However, the two largest recipients of TARP money – Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) – have yet to pay back their loans and the government is still exposed to possible losses from those two heavyweights, as well as from smaller U.S. banks.

The government netted roughly $4 billion – the equivalent of a 15% annual return – from  eight of the biggest banks that have fully repaid their obligations to the government, according to calculations by The New York Times.

Those financial institutions consist of:

• Goldman Sachs Group Inc. (NYSE: GS) – $1.4 billion in profit.
• Morgan Stanley (NYSE: MS) – $1.3 billion in profit.
• American Express Co. (NYSE: AXP) – $414 million in profit.
• Northern Trust Corp. (NYSE: NTRS), The Bank of New York Mellon Corp. (NYSE: BK),    State Street Corp. (NYSE: STT), U.S. Bancorp (NYSE: USB) and BB&T Corp. (NYSE: BBT) – $100 million to $334 million in profit.
• Fourteen smaller banks that have repaid their debt – $35 million in profit.

JPMorgan Chase & Co. (NYSE: JPM) and Capital One Financial Corp. (NYSE: COF) could yield an additional profit of more than $3.1 billion in the coming month, but the final number is dependent on how much they will pay to buy back their warrants, The Times said.

Additionally, the U.S. Federal Reserve earned $16.4 billion through the first six months of the year, thanks to a range of rescue programs – including loans to investment banks and purchases of mortgage-backed securities – while the Federal Deposit Insurance Corp. (FDIC) saw a profit of more than $7 billion on the fees it charged through a program that guaranteed debt issued by banks. Still, the FDIC has agreed to assume most of the risk on $80 billion in loans and other assets, and expects to eventually have to cover $14 billion in future losses on deals cut so far, according to The Wall Street Journal.

“Taxpayers should heave a sigh of relief that the investment in banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the New York University’s Stern School of Business.

The government said last year that its decision to purchase preferred shares from hundreds of banks ravaged by mortgage defaults would yield a positive return, including a 5% quarterly dividend and warrants to buy stock in the banks at a set price over 10 years.

As many banks stanched their losses and began to turn a profit, the government authorized them to buy back the preferred stock, make the dividend payments for each quarter since October. Banks also were permitted to buy back the warrants, which had a low fixed price – and which provided therefore provided a windfall for the government as the markets rallied.

The U.S. should consider imposing an automatic ban on dividend payments by lenders when “the bank stock price plummets and the banks aren’t doing well,” New York Federal Reserve Chairman William Dudley told CNBC, expressing concern over how the payouts could end up dissipating the banks’ capital.

Should a bank lose capital because of a falling stock price, it could raise more capital by issuing debt that is convertible, Dudley said.

Had private investors taken matching stakes in the banks in October, they would have tripled their investment to roughly $12 billion, or 44% on an annual basis, according to University of Louisiana at Lafayette finance professor Linus Wilson, who analyzed the data for The Times. But there’s a good reason for that. Under this hypothetical scenario, the private investors would have demanded a higher rate of return, bought in at a lower price, or both – because of the high risk that they would have been incurring.

But the government wasn’t in this to make a profit – it was working to stabilize a financial system that was quickly losing the public’s confidence, experts note.

“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions, told The Times.

Threat Posed by Loss-Shares

Despite the encouraging news that taxpayers are getting strong returns on their reluctant investments, the loan guarantees invested in the two largest TARP recipients – Citigroup and Bank of America – have not yet been repaid. Citi received $50 billion in TARP funds, while BofA got $45 billion.

In the last month, Citigroup has seen its stock surge roughly 58%, along with a 19% return in the shares of BofA, which leaves the U.S. government sitting on a combined $18 billion of profits from the warrants it purchased last year.

Those banks also hold troubled mortgages and other loans that no one can put a value on – which is why these so-called “toxic assets” have yet to attract buyers.

“No one has a good handle how much is out there,” Elizabeth Warren, the chairman of the Congressional Oversight Panel who acts as the so-called “TARP watchdog,” told Reuters Television in an interview last month. “Here we are 10 months into this crisis…and we can’t tell you what the dollar value is.”

More than 50 deals brokered by the FDIC to absorb losses at small banks affected by the financial crisis still remain in place. These agreements to assume the risk of loans and other assets from the consolidation of failed banks are known as “loss-shares,” and are an important inducement for healthy banks to take over busted institutions.

The FDIC brokered the sale of Alabama’s Colonial BancGroup Inc.’s (OTC: CBCGQ) deposits to BB&T after Colonial failed. It also agreed to help BB&T buy Colonial’s $15 billion portfolio of loans and other assets and absorb over 80% of any future losses. Under the deal, BB&T’s losses are capped at $500 million and – in the unlikely event the entire portfolio becomes worthless – the FDIC is on the hook to cover the rest.

The FDIC sees these deals as a way to keep loans and other assets in the private sector, as well as mitigate the cost of cleaning up the industry.

It would cost the FDIC considerably more to simply liquidate the assets of failed banks, especially with more than 400 banks on its “problem list.” Loss-share deals will cost $11 billion less than if the agency seized assets and sold them, The Journal said, citing the FDIC.

So far this year, 109 banks have failed – quadruple the amount of failures in 2008. The FDIC’s recouping any lost money from the loss-share deals, many of which are in place for up to 10 years, is dependent on the recovery of the economy

Some worry that bankers may tire of the partnerships with the FDIC and not work toward fixing bad loans because the bulk of the losses will fall to the government. But agency officials maintain that because banks still have a “material” exposure, they will be reluctant to do this.

“There is certainly an incentive for the banks to play fair and do right, but there is never a limit on the ability of the private sector to shift cost to the government,” former FDIC general counsel John Douglas told The Journal.

A typical deal has the FDIC agreeing to cover 80% of future losses on a big portion of the assets, and 95% on the rest. However, the FDIC does not expect to see the 95% scenario play out on any of the deals it has made so far.

