U.S. Rejects Nationalization of Citi and BAC

Just as the US equity market was in the process of a major breakdown over the issue of possible government takeover of Bank of America (BAC) and Citigroup (C), the White House made some comments that appeared to reject the notion of nationalization, and there was a sudden market turnabout. After Bank of America CEO Ken Lewis stated his bank was profitable and did not need government aid, BAC shares moved higher by about +20% in minutes. By the end of the session, however, the broad market rally ran out of steam.

By the end of the day, the DJIA (-100.28 -1.34% to 7365.67) and the S&P 500 (-8.89 -1.14% to 770.05) were well underwater, but the NASDAQ Composite (-1.59 -0.11% to 1441.23) closed flat.

Winning sectors were Tech (XLK +1.0%) and Basic Materials (XLB +0.8%), while the losers were Energy (XLE -2.6%) and Utilities (XLU -2.3%).

In Canada, although still swooning over the previous day’s visit of President Obama to Ottawa to talk about global warming issues, the Toronto Composite (-235.36 -2.88% to 7949.99) and the Venture Board (-9.20 -1.02% to 892.90) were hammered. Leading Canadian financial services company, Manulife (MFC -8.8%) and tech company (Research in Motion RIMM –7.0%) were among the worst losers on the day in the Cara 100. Vancouver-based precious metals companies Silver Wheaton (SLW +11.5%), Kinross gold (KGC +4.4%) and Goldcorp (GG +3.2%) were winners among the Canadians.

Others in the Cara 100 that moved a lot were Applied Material (AMAT +5.0%), Dell Computer (DELL +3.6%) and Amazon.com (AMZN +3.1%) among the winners, and Adobe (ADBE -7.7%) and General Electric (GE -6.8%) (GE to a multi-year low of $9.38) in the losers. In fact, adjusted for dividends, the present GE price of $9.38 was last seen almost 13 years ago, in May 1996.

A few Brazilians (ERJ -8.1%) (RIO -7.6%) (GGB -7.2%) were also big losers in the Cara 100. The Sao Paulo Bovespa closed down -2.6% at 38714.6.

Early in the day, the French CAC (-4.25% to 2750.6), the German DAX (-4.76% to 4014.7), and the UK FTSE 100 (-3.22% to 3889.1) also plunged as European-based banks like UBS were hammered. The problems for many of the European banks largely apply to loans made in Italy and Greece, apparently. But UBS is also presently under stress from US prosecutors who are dead-set on smashing Swiss bank secrecy. The global implications to international banking are enormous. Some of the motivation here is due to efforts to stop tax evasion, and some due to concerns about terror group money laundering.

Asia-Pacific equity markets were also losers Friday -- except for Shanghai (+1.54% to 2261.5), which continues to show a bullish break-out pattern. The losses in other regional markets were large, but not as excessive as we have seen there in the recent past or as happened later in the day in Europe and then North America: Australia (-1.32% to 3353.0), Nikkei 225 (-1.87% to 7416.4), Hong Kong (-2.49% to 12699.2), and India’s Sensex BSE 30 (-2.21% to 8843.2).

US Treasuries reversed course for the day as the $USB long bond gained +1.05% to close at 127.59. Yields on the 30-, 10- and 5-year Treasuries closed at 3.565, 2.772 and 1.798 percent, respectively.

The US Dollar weakened a second day in a row ($USD -1.24% to 86.49) while the Euro gained +1.13% to 128.18. Other currencies that gained on the day against the USD were the Yen (+0.94% to 107.15), the British Pound (+1.09% to 144.37) and the Canadian Loonie (+0.56% to 80.10).

Precious metal futures closed off their highs of the day, but very strong nonetheless. April gold futures closed at 993.25 (+16.75). Spot (cash market) prices for gold, palladium, platinum and silver, closed at 989.85 (1006.20 high for the day), 212 (215.5), 1080 (1092.5), and 14.4025 (14.61), respectively.

West Texas Intermediate Crude Oil contracts for April closed the week at 39.41, reflecting both the North American economic weakness as well as the tight banking credit conditions that have put the squeeze on speculators. The DJIA futures were at 7350, indicating a small recovery from mid-afternoon, but still down at lows that approximate the Bear market cycle bottom of October 2002.

