according to a report by Thomson Reuters.

HBOS shares have plunged since it announced a plan to raise £4 billion last month. And yesterday they dropped below the rights issue price.

Of course, as John Stepek points out in his Money Morning newsletter, shorting Britain’s biggest mortgage lender is hardly rocket science, given the overall shape of the British housing market. The real question is who the hell would go long on the likes of HBOS?

You have to laugh really. Though perhaps not if you’re an HBOS shareholder.

The Financial Services Authority has just introduced a rule forcing short-sellers of shares to disclose when they hold short positions of more than 0.25% of the stock of a company undertaking a rights issue (if you’re long, then you have to reveal when you hold 3%).

The FSA’s move was partly in reaction to a sharp plunge in HBOS’s share price back in March. The FSA blamed this on false rumour-mongering and vowed to hunt down the culprits, but the watchdog has been forced to admit defeat.

Meanwhile, its new rule on short disclosure forced Harbinger Capital, headed up by one of the world’s best-paid hedge fund managers, to reveal it was shorting not 0.5%, not 1%, but a whole 3.29% of HBOS stock.

When confronted with evidence that one of the smartest (at least, if you judge investment skill by the size of his pay packet) of their number was betting so extravagantly on Britain’s biggest mortgage lender to fall, all those independent-minded contrarians in the City did exactly what you’d expect.

They sold in droves…

HBoS saw its share price sink beneath the 275p price of its rights issue yesterday, falling 4% to 270.25p. We’ve already written about this (see: Why British property could be China’s next dud investment), but it looks increasingly like the underwriters, Morgan Stanley and Dresdner Kleinwort will have to carry the £4bn can for this one.

There were plenty of good reasons for HBOS to fall. There was the news from Rightmove that even house asking prices are now falling. A hammering for commercial property stocks after a heavy downgrade from HSBC also cast a general pall over the banking sector.

So it isn’t all down to revelations that hedge fund managers are shorting the stock by any manner of means. After all, that’s what hedge funds are supposed to do – generate ‘alpha’ (market-beating returns, basically) by taking advantage of anomalies in the market that no one else has spotted.

And this is the slightly worrying thing. After all, it shouldn’t have taken a genius to figure out that HBoS is not in a great position at the moment. Sure, March’s sharp sell-off had a whiff of rumour-inspired panic about it, but in the rather fevered post-Northern Rock atmosphere, it wouldn’t have taken much to inspire a run on bank share prices. More to the point, the stock has fallen by nearly 40% since then.

The real wonder is that anyone is long on HBOS, not that some highly-paid ‘experts’ are shorting it. After all, this is Britain’s biggest mortgage lender we’re talking about here. It has a great big loan book secured against what is the single most vulnerable asset class in Britain right now – residential property.

Now that wouldn’t be such a big deal if you thought that the management team has been prepared for a downturn, After all, all good things come to an end, don’t they? Yet it seems that they believed their own hype. Even now, after several downward revisions, they’re arguing that house prices will end the year down just 9%, which is frankly optimistic by most counts these days.

But there’s no point in the HBOS board just keeping their fingers crossed and hoping things will get better, because they won’t. HM Revenue & Customs data released yesterday showed that the number of property sales (both commercial and residential) has fallen by nearly 40% in the past year. There were 100,000 transactions in May, compared to 158,000 the year before.

Just how low can prices go? The latest participants at our property RoundTable had a wide range of predictions, spanning a range from ‘gloomy’ to ‘positively catastrophic’.

Suffice to say, the property market’s going to get a lot worse before it gets better. And that pretty much means the same for the outlook for HBOS. Even if the share price does manage to claw its way back up above 275p, I wouldn’t be taking up the rights on this one.

Source:  Why Shares in HBoS could Fall Yet Further

Many look like they’ll have to find more capital to shore up their balance sheets, and there was much speculation in the weekend papers about investment banks ganging up behind the scenes to prop the sector up.

With housing sales in freefall, builders aren’t building anymore. It now looks as though just 100,000 homes will be built this year compared to a Government target of 240,000. That would be the lowest number built since 1945.

David Sutherland, chairman of housebuilder Tulloch, tells The Telegraph: “The UK housing target does not have a cat in hell’s chance of being met this year or next. Somebody at central government needs to do something.”

Two questions immediately arise in response to this plea. “What can the Government do?” and “Why should anything be done?”

Housebuilders are calling for government aid now that the housing market has gone into self-destruct mode. The Home Builders Federation is calling for stamp duty to be suspended and interest rates to be cut.