Source: U.S. Turning Profit on TARP, but Big Loans Remain in Banks’ Hands

Source: Investment News Briefs Tuesday, July 14, 2009

Traders have grown increasingly fearful in recent weeks that the powerful surge in the three major U.S. stock indices – one of the strongest in history – may not have been justified because of an ongoing economic recovery that’s not as strong as originally believed.

“There’s no question in my mind that the economy is improving,” Phil Orlando, chief equity market strategist at Federated Investors, told The Associated Press on Friday. “But investors are betting on some sideways consolidation rather than a continuation of a sharp spike in share prices.”

All the major indexes closed the week down for the first time since the week of May 11. The Dow Jones Industrial Average lost 3%, theStandard & Poor’s 500 Index fell 2.6%, and the Nasdaq Composite Index 1.7%.

Stocks returned to the whipsaw trading pattern investors had grown wearily accustomed to in the months before the rally got under way.

Stocks fell early in the week as a handful of weak economic reports – including news that industrial production had fallen for the seventh straight month – contradicted other reports that seemed to depict a gradual improvement in the American economy.

But some modestly upbeat economic reports sent U.S. share prices up a bit on Thursday; one report demonstrated that the overall number of people drawing unemployment benefits fell last week for the first time since the start of January.

But it wasn’t until stocks finished the day mixed on Friday – with financial, retail and tech shares gaining, while energy and utility shares dropped – that the three major indices finished with their first weekly loss since the start of May.

Last week was a loss. And the week before the three key indices each rose less than 1%.

“It’s not going to be a one-way ride,” Keith Walter, portfolio manager of Artio Global Equity Fund, told reporters.

Since periods of powerful market overperformance are usually followed by a period of sharp underperformance, institutional players have been looking for a down week.  Usually, a 40% surge like the one seen in the S&P 500 index takes years to develop, not months.

But here’s the question: Does last week’s market pullback have more to go, or can it still move higher after two consecutive weeks of sideways trading?
The conventional wisdom is calling for a stretch of choppy trading that will last through the summer, a period during which there’s low volume, until July when Corporate America begins announcing second-quarter earnings.

Market Matters

As the Dow finished the week in the “red,” it also turns out that its push into positive territory for the year was relatively short-lived.  Just one trading session beyond the index’s surge into the “black,” traders surveyed the economic landscape, evaluated the new regulatory environment, reconsidered the ballooning deficit (not even including health care) and chose to book some profits.  While the other major indexes remain profitable year-to-date, many investors believe the markets stand at a crossroad as they attempt to determine whether the recent move has been:

• A mere blip on the radar screen, amid a much-longer bear market.
• A much-too-fast run-up for a rebounding economy that that still faces a plethora of challenges.
• The start of a new bull market that simply is taking a week off to digest all the “euphoric” news.

The analysts, TV pundits, and bloggers maintain no shortages of views about the markets’ future direction.  Only time will tell.

As expected, major financial institutions rushed to pay back $68 billion in Troubled Assets Relief Program (TARP) money and get out from under the strong arm of the government.

JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc. (NYSE: GS), and Morgan Stanley(NYSE: MS) highlighted the list, while Citigroup Inc. (NYSE: C), Wells Fargo & Co. (NYSE: WFC), and Bank of America Corp. (NYSE: BAC)are among those still seeking Uncle Sam’ approval for every action.
Meanwhile, Standard & Poor’s downgraded 18 related institutions, including a few that paid back the bailout money - BB&T Corp. (NYSE:BBT) and U.S. Bancorp (NYSE: USB) – and warned about the industry’s future

The Obama administration revealed plans for the most significant financial regulatory overhaul since the Great Depression.  The proposal expands the oversight role of the U.S. Federal Reserve, and includes higher capital and liquidity requirements, stricter reviews over hedge funds and certain derivative products, and the creation of a new consumer protection agency.  U.S. Treasury Secretary Geithner detailed the plan before the Senate and was met with mixed (but predictable) reactions…Republicans thought it was excessive, while Dems felt it didn’t go far enough.

If both sides dislike it equally, perhaps it’s a good plan?

Volatility returns to the markets as the VIX (Chicago Board Option Exchange Volatility Index) surged past the critical 30 mark early in the week, a sign generally associated with stock-market pessimism.  Bonds continued their ongoing roller-coaster ride as some fixed-income investors remained concerned about the global demand for U.S. debt, while others turned to the asset class as a flight-to-quality from riskier securities.

The worries continued as both China and Japan reportedly cut back their treasury holdings in April, a worrisome development considering the upcoming Treasury auctions will add a record $104 billion of government securities to the Street.

Oil hovered around the $70 a barrel level and gas prices increased for 52 straight days as consumers began to feel the pinch just in time for the summer holiday travel season.  Options expiration from “quadruple-witching Friday” brought additional volatility as each major equity index gave back some ground for the week on less-than-favorable reports from the likes of Best Buy Co. (NYSE: BBY) and FedEx Corp. (NYSE:FDX).

Market/ Index	Year Close (2008)	Qtr Close (03/31/09)	Previous Week (06/12/09)	Current Week (06/19/09)	YTD Change
Dow Jones Industrial	8,776.39	7,608.92	8,799.26	8,539.73	-2.70%
NASDAQ	1,577.03	1,528.59	1,858.80	1,827.47	+15.88%
S&P 500	903.25	797.87	946.21	921.23	+1.99%
Russell 2000	499.45	422.75	526.84	512.72	+2.66%
Global Dow	1526.21	1347.38	1,694.76	1,633.70	+7.04%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	2.68%	3.79%	3.79%	+155 bps

Economically Speaking

While U.S. Federal Reserve Chairman Ben S. Bernanke will be gaining enhanced powers under the federal financial system makeover, he must be wondering whether he will be around to experience them.  Despite the unprecedented challenges he has faced over the past few years, U.S. President Barack Obama has been tightlipped about whether he will reappoint Bernanke for another term when the central bank chairman’s current stint expires in January.

“Ben Bernanke has handled his position extraordinarily well under extraordinary circumstances…but I’m not going to make news on that right now,” President Obama said.

