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Another Record Debt Sale = Record borrowing for the U.S.

Ian Mathias — Fri, 13 Nov 2009 11:39:04 +0000

Ian Mathias (The Daily Reckoning):
The U.S. government will finish its historic streak of debt sales today with a record $16 billion offering of 30-year bonds. This will pile on top the $65 billion in 3-year and 10-year paper auctioned earlier this week, both records in their own right.

It’s worth noting that Monday’s auction for 3-year debt was met with ravenous, near-record demand and that Tuesday’s 10-year sale met a bid-to-cover ratio of 2.8… historically high for the 10-year, but not even close to the 3.3 ratio for the shorter dated bonds the day before.

“The market is sending many errant signals right now,” notes Dan Amoss. “U.S. policymakers are trying to reinflate stocks, houses and wages, while also recapitalizing an undercapitalized banking system with overt and covert subsidies. All of these actions are extraordinarily costly — so costly that creditors are getting nervous.

For the rest of the article, read Ian Mathias at The Daily Reckoning.

Bank Stress Tests: The Results Are in; Now What?

Jason Simpkins — Fri, 08 May 2009 18:58:09 +0000

The results of the government’s bank stress tests were released yesterday (Thursday), and the U.S. Federal Reserve has directed 10 banks to raise an aggregate $70 billion-plus in capital.

Banks that require funding will have 30 days to present a capital-raising strategy to regulators and then six months to implement it.

It is unlikely that any of the banks will require any additional taxpayer money.

J.P. Morgan Chase & Co. (NYSE: JPM), Goldman Sachs Group Inc. (NYSE: GS), MetLife Inc. (NYSE: MET), American Express Co. (NYSE: AXP), Bank of New York Mellon Corp. (NYSE: BK), BB&T Corp. (NYSE: BBT), Capital One Financial Corp. (NYSE: COF), U.S. Bancorp (NYSE: USB), and State Street Corp. (NYSE: STT) are in the clear in terms of having adequate capital cushioning.

The following banks will be required to raise these assigned amounts of capital:

Bank of America Corp. (NYSE: BAC): $34 billion.
Wells Fargo & Co. (NYSE: WFC): $13.7 billion.
GMAC LLC (NYSE: GMA): $11.5 billion.
Citigroup Inc. (NYSE: C): $5.5 billion.
Morgan Stanley (NYSE: MS): $1.8 billion.
Fifth Third Bancorp (NASDAQ: FITB): $1.1 billion.
KeyCorp (NYSE: KEY): $1.8 billion.
PNC Financial Services (NYSE: PNC): $600 million.
Regions Financial Corp. (NYSE: RF): $2.5 billion.
SunTrust Banks Inc.( NYSE: STI): $2.2 billion.

The banks will have until June 8 to develop a plan to raise the required capital and until Nov. 9 to implement it. They may choose to raise the money in a variety of ways. They may sell assets, court private investment or convert the government’s existing preferred shares into common stock.

Citigroup has already announced plans to convert a portion of the government’s $45 billion stake into common stock, a move that will give the federal government a 36% stake in the company. Other regional banks – such as Fifth Third Bank or Regions Financial – could be forced to take similar actions, but are loath to do so, as most of the moves would be dilutive to existing shareholders.

Citigroup has agreed to sell Nikko Cordial Securities to Sumitomo Mitsui Financial Group (OTC: SMFJY) for about $5.5 billion. The deal, which is to be completed by Oct. 1, is expected to boost the bank’s Tier-1 capital ratio by approximately 27 basis points.

Morgan Stanley plans to close its capital gap by selling assets or stock to private investors, a person briefed on the plan told The New York Times. And Wells Fargo said late yesterday that it plans to sell $6 billion in new common stock in an effort to raise required capital.

While Bank of America has said it doesn’t agree with the Fed’s conclusions, the bank yesterday outlined its strategy to accommodate the government’s demands. BofA is exploring the sale of such business units as its First Republic private-banking unit and asset manager Columbia Management, The Wall Street Journal reported.

The sale of those businesses could raise a combined $4 billion, David Hendler of CreditSights Inc. told The Journal. BofA could also get about $8 billion for its partial stake in China Construction Bank Corp.

Beyond that BofA would have the options of converting the government’s existing $45 billion investment, or $33 billion in private preferred shares, into common stock.

The Fed wants bank-holding companies to achieve a Tier 1 risk-based ratio of at least 6%, and a Tier 1 Common risk-based ratio of at least 4% by the end of 2010. The goal is to get banks to the point where they are stable enough that they can borrow from private investors without a Federal Deposit Insurance Corp. (FDIC) guarantee, people familiar with the matter told Bloomberg News.

