• U.S. home prices posted their biggest drop on record during the first quarter, with the median price falling 14% to $169,000 from a year earlier, the National Association of Realtors said. Prices fell in 134 of 152 metropolitan areas, with values plunging the most in Florida and California.

• The U.S. trade deficit grew 5.5% to a smaller-than- forecast $27.6 billion, dropping for the first time in eight months.  The gap widened as exports slumped to a two-year low, overwhelming shrinking imports, reflecting reduced American demand for goods made abroad. The report buoyed hopes that a record contraction in global trade flows may be easing. “It’s one more indicator that things are getting worse at a lot slower pace than before,” said John Ryding, chief economist at RDQ Economics LLC in New York, Bloomberg reported.

• The Social Security trust fund will run out of assets in 2037, four years sooner than previously thought, a report by the fund’s trustees said yesterday (Tuesday).  The same report said spending on Medicare, the health insurance plan for the elderly, will reach a legal limit by 2014.  Payroll tax contributions to Social Security and Medicare, the two main safety nets for American retirees and the elderly, are declining due to the recession just as the baby-boom generation begins to retire, Bloomberg reported.

• Citigroup Inc (NYSE: C) is using almost all of the $45 billion in U.S. taxpayers’ money it received from the TARP program to make new loans.  A committee at the bank, appointed to oversee the use of the money it received from TARP, approved $44.75 billion in lending initiatives as of March 31, according to an AP story, which appeared on the New York Times website.

• A.P. Moller-Maersk, the owner of the world’s biggest container shipping business, swung to a bigger net loss than expected in the first quarter and warned that the full year might end up that way too.  The company posted a net loss of $390 million for the first three months, as the dive in global trade and freight rates hit shipping and low oil prices hit its oil business even harder than expected, Reuters reported.

• Bank regulators in all 27 countries of the European Union will conduct confidential stress tests by September, stepping up scrutiny of risks after lenders absorbed more than $1 trillion of losses and writedowns in the global financial crisis, Bloomberg reported.  Finance ministers and the EU’s executive agency will get private reports and industry data from regulators.  Results for individual banks such as Spain’s Banco de Santander S.A. (ADR NYSE: STD) or Barclays Plc (ADR NYSE: BCS) won’t be released.

Source: Investment News Briefs Wednesday, May 13, 2009

For optimists, the message here is that all hope for holiday retail sales is not yet lost. A National Retail Federation survey showed that only 47% of consumers have finished their holiday shopping and another 19% have not even started.  As a dismal 2008 comes to a close, the last die-hard eternal optimists are calling for a year-end Santa Claus Rally, as the government bailouts and U.S. Federal Reserve actions give investors some hope for 2009 and beyond.

But such blind optimism too often ignores a key point or two. The Dallas-based Neiman Marcus, for instance, just announced that its third-quarter earnings plunged 84% because of its aggressive discounting, the Dallas Morning News reported. And since the discounting will continue, so will the decline in profits, the high-end retailer conceded.

With even luxury retailers discounting to try and salvage something from the holiday shopping season, the outlook for lackluster sales and even-more-lackluster earnings feeds into an already dour outlook for the U.S. economy.

And if that doesn’t squelch the optimists’ ardor, then a looming revision in the third-quarter gross domestic product (GDP) – last reported as minus 0.5% – will almost certainly bring them back to the realities of the sluggish economy.

It may even force those optimistic economists to finally say: “Bah Humbug.”

That GDP report is due out tomorrow (Tuesday).

Market Matters

Though perhaps it’s wishful thinking, there are some analysts who point out that one or more of any number catalysts could jump-start the economy and the financial markets in the New Year, putting the past few miserable months in the rearview mirror.  They argue that the trillions of dollars in bailout money pumped into the financial system should finally start to provide badly needed liquidity; the Fed seems intent to do “whatever it takes” to reverse, or at least blunt, the current downturn (even if runaway inflation may be a repercussion down the road); an “Obamanomics” stimulus plan could create new jobs, while enhancing the country’s aging infrastructure; risk-free Treasury yields at 0.00% should start to look less and less attractive, prompting investors to look into stocks and non-government bonds again. Just a few last minute items to add to the holiday investment-shopping wish list.

Sadly, Bernie Madoff saw to it that his investors will have a holiday season to forget as the list of prominent victims grew each day: Real estate mogul Mort Zuckerman, U.S. Sen. Frank R. Lautenberg, D-N.J., Hollywood movie mogul Steven Spielberg, Spanish bank Banco Santander SA (ADR: STD), France’s BNP Paribas SA, Nomura Holdings Inc. (ADR: NMR), and many charitable foundations and non-profit organization were among the people and institutions victimized.