Some Fed watchers believe that President Obama has Lawrence Summers, the former U.S. Treasury secretary and present National Economic Council chairman, in mind for the position.

On the economic front, inflation data highlighted the week’s releases as both producer price index (PPI) and the consumer price index (CPI) for May were reported as below expectations.  While certain naysayers pressed forward on the scary “deflation” argument, other naysayers point to the rapid rise in energy prices as proof that the dreaded “I” word is merely lurking on the horizon.

For now, however, inflation is not considered “Public Enemy No. 1″ and economists will focus on housing, labor, and manufacturing for more signs of economic stability.

Turning to housing, new construction climbed by its largest amount in three months and even building permits jumped in May as prospects for the future look more promising.  Bear in mind, however, homebuilding activity still remains more than 45% below last year’s levels.

Industrial production fell more than 1% in May as automakers Chrysler Group LLC and General Motors Corp. (OTC: GMGMQ) continued shutting down plants and limiting production as they initiated their restructuring plans.  While initial jobless claims actually increased slightly in its most recent weekly release, total insurance claims actually fell for the first time in five months.  Still, the labor market remains the primary concern as the economy begins to show some signs of improvement.

On that note, the leading economic indicators (LEI), an index thought to forecast economic activity for the next three to six months, experienced its best showing since March 2004.

Weekly Economic Calendar

Source:  Market Stumble Heightens Worries That Economic Rebound May Not Be That Strong

The details of the repayments were as follows:

• Morgan Stanley (NYSE:MS) repaid $10 billion

• Goldman Sachs (NYSE:GS) – $10 billion

• BB&T (NYSE:BBT) – $3.1 billion

• US Bancorp (NYSE:USB) – $6.6 billion

• Bank of New York Mellon (NYSE:BK) – $3 billion

• Capital One (NYSE:COF) – $3.57 billion

• American Express (NYSE:AXP) – $3.39 billion.

Lost in the euphoric brouhaha over the TARP repayments was the dispiriting news that Standard & Poor’s had downgraded the credit ratings of 18 large American banks, including one of the seven that repaid its TARP loan!

Incredibly, the US Treasury deemed Capital One sufficiently healthy to repay its $3.57 billion loan while, at the very same moment, Standard & Poor’s downgraded the credit card firm to BBB – just two notches above “junk.” Standard & Poor’s also characterized the credit outlook for Capital One as “negative.”

We would not place much faith in the analyses of either the Treasury Department or Standard & Poor’s. But we are nevertheless fascinated by their conflicting conclusions. Maybe they’re both right. Maybe Capital One is in fine shape today, as the Treasury Department’s stress test implies. But maybe the credit card company will be in miserable shape tomorrow, as Standard & Poor’s downgrade implies.

As investors, we see these conflicting assessments of Capital One as a metaphor for the entire American financial sector. This sector is a hodgepodge of conflicting opinions, data points and risk/reward assessments. Both sides of every trade in the financial sector can point to some sort of fundamental justification. The buyers see a sector on the mend; the sellers see a sector in the mire.

Your California editor is not smart enough to know which assessment is correct; but he is fearful enough to recognize a potential tar pit when he sees one. So he’s got no problem watching others wade into the water while he remains back on the bank…at least for now.

Curiously, bank stocks have gotten worse, ever since the government told us things are getting better. Most finance company stocks have been performing poorly, ever since the upbeat headlines about the “stress test” results first crossed the newswires. The BKX Index of bank stocks has tumbled nearly 19% since the close of trading on May 8, the first trading day after the Federal Reserve announced the “better than expected” results of its stress tests on America’s 19 largest financial institutions.

The TARP repayment announcements did not alter the downward trend of the BKX. Since June 9, when the Treasury Department disclosed which banks may repay their TARP loans, the BKX Index has dropped 5%.

Apparently, the finance company sector of the stock market has shifted into the “good news is no longer good news” phase. The BKX’s dazzling 135% rally between March 6 at May 8 may have adequately “priced in” all the good news that is likely to emerge for a while from the financial services industry.

Furthermore, the conspicuous recent weakness of the BKX Index is probably not good news for the overall stock market, since financial shares have been leading the market – both to the upside and the downside – during the last year and a half.

To cite just one example of this phenomenon, between February 1 and May 31 of 2008, the BKX slumped 21% while the S&P 500 actually advanced 1%. But during the ensuing month and a half, the S&P fell 13%. The BKX initiated a similar “bearish divergence” in early December last year, as it tumbled 35% between December 5 at February 6. The S&P 500 barely budged during this timeframe, but fell 20% over the next 30 days.

Obviously, the most recent decline of the BKX does not guarantee a subsequent decline in the S&P 500. But neither does it give us a warm, fuzzy feeling. So let’s call the weakness of the BKX a warning sign. Heed the warning, if you are so inclined.

Source: On the Mend or in the Mire?

• Inflation fears were quelled at least temporarily as U.S. consumer prices were raised only slightly last month, and actually experienced their biggest drop in almost 60 years. Higher gas prices contributed to the 0.1% increase in the Labor Department’s Consumer Price Index (CPI) versus the April’s CPI, which was flat. Financial markets had expected a 0.3% increase. The CPI fell 1.3% versus the same period last year, the largest drop since April 1950. “There is no sign that there has been widespread inflation because of the Fed’s quantitative easing regime. In fact, long-term inflation expectations haven’t budged and the Fed is still ahead of curve on inflation,” economic and investment strategist John Canally of LPL Financial told Reuters.

• Four of the nation’s largest banks repaid $54.7 billion to the U.S. Treasury’s Troubled Asset Relief Program (TARP), freeing themselves of government restrictions on lending and pay.JPMorgan & Chase Co. (NYSE: JPM) repaid $25 billion, andMorgan Stanley (NYSE: MS) and Goldman Sachs Group Inc.(NYSE: GS) repaid $10 billion each, Bloomberg News reported. As Money Morning’s Martin Hutchinson reported yesterday (Wednesday), the other two banks, U.S. Bancorp (NYSE: USB) and BB&T Corporation (NYSE: BBT) repaid their debts of $6.6 billion and $3.1 billion respectively. The banks are among 10 other that agreed last week to repay $68 billion in TARP funds,Bloomberg News reported. “Our strong capital position allowed us to pay back TARP in a very short amount of time,” BB&T Chief Executive Officer Kelly King said in the bank’s statement.