Comments

[apppro:]

What your headline should have read is:
"US Rejects Short Sellers of Citi & BoA"

This is what we need. Just stop the Shorting of America and things will work themselves out in a normal - rational - timely basis. Nothing will recover, nor will as they put it allow investors BACK into this market, as long as the rules are so bent by short sellers and no one is seeing the reality of it. All they can do is blame the CEO's and all those good people who are just trying to get things back to normal, so to speak.

The 4 Golden Rules

1. Reinstate the Up-tick rule

2. Crack down on naked short selling

3. Institute some rules on what should be said on National TV to prevent rumor-mongering

4. Pass a Wind-Fall Capital Gains Tax of 65% on ALL short sales retroactive to 01/01/08.

Feb 21 04:34 PM

[jepittman:]

This administration has a viable plan for dealing with this crisis. It has done an absolutely wretched job of selling it. There is a plan to get the 'bad assets' off the banks balance sheets. There is a plan to recapitalize the deserving banks with cash. There is a plan to restart securitization of commercial loans, residential mortgage loans, student loans, credit card consumer loans, with the federal reserve as the purchaser until private markets stabilize. These plans were vaguely outlined and then the spokesmen disappeared with no Q&A, no followup with details, and virtual silence while rumors of bank nationalization ran wild. Obama is a thoughtful and talented man but it appeares like he has no clue about how markets work, and the advice he is getting about communication with them leaves a lot to be desired.

Feb 21 05:00 PM

[vaughn:]

The nationalization of banks which received Tarp preferred money will be nightmare for treasury.
Let us agree what the nationalization of bank means: it means the total wipe out of equity interest, including preferred.
Take citigroup, for example. Treasury holds 45 billion preferred in Citigroup. By nationalizing Citigroup, the treasury (oops, that's you) will suffer an immediate loss of 45 billion, not to mention the nationalization will trigger CDS event and complicate the 40 trillion derivative contracts written by Citigroup which will definitely bring down massive bank failures around the world which will eventually bring down the US government itself.

How do you feel when treasury reports that treasury (oops, that's you again) just suffered an loss of 45 billion in preferred, plus circa 250 billion loss in guarantee of Citigroup's assets, plus circa 600 billion loss in insuring deposit (assuming 20% haircut of Citigroup's assets of 3 trillion, including off balance sheet assets) for a grand total of circa 1 trillion? Won't you be mad? I guess not cause we might not survive the resulting chaos.

Feb 21 05:14 PM

[epicure:]

appro I agree...the new greed is short

Feb 21 05:53 PM

[Notivanski:]

BofA is not "Ken Lewis' bank"! He is an employee who acts like he owns it. Shareholders continue to get screwed. May seem a fine point but he needs to work for shareholders not for himself.

Feb 21 10:16 PM

[Philly Jim:]

How about we just put responsible adults in supervisory positions, rather than political cohorts! The Bush administration was the greatest destructive force to our government in our nation's history. They systematically placed "know nothing" cronies in critical positions to govern and regulate the marketplace, not to mention almost every other aspect of our government. It was basically eight years of get-rich-quick scams on a massive scale, both in the public and private sectors!


On Feb 21 04:34 PM apppro wrote:

> What your headline should have read is:
> "US Rejects Short Sellers of Citi & BoA"
>
> This is what we need. Just stop the Shorting of America and things
> will work themselves out in a normal - rational - timely basis. Nothing
> will recover, nor will as they put it allow investors BACK into this
> market, as long as the rules are so bent by short sellers and no
> one is seeing the reality of it. All they can do is blame the CEO's
> and all those good people who are just trying to get things back
> to normal, so to speak.
>
> The 4 Golden Rules
>
> 1. Reinstate the Up-tick rule
>
> 2. Crack down on naked short selling
>
> 3. Institute some rules on what should be said on National TV to
> prevent rumor-mongering
>
> 4. Pass a Wind-Fall Capital Gains Tax of 65% on ALL short sales retroactive
> to 01/01/08.

Feb 21 10:36 PM

[Duke Wong:]

"STRESS TEST".
Goverment doesn't like bank nationalization. But an bank that can not survive then it needs to be nationalized.
The administration will tell us after the stress test what bank is nationalization or None of them are nationalization.
If you want to make a profit on the stock market then bet for the survival.

Feb 22 08:00 AM

[pragmist:]

I agree whole heartedly. Most of this naked shorting is being done by some Huge Hedge funds..overseas based.
This is Economic Talibanism against all major Western Banks.
These Governments need to wake up.
I agree with most of what you say.