Sales are down 60% on this time last year, says Roger Humber of the House Builders Association. “No business or industry can survive that.”

The housebuilders are indeed facing terrible times ahead. They’ve had their boom – a boom never seen before, the likes of which they could never have dreamed of. Now they’re having the bust that was always certain to follow that boom. Just as the boom was better than they could have hoped, so the bust will be worse than they’d ever imagined.

This is why housebuilders usually trade on low price to earnings ratios, by the way. It’s because they are so brutally cyclical. Once the market turns, it turns badly, and the ‘e’ part of the p/e ratio drops off a cliff.

When activity drops off, the builders find they are left with assets plunging in value (their land banks) and they have to rapidly lay off workers to slash costs as sales dry up.

So – no surprise that they now want someone to save them.

But this is capitalism, remember? This is the way it works. Throughout the boom, no one in the property industry was particularly keen to have the state intervening in the market any more than it already does. Home Information Packs (HIPs) for example, which started out as a broadly sensible idea, were ripped apart by the property industry until they were introduced in their current, worse than useless, state.

More to the point, there’s nothing the Government can do. Stamp duty cuts? House prices are falling by about 2% a month at the moment. That’s your stamp duty right there. Interest rate cuts? In case the builders hadn’t noticed, rates have already fallen by three quarters of a point, and it hasn’t made a bit of difference.

That’s because banks still aren’t keen to lend. There’s been a curious reaction to this in the press recently. One leading property writer seems to be blaming Halifax among others for the seizure in the housing market, complaining that they are causing the house price crash by refusing to lend to creditworthy borrowers. Meanwhile, in The Telegraph, a reader’s letter cites amazement at banks greedily ignoring the BoE’s interest rate cuts.

It’s important to understand that the banks aren’t doing this out of spite or greed. This is not a matter of simply persuading them to start dishing out the readies again. The banks – for anyone who didn’t notice Northern Rock or Bradford & Bingley’s travails – are undergoing a bit of a crisis themselves. Halifax parent HBoS is right now crossing its fingers for its £4bn rights issue, while Royal Bank of Scotland has just raised £12bn.

To put it bluntly, the banks are skint. They gave too much money to people who couldn’t pay it back, and now they’re paying for it. They need all the money they can get. They don’t care how good a credit risk you are – they simply aren’t in a position to be as profligate as they were before.

Sure, it’s their own fault they got into this mess. But if you want to blame the banks for their reluctance to lend now, you also have to acknowledge that they were wrong to have been so free and easy with the credit in the first place. And that’s something I suspect most property pundits would be reluctant to admit.

Anyway – back to the point in hand. There’s nothing the Government can do – short of actually giving the housebuilders money (don’t rule it out) – to save the construction companies.

The good news is that with the free and easy access to credit that created the boom in the first place now gone, house prices will settle back to a level that genuinely reflects supply and demand. And with builders unable to build more houses (bye-bye to Gordon Brown’s eco-towns, thank goodness), and foreign workers heading off back home in their droves, we’ll soon see just how much of a housing shortage Britain really has.

I think we’ll find it’s less of a problem than the bulls have been making out.

Turning to the wider markets…

The FTSE 100 recovered on Friday to rise 12 points to 5,802. HBoS was the biggest riser along with other banks as investors closed out short positions.

Meanwhile, in Europe, the German Xetra Dax climbed 50 to 6,765, while in Paris the French CAC 40 rose 10 points to close at 4,682.

In the US on Friday, stocks made strong gains as inflation data was in line with expectations and the dollar continued to rally. The Dow Jones rose 165 points to 12,307. The S&P 500 climbed 20 points to 1,360. And the Nasdaq rose 50 points to end at 2,454.

In the forex markets today, sterling was trading at 1.953 against the dollar and 1.2677 against the euro. The dollar stood at 0.6493 against the euro and 108.31 against the Japanese yen.

In Japan, stocks were higher as the weaker yen boosted earnings at car and electronics manufacturers. The Nikkei 225 climbed 380 points to close at 14,354.

Brent spot was trading this morning at $133.70, while in New York crude was trading at around $134.10. Spot gold was at $867 an ounce. Silver was trading at $16.49, while platinum was at $2,019.

This morning, Barclays’ share price has risen after it said that it is actively considering selling shares to prop up its balance sheet. Profit for May was “well ahead” of last year’s figure. Reports at the weekend suggest that any money raised would come both from sales to sovereign wealth funds and to existing investors.

