So Helicopter Ben tells us that he thinks the big banks can survive without FULL nationalisation and the market takes solace and rallies a solid 4% from oversold levels to end a six day losing streak. Naturally, European banking stocks are up on this story this morning with Deutsche Bank (DB) (who said costs will be down in ’09) and UBS (UBS) leading the way. The carrot of quantitative easing was left dangling, but Bernanke would clearly rather try and jawbone the crucial Treasury bond yields lower to encourage refinancing than actually put his money where his mouth is at this stage. A dangerous policy methinks.
Today’s Market Moving Stories
- Rumours yesterday that the US is planning to cease mark-to-market accounting. The UK’s IFRS would almost certainly have to follow suit. STRESS, there is no corroboration to this rumour. This would be a move away from transparency rather than towards it. Still, if the banks continue to score own goals, one does wonder how long it will be before authorities move the goalposts.
- The Nikkei newspaper is carrying details of the Japanese Government share purchase plan: Worried by the feedback from the real economy to banks, the Government is considering buying up to JPY20tr in shares direct from the market. The market is sceptical, but these measures could be exceptionally important, since they could go a long way toward putting a floor under equity prices in Japan, thereby removing a major risk to the financial system. Note Japan’s trade deficit ballooned to yen 952.6bn in January from yen 322.3bn in December, led by a staggering 45.7% yoy drop in exports. Despite this gloomy news, the big exporters (Toyota (TM), Canon (CAJ), Honda (HMC)) were all up strongly in overnight trading courtesy of a weaker yen.
- Continuing their now daily tirade against all things Continental, the Telegraph carries a story that the German Landesbank system may be entirely “rotten”. No wonder the UK doesn’t get any votes come Eurovision time! Note the widening in the German CDS spread in the last few days as fears rise that Fritz may have to foot the bill for the pan European meltdown.
- Standard and Poor’s has cut Latvia’s debt to BB+, or junk status, reflecting concerns that the IMF rescue package could unravel. The report also quotes research by Danske Bank, according to which Austrian banks face losses of 11% of GDP. Last week, Latvia’s government collapsed, which raised further doubts about the country’s commitment to the austerity programme.
- Influential ECB council member the Bundesbank’s Alex Weber has given the clearest indication yet of what is likely to be the terminal (low point) rate for the ECB in the current easing cycle. He is quoted as saying that he sees the 1% level as the lower limit, adding that the ECB can cut rates that far.
- Talks between the UK Chancellor and Royal Bank of Scotland (RBS) and Lloyds (LYG) have become “bogged down” as the sides haggle over the finer details of a planned asset protection scheme, in particular the insurance fee, the level of first loss retained by the banks and targets for new lending. The hope is that a deal can be concluded before RBS publishes its 2008 results tomorrow (followed by Lloyds on February 27th).
- German Q4 GDP shrank -2.1%. This was driven by a massive 7.3% exports drop.
- US consumer confidence dropped off a cliff and collapsed to a record low (the series goes back to 1967) and the Case Shiller index of home prices in 20 American cities was down more than expected to – 18.5%. House prices are now back at 2003 levels.
- Germany’s Henkel (the Persil) is up 10% on better than expected profits following asset sales. Other stocks showing blue this morning are Cadbury’s (CBY) and hotels group Accor (ACRFF.PK) after both updated earnings estimates. HSBC (HBC) and BNP are also showing well with more positive (it wouldn’t be hard) tone in banking stocks. But as I warned yesterday watch the next iceberg, insurers.
Stocks Are Not Cheap Yet
All I hear this morning is NOW is the time to buy stocks! The latest plunge in US equity markets does not mean that stocks are now cheap. Admittedly, the S&P 500 now trades around 13 times average corporate earnings over the prior decade after adjusting for inflation – considerably less than its 16.25 average since 1900. However, share prices have undershot “fair value” substantially during past bear markets. The P/E ratio at the trough of the 1982 recession, for example, was 6.6. I still don’t expect stocks to stage any meaningful rally until shortly before the economy reaches a floor.
While markets got a (temporary) respite late yesterday, it's important not to lose sight of the big (ugly) picture worldwide. The bad news just keeps rolling in. This is despite record low interest rates and gargantuan sums being pumped into the world economy via various programmes and stimuli.
Bernanke On Capitol Hill
What Bernanke actually said was that while he reckoned that the global downturn would last into next year, the banks can survive without being nationalised. However, rather oxymoronically he said “What we can do is make sure they have enough capital to fulfil their function and at the same time we exert adequate control to make sure that they are doing what is necessary to become healthy and viable over the longer term”. Of course, that could mean that the government has to take majority control to give them enough capital! So maybe not stocks wiped out, but certainly still potential for massive dilution; and let’s face it, Bernanke has been wrong before.
Data And Earnings Today
Today sees part two of Bernanke's testimony to Capitol Hill.
On the data front, US weekly mortgage applications are out at noon and existing-home sales are released at 15.00 GMT (expected 4.79m units).
And Finally… Nobel Laureate Joseph Stiglitz On Resolving The Financial Crisis