On Feb 21 04:34 PM apppro wrote:

> What your headline should have read is:
> "US Rejects Short Sellers of Citi & BoA"
>
> This is what we need. Just stop the Shorting of America and things
> will work themselves out in a normal - rational - timely basis. Nothing
> will recover, nor will as they put it allow investors BACK into this
> market, as long as the rules are so bent by short sellers and no
> one is seeing the reality of it. All they can do is blame the CEO's
> and all those good people who are just trying to get things back
> to normal, so to speak.
>
> The 4 Golden Rules
>
> 1. Reinstate the Up-tick rule
>
> 2. Crack down on naked short selling
>
> 3. Institute some rules on what should be said on National TV to
> prevent rumor-mongering
>
> 4. Pass a Wind-Fall Capital Gains Tax of 65% on ALL short sales retroactive
> to 01/01/08.

Feb 22 10:54 AM

[Mad Hedge F...:]

The longer crude stays below $40, the more production is being taken off the market. At this stage all 35 million barrels of storage at the Cushing, Oklahoma delivery point for west Texas intermediate are brimming with crude. The 709 million barrel Strategic Petroleum Reserve (SPR) is nearly full. And there is another 50 million barrels stored in supertankers at sea which is building by the day. Demand has collapsed so fast, that oil companies can’t shut down production fast enough. The scary thing about this is that when the next crude spike upward in crude comes, it will be worse than the last one. Take advantage of the current distress prices to accumulate oil infrastructure stocks. Kinder Morgan Energy Partners (KMP) has a PE multiple of 25 and a dividend yield of 8.3%. Enterprise Products Partners (EPD) has a $10 billion portfolio of fractionation facilities, storage, offshore drilling platforms, and 32,478 miles of product, natural gas, and crude pipelines, and carries a modest PE multiple of 12 X and a dividend yield of 9.2%. More expensive Kinder Morgan Energy Partners (KMP) with a PE multiple of 25 X and a dividend yield of 8.3% is also worth a look see.

Feb 22 11:20 AM

[formerhawk:]

apppro, you are right. Somebody needs to do what you said!

Feb 22 12:47 PM

[Swamp Donkey:]

First of all, Canada was not swooning over your Pres's visit, understandably at the home of liberal, lefty (save the world Pollyanna's) he would be greeted with open arms.
Take it from a Canadian who has put up with these types of policies for 40 years, America is on a slippery slope to higher taxes and more government control. Canada is dramatic proof that throwing money around (especially tax payers money) does not work, it only creates problems for our children

Feb 22 01:02 PM

[thotdoc:]

Or he is not overselling.

I have difficulty when you or anyone says that OBama doesn't understand how the markets work.

First, it is arguably correct to say that no one knows how the markets work. Second, it is arguably correct to say that knowing how the markets work is what led to the Fed, in the past, not making the hard decisions. Let's see how they do.

On another topic, The problem with taking out the shorts is that shorting is part of teh game. I agree with a wind fall tax on it, however.

G


On Feb 21 05:00 PM jepittman wrote:

> This administration has a viable plan for dealing with this crisis.
> It has done an absolutely wretched job of selling it. There is a
> plan to get the 'bad assets' off the banks balance sheets. There
> is a plan to recapitalize the deserving banks with cash. There is
> a plan to restart securitization of commercial loans, residential
> mortgage loans, student loans, credit card consumer loans, with the
> federal reserve as the purchaser until private markets stabilize.
> These plans were vaguely outlined and then the spokesmen disappeared
> with no Q&A, no followup with details, and virtual silence while
> rumors of bank nationalization ran wild. Obama is a thoughtful and
> talented man but it appeares like he has no clue about how markets
> work, and the advice he is getting about communication with them
> leaves a lot to be desired.
>

Feb 22 01:58 PM

[Ravo:]

I made a post in my blog in December, 2006 (see archives) that predicted the very events that are now occurring. The ancient Greek Historian, Polybius wrote in 200BC, that anytime a democracy is subject to cronyism by elected officials, it is doomed to descend into anarchy and violence by the masses, only to be superceded by a strong-man type of dictatorship.

Feb 22 02:44 PM

[Berninvestor:]

Great comment apppro!
In my opinion as well, your suggestions would go a long way in helping to solve many of our problems. Too bad, many people can't see the forest for the trees.