Plenty of finger-pointing has been directed at the U.S. Securities and Exchange Commission (SEC) for failing to uncover some rather obvious signs of wrongdoing through the years. As Money Morning reported even before the official announcement was made, U.S. President-elect Barack Obama tapped FINRA Chief Executive Officer Mary L. Schapiro to head the SEC during this time of turmoil. Congrats on the appointment, I guess?

The Detroit Big Three automakers received early holiday cheer as the U.S. Treasury Department will release $17.4 billion of Troubled Asset Relief Program (TARP) money in return for potential equity stakes and other concessions from management and unions.  General Motors Corp. (GM) and Chrysler LLC will be the recipients, while Ford Motor Co. (F) pursues – for now – the go-it-alone strategy. Meanwhile, Chrysler will be shutting down all of its North American production plants for at least a month and also will begin charging dealers large fees on unsold cars that remain on their lots after prolonged periods.  In perhaps a sign of things to come, a consortium of 14 companies – including 3M Co. (MMM) and Johnson Controls Inc. (JCI) – have asked for $1 billion in government funding to begin manufacturing state-of-the-art batteries for electric cars.  The move is reminiscent of action taken by computer chip firms decades ago that helped make the industry more competitive domestically. (Johnson Controls also announced last week that it would invest $90 million to open a lead-acid-battery-production plant in China’s green-power energy industrial center in Changxing Economic Development Zone of Zhejiang province, Alibaba.com reported).

Energy traders disregarded the decision by the Organization of Petroleum Exporting Countries (OPEC) to cut production by a record 2.2 million barrels a day, fearing lack of compliance by its members. Instead, traders chose to focus on the shrinking demand in the sluggish economy as oil prices briefly fell below $35a barrel to levels not seen since 2004.

Goldman Sachs Group Inc. (GS) reported its first-ever quarterly loss and Morgan Stanley (MS) followed with a shortfall of its own.

FedEx Corp. (FDX) posted a higher profit, but gave a dire outlook and announced major compensation cuts for senior management (and benefits cuts for the rank and file).  Stocks were relatively flat as investors digested the latest on Madoff, the auto bailout, and significant Fed actions.

Economically Speaking

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

Too bad Fed Chief Ben S. Bernanke couldn’t punctuate that last statement with a hearty “Ho, ho, ho – happy holidays.”

After setting the target for the Federal Funds rate at 0.00% to 0.25%, the Federal Open Market Committee (FOMC) policymakers revealed they are studying other measures and may purchase U.S. Treasuries at some point in an effort to stimulate the financial markets.
There are already some signs that the central bank’s action already are working. Mortgage rates have dropped dramatically and borrowers are taking advantage of refinancing opportunities to save on future interest payments.  Investors are finding value in corporate and municipal securities, as certain high-quality issues are yielding more than 6% more than comparable Treasuries. Meanwhile, Japan’s central bank followed suit with a rate cut (to 0.1%) of its own.

More details of the Obama stimulus plan emerged during the week and his economic team pegs the total package at about $800 billion (or more than $1 trillion by the time Congress adds its required “pork.”).  Tax cuts of up to $100 billion will serve as the most immediate stimuli, with construction (infrastructure), energy and healthcare among the industries that will benefit the most over time.

The data of the week revealed that his package can not arrive soon enough.  Housing starts fell by 18.9%, to a record low, and declining building permits did not offer much promise for future construction. Another forecasting release, leading economic indicators, fell for the second consecutive month; in fact, over the past six months, the index has experienced its worst decline since 1991.

The inflation picture remains favorable, though naysayers find pessimistic views in that data as well.  The November consumer price index (CPI) fell 1.7%, the largest decline on record (since 1947), as gasoline prices plummeted by 29.5%. While the deflation-mongers claim that falling prices will force consumers to delay purchases (for when they become even cheaper), others point out that gas purchases can not be delayed, as people have to get to work (and few are choosing to ride their bikes or shift into mass transportation).  In reality, plunging gasoline serves as a stimulus package without any government interaction (though OPEC is getting involved).

Weekly Economic Calendar

Source: If Holiday Retail Stats Don’t Have Economists Saying “Humbug,” Tuesday’s GDP Report Certainly Will

Of all the articles covering the scandal, that title from the Financial Times sums it up best. The opening of the piece is pretty good too:

Nothing stupefies like money. Even the savviest investors tend to look the other way when extraordinary returns are being made. This unfortunate human trait is the fuel behind speculative bubbles and the magic behind all financial scams.