Source: The Good News About the Housing Crash

But that was the bottom. In fits and starts, it clawed its way back to close at around $868 according to the Kitco chart. The price is up about $4 in Sydney and Hong Kong trading as I write this. But don’t forget that New York has access to the Globex trading system for nearly 24 hours a day, and it could just as well be them trading in Hong Kong.

Silver action was slightly different. It declined virtually in a straight line until the Comex open, before it too was hit by the same not-for-profit sellers. The bottom tick was $16.22. Actually, some of the tech funds could have been shorting silver (and gold, too) at that point…at the same time as other tech funds were pitching their long positions. It’s hard to know without the COT report…and Wednesday’s and Thursday’s data won’t be in it until next Friday…June 20th.

On Wednesday, gold open interest fell 1,857 contracts, even though the gold price was up on the day. Silver o.i. went the other way…rising 2,174 contracts…which is a lot for a 30 cent move.

I see that Dennis Gartman is talking about gold again. Here are a few words from his early Thursday morning commentary….”If the governments of the world are now as concerned about inflation as we think they may be, and if they are even more concerned about the prospects for a generic, rising inflationary psychology amongst the public at large, then perhaps a collusive sale of gold to push it down through $865 would be possible…that is, if the (Gold) ‘Bugs’ great fear of collusion amongst the central banks is indeed a reality, and we truly have our doubts.”

Well, Dennis…gold did fall some more on Thursday, but that’s not the end of the world…nor has it been a surprise to the readers of my daily rant. As I’ve always said, the ultimate goal (if the bullion banks could achieve it) would be to take out the 200-day moving averages. They came within an eyelash in both gold and silver on Thursday. The 200-day m.a. has withstood every challenge going back for the last ten years. And when it has been broken, it’s wasn’t for long…and not by a lot. Dennis…if you want some investment advice…I’d seriously think about putting on a long position or two in the next month or so, and letting it ride…as we’re awfully close to the bottom. You can thank me later.

I see in an article dated 09 June/08 out of the bankingtimes.co.uk in Britain that “The Bank for International Settlements (BIS)…has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s.” Really??? Thanks for pointing out the obvious.

Remember Northern Rock…the British bank with the huge line-ups as depositors withdrew their money? Here’s a new bank over there to keep an eye on…as the industry regulators certainly are. The bank is the UK’s biggest mortgage lender…HBOS…Halifax Bank of Scotland.

Today, it’s a double header from Ambrose Evans-Pritchard at The Telegraph out of London. The first story is entitled “Iran’s switch good news for gold bulls?” The story is worth the read in and of itself, but the graph embedded in it is worth printing off and taping to your bathroom mirror so you can see it every day. The article is linked here.

The second AE-P article is entitled “Emerging markets face inflation meltdown”. This story is a must read. The link is here.

I see the Dow rolled over again yesterday and the Catch-a-Falling-Knife Corporation was there to save it just as it was about to turn negative. The beat goes on.

Since today is Friday…it will be an interesting one in the markets. And all of us at Casey’s Daily Resource Plus will be here on Saturday to talk about it.

Have a great weekend.

U-turns on rights issues, never-ending writedowns – there’s been plenty of badly handled mishaps to choose from.

But even by the low standards of the banking sector, Bradford & Bingley (LON:BB) has been particularly hapless. In fact, its latest bombshell managed to wipe £2.8bn off the value of the UK’s six biggest banks, even though B&B itself only started the day with a market cap of barely half a million.

So how did such a small bank cause such a big reaction?

The reasons behind Bradford & Bingley’s shocking share price slump

Bradford & Bingley has had a dreadful few months. In the middle of April, rumours arose that the bank was on the verge of launching a rights issue. At the time, B&B denied it strongly. However, within a few days, Royal Bank of Scotland had announced its plans for a rights issue, which was closely followed by HBoS.

With the floodgates open, B&B apparently changed its mind in mid-May, saying it would be raising £300m from shareholders, with new shares placed at 82p a pop, way below the share price at the time.

At the time there was no suggestion of a profit warning, but with the housing market deteriorating, and management under a cloud because of the U-turn, investors were clearly worried. B&B’s share price slumped as investors fretted over the state of the bank’s finances, until on Friday, B&B was trading at just 88.5p a share.

Then, on Sunday, chief executive Steve Crawshaw, whose position was probably already untenable, resigned due to health problems. Then yesterday, the bank finally issued the much-expected profits warning.

And what a warning it was. The group plunged into an £8m loss in the four months to April, compared to a £108m profit for the same period in 2007. Profit margins have dived as funding costs grew, while bad debts have rocketed – more on that in a moment. The group also wrote down a further £89m in sub-prime related assets.