“Going forward, we just need banks to be able to issue debt without the FDIC backing – that’s the next stage for these bank names in terms of evaluating their health,” Mark Bronzo, a money manager at Security Global Investors LLC, which oversees $21 billion in Irvington, N.Y., told Bloomberg.

If the banks fail to meet capital requirements, the government will step in to provide the necessary funds. However, it’s unlikely that any more taxpayer money will be needed, as about $110 billion of the original $700 billion in Troubled Asset Relief Program (TARP) funding remains.

Wall Street’s Reaction

The Dow Jones Industrial Average closed down 102.43 points, or 1.2%, yesterday, with the Dow Jones U.S. Financial Services Index down 3.78%. However, Wall Street’s reaction to the tests won’t be fully realized until the market opens later today (Friday).

“I think this will be a confidence-instilling announcement,” Federal Deposit Insurance Corp. Chairman Sheila Bair told a Senate panel Wednesday. “There will be additional needs for capital buffers for some institutions, but I think there will be mechanisms to do that within the next six months.”

Treasury Secretary Timothy F. Geithner said in an interview with PBS television’s “The Charlie Rose Show” that all of the institutions tested already have “significant cushions” of capital and that Americans have every reason to be confident going forward.

“The results will be, on balance, reassuring,” Geithner said.

But some analysts are skeptical about what the bank stress tests actually achieved, or if their standards of evaluation were even valid in the first place. After all, the tests have occupied resources from both the federal government and the private sector for months, and have increased stock market volatility.

“The banks are healing themselves, and it could have been done a lot faster if government had gotten out of the way instead of parking the emergency equipment in the middle of the road,” Gary B. Townsend, a former banking regulator who now runs his own investment firm, told The New York Times.

Also, many bank employees, and even Elizabeth Warren, who chairs the Congressional Oversight Panel for TARP, have expressed concern that the tests weren’t stringent enough.

Last month, Warren gave rise to speculation that another stress test might be needed by the end of the year, after she called the adverse economic scenario employed by the Fed “disturbingly close” to current economic conditions.

In the Fed’s most pessimistic economic forecast, for example, the government projects the unemployment rate will climb to 10.3% in 2010. But unemployment already hit 8.5% in March and many economists are predicting that it rose to 8.9% in April. If that’s the case, it’s not hard to imagine the national jobless rate reaching double digits by the end of the year.

“The stress tests will make a terrific contribution if they are tough and transparent,” Warren said. “If they are not, they will be useless.”

Still, despite the test’s alleged failings, there is a hope that with more transparency and a greater buffer of equity, investor confidence will be restored.

“This is sending a message that the banks need more capital, but their losses are manageable and the system itself is solvent,” Kevin Fitzsimmons, an analyst at Sandler O’Neill told The Times. “Whether it sticks is something else.”

Source: Bank Stress Tests: The Results Are in; Now What?

A Bill No One Could Possibly Manage

Adam Lass — Fri, 14 Nov 2008 11:46:23 +0000

Charitable as the thought might be, Washington simply doesn’t have deep enough pockets to bail out every deadbeat. Did you really think it would stop at a mere trillion for the banks?

I am speaking of Washington’s grand plan to repair two decades of asinine economic policies (and the inevitable foolhardy speculations that resulted from those policies).

When Paulson’s cabal first pitched us on the grand bailout, they claimed that it would “only” take $700 billion or so. And they promised to be fair, even-handed and transparent in how they managed this largesse.

Not a Gravy Train?

“This is no gravy train for rich guys who screwed up,” they assured us. “We’re just going to buy up a few of these ‘distressed bonds.’ In the end, it won’t even cost you money. Heck, we might even turn a profit selling them later!”

They even managed to say it with a straight face.

What they didn’t tell you was that the Fed had already lent the banks some $2 trillion dollars. And you know what? They still would rather not admit this mind-boggling giveaway. They don’t want to talk about who got the money. Nor do they wish to discuss what kind of crappy assets were put up as collateral.

When queried as to just where the trillions went, neither the lame-duck Bush administration nor the incoming Obama administration offered more than a stern “no comment.” Bloomberg has filed a Freedom of Information lawsuit that may someday bear fruit.

But don’t hold your breath.

The Best Market EVER! (Here’s How to Play It for 146% in 12 Weeks!)

While current market conditions are treacherous for naive “buy and hold” investors, a small group of smart folks are converting the market slide into gains of 251%… 307%… even 387%… week in and week out… no matter how far the Dow falls. Read on now to get in on their next triple-digit winner…

Distressed Assets Are Just So, Well, Distressing

In the meantime, the Grand Cabal has become bored with mere “distressed assets.” Within hours of receiving permission to buy those icky bonds, it confessed that they were unpriceable after all. Instead, Washington would simply buy stakes in all the banks.