No one, it seems, has exploited this as blatantly in recent times as Wall Street bigwig Bernard Madoff, a former Nasdaq chairman arrested this week for allegedly running the biggest dollar Ponzi scheme of all time.

The scale of the fraud is staggering. Tens of billions have been lost – perhaps as much as $50 billion over many years. Wealthy families, numerous charities, and even college trusts have been all but wiped out.

The Palm Beach Country Club, where Madoff recruited many of his victims – er, investors – is said to be in a panic. Perhaps the largest private victim is Carl Shapiro and family, who had known Madoff for 50 years and had $545 million invested.

A number of large players were caught in the scam too. Britain’s HSBC Bank may have lost as much as $1 billion. Banco Santander had more than $3 billion in exposure through its money management arm. Even the State of Massachusetts had skin in the game… the list goes on and on.

The Biggest Red Flag

There were plenty of red flags, but Madoff’s reputation gave him a pass with investigators and regulators alike.

As far back as 1999, forensic whistleblowers had reported Madoff to the SEC as a fraud. Barrons ran an article in 2001 openly wondering how Madoff did it when no one else could. In hindsight there were many small things… skeptics had been asking questions for years, but they were always waved off.

The biggest red flag of all, from a trading point of view, was the silky-smooth consistency of Madoff’s returns.
The steady gains with virtually zero losses were exactly what enthralled Bernie’s clients, when they should have been warned away.

Charles Gradante, founder of hedge fund consulting firm Hennessee Advisors, is one of the skeptics who steered clear.

“He only had five down months since 1996,” Gradante notes. “There’s no strategy in the world that can generate that kind of performance. But when people would come to him and say, ‘How did I make money this month?’ he didn’t like it. He would get upset with people who probed too much.”

In the real world, returns just don’t go up in a nice straight line. Mother nature is messy… markets are messy… and nothing works 100% of the time. But people will pay big bucks to avoid facing up to that truth.

Some of the biggest losers in this mess will prove to be the “funds of funds” – investment pools that allocate money to traders on behalf of their clients. The funds of funds who put billions with Madoff all claimed to be practitioners of deep due diligence. Now they look like useless fools.

On one of my trips to New York two years or so ago, I asked a fund of funds manager what their ideal trader looks like. “The best guys are the ones who deliver that steady 1 to 2 percent a month like clockwork,” he told me.

I thought the idea was dangerous even then, and wrote as much to readers that it would all end in tears. But a clockwork 1 to 2 percent is what the funds of funds wanted… so that’s what Bernie Madoff delivered.

Variations on a Theme

When I first read of Bernie’s loss-defying equity curve, four other exercises in smoothing folly came to mind:

• Ralph Cioffi and Matthew Tannin, managers of the Bear Stearns “High Grade Structured Credit Strategies Fund” and, even more laughably, the “High Grade Structured Credit Strategies Enhanced Leverage Fund.” These guys made money every month for something like 40 months in a row. Then they blew up. Then Bear Stearns blew up.
• Jack Welch, the hero CEO of General Electric whose legacy was later tarnished by the reveal of his “massaged earnings” technique. Under Welch, GE managed to hit growth targets with bull’s eye precision year after year after year. The Street loved it… later it was revealed that Welch had more than a little help from GE Credit (the creative finance arm) of the sort that would be frowned upon today.
• Victor Neiderhoffer, a naked options seller who blew up his clients not once, but twice within a decade. For much of the 1990s, Niederhoffer was rated the top hedge fund manager in the world… until the Asian financial crisis blew him up in 1997. A few years later Vic got back in the game… again posted award winning returns… and blew up in 2007 for a second time, to the tune of 75%.
• Long Term Capital Management, perhaps the most arrogant hedge fund of all time. LTCM had not one but two Nobel laureates on staff. Their strategy was self-described as vacuuming up nickels all over the world that others weren’t smart enough to see. What they were really doing, it turns out, was snatching nickels from the path of bulldozers.

In all these cases, the strategies in question worked smoothly and superbly for quite a long time – until one day they didn’t. It’s like the old trader’s saying… you can take your volatility in small doses, or you can take it all at once. Which one is up to you.

Fraud Prevention is the Easy Part

In keeping with human nature, people will likely draw the wrong lesson from the Madoff fiasco. They’ll focus on the fraud part – the importance of making sure whoever manages their money is not a charlatan.

