This from Money Morning:

While the U.S. government’s plan to invest $250 billion into U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, the recapitalization plan is likely to have a secondary effect – one that whipsawed U.S. taxpayers likely won’t be very happy to learn about.

Those billions are a virtual lock to set off a merger tsunami in which the biggest banks use taxpayer money to get bigger – admittedly removing the smaller, weaker banks from the market, but ultimately also reducing the competition that benefited consumers and kept the explosion in banking fees from being far worse than it already is.

One last point: Experts say that takeovers financed by the government infusions are likely to have less of a beneficial impact on the economy than an actual increase in lending levels would have. And because so much of this money will be used for buyouts, the reduction in the benchmark Federal Funds target rate announced yesterday (Wednesday) by central bank policymakers will likely do very little to actually spur lending, experts say.

Fueled by this taxpayer-supplied capital, the wave of consolidation deals is “absolutely” going to accelerate, Louis Basenese, a mergers-and-acquisitions (M&A) expert and the editor of The Takeover Trader newsletter, told Money Morning.

“When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.”

Lining Up for Deal Money

Late last week, the Pittsburgh-based PNC Financial Services Group Inc. (NYSE:PNC) became the first U.S. bank to make use of the government’s Troubled Assets Relief Program (TARP), announcing plans to purchase the beleaguered National City Corp. (NYSE:NCC) for $5.2 billion. To help finance the purchase, PNC will sell $7.7 billion worth of preferred stock and warrants to the U.S. Treasury Department, as part of that department’s bank-recapitalization program.

With regards to that program, U.S. Treasury Secretary Henry M. “Hank” Paulson recently said – yet again – that the government’s goal was to restore the public’s confidence in the U.S. financial services sector – especially banks – so that private investors would be willing to advance money to banks and banks, in turn, would be willing to lend, The Wall Street Journal reported.

“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital,” Paulson said last week.

Whatever the Treasury Department’s actual intent, the reality is that banks are already sniffing out buyout targets, thanks to the TARP money. Indeed, they’ve been quite open about it during conference calls related to quarterly earnings, or in media interviews.

Take the Winston-Salem, N.C.-based BB&T Corp. (NYSE:BBT). During a conference call that dealt with the bank’s third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank “will probably participate” in the bailout program, accepting federal infusions. Allison didn’t say whether the federal money would induce BB&T to boost its lending. But he did say the bank would probably accept the money in order to finance its expansion plans, The Wall Street Journal said.

“We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill],” Allison said during the conference call.

Talk about brazen. However, he’s not alone. For instance, there’s also Zions Bancorporation (NASDAQ:ZION), a Salt Lake City-based bank that’s feeling the pain due to losses from bad real-estate loans. On Tuesday, Zions announced it would be receiving $1.4 billion in capital from the Treasury Department – cash it would use to boost lending and keep paying a dividend, albeit at a reduced rate.

“As a strong regional bank with a major focus on financing small and middle-market businesses, we are pleased to have this additional capital to better serve the lending needs of customers throughout the Western United States,” Chairman and CEO Harris H. Simmons said. “We expect to deploy this new capital in the form of prudent lending in the markets we serve. This new lending will be good for our country’s economy, our customers and our company.”

However, during a recent earnings conference call, Zions Chief Financial Officer Doyle L. Arnold said that while new capital might allow it to boost lending, the increase wouldn’t necessarily be a dramatic one. The Journal said. Besides, Zions will also use the money “to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters.”

Buyouts Already Accelerating

The reality is that – with all the liquidity the world’s governments and central banks have injected into the global financial system – the global game of “Let’s Make a Deal” has already become a reality.

Indeed, as WSJ.com reported a week ago, global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer this year than it did a year ago.

This time around, the new kings of deal making aren’t such highly compensated “Masters of the Universe” as The Blackstone Group (NYSE:BX) LP’s Stephen A. Schwarzman, or KKR & Co. LP’s Henry R. Kravis, The Journal’s blog reported. Instead, they are the much-lower-paid – but decidedly more powerful – civil servants of the U.S. and U.K. governments: Treasury Secretary Paulson, U.S. Federal Reserve Chairman Ben S. Bernanke, U.K. Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling, the Web site stated.

At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments have ignited record levels of financial sector deal making.

According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $125 billion the U.S. government is investing in the large U.S. banks as part of its rescue package, the similar amount it may invest in smaller banks, or other deals that the feds are helping engineer (JPMorgan Chase & Co.’s (NYSE:JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ) are two such examples).

When the dust settles on this buyout boom, we may well have a record in hand that’s even less beatable than Joe DiMaggio’s 56-game hitting streak. That’s because with the Fed, the U.K. and other governments and central banks doling out the capital, there’s no financial-sector equivalent of Kenny Keltner to bring this buyout fest to an abrupt close. That means that the “hits” – the buyout deals – will just keep coming.
If You Can’t Beat ‘em… Buy ‘em?

When it comes to identifying possible buyout targets, M&A experts such as The Takeover Trader’s Basenese say there are some very clear frontrunners.

