Is the financial industry now in full recovery?

Investors short selling financial stocks appear to think so, notes the financial web site 24/7 Wall St.

“We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle.” To drive home his point, he makes a remarkably bold claim. “We have a social purpose.”

The FDIC proposes to limit zombie banks to offering no more than 0.75 percent over the national average for deposits. Banks on their last legs routinely use the FDIC guarantee and high interest rates to siphon CDs and deposits from healthy banks. Depositors don’t care because they won’t lose any money as long as the deposits are FDIC guaranteed. Then the zombie bank turn around and loan out those deposits on the most speculative ventures they can find. When the 100th strip mall in Boca Raton, Florida can’t find tenants, those loans go bad and the FDIC picks up the tab.

CIT Group (CIT), an embattled small business lender that filed for bankruptcy Sunday as a result of lack of government-sponsored financial assistance, is now hoping regulators will give it a second chance to turn itself around.

The firm’s Chapter 11 filing appears to be the oddest kind of bankruptcy in a very long time. The 101-year old firm will be allowed to draw on $125 million of a $500 million loan from Bank of America (BAC), pay employees and vendors, as well as make intercompany loans, U.S. Bankruptcy Judge Allan Gropper ruled earlier today. “We are on a very fast track,” Gropper told the court.

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Given the slew of positive economic data Monday, you might have been forgiven for expecting a decent rebound in risk assets. There was a rebound of sorts in early New York trading, with the Dow up close to 150 points at one stage. But the rally lost momentum and was largely undone. Indeed the Dow traded in the red for a period.

Perhaps in part, this may have been due to comments made by a Fed official Jon Greenlee who told a House of Representatives Oversight and Government Reform subcommittee hearing that “credit losses at banking organisations continued to rise, and banks face risks of sizable additional credit losses given the outlook for production and employment… Poor loan quality, subpar earnings, and uncertainty about future conditions raise questions about capital adequacy for some institutions." More generally, fears about loan quality were corroborated overnight by the news that business bankruptcy filings jumped in October, reversing two months of declining commercial filings. Overall, the price action looked pretty poor to me. I’d have expected a much more positive reaction to the numbers yesterday

• NYSE up 45.5 (0.7%) to 6,784.94.
• DJIA up 76.7 (0.8%) to 9,789.
• S&P 500 up 6.63 (0.64%) to 1,043.
• Nasdaq up 4.1 (0.2%) to 2,049.

GLOBAL SENTIMENT

Friday was a frightening day for stocks as the exuberance seen on Thursday following the GDP report evaporated following a weak US consumer sentiment reading and amid CIT bankruptcy fears. The Dow experienced its largest one-day fall (-2.5%) since late April, while the S&P and Nadsaq also shed more than 2.5%. Leading the decline were financials. Weighing on sentiment was also investor Wilbur Ross’ warning that a “huge crash in commercial real estate” was beginning and comments from analyst, Michael Mayo, that Citigroup (C) may have a $10 billion writedown of deferred tax assets in Q4. Volatility has resurfaced, rising back to early July levels,and now hovers above 30. Other markets followed in due course with risky currencies selling off, driving gains in the dollar and yen. The NZD, CAD, SEK, AUD and BRL all fell in excess of 1.5% for the session as the USD rallied.

The data Friday showed that US consumer spending fell 0.5% month-over-month in September, the largest drop since December, after a 1.4% increase in August. The decoupling between US consumer spending and the manufacturing PMI is startling. Of particular interest this week will be US consumer credit and Non Farm Payrolls. Consumer credit has been falling for seven months in a row (i.e. redemptions have outpaced new lending).

The New York-based firm filed for Chapter 11 bankruptcy protection yesterday, a move financed by famed corporate raider and activist hedge fund manager Carl Icahn. The “prepackaged” bankruptcy filing was also strongly supported by the firm’s creditors committee, which is led by hedge funds Baupost Group, Centerbridge Partners, Oaktree Capital Management and Silver Point Capital.