This is important obviously. But the fraud aspect is actually one of the easiest things to prevent, once one learns to pay attention.

There were many working parts to the setup, but one was absolutely vital. Madoff was only able to pull off the scam because he cleared his own trades. He acted as his own broker-dealer and used a three-person accounting firm holed up in a strip mall to handle the firm’s books. When you’re running $17 billion in assets, that’s insane.

Any normal hedge fund would have been set up with a “prime broker” – a respected third party custodian to handle the assets and book the trades. That would have made it impossible to commit fraud the way Madoff did. When a legit third party holds the assets, there’s no way to falsify the results.

This is probably why Madoff never registered as an outright hedge fund. He knew that doing so would prevent him from carrying out the scam in full.

If Madoff’s returns were real, he could have made hundreds of millions of dollars in “2 and 20″ incentive fees every year, instead of leaving those fees on the table and merely collecting commissions. But as a full-blown hedgie, his books would also have been subject to more scrutiny… so Bernie took a pass on hedge fund status in order to maintain a low profile.

In passing up those huge fees, Madoff’s lack of greed was the dog that didn’t bark. Funny old world innit.

And furthermore in that respect, it’s ironic that hedge funds could get the most political heat from this whole deal. If anyone should be tarred and feathered, it’s the SEC, who had ample reason to check out Madoff through the years and never did.

Know the Risks

The more subtle-yet-vital lesson from this whole Madoff fiasco, in my opinion, is the importance of understanding the strategy.

If you can understand how a trading or investing strategy makes money – the guts of how it really works, good and bad, warts and all – then you can also understand the risks.

The most robust trading and investing strategies are logical. They don’t take rocket science or complicated math or a PhD in physics to understand.

And yet, Madoff’s investors didn’t apply this simple rule of thumb. They took his explanations at face value, even when those explanations didn’t make sense. The strategy was laid out in simple fashion, but the returns literally didn’t add up.

A few savvy investors, knowing the official line had to be bogus, figured Madoff must have been doing something he didn’t talk about… maybe even something illegal… but they figured it was no problem as long as their profits were safe. Call that the most cynical trade of all.

My one hope from all this is that the Wall Street love affair with silky-smooth returns and artificial stability comes to an end (or at least goes into remission for a good long while).

On a larger scale, we run into the same type of “smoothing” problems when our government tries to iron out the natural fluctuations in a free market economy. And what bigger Ponzi scheme exists than social security… but I’d better end here before going too far down that road.

The sooner we realize there’s no free lunch – and no such thing as investing without healthy ups and downs – the better off we’ll be.

Source: Thanks for the Memories (and the $50 Billion)

Felipe Reis, an analyst for Banco Santander SA (ADR: STD), yesterday (Monday) slashed his target price for the U.S.-listed shares by more than half, stating that the worldwide outlook has become “more challenging.”

Reis, who previously had placed a year-end 2009 price target of $40 a share Vale’s U.S.-listed American Depository Receipts (ADRs), now says the shares of the Rio De Janeiro-based mining-and-metals heavyweight will trade at $18 at next year’s close. If you’re keeping score, that’s a reduction of 55% from his prior target. But it still represents a 59% gain from yesterday’s closing price of $11.32 a share.

”We are adjusting our estimates for Vale in order to reflect the more challenging scenario in the commodities market,” Reis wrote in a research missive, noting that the reduced target price takes into account “the significant global economic slowdown.”

In related news yesterday, Merrill Lynch & Co. Inc. (MER) cut its 2009 economic-growth forecast for Brazil to 2.9%, from a previous estimate of 3.1%, as the lagging effect of scarcer credit may be deeper than thought.

The Brazil exchange-traded fund, theiShares MSCI Brazil Index (NYSE: EWZ), was the focus of a recent Money Morning “Buy, Sell or Hold” column, and soared as much as 42% in six days after it was recommended as a “Buy.”

Source: Hot Stocks: Despite Lowered Target, Vale Still Poses Potential 59% Gain, Analyst Says

Editors Note: “Hot Stocks” is a new Money Morning feature that analyzes the investment outlook of global companies that are in the news. This is the sixth installment of this ongoing investment series.

This from Taipan Daily’s Emerging Markets blog:

Late October, Brazil and Argentina announced that their governments would buy up private assets in financial markets.