The good news – what little there was – was that US private equity group TPG has picked up a 23% stake in the bank for £179m. But even so, the rights issue had to be entirely revised. Under the original deal, if the share price had fallen below 82p, there would have been no incentive for anyone to buy into the stock and the underwriters (UBS and Citi, the investment banks who undersigned the deal) would likely have been left on the hook for the whole £300m.

Obviously, this wasn’t something either UBS or Citi would have appreciated. Reports in the papers suggest that they might even have found reason to pull out if necessary. So the deal has been changed. Shareholders will now be offered 19 shares for every 25 owned, at the price of 55p a share. Rather than raising £300m, B&B aims to raise £258m.

But why did the other bank shares fall?

The chaos and the grim news on profits sent B&B’s shares diving 24% to 67p, and it’s certainly a messy situation. But why did other banks take such fright? For example, HBoS sank 10%, while Alliance & Leicester fell 5.2%.

Well, the main worries for other banks were in B&B’s trading update. The group – which is Britain’s biggest buy-to-let mortgage lender – saw bad debts on its buy-to-let mortgages jump by a staggering 50% between the start of the year and the end of April. More than 3,000 of B&B’s buy-to-let customers are now at least three months behind in their mortgage payments, from less than 2,000 at the start of 2008. Buy-to-let accounts for nearly 60% of the bank’s mortgage book.

Things will only get worse, said the bank. “The tougher economic environment will continue to push arrears beyond the current level.” As Sandy Chen at Panmure Gordon put it: “This is not the bottom. The UK housing market – not just buy-to-let – is turning south.”

And although the bank has been raising its mortgage costs, it’s not seeing the benefit feed through to its profits, because it can’t write enough of the new mortgages. As Derek Chambers of Standard & Poor’s tells The Telegraph: “I think the hope had been at Bradford & Bingley, probably at HBoS as well, that as they re-priced new mortgages they’d be able to pass on these costs.” But in fact, they are “stuck with more mortgages at low rates which are probably low margin or even negative margin, and they’re not able to free up capital to lend at the new higher rates.”

The trouble is, this is just the beginning of the housing market upheaval. The Bank of England reported yesterday that in April mortgage approvals hit their lowest level since the Bank started recording the data in 1993. Capital Economics reckons the data suggest we could be looking at “house price falls that are well into double digits by the end of the year”.

So all of the banks can expect their bad debts to rise from here on in, for quite some time. Any shareholders in B&B, RBS, or HBoS pondering whether to buy into their rights issues needs to forget their current shareholding and ask themselves: “Given the choice of all the stocks in the stock market, would I put my money in a bank right now?”

And for anyone with anything less than the strongest risk appetite, then in the current economic climate, the answer has to be no.

Source: Why the Buy-to-Let Carnage is Just Beginning

Nicholas Nassim Taleb coined the term Black Swan to explain how massive unforeseen events have the greatest impact on markets. But only the most naïve and optimistic of investors was not expecting further fallout from the abominable banking sector.

Bradford & Bingley (B&B), like Northern Rock, RBS, Alliance & Leicester, Barclays and HBOS before it, is in the spotlight and in a lot of trouble.

The company has launched a £258m rights issue at an offer price of 55p a share. They are set to issue a profit warning. Steven Crawshaw has stepped down as CEO. And they have agreed to sell 23% of their shares to Texas Pacific Group (TPG) Capital, a US private equity firm for £179 million.

This “perfect storm” hit the firm so hard that the FSA were forced to come in and suspend trading in the shares.

The downturn in the buy-to-let housing market means the UK’s eighth largest bank, from £3 billion in 2006, now is worth a mere £404m — less than Dignity funeral care. Which is shocking, viewed in isolation.

But, I’m pretty blasé about all of these rights issues and share plunges. Anything happening in the banking sector is a write-off (pun intended). Regular readers know that I’ve no interest in bottom-fishing for ‘bargain’ banks.

Despite my antipathy, I have been constantly advised to pile into banking shares. In the past 3 months I’ve been told:

To buy Barclays at 510p; the shares are now 363p;
To buy RBS at 330p; now 222p;
And to buy HBOS at 497p; now 368p.

All three tips were made, among other things, on the basis of big dividend yields, which seem to cover a multitude of sins.

Except they don’t. All three tips have incurred a greater capital loss than their total annual dividend payout would compensate for. And, none of these three firms is paying a dividend in cash. They’re paying them in shares instead.