• CIT makes it official. CIT Group (CIT) filed for bankruptcy protection Sunday with broad support from its debtholders, but taxpayers will lose the $2.3B invested in CIT, marking the first definitive loss in the government's rescue of the financial system. Nearly 90% of CIT's bondholders voted in favor of the prepackaged bankruptcy, which CIT says will enable it to reduce total debt by $10B, significantly reduce its liquidity needs over the next three years, enhance its capital ratios and accelerate its return to profitability. Bondholders will receive about $0.70 on the dollar, a number that could have fallen as low as $0.06 had CIT entered a freefall bankruptcy. With $71B in assets and $65B in liabilities, CIT's bankruptcy ranks among the largest in corporate history. (CIT's bankruptcy filing)
• Goldman wants Fannie's credits. Goldman Sachs (GS) is in talks to buy up to $1B in tax credits from Fannie Mae (FNM) for an undisclosed amount. But the government - which controls Fannie - is reluctant to approve a deal that would allow Goldman to reduce its tax bill "given the animus held by many lawmakers toward big Wall Street firms in general, and Goldman in particular." Fannie and its rival Freddie Mac (FRE) loaded up with billions of dollars in the credits - which were created to spur investment in low-income housing - during the boom years, but now have no use for them.
• Comcast/GE near deal. Sources say a deal giving Comcast (CMCSA) control of GE's (GE) NBC Universal could be announced as soon as next week after a tentative agreement was reportedly reached Friday. GE would contribute $12B in debt to the new entity, and retain 49% ownership, while Comcast would kick in "several billion dollars" and its stable of cable networks for its 51%. Talks with Vivendi, which owns 20% of NBCU, continue to center on how to arrive at a mutually acceptable valuation - and are currently the main roadblock to a deal.
• Denbury picks up Encore of $4.5B. Denbury Resources (DNR) agreed to acquire Encore Acquisition Co. (EAC) in a transaction worth $4.5B including the assumption of $1.25B in debt. Denbury will pay $50 for each share of EAC - $15 in cash and $35 in stock - a 35% premium to Friday's close. "All of our operations are in the Gulf Coast. It is good to expand to another area, to get a footprint in another location like the Rockies," Denbury CEO Phil Rykhoek said, noting the combo will have one of the largest reserves of crude among independents. Denbury plans to sell off some non-core oil and gas assets next year to pay down its debt. JPMorgan (JPM) will provide Denbury with a new $1.6B line of credit and another $1.25B in bridge financing.
• Lupus drug passes critical 2nd trial. Human Genome Sciences's (HGSI) experimental lupus drug Benlysta was successful in a second large clinical trial, paving the way for approval of the first new treatment for the disease in 50 years. While not as strong as the results from an initial study, the results released Monday should be enough to secure FDA's go-ahead. Hopes for Benlysta have been growing since initial results were released in July, surprising many experts who had been sceptical given the previously poor track record of new lupus treatments. HGSI +41% premarket.
• Pfizer eyes Protalix. Pfizer (PFE), is reportedly considering a JV with Israel's Protalix, and may even buy the company. Protalix developed the ProCellEx system for producing medical proteins through genetically engineering carrot cells; the method is up to 90% cheaper than other methods. Last month Protalix said its experimental drug to treat Gaucher's disease, Uplyso, was successful in a late-stage clinical trial. If approved, it would compete with Genzyme (GENZ) blockbuster Cerezyme.
• The cost of doing better. UAW rank-and-file dealt Ford (F) a fatal blow, overwhelmingly rejecting proposed contract concessions that would bring its costs in line with GM and Chrysler. "This was a tough sell from the beginning," a professor who specializes in labor issues said. "Ford was caught in between doing better and advertising that, and the UAW already giving Ford concessions." Sources say Ford will continue talks with the union to find ways to cut costs, but may look to move some production to lower-cost locations if it can't remain competitive in the U.S.
• Goldman secretly bet on the housing crash. In 2006 and 2007, Goldman Sachs (GS) sold more than $40B in mortgage-backed securities to pension funds, insurance companies, labor unions and foreign financial institutions, while failing to disclose it was betting heavily on a sharp drop in U.S. housing prices. While some say the omission may be a violation of securities laws, Goldman says it had no obligation to disclose its internal hedges.
• Kelly tells BofA 'no thanks.' Bank of New York Mellon (BK) CEO Robert Kelly was reportedly asked to become Bank of America's (BAC) next CEO, but said he's not interested in the position. While BofA's search committee hasn't ruled out hiring an insider - with Gregory Curl and Brian Moynihan the current favorites - the Kelly feelers reflect the board's growing interest in outside candidates.
• Nest egg keeps growing. U.S. companies are holding on to more cash than in any time during the last 40 years, according to a study by the WSJ. In Q2, the 500 largest nonfinancial companies held 9.8% of their assets ($994B) in cash and short-term investments, up from 7.9% ($846B) a year earlier. Firms are hoarding cash to ensure they can cover day-to-day costs after credit markets froze up last year, catching many off guard; their unwillingness to spend during the downturn is another factor increasing the bulge. In the short-term, large cash balances are a curse for the economy, but analysts say a strong cash position will enable companies to transition more quickly into growth mode when reinvestment begins.
• Full speed ahead in Asia. Asian factory activity grew again in October, with China hitting an 18-month high, suggesting the region is on an economically solid footing and will likely lead the global recovery. In comments released along with the official version of China's PMI, a government researcher said China's economy could grow 9.5% in Q4.

Earnings: Mon. Before Open

• Cooper Tire & Rubber (CTB): Q3 EPS of $0.77 beats by $0.11. Revenue of $794M (-1.1%) vs. $715M. (PR)
• Dean Foods (DF): Q3 EPS of $0.34 beats by $0.01. Revenue of $2.77B (-13.2%) vs. $2.94B. (PR)
• Ford (F): Q3 EPS of $0.26 beats by $0.38. Revenue of $30.9B (-2.5%) vs. $28.3B. U.S. market share +2.2% Y/Y. Expects full-year 2009 U.S. industry sales of 10.6M, consistent with previous guidance. Shares +4.3% premarket. (PR)
• Humana (HUM): Q3 EPS of $1.78 beats by $0.01. Revenue of $7.72B (+8%) in-line. (PR)
• Loews (L): Q3 EPS of $1.08 beats by $0.19. Revenue of $3.74B (+25.9%) vs. $3.35B. (PR)

Today's Markets

Asian markets were mostly lower Monday. Europe shares are trading higher at midday, and U.S. futures have moved higher overnight.

The cost to the Deposit Insurance Fund for nine banks is estimated at $2.5 billion, which makes the fund $7.9 billion in arrears unless assessments have been collected. But, the FDIC told me they do not keep track of their Deposit Insurance Fund on a daily basis.

According to my analysis of the transaction reported in TheStreet.com, the CIT Group investment was a bad deal for taxpayers on the day it was made. Today it looks like what little value remained in the taxpayers' preferred stock investment has been wiped out. There was little evidence that Treasury officials performed basic due diligence when investing in CIT Group in December 2008. If they had, they would have been shocked by the high yields on its publicly traded preferred stock. Preferred stock is a very risky security. CIT Group is the first large lesson for taxpayers of its risks.