• Beleaguered outdoor clothing retailer Eddie Bauer Holdings Inc.(Nasdaq: EBHI) yesterday (Wednesday) filed for Chapter 11 bankruptcy protection and said it planned to sell itself to private equity firm CCMP Capital LLC for $202 million. The sale to CCMP, known as a 363 sale, means the sale needs the approval of a judge, and other bidders could emerge. CCMP is entitled to a $5 million breakup fee if it loses to a higher bidder. Court filings show that Bank of America Corp. (NYSE: BAC), General Electric Company (NYSE: GE) and CIT Group Inc. (NYSE: CIT) will provide up to $100 million in financing during the bankruptcy case,The New York Times reported. Eddie Bauer said its 371 stores in the United States and Canada are operating as usual.

• Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) options will begin trading on the Chicago Board Options Exchange (CBOE), enabling investors to bet on the company using a technique Chairman and Chief Executive Officer Warren Buffet has rejected, Bloomberg News reported. “Usually, if you want to buy or sell a stock, you should buy or sell the stock,” Buffett said last year on the weekend of the company’s annual meeting. “Using options, four times out of five you will be right, the last one you’ll miss. I’ve virtually never used options as a way to enter or exit a position.” CBOE will offer contracts on Buffet’s conglomerate starting today (Thursday).

• FedEx Corp.’s (NYSE: FDX) losses more than tripled in its last quarter, and the company said things won’t be much better in the near future, The Associated Press reported. The nation’s second-largest package shipper reported a loss of $876 million, or $2.82 per share in the quarter ended May 30. That compares to a loss of $241 million, or 78 cents per share in the same period last year. “The operating environment for our first two quarters in fiscal 2010 is expected to be extremely difficult,” Executive Vice President and Chief Financial Officer Alan B. Graf Jr. said. The company has not yet decided whether it will have to lay off more workers or make further cutbacks due to poor economic conditions, Graf said in a conference call with investors.

• Newly sold automaker Saab secured a key court ruling yesterday (Wednesday) to cut 75% of the more than $1.28 billion (10 billion in Swedish crowns) of debt after a vast majority of creditors approved the proposal, Reuters reported.  Sweden-based Saab was sold on Tuesday to fellow countrymen Koenigsegg Group ABby soon-to-be former parent General Motors Corp. (OTC:GMGMQ).

• The annual rise in gas prices entered its 50th straight dayyesterday (Wednesday) after crude prices bounced back after an initial slump in the beginning of this week, The Associated Pressreported. Pump prices are now at a national average of $2.67 per gallon. The rising crude prices and less production has added to the typical increase in demand in the late spring and summer months as more Americans take to the roads for vacation-related travel.

• After being dogged by reports of orderless days at the Paris Air Show, The Boeing Co. (NYSE: BA) finally got a $153 million order for two single-aisle planes, The Associated Press reported. But this order pales when compared to the $6.2 billion in orders already attained by rival Airbus S.A.S. Both aircraft makers are feeling the economic crunch by the worldwide recession.

• China will use part of its $200 billion sovereign wealth fund to invest in hedge funds, according to Felix Chee, who will initially run the fund. “We will have a preference for managed accounts,” he said in an interview with Bloomberg News Wednesday at the GAIM International hedge fund conference at Monaco’s Grimaldi Forum. “The platform would like a core of single-manager funds and fund-of-funds.” Chee, is a special adviser to the chief investment officer of China Investment Corp.’s hedge fund and proprietary trading effort, “It’ll be across the spectrum of strategies,” he said. “We’re looking for the best managers and a handful of fund of funds, and when I say handful I mean five or less.”

• A prominent Wall Street analyst sees the benchmark S&P 500 Index (NYSE: .INX) breaking its all-time record by the end 2012. JPMorgan Chase & Co. (NYSE: JPM) Chief U.S. Equity Strategist Thomas Lee said on Wednesday the index should surge back above 1,500, its October 2007 high in less than three years, provided the U.S. economy sees a V-shaped recovery.  “The global economy is in the midst of a synchronized recovery,” Lee said at the Reuters Investment Outlook Summit.  Lee also reiterated his year-end 2009 target of 1,100 for the S&P 500, saying the United States will likely come out of its recession some time this summer, followed by the rest of the developed world.

• Prices on Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE:FRE) mortgage securities rose for the fifth day Wednesday, pushing yields down as they tracked a drop in rates on benchmark U.S. Treasuries, foreshadowing possible further declines in borrowing costs for new home-loans. Yields on Washington-based Fannie Mae’s 30- year fixed-rate mortgage bonds fell by 0.02% to 4.56% in New York trading, the lowest since June 3, according to data compiled by Bloomberg. Treasuries and so-called agency mortgage bonds rallied after a government report showed the cost of living rose less than forecast in May. The mortgage-bond yields are down from 5.07% on June 10, the highest level since the Federal Reserve announced plans to buy home-loan bonds in November.

• Applications for mortgages fell for a fourth consecutive week, with overall demand plunging to its lowest level in nearly seven months, according to a report Wednesday from the Mortgage Bankers Association.  Rising interest rates have tempered demand for refinancings and new purchase applications, as the industry group’s seasonally-adjusted index fell 15.8% to 514.4 for the week ended June 12, the lowest since the week ended November 21, 2008.  Rates on 30-year fixed-rate mortgages averaged 5.50%, down 0.07% from the previous week, but significantly higher than the all-time low of 4.61% set in the week ended March 27,Reuters reported.