“I’d put regional banks with solid footprints in the Southeast high on the list, and for two reasons,” Basenese said. “First, demographics point to stronger growth [in this region] as retirees migrate to warmer climes – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (NYSE:STI) would provide a distinct competitive advantage.”

With a lot of bigger deals already in the books, many analysts agree with Basenese’s assessment, and are now watching to see if regional banks will be the next to succumb to the dealmaker’s bid. Indeed, earlier this month, Matthew Schultheis, a senior analyst at Boenning & Scattergood Inc., told a reporter that he expected this to be a “trend that continues at least through the first half of ’09, unless some of these [companies] stabilize. It could even last beyond that.”

There’s a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It’s toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors. Regional banks have a tougher time, says Doug Landy, a partner in the U.S. banking practice of the law firm of Allen & Overy.

“A regional bank lacks both the international access and the local character,” Landy told The Associated Press.

Several big regional banks at least acknowledged the possibility of buyouts on recent earnings conference calls, The Journal reported.

The Cincinnati-based Fifth Third Bancorp (NYSE:FITB) talked about raising $1 billion in capital by selling non-core assets. Bank executives said that a difficult 2009 is “a view that continues to seem likely to us.” They confirmed discussions with a number of possible investors or asset-purchasers, and said they were “confident that an attractive transaction would be available to us as the opportunity and timing are appropriate including the ability to generate capital in excess of our original expectations.” Earlier this week, however, it announced that it was getting $3.4 billion in TARP funds, the Cleveland Plain Dealer newspaper reported.

Clearly, the bank isn’t thinking in terms of an outright sale, or at least doesn’t admit to that publicly.

One other potential buyout candidate includes Huntington Bancshares Inc. (NASDAQ:HBAN), a Columbus, Ohio-based regional that just received a $1.4 billion federal infusion of its own, the Plain Dealer said.

Who will be doing the buying? The Takeover Trader’s Basenese tells investors to “also look for banks with foreign ownership” to be on the prowl for acquisitions.

“Just like Spain’s Banco Santander SA (ADR: STD) [which earlier this month said it would buy the 76% of Philadelphia-based Sovereign Bancorp Inc. (NYSE:SOV) it didn’t already own for about $1.9 billion], foreign-based banks will likely jump at the opportunity to expand their U.S. presence at a discount,” Basenese said. “M&T Bank Corp. (NYSE:MTB) fits the bill, as Allied Irish Banks PLC (ADR: AIB) already owns a 24% stake.”

Then there’s the Minneapolis-based U.S. Bancorp (NYSE:USB), which is one of the few regionals still in a strong position. CEO Richard K. Davis has reportedly rejected the idea of buying large banks that are already in trouble and was asked if the new rescue plans might change his mind.

“It makes it a little easier to do those things,” Davis told The Journal. “But first and foremost, whether the capital is less expensive or the opportunity that TARP is present, we’ll continue to look at deals on an accretive basis where they make sense and where they would fit into this company’s long-term structure. So it would definitely make it more attractive, and so some of our positioning and our targets look more attractive and our valuation is easier now.”

There’s something else to consider, Davis said.

“To the extent that [a deal] has to hit all of the normal bellwether marks and the expectations we have for the near term and long term, it still has to be a good deal. So it doesn’t really change our philosophy, but it does make it easier to find our way to partnerships that might be more accretive sooner.”

Basenese, the M&A expert, believes that Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) will be “big spenders,” using the TARP funds to help accelerate their conversions from an investment bank to a bank holding company – a transition that will require them to bulk up their deposit bases. And the quickest way to do that is to buy other banks, Basenese says.

“One thing [the wave of deals] does is to restore confidence in the sector,” Basenese said, “It will go a long way in convincing CEOs that it’s safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank.”

Source: Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis

Andrew Snyder says the current “neck-breaking” volatility creates great profit plays for contrarain investors. He recommends using puts to bet on further downside for Boeing (NYSE:BA).

To hedge, he advises investors buy call options on National City Corporation (NYSE:NCC). This bank has a solid balance sheet and could soar if the $700 billion bailout is passed in Congress.

This from Today’s Financial News:

There is an old adage on Wall Street that says as long as the markets are moving, you can make money. It may be a tired, overused cliché, but boy is it right.

No matter which direction the market heads, there is always a profit opportunity. And with the Dow making huge day-to-day swings, this is a monumental chance for savvy traders.

We have seen “neck-breaking” volatility over the past three weeks. Yesterday’s [Monday] 777-point mega-plunge will go down as one of the worst days in Wall Street history, but you need to look at it as a fantastic gift. After all, shares of thousands of companies are selling at incredible discounts.

There is going to be more volatility over the days and weeks ahead. As Congress debates another bailout package and as news of more troubled firms cross the wires, the equities market will surge and plunge and surge and plunge. Take advantage of the swings and profit with every move.

I have created a hedge-type plan that will allow you to profit no matter which way the market moves. As this market works itself out, it could make you a lot of money. So pay attention.

Market divergence

In the next few days, Americans will begin to realize the truly dire economic situation this country is in. We will read more and more about an impending recession. Share prices of companies that have anything to do with consumer spending will get hit hard.