Brazil’s plan would allow its state-controlled banks (Banco do Brasil and Caixa Economica Federal) to buy stakes in private financial institutions. Argentine President Cristina Fernandez de Kirchner announced that the government would take over the $30 billion private pension fund.

These announcements pushed Latin American markets well into the red, but they also knocked Spain’s Ibex index off 184 points, or 2%.

That should come as no surprise. Spain and Latin America have many economic ties, and some Spanish companies do so much business across the pond that 29% of net profits come from that region.

So when news of nationalization hit last week, naturally Spanish markets shuddered… With good reason.

Just look at Bolivia and Venezuela, both controlled by heavily nationalistic leaders.

Venezuela has had three major blackouts this year. Some areas spent more than two weeks without power at a time. Bolivia continues to buy up local and international stakes in its natural gas pipeline infrastructure, but it’s been shipping less than 50% of its contracted amount of natural gas to Argentina since September.

Problems like this led to a severe power crisis last summer, and forced Argentina to buy energy from Brazil.

So the question is… Will government intervention result in protection from global markets, or will pensioner and investors alike be holding worthless papers and wondering where all their money went?

And how will markets in both Latin America and Spain respond?

We know the first knee-jerk reaction was not good. In fact, after the news, Argentina’s main index fell 8.3%, Brazil’s fell nearly 7%, and Mexico’s dropped more than 4.5%.

And yet, markets started to rally back a couple days later… And get this: Spanish banks are posting jumps in earnings, thanks in part to their Latin American divisions. That flies directly in the face of what some analysts were saying last week after those nationalization announcements.

Let’s take a closer look.

Banco Santander (NYSE:STD), Spain’s largest bank, announced net profits from its Latin American units climbed 6% in the first nine months this year compared to the first nine months of 2007. And the group’s net profits rose a collective 9.1% for the past nine months, and 4.3% in the third quarter alone.

Here’s what’ll blow you away though… The bank’s third-quarter profits for Latin America clocked in at 1.12 billion euros (US$1.45 billion) – an all-time high for the group.

I know what you’re thinking, “Okay, those numbers are good, but it’s only a matter of time before bad loans and credit crunches catch up to these guys, right?”

Not quite…

You see, Spanish banks operate differently than other international banks. They chose not to buy any of the risky subprime mortgages during the banking heyday and the housing bubble.

Actually, one Spanish bank, BBVA Group (NYSE:BBV), who also posted good earnings for the third quarter this year (net profit is up 5.6%), even called U.S. banks “immoral” lenders.

Have non-performing loans (NPLs) increased? Sure… BBVA’s NPL ratio jumped from 1.2% to 1.5% and Santander’s ratio climbed to 1.6% from 1.3%. But get this… Santander’s loan coverage ratio is at 116%, meaning it has enough cash to cover those non-performing loans. BBVA’s coverage ratio is even higher at 127%.

These guys are at rock-bottom prices, and I consider both strong companies. Both have sizable dividends as well. Could they go lower? Yeah, maybe. We’ve watched these financially stable companies get halved over the past year, just for being in the financial business.

The IMF still maintains that Latin America will weather this storm… that countries are expected to deal with this current crisis better than previous crises… and that the region will grow 3% next year, which is close the emerging market average forecast.

It’s time to take a wide-angle, long-term view on growing markets with strong companies. That’s Latin America and these two companies.

Source: Latin American Investments: A Hot Bed of Opportunity

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

This from Money Morning:

Brazil’s economy has been given a second chance. And so have prospective investors.

Brazil will use that second chance well – shouldn’t we?

Although there are a number of ways to play this promising “BRIC” (Brazil, Russia, India and China) market, including some excellent companies, the best way to capitalize on Brazil’s terrific prospects is through the iShares MSCI Brazil Index (NYSE: EWZ).

Brazil’s Shrewd Game Plan for the Current Financial Crisis

Vale (ADR NYSE: RIO), formerly known as Companhia Vale Rio Doce, is the largest exporter of iron ore in the world. It has thrived and continued to expand production of this critical resource, supplying China, Japan, Europe and other major global steel-making operations.  The story behind Petrobras Energia Participaciones SA (ADR NYSE: PZE) is even more impressive: After decades of government initiatives focusing on oil self-sufficiency – which includes deep-sea drilling and the now-vaunted sugar-cane ethanol program – Brazil achieved that goal last year. Now, with the biggest oil discoveries in the world in decades, Brazil is well on its way to becoming an oil superpower.

As President Lula said, “God has given Brazil one more chance.”

And us, as well.