Source: Investment News Briefs Thursday June 18, 2009

Do we believe the government’s clean bill of health on the 10 TARP escapees, and do we mark down the shares of the banks that remain in the government’s debt?

The question is a simple one. But the answer is anything but clear-cut.

At the extremes, the question isn’t difficult. Citigroup (NYSE: C) is being forced to raise $55 billion of capital through preferred stock conversion, and even then is not sure of survival. In addition to the federal TARP injections, Citi has benefited from a $300 billion guarantee of its assets. It has been forced to sell some of its major subsidiaries, including Japanese broker Nikko Cordial Securities, which it bought only two years ago. Its chief executive officer, Vikram S. Pandit, cost Citi $600 millionwhen the bank lured him into the organization by buying out his hedge fund two years ago.

That hedge fund was subsequently closed. And it’s by no means clear that Pandit has the skills needed to run a low-risk financial behemoth whose future should be oriented towards doing stuff that is very simple.

With Citi’s stock trading at about $3.50 a share, investors may feel the chance is worth taking. But given the company’s long history of serial financial disasters, it must be much more likely that the government will eventually be badgered by taxpayers into losing patience with the mess, resulting in its final dismemberment with little or no payoff for shareholders.

At the opposite end of the banking-bailout spectrum, at least two of the banks that have paid off TARP – U.S. Bancorp (NYSE: USB) and BB&T Corp. (NYSE: BBT) – seem to be in good shape, and indeed have expressed indignation at being forced to go through the demeaning TARP process at all.

Their shareholders should be equally indignant: Both banks have been forced to raise capital while their share prices were still depressed, and to slash their dividends from levels that had literally taken years to build up. It will be interesting to see whether either bank has the moxie to restore its previous dividend in full in the coming quarter. Doing so would be a sign of management that was both confident and shareholder-friendly – and of an outlook for each bank that was decidedly favorable.

Certainly, however tempting it may be for these banks to assert their strength by taking over weaker neighbors, their dividends should be fully restored as a matter of principle before they go out on any acquisition binges. The last few years have seen far too many self-aggrandizing management schemes that are engineered at the expense of shareholders, and a policy of acquisitions-before-dividend restoration would signal that management has still not received the message of how a responsible financial institution should be run.

If all the banks still in TARP were like Citigroup, and all those that had escaped were like USB and BBT, the government would have done a great job, and investors would have useful information. However, they’re not. Among the escapees is Capital One Financial Corp. (NYSE: COF). Capital One has raised $1.5 billion in new equity, but it made losses in the first quarter and is a leader in the subprime credit card segment, surely close to the next epicenter of the ongoing financial crisis. It doesn’t help that Congress has also passed a credit card reform actoutlawing many of Capital One’s favorite practices. In short, nothing will convince me that Capital One is a safe place for your investment dollars, and my best guess is that before the end of this year we will know that the government blew this one big-time.

In the final quadrant, those that have not repaid TARP but appear to be in good shape, we have Wells Fargo & Co. (NYSE: WFC) and PNC Financial Services Group (NYSE: PNC). Both appear to have been in relatively good shape from their own operations, but during the crisis bought banks of equivalent size to themselves that had made a mess of things: Wells bought Wachovia Corp. and PNC bought the Cleveland-based National City Corp. Their failure to repay TARP may mean that further problems are lurking under the hood in the banks they acquired; Wachovia, in particular, made an exceptionally foolish acquisition by spending an estimated $25 billion to buy the huge California mortgage bank, Golden West Financial, in August 2006.

But only time will tell. Both Wachovia and PNC are worth watching closely. If, during the next couple of quarters, only medium-sized problems surface, then it’s likely that these institutions will emerge stronger from their deals and will be well worth an investment.

The bottom line: Keep an eye on Wells Fargo and PNC, but don’t buy them yet. If either U.S. Bancorp (which is due to declare a dividend in the next few days) or BBT restores their previous quarterly dividends of 43 cents and 47 cents, respectively, back the truck up and buy!

Source: What TARP Banks Are Investment Grade?

I ask because moves like this trigger a spike in volatility because the risk of reversal increases. In turn, this throws up a conundrum for many investors – and hamstrings them from making the correct decision.

For example, after a strong move higher, it’s wise to lighten up on a few positions in advance of a pullback, especially the non-core positions. But invariably, the market continues to rise. Similarly, you may use a fall as a chance to buy some undervalued stocks at a discount. But what if the market keeps heading south?

It’s at this point that panic can set in.

Did I sell/buy too soon? Did I sell/buy too much? Stock market uncertainty can cause some serious stress. So how do you bet both for and against the market – specifically on individual shares – in order to alleviate some of the anxiety of being out of the market completely?

The answer is below…

Exposure To An Entire Market Through One Simple Investment

There are several vehicles that allow you to bet on the market’s direction.

Take ETFs (exchange-traded funds), for example. One of the fastest-growing areas of the market in recent years, these funds allow you to participate in a sector, industry, currency, country, etc. because they hold a specific basket of stocks that represent them.

In the financial sector, this includes the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ). These funds allow you to participate in the direction of financial stocks to the tune of three times the move of the underlying shares.

So if a normal financial ETF were to move by 2% in one day, FAS or FAZ would move by 6%. But here’s the rub: This is for day-traders only. If these ETFs really were triple up and triple down, you could buy 1,000 share of each and retire, since one would eventually go to close to zero, while the other would soar in value. Each ETF is reset every morning and the gains or losses are dependent on the trading action for that day.

There is a better way…

Unsure Of A Stock’s Direction? “Straddle” It…

Since practically no one can predict the market’s direction with 100% accuracy all the time, it makes sense to employ a strategy that allows you to hedge against the uncertainty.

You can do that through an options “straddle” play.

A straddle is when you make a bet on both the market’s potential upside and downside. The goal is for one side of the trade to move substantially higher, offsetting the losses from the other side of the trade.

For example, let’s say you’re looking at a way to play US Bancorp (NYSE: USB). The stock’s 52-week high is $42, while the 52-week low is $8, and the current price is around $19. So for the sake of this example, let’s use the $20 option.