And what if you didn’t screw up and put your particular bank over the barrel with worthless subprime bonds and mutant debt swaps? What if you acted like a respectable grownup banker, instead of some kind of cocaine-maddened 24-year old derivatives trader, and kept your depositors’ and investors’ needs front and center?

In that case: Tough luck, Chuck!

The Cabal is in charge now, pal, and everyone has to toe the line… or get left out in the cold forever more.

It’s a Recession After All — Who Knew?

As if that weren’t enough, there’s more: After being warned for over a year that the real economy was suffering as much as (if not more than) their friends on Wall Street, Bernanke, Paulson, et al, finally noticed that we might just be in a real recession.

Real people were having a hell of time buying groceries. And real businesses were firing workers willy-nilly. What’s more, they didn’t stop when Washington bought up the banks!

What an outrage!

Just Buy It All!

So now it seems we’re going to have to find a way to bail just about everyone out. GMAC Financial Services (GJM: NYSE) – once General Motors’ sole profit center – wants to be redefined as a bank so that it can qualify for a piece of the pie.

Not to be outdone, American Express (AXP: NYSE) is begging for a modest $3.5 billion too, lest it come undone from the stress of failing sales and skyrocketing defaults.

(I must confess that I have participated in pushing this doddering gray lady of the credit world to the curb. I tore up my card when they transferred their service bureau to Bangalore.)

Furthermore, insurance outfits like MetLife (MET: NYSE) and Allstate (ALL: NYSE) are drooling over American International Group’s (AIG: NYSE) new terms. Remember that $80 billion we “loaned” them? Well furgedaboudit, because we will in all probability never get a penny back – and more is going down the hatch.

GM Puts Six Million Workers On the Line

Oh, and speaking of GM, they have very publicly announced that if they don’t get a very large piece of the action, they will simply shut their doors – throwing an additional 266,000 workers onto the breadlines.

(That is roughly the number of full time workers at GM. Some analysts claim that after adding in all the folks who cling to GM’s mighty sides, the real figure is somewhere between 3 and 6 million!)

No doubt Ford and Chrysler are watching closely, prepared to scream, “Me too!” at the drop of a hat. If Washington does bail out the automakers (and I believe that they will), there is every likelihood that they will shaft both shareholders and bondholders in the process.

(For those who are interested in capitalizing on this particularly horrid storyline, Bryan Bottarelli and I have offered WaveStrength Options Weekly readers an option straddle that ought to capture some 15%-40% gains regardless of what Washington does for the automakers.)

Heck, even the National Marine Manufacturers Association has dispatched a delegation to Washington, to find out if its members qualify for a place in the “grand gravy train” that this wasn’t supposed to turn into.

A Bill No One Could Possibly Manage

So why not just bail them all out? Why not just cut a billion-dollar check right now for each and every deadbeat and sad sack who was not prepared for “the sudden downturn” that has been clearly coming for over a decade?

Try this on for size: our current annual GDP is estimated at some $14 trillion and falling. Over the past six months we have already given away some $2.5 trillion. And with the cost of running the rest of government, not to mention a couple of grueling wars, we are out another $10 trillion or so.

When the rest of the world sees spending like this (i.e. the folks who buy our bonds and fund it all), they shrink back in horror. Word is already circulating around the global finance community that the danger of default may even cause the U.S. to lose its triple-A credit rating.

If this happens, we would have to double or triple (at least) the bribes we pay out to entice bond sales. Our already skyrocketing deficit (currently somewhere in the vicinity of $10 trillion) would further expand geometrically.

Simply put: There ain’t enough dough in world to save every deadbeat. The charitable impulse is nice enough. But it simply cannot be done.

Adam Lass, Senior Editor, WaveStrength Options Weekly

Source: All Aboard the Grand Gravy Train

Profit from Stocks’ Slide with These 3 Put Options

Adam Lass — Tue, 26 Aug 2008 13:50:54 +0000

The dominoes are falling, says Adam Lass in Taipan Daily.

The housing market is still a shambles, nine U.S. banks have failed so far this year, and Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) are all but nationalized. What’s more, the world’s central bankers can’t agree on what caused this mess, let along how to fix it.

But amid the gloom and doom, Adam says put options on MetLife (NYSE:MET), Bank of America (NYSE:BAC) and Capital One (NYSE:COF) can still yield triple-digit gains…

Central bankers see few options to repair a damaged financial sector and weak global economy underway for years now. Thud.

Thud, thud, thud.

Bang!

It’s the sound of massive dominos falling, my friends – a worrisome crash that has become all too familiar to observers of the ongoing financial crisis.