This only serves to hurt the per share profitability, which lowers the already low share price… not what the dividend hunters signed up for.

The world’s worst stock tipper

I will no doubt receive another tip for Bradford & Bingley. Why do the tippers persevere with banks?

Because the culprit ultimately responsible for all of these tips is still at large, pushing bank stocks like never before.

Let me now reveal to you who that culprit is. This is today’s the print-out from my Bloomberg terminal, objectively ranking stocks by their value credentials:

1. Bradford & Bingley, Score: 99:89
2. Alliance & Leicester, Score: 83.96
3. HBOS, Score: 80:86
4. Barclays, Score: 78.68
5. RBS, Score: 76.42

Blame the machines.

Across the entire UK stock market, banks are the five best value investments around today. And it’s not just Bloomberg… running any value ‘stock screen’ from Reuters, to Digital Look, to Zacks, to ADVFN produces the same result. This is what every investor and fund manager has been seeing on their screens since late-October.

In objective terms, these are the shares to buy. But anyone who’s been following this advice over the last 12 months has lost, and lost big.

There are two ways to look at investments, bottom-up and top-down.

Bottom-up investing uses stock-screens — systems that zero-in on company fundamentals. Think of it as tunnel-vision investing. In a bull-run, it is a great way to buy stocks. I used to build stock screens for a critically-acclaimed investment service, so I can personally testify to how effective they can be.

Top-down investing is quite different. This method is far more big picture. The first question is not ‘What company should I look at?’ It’s ‘What assets should I look at?’

Top-down investors are not only looking at numbers, but at sentiment and market opportunities outside of a machine’s scope.

While neither method is perfect, in a market downturn it is essential to think big.

Bottom-up investing can lag reality — in the 2000 bear market, stock screeners were picking out the companies that had fallen hard and were more value trap than value opportunity. The same thing is happening here. A system is not a substitute for common sense.

If the market falls by 20%, you have to sit up, take notice and, depending on the portfolio, take action.

The fallout was an opportunity to re-evaluate and find safe-havens for your money. Those who did this have profited in the last six months. Those who had well diversified portfolios in a variety of sectors have probably broken even.

Those who held the ‘good value’ banks, house-builders and retail stocks must now take drastic action to pull things back.

Theo Casey

Source: Bradford And Bingley’s White Swan Event

Let’s get the cautious bit out of the way first. One swallow does not a summer make.

Excellent! Now we’re all nice and circumspect. I can reveal the big news.

HBOS has sold some mortgage-backed securities to someone. We don’t know who, because the details are all secret. But HBOS got £500 million for them — not too shabby!

This is a bit of a landmark. It’s the first successful sale of mortgage-backed securities since the credit crunch kicked off last year.

Even billionaire misery-merchant George Soros cracked his face.

“The acute phase [of the credit crunch] is behind us,” he said. But, like us, Soros was wearing his cautious helmet (in fact, his is permanently welded to his head).

He reckons the economic fall-out will get worse for Britain. So does Michael Spencer, head of ICAP, the interdealer broker that handled the sale.

So, donning our robes of wariness, exuding an air of “Let’s not get carried away”, and probably also holding a couple of horses, shall we dive in and ask that perennial question:

Is the credit crunch over?

“There’s definitely a market for mortgage-backed securities,” says Theo Casey, one of our research Mafia. “But here’s the rub: the market is highly vulnerable to swings in sentiment. Bearish sentiment doesn’t simply lower the price — it causes the market to disappear entirely”.

But commodities man Garry White reminds us of an age-old investment adage:

“The best time to buy something is often when everyone else says don’t”.

So it could be that, a year or so from now, those who were brave enough to buy these HBOS assets will be banking a tidy little profit.

Of course, these are mortgage-backed assets, so a lot depends on what happens in the UK housing market.

But that’s a whole other debate — and these Clothes of Careful are getting heavy…

Rock boss Sandler hanging onto our money

OK, OK, you’ve twisted my arm. A very quick cameo for the housing market.

As you’re probably aware, you and I, through our taxes, are underwriting Northern Rock’s mortgage book. To the tune of around £75 billion.

Not only that, but the Rock owes the Bank of England £24.1 billion. It is going to pay it back. Honest, guv. Only… well, there might be a bit of delay.

The original plan was to pay back the loan by 2010, and free the Treasury from its guarantees by 2011.

But yesterday, Rock supremo Ron Sandler told a Treasury Select Committee that they might have to wait a bit for the money.

