A Rough Day for Banks

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Includes: AIG, AXP, HSBC, PNC
by: Reggie Middleton

For those of you who follow global markets, it's been a round Monday. The selloffs are being led primarily by the banks, and for good reason. HSBC (HBC), which I believe I advised readers to sell in the 80s last year, is near the mid 20s pre-market as it issues a rights offering at a 48% discount to last weeks share price at the close. Wheww! Talk about a crew cut. A set of 20 at the money puts should have thrown off about $70 to $90k by now with at least $20k to $30k to go.

If you were creative, you would have done much better. For instance, my institutional guys would have hit a home-run with just a few hundred thousand put out of the money, long dated - of course you would have had to have faith in my research and opinions. Still, $500k in, $4 million out and still counting would do a lot to take the edge off of some of the other mistakes that may have been made.

Reggie says: "Part one of three of my opinion of HSBC and the macro factors affecting it) - Nevertheless, the slowdown in the US economy and spiraling global inflation are likely to hurt economic growth in Asia and the Middle East. This factor could have a huge negative impact on the bank’s financial health in the near-to-medium term. Another cause for concern are the European markets, especially the UK, that are mirroring the recessionary trend seen in the US, where effects of the weakening housing market are likely to spill over into the personal loans business. Added to these issues, as mentioned in the earlier snapshot on HSBC, the bank’s stock price has declined by a mere 7.5% since the turmoil began in the middle of 2007, while its peers, such as Citigroup, JP Morgan Chase, Bank of America, and Barclays Plc, have lost on average 38% of their market values until now. 14 August 2008.

In the news this morning:

HSBC Trims U.S. Lending Unit: HSBC will abandon much of its U.S. consumer lending while planning to raise capital and cut its dividend.

Then there's Amex, whom I think I recommended short at $20 or $30 last year. They, admittedly, have been volatile as hell and difficult to hold on to, but the ride is paying off handsomely - currently trading at $11.40.

Reggie says: When the best of the best start with the shenanigans, what does that mean for the rest... My team has finished the Amex analysis, and it is interesting. Amex is considered the creme de la creme of credit card lenders, with a premium upscale consumer and business clientele that generally. The deteriorating consumer credit environment in the US has seen large credit card companies, including American Express (NYSE:AXP), witness large write-offs and provisions in the last two quarters. AXP reported 2Q2008 net income from continuing operations of $655 million, or 56 cents a share, down from $1.04 billion or 86 cents a share in 2Q2007, off higher-than-expected provisions on its credit card lending portfolio. Credit metrics for AXP continue to weaken with 30 days past due card loans and 90 days past due card receivables rising to one of their highest levels ever at 3.9% and 3.0%, respectively, in 2Q2008. Amid the continuing US housing price decline, rising unemployment levels and increasing energy, commodity and food prices borne from burgeoning inflationary pressures, we expect AXP's delinquent credit card payments, credit cards defaults and losses to rise over the current levels. This coupled with rising funding cost off hastily dwindling liquidity in the credit markets, near non-existent securitization activities in the US, and deceleration in AXP's core credit card income due to slackening consumer spending, should weigh on AXP's near-to-medium-term earnings. However, we believe that AXP's liquidity position remains reasonable to weather the current difficult operating environment, particularly as the Company is expected to receive approximately $880 million annually for the next three years consequent to a favorable settlement of antitrust lawsuit against MasterCard and Visa. Thursday, 31 July 2008

In the news this morning:

Bruised AmEx Returns to Roots: AmEx is returning to its roots as a charge-card issuer to well-heeled Americans, as the company reels from late payments and defaults.

Also from the Doo Doo 32 - PNC Slashes Dividend to Build Capital 3/2/2009 8:13 AM EST. I warned on this one way back in May of 2008 , and it has paid handsomely, and repetitively.

Then there's AIG: AIG Posts $61.7B 4Q Loss, Bailout Is Restructured- AP - American International Group Inc., once the world's largest insurer, said Monday it lost $61.7 billion in the fourth quarter, the biggest quarterly loss in U.S. corporate history, amid continued financial market turmoil.

I hope you guys don't believe AIG is in this mess by themselves. I have already caught one prominent insurer in the same hanky panky, just on a smaller scale using different acronyms for the activity. As I have said numerous times, the insurance sector's systemic risk to the economy is woefully underestimated.

And from around the globe...

Asia Pacific Markets

Symbol Name Last Trade Change
^AORD All Ordinaries 3,203.800 12:10AM ET Down 93.100 (2.82%)
^SSEC Shanghai Composite 2,093.447 2:00AM ET Up 10.595 (0.51%)
^HSI Hang Seng 12,317.46 4:59AM ET Down 494.11 (3.86%)
^BSESN BSE 30 8,607.08 5:28AM ET Down 284.53 (3.20%)
^JKSE Jakarta Composite 1,256.109 3:59AM ET Down 29.367 (2.28%)
^KLSE KLSE Composite 876.56 5:18AM ET Down 14.11 (1.58%)
^N225 Nikkei 225 7,280.15 2:00AM ET Down 288.27 (3.81%)
^NZ50 NZSE 50 2,481.515 Mar 1 Down 40.802 (1.62%)
^STI Straits Times 1,533.40 4:10AM ET Down 61.47 (3.85%)
^KS11 Seoul Composite 1,018.81 4:03AM ET Down 44.22 (4.16%)
^TWII Taiwan Weighted 4,425.83 12:45AM ET Down 131.32 (2.88%)

Africa/Middle East

Symbol Name Last Trade Change
^CCSI CMA 1,310.23 Mar 1 Up 22.88 (1.78%)
^TA100 TA-100 579.89 Mar 1 Down 23.80 (3.94%)

Europe

Symbol Name Last Trade Change
^ATX ATX 1,430.60 7:11AM ET Down 51.07 (3.45%)
^BFX BEL-20 1,627.92 7:26AM ET Down 68.66 (4.05%)
^FCHI CAC 40 2,609.8201 7:11AM ET Down 92.66 (3.43%)
^GDAXI DAX 3,732.44 7:11AM ET Down 111.30 (2.90%)
^AEX AEX General 211.69 7:26AM ET Down 8.12 (3.69%)
^OSEAX OSE All Share 250.79 7:11AM ET Down 8.27 (3.19%)
^MIBTEL MIBTel 12,048.0000 7:26AM ET Down 478.0000 (3.82%)
^SMSI Madrid General 773.03 7:25AM ET Down 30.89 (3.84%)
^OMXSPI Stockholm General 190.86 7:26AM ET Down 6.69 (3.38%)
^SSMI Swiss Market 4,499.83 7:11AM ET Down 190.84 (4.07%)
^FTSE FTSE 100 3,672.56 7:11AM ET

Down 157.53 (4.11%)