On Feb 21 04:34 PM apppro wrote:

> What your headline should have read is:
> "US Rejects Short Sellers of Citi & BoA"
>
> This is what we need. Just stop the Shorting of America and things
> will work themselves out in a normal - rational - timely basis. Nothing
> will recover, nor will as they put it allow investors BACK into this
> market, as long as the rules are so bent by short sellers and no
> one is seeing the reality of it. All they can do is blame the CEO's
> and all those good people who are just trying to get things back
> to normal, so to speak.
>
> The 4 Golden Rules
>
> 1. Reinstate the Up-tick rule
>
> 2. Crack down on naked short selling
>
> 3. Institute some rules on what should be said on National TV to
> prevent rumor-mongering
>
> 4. Pass a Wind-Fall Capital Gains Tax of 65% on ALL short sales retroactive
> to 01/01/08.

Feb 22 03:15 PM

[nova:]

For all practical purposes all major US banks are nationalized: without government money and/or guaranties they will not last a week or two.

Pumping more money into failed banks with totally incompetent and corrupt management will result in more fraud and more looting of taxpayers money.

About Obama plan: it throws $3T+ of taxpayers money on welfare for no-good individuals and no-good state and local governments. This is a total waste.

Government must
- take its losses
- take over no-good/failed banks and dispose them into private hands capable of successfully running financial institutions
- invest in interprises capable of surviving and prosper
- big financial banks/institutions must be broken in to small ones unable to create future "systemic risks"

Feb 22 05:41 PM

[Moneylending:]

i agree BAC stocks took some worst price drops on friday, but came back up after nationalization concerns were confronted by WH and Ken Lewis. At this time its hard to tell if nationalization concerns have been put to rest or not, but lets just cross our fingers and hope it is because this ambiguity is killing the markets.

disclosure- long bac

Feb 22 06:36 PM

[Mad Hedge F...:]

Gold continues to move from strength to strength, hitting a new high for the year of $1,007 today. In January, gold ETF’s bought a record 104 tonnes of the yellow metal. Last week alone, purchases soared to an astonishing 110 tonnes. There has also been huge buying of December, 2009 1,000 calls, suggesting that some players are hoping for a melt up if we break the old highs at $1,050. Looks like we have found our new bubble. Let the games begin! If you have been regularly reading my letter you should by now have sacks of gold American Eagles stacked up against the walls, your portfolio is brimming with gold mining stocks like Barrick (ABX), Freeport McMoran (FCX), and Rangold Resources (GOLD), and your safety deposit box is groaning from the weight of the gold bars it is holding. Gold has since become the trade of the first quarter, with the open interest on call options on the Street Tracks Gold Shares ETF (GLD) exploding from 445,000 to 1.1 million in just the past few weeks. Options implied volatilities are suggesting that gold could hit $1,115/ounce by June. Oops, you forgot to buy the yellow metal? Use $50 pullbacks to get long. Investors will continue to pour into the sector, since it is one of the few things the government can’t create more of with a printing press.

Feb 22 09:50 PM

[HChang:]

I agreed with banning Short Selling. It was already implemented in many countries like Japan, HK, S'pore, Malaysia, Indonesia. Once the gamblers disappear, we will know the real price of BofA. And I believe that given time Ken Lewis will resolve the problems, else he will have to step down. But please be fair to him, he's now GOD and was forced to absorb ML. He needs time to work out this mess but I believed he will because he had sanked in almost US$2M of his own money into BofA.

The current price of BofA is so distorted now because of the gamblers. It should be between US$12 to US$15. The gamblers should move their money to Las Vegas instead, not NYSE. It caused many real long term investors to suffer unjustly and created global panics which may reuslt in another round of global meltdown. Please convey this to the president.

Feb 22 10:23 PM

[Moon Kil Woong:]

Well something needs to be done with these lemons. Personally, bankruptcy seems like the most justifiable even if we have to eat the loss. It looks like the taxpayers gonna eat the loss anyway even if it doesn't go into bankruptcy.

As for BAC, you can say your profitable or whatever you want with current banking rules since you can hide derivatives losses, etc. Cash flow is still proving that BAC is not healthy and keeps needing mass reserve injections far exceeding any "profit" to stem the tide of losses.

Feb 23 01:10 AM