U.S. home foreclosures climbed 55% in between June and July. Year over year, U.S. banks have tripled the number of “repossessed” houses.

I put repossess in quotes because it is questionable as to whether many of these folks ever actually owned the houses in question. Seeing as how their perverse loans allowed them no equity stake whatsoever, it might appear to a disinterested observer that they are in fact simply being evicted from rented houses.

Thud!

These foreclosures are both a fallen domino and the trigger for the next big crash. When they are wrapped into our national statistics, they distort our understanding of the situation at hand in the most peculiar ways.

First of all, they make it appear that both U.S. housing sales and GDP are actually gaining ground. In fact, just Monday, I saw some of Wall Street’s favorite shills post headlines touting July’s “3.1% Increase in Home Sales!”

The catch? Everyone involved is losing their shirts on these sales.

There is now an 11-month backlog – some 4.67 million unsold houses and condos – weighing down the U.S. housing market. This glut of “resale inventory” is keeping builders on the sidelines. Permits and broken ground are at a 17-year low. The Dow Jones U.S. Home Construction Index continues to grovel along around the 300 mark, making for a 61% decline from the heady days of early 2007.

Global Investing Roundups Thursday, June 05, 2008

William Patalon III — Thu, 05 Jun 2008 13:59:25 +0000

ADP Paints Positive Job Picture; MetLife Buys into Mortgages; United’s Ongoing Cost Battle; Smucker Strikes a Deal with P&G; U.S. Service Sector Continues to Grow; Emerson Abandons Bid for Chloride; Bob Evans Serves Meaty 4Q Profits; Icahn Moves to Replace Yahoo’s Yang

Automatic Data Processing’s (ADP) National Employment Report, released yesterday (Wednesday) indicated that 40,000 U.S. private-sector jobs were added in May. “ADP hasn’t been a good forecaster of the job report lately. But if it’s right then the economy is stronger than we thought,” David Wyss, an economist with Standard & Poor’s told Forbes. “So far, this isn’t much of a recession.”

MetLife Inc. (MET) announced it plans to purchase a home-mortgage business from First Horizon National Corp. (FHN) The deal includes the home loan unit of First Horizon’s Tennessee Bank National Association, with 230 offices in the U.S., the New York-based life insurance firm announced yesterday (Wednesday) in a statement, Bloomberg News reported.

UAL Corp.’s (UAUA) United Airlines will ground 70 planes and cut 1,100 jobs in an ongoing effort to cut costs due in large part to skyrocketing jet fuel costs. This is the second round of cutbacks in two months for the nation’s second-largest air carrier as the price of jet fuel has increased 76% in the past year, adding $3 billion to United’s fuel expenses, Bloomberg News reported.

The J.M. Smucker Co. (SJM) will acquire Folgers, from Procter & Gamble Co. (PG) for stock in a deal valued at $2.95 billion, the companies said yesterday (Wednesday). The deal will give P&G shareholders a 53.5% stake in Smucker, and Smucker will issue a one-time dividend of $5 per share to its shareholders prior to the deal, The Associated Press reported.

The Institute for Supply Management said yesterday (Wednesday) that its service sector index was 51.7 in May, stronger than expected, but still a drop from April’s reading of 52. A reading above 50 indicates the sector, which comprises roughly 80 percent of the total economy, is growing, while a reading below 50 indicates contraction.

Emerson Electric Co. (EMR) abandoned its pursuit of Chloride Group PLC, Europe’s largest maker of backup power supplies, after the company rejected a $1.36 billion takeover proposal. Emerson was hoping the deal would beef up its Network Power division, which produces equipment to protect hospitals, banks and airports from power failures, The Associated Press reported.

Chain restaurant operator Bob Evans Farms Inc. (BOBE) posted strong fiscal fourth-quarter results yesterday (Wednesday), a sign one analyst says means isn’t economic health, but rather, a reallocation of value-minded assets. “We think there are an increasing number of value-conscious customers moving from bar-and-grill restaurants to Bob Evans,” analyst Stephen Anderson of MKM Partners told Reuters. The company reported fourth-quarter net income of $16.1 million, or 52 cents a share, on revenue of $436.4 million.

Billionaire investor and vocal Yahoo Inc. (YHOO) critic Carl Icahn said in a letter to the board that he will move to replace Chief Executive Officer Jerry Yang and pursue a takeover by Microsoft Corp. (MSFT), Bloomberg reported. “It will be extremely difficult for Microsoft or other companies to trust, work with and negotiate with a company that would go to these lengths,” Icahn wrote, referring to Yang’s refusal of Microsoft’s $33-a-share offer.

Source: Global Investing Roundups Thursday, June 05, 2008