Preview from Europe: Market Futures Bounce

Preliminary details of U.S. Treasury Secretary Tim Geithner’s (aka the one trillion Dollar man) plans have prompted a strong session in equities overnight with the Dow futures currently up 195 and Europe looking chirpy. Now I may sound like a worn out old 45 but don’t believe the hype. The markets are as ever buying the rumour and will sell the fact(s).

Today’s Market Moving Stories

• Angela Merkel and Peer Steinbruck want to pressure the EU to abandon mark-to-market accounting in favour of model-based accounting (mark-to-model). They believe that mark-to-market accounting is one of the reasons why banks are not providing credits, while critics say that abandoning the rules now would create a lack of transparency. There is also pressure for an end to mark-to-market accounting in the U.S., though Tim Geithner is said to be opposed.
• Spanish newspaper El Pais has an article containing angry reactions from Spanish banks to the ECB’s tightening of liquidity rules. The ECB will continue to provide unlimited liquidity in its repo operations, but it has hardened the conditions for the certain types of securities, including asset-backed securities, where it will now apply a haircut of 40-60% i.e. they will only advance you 40-60% of the alleged value of the securities. One banker quoted said this would hit Spain particularly hard, and in the absence of a market for these products, it will essentially provide a price ceiling. It’s also bad news for Irish financials.
• Japan’s BSI quarterly survey of industrial sentiment paints a very bleak picture, falling to its lowest level in its short history. This points to a very weak Tankan survey, due for release on 31 March. Despite this, Asian equities rallied hard overnight led by financials.
• Oh and US banks and credit unions are still going wallop with two corporate credit unions, with combined assets of $57 billion, gone over the weekend. But Citigroup (C) still plan to spend about $10 million on new offices for CEO Vikram Pandit and his lieutenants. It’s good to see that they are as grounded and frugal as ever.
• And Bernie Madoff is on Twitter! Well not really but mildly diverting.

Why Does Failure Merit Reward
An eventful week lies ahead. Today should see the Geithner $500bn toxic debt plan finally take flight, with details expected at 12.45 GMT. It will be the most important moment of this crisis so far, but the plan looks flawed and the process has become messy and unpredictable.

Essentially the US government wants to create a series of leveraged hedge funds to buy the banks’ bad loans and mortgage securities at “market prices” and have the assets privately managed. There will be three parts to the program:

1. A set of public/private investment funds to buy mortgage securities, funded on a dollar-for-dollar basis by the government, and run by private fund managers,
2. Another set of partnerships funded by non-recourse loans from the Federal Deposit Insurance Corporation up to 85% of value, to buy loans from the banks,
3. An expansion of TALF (term asset-backed secure lending facility) to include older securities instead of just new ones.

According to weekend reports, the government will be funding about 95% of the plan and private investors 5%, for which they will get a much larger proportion of the equity. The problem with all previous plans was that if the government paid too little for the assets, it would not help the capital position of the banks; if it paid too much, taxpayers would be in the hole.

It seems to me that unless there is something we still don’t know, the plan is fundamentally flawed. It seems to be based on the proposition, mistakenly held by many politicians and commentators around the world in my view, that the crisis is one of sentiment and confidence – that if we don’t panic, and stay calm, the economy will simply recover. But actually this financial crisis is very soundly based: US and European banks did make bad loans and buy over-priced securities and derivatives. As a result, they have actually lost money. This is not a situation where a panic attack is leading to a bank run, where depositors’ fears can be soothed and the run brought to an end by reassurance. The banks are genuinely insolvent and the world’s credit system is genuinely dysfunctional.

The Fed will first provide quantitative easing details in a day or so before taking its first steps into the unknown later in the week.

Equities

• European sunrise stocks on the rise this morning include Deutsche Bank (DB), AXA and Legal & General (LGGNY.PK), all up about 6%.
• Other early winners are Daimler (DAI) on news that it plans to sell special shares to Aaber Investments of Abu Dahabi and raise €1.95bn for a 9.1% stake at only a 4% discount to Friday’s close. It looks a sweet deal.
• Goldman Sachs also has a research note out boldly stating that is was the best time in 10 years to buy European auto shares.
• San Francisco based PE firm Hellman and Friedman (who already own Gartmore) is putting together a group of investors that may bid for Barclays iShares unit (BCS). The shares are up 5% this morning.
• McInerney’s have reported a pre-tax loss of €206m for the year ended December 2008 slightly behind broker estimates. Charges related to land write downs, restructuring costs and goodwill impairment totalled €159.6m. Given it has €219m of net debt, their recently secured agreement to restructure its UK lending facilities is crucial.
• There is talk that the much hyped private equity consortium Mallabraca has not gone away and this time is interested in taking a stake in building society EBS.

And Finally… Wall Street Blues

Disclosures: None

Comments

[Asbytec:]

Yea, stunning rally based on Obama's take on what's beginning to show signs of improvement: financial markets, housing, and the list goes on. But, wait till the short sellers take theirs. I dunno, still digesting this whole thing. The fundamentals are still out of whack, but good news coming out of Washington.

I am pleased Obama is ensuring the rest of he G20 will follow suit. This means the dollar might not tank as badly as it should.

Mar 23 12:24 PM

[Ned S:]

They markets are saying they like it? But yes I do agree the fundamentals are still out of whack. P/Es never seemed to get low enough. And I'm biased because I believe the West is only part way into a generational decline anyway.
Although America could well be better off than lots of developed nations in that regard for lots of reasons. (Eg Comparatively high population growth, respectable agricultural base, still has some natural resources plus Canada's close by, potential to rebuild the broad manufacturing base if the exchange rate drops enough to make same competitive and maybe still a few innovators and entrepenuers around.)
But the exchange rate thing and any significant impact on foreign cash inflows and interest rates based on being the world's reserve currency holder is very much a double edged sword.

Mar 23 11:07 PM