The Upside Scenario:

• The January 2010 $20 call option is trading for $3.
• The January 2010 $20 put option is trading for $4.
• If USB hits $30, you’d make a $7 net profit on the trade.
• That’s because the put option would be $1, meaning you’d lose $3 on it. But the call option would rise to about $7, meaning you’d make $4 profit on it and offset the loss on the put.

If USB were to reach its 52-week high, you’d lose your premium on the $4 put option premium… but make $19 on your call option ($22 minus $3 = $19).

The Downside Scenario:

If USB moves to the downside, the equation is the opposite.

• If USB moves to $10, the put option would be worth $10 ($20 strike minus $10 price) and your net profit would be $6 ($10 current value minus $4 invested).
• The call option would be worth $3 at most, so the $6 would more than offset the loss.

A straddle is best used when you are unsure which direction the stock/market will move… but you know that whether it’s up or down, it will be a strong move when it happens.

Next week, I’ll tackle the Strangle trade.

Karim Rahemtulla

Source: Two Profitable Ways To Play Stock Market Uncertainty

GM dealers targeted for separation were informed by letter over the weekend, Reuters reported.

The eradication of hundreds of hundreds of American auto dealerships is merely the latest development in the ongoing dismantling of the so-called U.S. “Big Three’’ – a  process that seems likely to leave Ford Motor Co. (NYSE: F) as the last American automaker standing.

“These companies are making up for now for what they have avoided doing for years, if not decades,” industry analyst John A. Casesa, managing partner of consultantcy Casesa Shapiro Group LLC, told The New York Times. “And if the market doesn’t stabilize, this may only be Phase I.”

The moves will clearly change the entire auto-purchasing landscape for U.S. consumers. All told, nearly 800 dealers selling Chrysler brands were given notice that they would be cut off next month. These dealers represent about a quarter of the 3,200 in Chrysler’s dealership network, but account for only 14% of the company’s sales.

Without the dealership cuts, U.S. automakers will likely see their troubles continue. For instance, in its bankruptcy filing, Chrysler says it needs to streamline its distribution-and-sales operation to become more competitive. The current Chrysler dealership sells 303 vehicles per year, compared with 1,219 for a Honda (NYSE ADR: HMC) and 1,292 for Toyota. (NYSE ADR: TM).

GM is looking to close as many as 2,600 of its dealers – about 40% – by 2010. This weekend, it notified the first 1,010 that their franchise deals with General Motors would not be renewed after they expired in October. The other dealerships that will get cut are those that sell such brands as Hummer and Saturn – brands that GM plans to divest.

Both Chrysler and GM have been subsisting on government loans for months.

Just a few years ago, U.S. auto dealers were selling an aggregate 16 million vehicles annually. But after the biggest drop in vehicle sales in a quarter century, dealers are now struggling to even reach the 10-million-vehicle mark.

The letters to GM dealers did not specifically say the company would be filing for bankruptcy, but the move indicates that could well happen next month, which is when the longtime No. 1 U.S. automaker is due to submit a restructuring plan to U.S. President Barack Obama, The Times reported.

In fact, General Motors sales chief Mark LaNeve told reporters on a conference call that carrying out the plan without the benefit of bankruptcy-court protection would be nearly impossible, since state franchise laws make it “onerous and expensive” for manufacturers to force dealers out of business. Wrapped in the cloak of bankruptcy protection, however, the dealership contracts can be nullified, the The Wall Street Journal said.

Chrysler on Thursday asked its bankruptcy judge, U.S. Justice Arthur J. Gonzalez, to hold a hearing on June 3 to allow the company to reject its “contracts and unexpired leases with certain domestic dealers.”

At a time when the falling earnings are continuing to push U.S. companies to make deep job cuts, the dealership closures will add to the national rise in joblessness. The National Automobile Dealers Association (NADA) has estimated that all dealership closings – including those already announced by Chrysler and GM – could cost the U.S. economy 187,000 jobs – or more than the total U.S. employment of the two companies.

Market Matters

When the government was “forced” to help resolve the global financial crisis with bailouts and stimulus packages, analysts hoped for the best (economic and market recoveries) and feared the worst (overreach or even socialism).

To date, some signs have emerged that the recession may be nearing an end, though naysayers also warn about the ramification of “excessive” intervention.

On that note, the Obama administration has begun talks about a complete overhaul of the compensation structure for the entire financial services industry, a move that could even impact employees at institutions that did not accept bailout moneys.  While some believe the current system rewards short-term goals in lieu of longer-term performance, many still feel the government is overstepping its bounds.

President Obama’s administration also announced plans to regulate certain derivative securities, many of which have done considerable damage to the balance sheets of the world’s leading institutions.  While many “experts” agree greater transparency and oversight may have prevented some of the carnage, others worry that over-regulation is never a good things and efforts to improve the system actually may have the exact opposite impact.  Stay tuned.

With the much-ballyhooed stress-tests in the books, banks moved to raise capital with US Bancorp (NYSE: USB), Capital One Financial Corp. (NYSE: COF), and Bank of NY Mellon Corp. (NYSE: BK) among those issuing $1 billion to $2.5 billion in new stock (and diluting current shareholders).

In fact, US Bancorp expects to be the first major institution to repay Troubled Asset Relief Program funds over the next few weeks.  Meanwhile, as banks begin to move off the Treasury’s coffers, insurance companies become the latest recipients as The Hartford now is eligible for a $3 billion-plus government infusion with others to follow.  Automakers continued their cost-cutting moves as both GM and Chrysler started saying goodbye to large percentages of their dealers (and perhaps another 150,000 in related workers), while Ford raised about $1.6 billion through a 300,000-share offering of its own.  GM’s share price fell into penny stock territory for the first-time since 1933 as bankruptcy becomes an even greater likelihood.