The only asset the Rock really has is a big mortgage book. But the value of that collateral rises and falls with house prices. Right now, house prices are falling.

And there are other worries as rival lenders lure away the best customers.

As Sandler admitted: “There is a risk of adverse selection. Those customers who represent a better credit risk will get mortgages elsewhere. We do expect it will increase the riskiness of our book”.

So, as we suspected all along, you and I are in possession of a really bad business. A business which could struggle to pay us back.

Never mind the Helmet of Caution — it’s time to put on the Jumper of Indignation.

Darling to Businesses: “Don’t leave, I can change!”

Sometimes, you just wish you could take back something you’ve said.

I’m sure we’ve all been there — the argument with our partner which flared up over nothing, just a daft remark, something we didn’t really mean. And then we spend the rest of the evening (or the week… the month… the entire relationship) grovelling and apologising.

Alistair Darling knows how we feel. All he did was make a silly little slip — “Let’s maybe tax profits that British companies make abroad!” — and now he’s been forced to bow and scrape and beg for forgiveness.

So it was that yesterday Darling made some heavily pro-business statements in a speech to the Confederation of British Industry (CBI).

“Business is increasingly mobile,” he said. “Tax rates have to be globally competitive. Business is the linchpin of the British economy.”

He was probably wearing an ‘I ♥ Business’ t-shirt under his suit…

He’s right, of course. Tax rates should be competitive. Otherwise the businesses we rely on to generate the nation’s wealth will simply pack up and leave. Some already have.

The fear is that this debate could prove to be the catalyst for a business exodus. Just in case, businesses have already looked into the possibilities of moving elsewhere.

Businesses know that Ireland, for example, offers a corporate tax rate of just 12.5%. In Britain it’s 28%. Simple arithmetic says move to Ireland.

Now that some businesses have looked at the logistics of upping sticks, they may consider it’s worth taking the plunge — even if the Treasury’s proposals are dropped.

Time for another wardrobe visit — this time to fish out the Trousers of Concern.

At least it’s Mayoral decision time for those 5.5m registered to vote in the polyglot Babel known as England’s capital. A quarter of Londoners were foreign born according to the 2001 census and with unknown immigration numbers since, that reading is likely a considerable understatement now.

For your editor it means another visit to the local junior school. In the past it has been a slightly bemusing experience trying to figure out what you’re supposed to do and where…not to mention some last minute dithering about the choice of the day. A decision usually reached via some trivial tipping point item.

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As for the Bank of England, often it is said the job of a central banker is to take the punch bowl away while the party’s still swinging. The job of reminding partygoers where the punch bowl is and that the brew was potent but not entirely poisonous is less familiar. But that is what it appears to be encouraging in its latest report.

Cheer up all you glum faces. The worst is behind us, they say. $1trn in subprime losses is way off the scale. They estimate a fraction of that sum – $170bn. The risk pendulum has swung too far. Financial markets have turned bipolar they say, from under-valuing risk to overvaluing it – from irrational exuberance to irrational gloom. Or in Bank speak:

“…estimates implied by prices in some credit markets are likely to overstate significantly the losses that will ultimately be felt by the financial system and the economy as a whole, as they appear to include unusually large discounts for illiquidity and uncertainty.”

Whether they have or not remains to be seen. As one commentator has it, it’s a buy note on asset-backed securities now selling at knock down prices. But confidence is in short supply and a rallying call from the top is worth a go. As things stand we’re a bank down – Northern Rock – with £100bn added to taxpayer liabilities, there’s a new £50bn bank funding facility on top, government coffers are empty and the interbank lending rate is still stuck 84 basis points over bank base.

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Successful raids such as the one on HBOS can have spectacular results. The trouble is “harmful manipulation” can really do lasting damage says research from the Oxford Said school of business and Wharton School. There is more than a loose connection between stock market value and actual economic worth they find. It is a conclusion that may well add power to the elbow of regulators seeking to reign in the short sellers.

*** Colleague Warren Green, passes on the scores for last month’s Daily Reckoning poll. Which commodity of gold, silver, platinum and palladium will rise most in April, we asked. Here’s how you scored

Gold 25%
Silver 41%
Platinum 17%
Palladium 15%

Unfortunately, Dear readers missed the fact it was trick question. Unfortunately, too, so did we. Your editor now makes a mental note to not to phrase such leading assumptions with questions in future.

These four precious metals actually fell over the month…

Price/oz (US$)

Click here if you would like to have your say on this month’s question Regards,

Rob Mackrill
The Daily Reckoning

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