Late last week, Brazil’s hopelessly mismanaged neighbor, Argentina, had to seize its privatized pension fund money in order to meet its fiscal obligations. We’re also watching as Hungary, Belarus and the Ukraine approach the International Monetary Fund (IMF) for help.  This directly contrasts with Brazil, which has amassed $200 billion in foreign reserves, having become a net creditor of the world.

So, in this crisis, both the Central Bank of Brazil and the Brazilian government have acted very quickly to backstop the liquidity effects against their banks.  The Central Bank of Brazil has been continuously superbly managed, despite changing administrations: and is very experienced in crisis management. It is currently managed by Henrique Meirelles, a highly experienced and greatly respected international banker. Meirelles has operated in the tradition of Brazil’s inflation-fighting central-banking pioneer Gustavo Franco.  Franco was one of the economic advisers who put together the Plano Real, which brought Brazilian inflation down dramatically under former President Fernando Henrique Cardoso. Franco was followed at the Central Bank by Arminio Fraga, formerly associated with George Soros in the Quantum Fund, and finally by Meirelles, who was formerly with Fleet Bank.

It’s important to note that the Lula administration has many officials who have previously held senior positions with major international banks.  This is a clear indication of professionalism, transparency and commitment to serious macroeconomic and monetary policy management.  No more “brincadeira” – playing around.

President Lula went on to say that the government will buy bank stakes in order to shield its financial institutions from the global crisis.  This is happening today, as the government’s largest banks have been authorized to buy stakes in Brazilian banks.  Much like the U.S. Federal Reserve has done in here in the United States, the Brazilian Central Bank also has been authorized to enter into swap operations with other central banks in order to restore liquidity to the Real, which has been under pressure.

To add further liquidity, the Brazilian Central Bank has reduced minimum reserve requirements for the banks, extended an almost $2 billion line to the banking system to finance exporters and injected some $71 billion to ease liquidity.  The Central Bank explicitly requires the banks to lend the money and monitors closely their activities to prevent them from instead using the capital to buy – and sit on – government bonds.

The Brazilian Central Bank also has had to resort to selling only about $23 billion of its more than $200 billion in total reserves, in order to cushion the decline of the Brazilian Real. The upshot: Brazil today operates from a position of macroeconomic strength, like China, India and Russia.

And the Central Bank has stimulated housing by easing liquidity requirements and encouraging banks to lend more.  This policy will soon gather more strength. Similarly, the government banks, rather than international investors, are the most likely to finance a huge electricity project coming for bid. And Brazil’s plans for a major infrastructure build-up should not have problems obtaining financing.

For example, Petrobras should easily be able to finance the estimated $163 billion needed over five years to continue developing its ambitious mega-oil project out of its own cash flow, government and bank financing and profit-sharing arrangements where it chooses.   Vale and other major exporters should likewise have little difficulty in moving forward. These companies, like the government, are committed to continuing with their long-term investment plans, despite the current problems.

Nor have Brazil’s market-supporting measures stopped there. Brazil has required all companies to report their derivatives positions and even to estimate future potential losses under certain scenarios on a quarterly basis, starting immediately.  This will greatly increase transparency, dispel fears and increase confidence.  Some companies saw their currency derivatives positions get hit hard in the recent sell-off.  But these hits, which in some notable cases wiped out the quarter’s profits, are a one-time effect, so it represents a buying opportunity in those stocks.

Finally, the Brazilian banking system is sound, with strong capitalization and low delinquencies.  Credit expansion has been strong in the recent years, but not overdone.  And banks like Spain’s Banco Santander SA (ADR NYSE: STD), government banks and others are taking advantage of the crisis to buy loan portfolios from their weaker rivals, as has been the case in most liquidity crunches in emerging markets.

The critics will refer to this crisis as the first major test for Lula.  And many doubt whether he will resist the temptation to throw monetary and fiscal prudence out the window.  But Brazil, as has been seen for decades, is much more than just Lula.  Its technocratic administration and central bank have decades of experience in crisis management. Brazil’s strong local companies, which are world leaders in many industries, and committed investors, including major multinational companies, are heavily vested in the country’s success.

Going for Growth

As the Brazilian government has done in the past, I expect it to stay the course for the long term, to maintain its inflation-targeting discipline (as the Central Bank recently announced), and stimulate its economy as inflation drops markedly. That will keep Brazil in the running to be one the engines of growth in the world for the next couple of decades.