On the earnings front, Macy’s Inc. (NYSE: M), JC Penney Co. Inc. (NYSE: JCP), Liz Claiborne Inc. (NYSE: LIZ), and Sony Corp. (NYSE ADR: SNE) all posted disappointing results, a sign that retailers have yet to overcome the ongoing consumer negativity.  While Wal-Mart Co. Inc. (NYSE: WMT) continued to outshine rivals, its earnings were negatively impacted by currency translation.

Both SAP AG (NYSE ADR: SAP) and Intel Corp. (Nasdaq: INTC) expressed optimism about the future for techs as phrases like “bottomed out” and “glimmers of hope” brought renewed investor confidence, though the latter was greeted with a $1.45 billion record fine in Europe over sales and marketing abuses.  Microsoft Corp. (Nasdaq: MSFT) announced its first debt offering in its 36-year existence and some expect the tech giant to explore acquisition opportunities.

Economically Speaking

Yep, the consumer is a fickle sort.  In fact, consumer statistics are quite fickle these days as well.  A few weeks back, same store sales for April showed enhanced retail activity, a strong sign for the consumer-driven economy.  Well, this past week, the U.S. Commerce Department reported that April retail sales actually fell by 0.4%, a worse than expected showing and the eighth decline over the past 10 months.  Before analysts could express renewed doubt about any pending recovery, Redbook Research threw even more confusion into the equation by reporting that chain-store sales climbed 0.1% during the first week in May and bested Wall Street expectations.

Additionally, the University of Michigan Sentiment Index reached its highest confidence level since September 2008.  As long as the labor picture remains bleak, however, consumer activity may vary from one month (week) to the next as many folks remain hesitant to spend and continue saving for that rainy day.

The inflation gauges calmed down those deflation naysayers as the producer price index (PPI) climbed in April on rising food prices and the consumer price index (CPI) was reported as unchanged last month.  Additionally, as oil prices creep a tad higher, the threats of (economy-hurting) price declines lessens; therefore, analysts can focus on other more pressing matters (like labor, manufacturing, housing, retail, etc.) and leave the (soon-to-come) inflation hysteria for another day.  Of note, RealtyTrac reported foreclosures soared by over 30% last month as unemployed homeowners struggle to make their mortgage payments.

Weekly Economic Calendar

Source:  Chrysler, GM Dealer Cuts Point to More Rough Times Ahead for U.S. Automakers

At least seven of the 10 banks considered by the government to be inadequately capitalized, as well as two others that were found to have sufficient capital cushioning, announced fund raising plans following the release of the stress test results.

PNC Financial Services Group Inc. (NYSE: PNC), U.S. Bancorp (NYSE: USB), KeyCorp (NYSE: KEY), Citigroup Inc. (NYSE: C), Morgan Stanley (NYSE: MS) Wells Fargo & Co. (NYSE: WFC), and Bank of America Corp. (NYSE: BAC) all announced stock offerings or asset sales in the past week.

BB&T Corp. (NYSE: BBT) and Capital One Financial Corp. (NYSE: COF), which were deemed by the government to be sufficiently capitalized, have also announced stock offerings.

Still, S&P says the banks, which have will continue to struggle without a bigger capital cushion than regulators require.

“There’s nothing to say that this banking crisis can’t go on for another three or four years,” S&P Managing Director Tanya Azarchs said.

S&P on May 4 said it might lower its ratings for 23 U.S. banks and thrifts, including 10 that underwent stress tests, citing concern about the industry’s capitalization, Reuters reported. It said the 23 companies had at least a 50% chance of being downgraded within 90 days.

Source: Standard & Poor’s Says Banking Crisis Has Entered New Phase

U.S. banks – under government order to raise capital as a result of the recently completed bank stress tests, and desperate to shed the onerous shackles of the U.S. Treasury Department’s Troubled Assets Relief Program (TARP) – have been announcing billions in secondary stock offerings in recent days, and experts say many more such deals can be expected.

Anadarko Petroleum Corp. (NYSE: APC), Bank of America Corp. (NYSE: BAC) and Ford Motor Co. (NYSE: F) yesterday (Tuesday) became the latest U.S. companies to pursue new sources of capital, announcing deals that involved offerings of stock or debt, or outright asset sales.

Those announcements came just one day after four of the largest U.S. banks – BB&T Corp. (NYSE: BBT), Capital One Financial Corp. (NYSE: COF), U.S. Bancorp (NYSE: USB) and KeyCorp (NYSE: KEY) – announced plans to raise a combined $6.5 billion through stock offerings. At least some of the money raised will be used to repay the TARP money the federal government injected into troubled U.S. banks.

“All the deal activity sends a clear signal – investors are willing to take more risk,” says Louis Basenese, a longtime expert on the IPO market and editor of The Takeover Trader and White Cap Report newsletters. “And it’s already trickling down into the IPO space. In the next two weeks, four deals are slated, doubling the total volume for 2009.”

When asked if all these deals could end up soaking up all the capital that’s still sitting on the sidelines – blunting, as a result, the rally that’s had stocks surging over the past two months – Basenese said there’s no reason for that to be a concern.

“With $8 trillion-plus on the sidelines, we’ve still got a ways to go before the capital is gone,” Basenese said.
In fact, we may well be just getting started, he says.

“During slowdowns, the IPO space is as lonely as a geek on prom night. But right now, our geek might be getting lucky. Along with the market rally and strong appetite for secondary offerings, we’re seeing IPOs hit the market again,” Basenese said. “This week we get Digital Globe. Next week, OpenTable and SolarWinds are slated to debut. And there are over 100 more in the pipeline to fuel a sustained recovery.”

The Latest Deals

Yesterday’s announcements involved a carmaker, an energy company and a top U.S. bank.

Anadarko, an independent oil-and-gas exploration and production company based in Woodlands, Tex., said yesterday that it priced a public offering of 30 million shares at $45.50 each. Underwriters have an option to buy up to 4.5 million additional shares of the company’s common stock through the offering, which is expected to close Friday.

The company’s shares were down about 6% and listed at $45.70 in pre-market trading yesterday morning, FoxBusiness.com reported.