One company that will be hurt is Boeing (NYSE:BA). The company was doing quite well just a few months ago, but now that a global slowdown is imminent and a lot of its workers are circling the company in a picket line, it is in serious trouble.

Shares have started on a rapid decent and will continue to plunge until this economy rebounds. In the past twelve months, shares are already down nearly 50%, from $107 to just $55. The combination of a strike and a major economic slowdown will drag prices even lower.

Judging by historical trends, trading volume, and valuations, a share price drop to $45 is not only justifiable, it is almost a certainty. With a huge order backlog and creditors nipping at the company’s heals, Boeing cannot afford to have its workers on strike. They need to be on the assembly line pumping out planes.

To take advantage of the impending fall, you have two options. Directly short the company’s shares or take the options route. Since shorting is considered un-American right now, I recommend buying Boeings February 55 Puts (BANK.X).

With a strike price of $55, they are close to being in the money. As share price drops, they will rise dollar-for-dollar. As Boeing drops towards $45 per share, these puts could easily double in value.

Taking a short position on Boeing is just one side of this hedge. Not every company will be hurt by this market downturn, especially if you believe as I do that action from Congress will create a significant, even if short-lived, share price surge.

As I already mentioned, there are a lot of companies unduly discounted by Wall Street’s decline. Many of them are in the headline sector, the financial industry. As companies like Lehman Brothers, Wachovia, and AIG disappear, investors worry if the smaller, regional banks will follow the same path.

Companies like Sovereign Bancorp (NYSE:SOV) and National City Corporation (NYSE:NCC) have seen their share prices destroyed by the negativity. Some of the companies deserve the deep discounting; many others do not.

Catch the rebound and score

National City does not deserve the horrific action its investors have been forced to digest. It does not have the huge exposure to the sub-par mortgage industry that companies like Wachovia (NYSE:WB) have. In fact, its balance sheet is healthier all across the board.

National City records more than $11 billion in cash, with over $7 billion in operating cash flows. It is working to support just $30 billion in debt. Yes, its debt ratios are fairly high, but nothing it cannot work itself out of, especially with the help of an industry bailout. Share price deserved a hit, but not one of this magnitude.

The company’s share price has dropped from over $30 to less than $2 in the past two years. Over the last three weeks it has plunged by over 50%. It is giving savvy investors a shot at some bragging-worthy profits.

To take advantage of the short-term appreciation potential, once again, you have two options. Buy shares of National City, or buy the company’s call options. Either way, you have a shot at triple-digit profit potential.

Buying the underlying shares is simple, but deciding which options to purchase is a bit more difficult. You have to factor in time decay, market volatility, and valuations.

How about I do the hard work for you? Buy National City’s January 2.50 Calls (NCCAZ.X). They will soar on any positive news from Congress.

The markets are highly volatile. If you pay attention and are prepared to act fast, there are some fantastic profit opportunities. When Congress finally gets a bailout bill on the president’s desk, expect some positive action in the financial sector. Meanwhile, the nation’s economy is not out of the woods.

Companies that rely on consumer spending or economic expansion are going to be feeling the pain of a major slowdown for at least another year, maybe two.

Take advantage of the market dichotomy and profit no matter which way it heads.

Source: Volatility Hedge: Short Boeing (BA), go long on National City (NCC)

• Oil prices rallied yesterday (Tuesday) jumping $4.27 to settle at $100.64 a barrel on the New York Mercantile Exchange, after earlier rising as high as $101.40. On Monday, prices fell $10.52 to settle at $96.37 – the second largest drop ever in dollar terms.

• Barney Frank (D-MA), the chairman of the House Financial Services Committee, yesterday (Tuesday) told policymakers that Sheila Bair, chairman of the Federal Deposit Insurance Corp., would seek to increase the deposit insurance limit to a level above its current $100,000 level, Reuters reported. The agency’s insurance fund stood at about $45.2 billion at the end of the second quarter.

• Prices of U.S. single-family homes fell a record 16.3% in July from a year earlier, according to the Standard & Poor’s/Case-Shiller Home Price Indexes. The S&P/Case Shiller composite index of 20 metropolitan areas fell 0.9% in July from June. Since the peak of the housing boom in July 2006, the index has dropped 19.5% the group said.

• Shares of Sovereign Bancorp Inc. (SOV) yesterday (Tuesday) shot up 70% with a gain of $1.62 to $3.95 on analyst upgrades and a new chief executive officer. Sovereign announced Paul Perrault would replace Joseph Campanelli as CEO, a move met with enthusiasm by stock analysts, Bloomberg News reported.

• Chicago Mayor Richard M. Daley announced the city had selected a consortium of investors headed by Citigroup Inc. (C) to privatize Midway Airport for $2.52 billion. The deal, approved by both the Federal Aviation Administration and the Transportation Security Administration, represents the first privatization of a major U.S. airport, The Wall Street Journal reported.

• Pfizer Inc. (PFE), the world’s largest drugmaker, yesterday (Tuesday) announced a refocusing of its research and development budget. Pfizer is looking to cut costs and focus on areas with potential high profits as it faces increased competition from generic drug manufacturers, The Associated Press reported.

Source: Global Investing Roundups Wednesday, October 1st, 2008