Equities were becalmed on Friday after a week in which Citigroup (NYSE:C) and Bank of America (NYSE:BAC) lost nearly half their market capitalistion. Size it seems isn’t everything these days. As was the case in Autumn 2008, it’s very hard for indices to make much progress if financials remain a drag.
Today’s Market Moving Stories
- The UK ITEM club is forecasting the UK economy will contract by 2.7% in 2009 and 0.5% in 2010 with unemployment set to rise to 3.25 million by the end of 2010.
- UK house prices fell 1.9% m/m in January according to Rightmove. The company’s spokesman described the decline as “worrying”. Looks like more pressure on the British peso beckons.
- In the US, 1 in 54 (1.84%) of “U.S. housing units” received “at least” one foreclosure notice during the year, which was up from 1.03% in 2007.
- Germany’s 20 biggest banks have accumulated about €300bn of so-called toxic assets, of which one-quarter have been written off. The amount of “risky assets” held by all of Germany’s banks may be as high as €1 trillion. Yet Germany’s Steinbrueck rejects a “bad bank” concept. Elsewhere we read that the German Government may buy 33% or more of Hypo Real Estate.
- There are reports suggesting that China, Korea and Japan have created a $120bn pool of foreign exchange reserves in case they need to protect their currencies
- Big government just keeps getting bigger. One wonders what J.M. Keynes or J.K. Galbraith would think. From Japan there is news of fresh measures to try and prop up the world’s second largest economy. Possible measures include increasing the growth of the money supply, widening the range of assets the Central Bank accepts as collateral to include equities and setting up a separate standalone entity to purchase stocks in the open market.
- It seems more financiers are trying the old Reggie Perrin trick of staging suicides.
UK Bailout Mark 2
Markets have been awaiting news on an expanded U.K. government rescue of its banking sector. The government, which in October launched a £500 billion bailout, now plans to take on the role of insuring banks against losses on loans that would be bundled into securities and sold to investors.
This is all very fine but it still seems to me like we are avoiding the BIG ISSUE. When are the powers that be going to MAKE the banks write down their loans / assets to something like a realistic market value? The longer we put off the evil day and keep putting this on the long finger, the more the crisis will linger. Officialdom is extending the crisis, not resolving it.
The U.K. plan may come just in the nick of time. The Daily Telegraph reported that Royal Bank of Scotland (NYSE:RBS) would unveil up to £25 billion of losses for 2008 from increasing bad debts and a vast goodwill write-off on its acquisition of Dutch bank ABN Amro. The stock is off 10% this morning. Taking this a step further, the Independent reports that British banks are technically insolvent!
What Next For The US TARP?
What should be done with the second tranche of the TARP - do they have a clue? Incoming US Treasury Secretary Tim Geithner is working on proposals for an American “bad bank” to remove the toxic assets from the balance sheets of major financial institutions. Fed’s Lacker says arguments are “compelling” for lifting bad bank assets. Remember, that was the initial plan with the TARP - before Henry Paulson realised it would be less costly and more appropriate (due to leverage considerations) to inject capital. But what price for the bad assets? Either banks would have to declare more losses, or the government would spend too much and take on yet more risks. Meanwhile Larry Summers, the President-elect’s top economic adviser, says they will focus the second tranche of the TARP on getting credit to consumers and businesses rather than helping banks.
The new Administration does not seem to be quite sure about what needs to be done. Indeed there are too many needs, and not enough money. Already the Treasury plans to issue $2.2trn this year, or 15% of GDP! How much more can they afford?
- HSBC (HBC) was a drag on the Hong Kong market this morning, falling 2.2%. Activist investment firm and shareholder Knight Vinke said HSBC may have to raise funds through a rights issue if its U.S. sub prime lending business was not restructured. Fitch revised its outlook on HSBC to negative, while affirming its AA rating.
- Toshiba (OTCPK:TOSBF) jumped 7.5% after reporting the company would receive orders worth Y600 -Y800 billion for equipment for two nuclear plants that U.S. based NRG Energy (NYSE:NRG) was planning to construct in Texas.
- KPMG is asking staff to take unpaid leave or face a significant redundancy programme.
- Barclays (NYSE:BCS)has soared this morning on comments that earnings will be higher than estimates.
- Lloyd’s (NYSE:LYG) is also ahead after it said it has “traded satisfactorily” since their Dec 12th update.
Economic Data And Earnings
The U.S. is closed today for the Martin Luther King Day public holiday so there are no figures to fret over.
On the earnings side, the slew of reports will be coming thick and fast. Highlights early in the week are IBM (NYSE:IBM) (expected EPS $3.03), J&J (NYSE:JNJ) ($0.92) and State Street (NYSE:STT) ($1.14) on Tuesday with Apple (NASDAQ:AAPL) ($1.38), Ebay (NASDAQ:EBAY) ($0.39), and Blackrock ($1.15) on Wednesday.
From Europe we get results from Burberry (BRBY.PK), Nokia (NYSE:NOK) and Fiat (FIATY.PK) (where there is talk of a rights issue).