Bank of America, ordered to find $33.9 billion in new capital as a result of the recent bank stress tests, has finally sold about $7.3 billion worth of its shares in China Construction Bank Corp., Reuters and Bloomberg News both reported.

BofA sold 13.5 billion shares, or 6% of CCB, to investors including Hopu Investment Management Co. and Singapore sovereign wealth fund Temasek Holdings Pte. The sale cuts Bank of America’s stake in CCB to 10.6%.

Hopu Investment was founded in 2007 by Fang Fenglei, Goldman Sachs Group Inc.’s (NYSE: GS) China partner. Hopu and Temasek have collaborated before; in late April, the two announced plans to invest $300 million in a Mongolian iron-ore mine. It was Hopu’s first deal since being launched as a private equity firm, Bloomberg News reported.

Bank of America’s sale of part of its CCB stake wasn’t news to Money Morning readers. In a story published in mid-January – “The Global Financial Crisis Will Cost Western Banks a Share of Future China Profits” – Money Morning reported that BofA was going to have to sell some of its stake in that key China bank. Indeed, the report detailed how banks in the United States and Europe would have to divest their interests in China’s promising banking market in order to close capital deficits created by the global financial crisis. The story was part of Money Morning’s ongoing investigation of the U.S. banking bailouts.

On Friday, BofA filed with the U.S. Securities and Exchange Commission (SEC) to sell as much as 1.25 billion shares of common stock, a move that would raise as much as $11 billion (given a proposed maximum offering price of $8.79 per share).

BofA said it will use the net proceeds from the offering for general corporate purposes. Bank of America Securities LLC and Merrill Lynch & Co. (NYSE: SQD) were listed as the underwriters for the stock offering.

Bank of America is also looking at still more asset sales to raise the rest of the required capital. Last Thursday the bank said it’s looking to end a loss-sharing agreement with the federal government on $118 billion of troubled assets, calling the agreement unnecessary – and too expensive.

Ford announced plans to sell 300 million common shares, and said it would use the proceeds from the offering for “general corporate purposes,” and to make a contribution to a fund that pays for healthcare for its retirees.

Total shares outstanding will increase to 3.102 billion – or to 3.148 billion if underwriter’s option for an additional 45 million shares is exercised.

Citigroup Inc. (NYSE: C), Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS) are acting as joint managers for the stock offering.

Ford’s shares closed yesterday at $5.01, down $1.07, or 17.6%, from Monday.

According to an SEC filing, a settlement with various unions calls for the initial three payments to be made on Dec. 31, 2009, June 30, 2010 and June 30, 2011. At each date, as much as $610 million of the amounts payable could be satisfied by the delivery of Ford common stock, valued at fixed prices of $2.00, $2.10 and $2.20 per share, respectively, the filing stated.

Ford intends to use a portion of the proceeds of this offering to fund all or a portion of the payments to the settlement fund – in lieu of delivering shares on those payment dates, according to a media report by 123Jump.com.

Ford Chief Executive Alan R. Mulally took advantage of the stock-offering announcement to say that Ford’s management and employees are making “strong progress on our transformation plan – gaining retail market share with great new products, improving quality, reducing costs and positioning Ford for a return to profitability.”

Ford also said that it’s unlikely the company will pay any dividend in the foreseeable future. Ford last paid dividends in the third quarter of 2006.

As Ford Sells Shares, So Do GM’s Top Execs

Interestingly, Ford is trying to sell shares to investors just as a group of top General Motors Corp. (NYSE: GM) executives – including GM Vice Chairman Robert A. “Bob” Lutz – have sold what was left of their personal stakes, according to several SEC filings on Monday. The stock sales by GM executives were reported by MarketWatch.com.

“Our shareholders are obviously facing some pretty severe dilution if the bond exchange goes through or we end up in bankruptcy,” GM spokesperson Julie Gibson told MarketWatch. “Either way, no matter the outcome, we’ll essentially be issuing new stock.”

She acknowledged to MarketWatch that the executives took advantage of a trading window to sell their shares while there’s still some value “like most reasonable people would do.”

GM’s executives sold their shares just as the company is trying to rid itself of $27 billion in debt by persuading thousands of creditors to exchange their bonds for 10% in GM stock.

According to the MarketWatch report, the SEC filings say that Lutz was joined by fellow Vice Chairman Thomas G. Stephens, Ralph J. Szygenda, Troy A. Clarke, Gary L. Cowger and Carl-Peter Forster. All together, the six sold nearly 205,000 shares between Friday and Monday, fetching between $1.45 and $1.61 a share.

GM’s shares closed yesterday at $1.15 each, or 20.14%.

It is worth noting that Money Morning Contributing Editor Martin Hutchinson wrote this week that there’s a chasm of difference between the prospects of GM and Chrysler LLC – the two foundering members of Detroit’s “Big Three” – and Ford, which Hutchinson says may actually be worth investing in.

If the market shakes out as Hutchinson expects, Ford could emerge as only real winner among the U.S. automakers.

Under such a scenario, “Ford will pick up market share from GM and Chrysler, even if domestic brands overall continue to see their market share ebb,” Hutchinson wrote. “That will reduce Ford’s losses, and when the automobile market does rebound, the company that created the original automobile assembly line will move to a position of substantial profitability. For the first time since Henry Ford kept the Model T in production too long in the 1920s, Ford may become the dominant U.S.-controlled automobile manufacturer.”

As the secondary-offering market heats up, and the recession, Basenese, the stock-offering expert, says investors need to focus on these investment opportunities – and especially on those that emanate from the expected escalation in IPOs.

“History suggests IPOs are the place to invest coming out of a slump,” he said. “For proof, all we need to do is go back to the last ’severe’ recession on record, from 1973 to 1975. As we exited, IPOs turned in impressive numbers, with first day gains jumping to 40% and three-year returns climbing to more than 150%, easily outpacing the Standard & Poor’s 500.”

Source: Big Surge in Secondary Stock Offerings Will Lead to a Major Uptick in IPO Profit Plays