As we’ve seen, the country’s prudent monetary and fiscal policies, coupled with its solid macroeconomic position, strong reserve position, and controlled inflation will lead to good growth. Gross domestic product  (GDP) is expected advance at a rate of between 4% and 5% next year. And since only 13% of GDP comes from exports, Brazil will have lots of room to maneuver.  The slowdown in the advanced economies will give Brazil – as well as India, Russia and other emerging economies – room to start cutting domestic rates as inflation abates, just as China is doing right now.

In China, savings are 10% of GDP more than investment, so a slowdown in foreign capital inflow to China is a blessing, since it will allow the Beijing government to deploy its own capital to work and increase China’s internally driven growth as opposed to export-driven growth.  The same phenomenon will be pervasive throughout the emerging markets that – like Brazil, India and China – have not squandered their newly found wealth.

Hence, at the current prices, Brazil is – if you’ll pardon the Wall Street slang – a “screaming buy.”  In fact, as we speak, foreign investors are flying in droves to Brazil to buy beachfront property at a discount.  Prices of financial and real assets have been hit by excessive fears of a Global Depression.  When you see that G7 nations have injected more than $3 trillion into their economies in order to backstop the credit crunch, and another economic stimulus plan in the United States is almost a given, you have to realize that this will have an enormous positive impact on the fragile global market situation we are seeing today.  As the credit markets thaw out, despite ongoing hedge fund de-leveraging, we will see renewed waves of buying and Brazilian financial assets will be amongst the biggest winners.  Do not be left to watch from the sidelines as I once was.

Recommendation: Buy iShares MSCI Brazil Index (NYSE: EWZ) in increasing increments over the next eight weeks.  This means that you will be increasing the amount of money deployed every week, until you’ve invested the total amount that you’ve set aside for this ETF purchase, just before the year comes to the end of the year.

PS. This is a cut version of Horacio’s popular ‘Buy, Sell or Hold’ column, published every Monday on Money Morning. For a more in-depth report on Brazil, follow the link below.

Source: Buy, Sell or Hold: iShares MSCI Brazil Index

“The global market has ceased to function,” British Prime Minister Gordon Brown said yesterday at a press conference in London. “The banking system must be sounder, and that is why we are putting the capital in.”

Under the plan, the U.K. Treasury will provide $43.5 billion (25 billion pounds) to recapitalize banks and boost their Tier 1 capital ratio. A bank’s Tier 1 capital ratio is a key indicator of the firm’s financial strength. An additional $43.5 billion (25 billion pounds) will be available if needed.

In addition, the Bank of England, the nation’s central bank, will increase the amount of funds available for short-term lending to $346 billion (200 billion pounds). The plan further guarantees an additional $432 billion (250 billion pounds) in loans.

“The Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity,” the central bank said in a statement, The Financial Times reported. “In its provision of short-term liquidity the Bank will extend and widen its facilities in whatever way is necessary to ensure the stability of the system.”

The Bank of England also cut its benchmark lending rate a half-point bringing it to 4.5%. [Please click here for a related story on the coordinated global central bank rate cuts in today’s issue of Money Morning.]

The following banks plan to take advantage of the government assistance:

• Abbey National PLC, a wholly owned subsidiary of Spain’s Banco Santander SA (ADR: STD),
• Barclays PLC (ADR: BCS),
• HBOS PLC (ADR: HBOOY),
• HSBC Holdings PLC (ADR: HBC),
• Lloyds TSB Group PLC (ADR: LYG),
• Royal Bank of Scotland Group PLC (ADR: RBS),
• Standard Chartered PLC,
• And Nationwide Building Society.

Other U.K. banks and building societies are invited to apply for the program as well, The FT reported.

Britain’s blue-chip FTSE 100 Index hit a four-year closing low as it dropped 5.2% despite the government’s bailout package and the rate cut.

“These measures will not, of course, prevent the recession which is already underway. The aim is to reduce the risk that recession turns into depression,” Citigroup Inc. (C) economist Michael Saunders told MarketWatch.

Saunders cautioned that additional government measures could be needed to stabilize the British economy, including further capital infusions.

“We are probably not even half way through the decline in U.K. house prices. We are not even close to half way through the U.K. recession,” Saunders said. “Much of the economic pain still lies ahead.”

Source: U.K. Unveils Its Own Banking Bailout Package

But Eric Roseman says Spain’s solid regulatory system should protect its banks from the worst of the storm. This is despite a major slump in real estate that is wreaking havoc in the wider economy.

