The market ended up marginally higher, shrugging off weak retail sales and initial claims data after the proposed Obama tax on banks was interpreted by investors as not particularly onerous. Retail sales in December were surprisingly down 0.3% while economists expected them to be up 0.4%, but at least they were up 5.4% from the year-ago period and November results were revised upward. Initial jobless claims for last week were 444K, not alarmingly higher than the 437K consensus estimate.
The focus today was on Obama's proposed tax levy on banks, which if too onerous could derail job growth and economic stability. In the end, the perception was that the tax costs -- while high -- would be passed on to customers in one form or another eventually. Besides, a lot of uncertainty around the plan and its implementation still remains for it to have much of an impact in the midst of a bull market for Financials, especially in front of JP Morgan's - JPM earnings announcement coming tomorrow morning. The expectation is that JP Morgan will kick off the earnings season officially on good terms, yet the market's reaction is less dependable, since there may be some selling the news action regardless. After the market's close, Intel - INTC kicked off the Tech earnings season with a very robust beat. It earned 40 cents per share vs. analysts' consensus estimate of 30 cents, driven by a healthy top line and margins.
The financial tax proposed by Obama will cost the top 50 or so financial institutions -- regardless of whether they received or repaid or produced gains on TARP for the government or not -- 5-10% of their earnings for the next 10 years approximately. This is a big knock on their earnings power. The banks that are most impacted are those with the highest leverage and dependence on wholesale funding. The formula for calculating the tax levy is to charge 0.15% on covered liabilities, which are total liabilities excluding deposits (in order to avoid double-taxing, since the FDIC levies insurance fees on deposits).
Critics said that it is not a good idea to tax companies to make them pay, because they eventually figure out a way to pass on the costs to their customers. Therefore, the taxpayers will end up paying anyway, but on top of that there will be curtailed lending and growth in the short-term, which can threaten a job market recovery. The government countered that the tax will be levied only on the largest institutions, so their smaller competitors will maintain prices, so large banks will be unable to pass on the costs to consumer in order to remain competitive. This argument applies to most of the large banks, but perhaps less so to JP Morgan, Goldman Sachs, and Morgan Stanley, who have larger investment banking and trading operations, where the smaller banks are not competitors. At the same time, the larger banks with investment banking franchises are the ones that have the most leverage and dependence on wholesale funding, so the impact on their return on equity (ROE) is larger than for the rest of the group. However, the negative impact may be misleading, since they are also the most capable of passing on costs to their customers. Regardless, regional bank stocks, e.g., SunTrust - STI and KeyCorp - KEY (both up more than 4%), outperformed in reaction to the government making larger banks pay for TARP-related losses.
A big gainer today was LaBranche - LAB, which was up 40% after announcing what seems to be at least a partial liquidation plan. It will sell its market making business to Barclays for net proceeds of $25mm and will increase its stock repurchase plan from $24mm to $100mm (the market capitalization before the announcement of the news yesterday evening was only $160mm), as the sale of the market maker business freed up some of its capital. With a tangible book value in excess of $5 and what could be a liquidation plan in place, the company has figured out a way to unlock value for shareholders.
Disclosure: No positions