This makes the country’s biggest bank, Banco Santander (NYSE:STD), an interesting investment option…

More from The Sovereign Society:

Economic paralysis is starting to grip Europe. In the span of just four days, five European banks have either collapsed or have been bailed out by governments.

On Tuesday, the Irish government – in an unprecedented move – guaranteed all deposits for the country’s five largest banks, possibly stemming a run. Ireland is now viewed as a European safe haven amid the ongoing financial storm, because the government is protecting all deposits, unlike other European deposit schemes.

On Monday, the Benelux countries of Belgium, the Netherlands and Luxembourg collectively spent US$16 billion to keep Fortis NV alive, one of the largest financial services companies in the Low Countries. Each government got a 49% share of their specific banking operations in each individual country.

While Europe heads deeper into a credit crisis of its own, the Spanish market has been able to thus far absorb weaker financial institutions and has not witnessed even a single bank failure among its largest companies.

In Spain – where I’m visiting this week – the country’s banks remain mired in an increasingly vulnerable residential real estate market that has already peaked. Barcelona property is now in a downtrend while the rest of the region, including Costa Brava and even Costa del Sol in the south is also clearly in a major downtrend.

Unlike many other European countries, Spain has some of the best regulations governing real estate ownership, including provisions against aggressive lending. That’s something that didn’t exist in the United States or England before 2008 and it’s the root cause of the pain felt by Anglo-Saxon economies over the last 12 months. This difference might save Spain from more economic hardship.

A few of the smaller Spanish banks remain exposed to real estate loans that are souring. But I doubt you’ll see a bank panic grip Spain. The country’s biggest bank, Banco Santander (NYSE:STD), is flushed with net cash-flow and has more than two-thirds of its earnings generated outside Spain.

But aside from Spain, the rest of the region will see more bank failures. Europe is still about 6-9 months behind America’s credit cycle and we’re now seeing more signs of weakening economic growth. As this process reverses, I expect more turmoil in Europe, and more failures and bailouts.

Source: Bank Bailouts Accelerate in Europe, but Spain Will Be Spared

• Carlos Slim, the Mexican billionaire Forbes ranks as the second-richest man in the world, yesterday (Thursday) announced he purchased a 6.4% stake in New York Times Co. (NYT). Slim called the publisher of The New York Times an “attractive value” due to the stock’s 20% loss so far this year, Bloomberg News reported.

• Campbell Soup Co. (CPB) yesterday (Thursday) announced quarterly profit for its fiscal fourth quarter ended Aug. 3 increased 46% from the year ago period as the company increased prices to offset higher commodity costs. Campbell’s reported net earnings of $89 million, or $0.24 per share, compared to $61 million, or $0.16 per share for the prior year in a company statement.

• King Pharmaceuticals Inc. (KG) upped its takeover offer for Alpharma Inc. (ALO) yesterday (Thursday) to almost $1.6 billion. King raised its offer to $37 per share from its initial bid of $33 per share and said it plans to take the new offer directly to shareholders, Reuters reported.

• According to a report published yesterday (Thursday) by the Commodity Futures Trading Commission, commodity index traders only accounted for 13% of crude oil futures trading on the New York Mercantile Exchange in the first half of 2008, Bloomberg News reported. “At first glance the numbers seem inconsistent with the allegations that swaps traders and index traders are driving up the price of oil,” said Robert Webb, a finance professor at the University of Virginia.

• Bank of America Corp. (BAC) is in talks to buy Lehman Brothers Holdings Inc. (LEH), the Wall Street Journal reported, citing an unnamed source. Sources say Goldman Sachs Group Inc. (GS), also thought to be interested, will not takeover the beleaguered firm.

• Bristol-Myers Squibb Co. (BMY) yesterday (Thursday) reiterated its $60 per share offer for ImClone Systems Inc. (IMCL), even though the biotechnology company said earlier this week that a secret suitor is offering $10 a share more.

• Shares of Sunrise Senior Living Inc. (SRZ) yesterday (Thursday) reported a $31.8 million second-quarter loss. The company’s shares fell $2.56, or 13.5%, to close at $16.36 after falling as low as $16.22 earlier in the day. On Wednesday, the stock fell $1.82, or 8.8%.

• Deutsche Bank AG (DB) will today (Friday) announce the purchase of a controlling stake in Postbank, a profitable German institution worth about $14.6 billion, the International Herald Tribune reported. This opens up the door for a potential bidding war with Banco Santander SA (ADR: STD), which said Thursday that it wanted to negotiate the purchase of all of Postbank.

Source: Global Investing Roundups Friday, September 12th, 2008