By: Paul Azeff and Kory Bobrow
“Economic diseases are highly communicable. It follows therefore that the economic health of every country is a proper matter of concern to all its neighbors, near and distant.” –Franklin Delano Roosevelt
“If Tim Geithner, the much praised and ballyhooed NY Fed Chairman gets to be Obama's Treasury secretary, and he looks like a shoo in for the job, let me just tell you something, we are done, we are kaput, we are finished, we are completely and royally hosed as a nation... Geithner should be facing a senate investigation, not a senate confirmation...I am predicting he will be a total disaster as he has been as a New York Fed Chairman. Please I am begging you: don't hire Tim Geithner, he is an academic and all he has going for him is that he is a democrat.”- Jim Cramer
“No risk of that” –Tim Geithner (see B.L. #3)
“There is no chance that the major countries of Europe will let their institutions be at risk in the eyes of the market. There is not a chance.” – Tim Geithner
Saturday marked the third anniversary of the death of Lehman Brothers, not the first, nor the last, bank or broker-dealer to require emergency meetings of exalted officials to take place over a weekend (so they could make an announcement before the Asian markets opened), but it is the only one that resulted in a complete loss for shareholders and significant losses for bondholders. Whether you see this as the example of the officials getting it right or stunningly wrong really depends on where you sit, and it should color your perspective on everything that has occurred since.
Sadly, three years on, governments around the world are still out there bailing out the banks. Two days ago an unnamed BNP Paribas (OTCQX:BNPQY) official was quoted in an opinion piece in the Wall Street Journal:
“We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore," a bank executive for BNP Paribas, who declines to be named, told me last week. "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . We hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore."
The article prompted not only vociferous denials from bank officials, they actually went a step further and asked the French regulators to investigate. But a funny thing happened two days later: five central banks including the European Central Bank and the US Federal Reserve got together and announced a dollar-funding deal to help alleviate a problem that the French banks swore didn’t exist! The biggest beneficiary in the immediate run up after the announcement was none other than BNP, whose shares soared 22% after receiving help they obviously didn’t need…. The farcical reality is that it appears that the only BNP official willing to tell the truth is the only one who may face charges from the French Financial Authorities.
Speaking of companies that don’t need capital, it’s amazing how many of them are going out and raising it. In our last piece, we had the temerity to bring up the Canadian banks and their capital positions. We pointed out that by one measure of a bank’s solidity - Tangible Common Equity, or TCE - the Canadian banks ranked fairly low down in terms of quality on an international scale. The response we got from clients and other readers was swift and very clear: don’t mess with our sacred cows! While we weren’t suggesting that any of the Canadian banks were in any immediate danger, the fact that we hit such a sensitive nerve makes us wonder if people are being rational when it comes to their bank stock holdings. Apparently the idea that Canadian banks could need to raise capital was perceived as rather ridiculous.
Well, since we wrote that piece, Toronto-Dominion Bank (NYSE:TD) raised $600 million in a common-equity capital raise, and a large Canadian insurer, Industrial Alliance, just raised $200 million in equity in a private placement with a big pension fund. The last time the banks came to market with common equity was in 2008, and if anyone needs a reminder, that wasn’t such a great time to be a bank shareholder.
The technical indicators are no better for the financials. Four out of the five largest Canadian banks have done the dreaded “death cross” (for the technical analysis neophytes among you, that’s not good, death is bad), meaning that their 50-day moving average has declined below their 200-day moving average. Their 200-day moving averages are also trending lower. Our good friend Ron Meisels just put out a report calling for significantly lower prices on what used to be the largest Canadian bank by market-cap until very recently…. Ron has an old Hungarian expression: “don’t mistake the bottom of the page for support”!
Elsewhere, many other companies that insist that they have no need of capital seem to be bolstering their capital positions or raising fresh capital anyway, including several French Banks like, yes, BNP Paribas.
And then there’s Bank of America (NYSE:BAC).
Many of you have probably heard that Warren Buffett invested $5 billion in Bank of America. When the announcement came out, Bank of America stock initially soared on the news. Keep in mind, what Buffett bought wasn’t common shares of Bank of America. No sir, he bought special preferred shares that pay him 6%, rank ahead of the common shares in every way, and still give him all the upside on the common shares. Nice work if you can get it, but if you’re a poor, suffering Bank of America shareholder, you might wonder why you didn’t get offered the sweetheart deal that Buffett was.
If Bank of America wanted to raise capital (they keep insisting they don’t need any, but does anyone believe them anymore?), why didn’t they do a rights offering and allow every one of their shareholders the opportunity to participate? They could have even allowed Warren to backstop the deal, but instead, only Mr. Buffett gets the goodies. If you don’t own Bank of America and think you should take this as a sign to load up, keep in mind, if Bank of America is a house, Mr. Buffett didn’t buy the house, he bought the mortgage ON the house. So if someone offers you a sweetheart deal on the mortgage, by all means.
In an entirely unrelated note, Bank of America also announced that they would seek to shed upwards of 30,000 jobs, and are continuing a recent trend of selling off “non-core” assets. A sure sign it’s time to buy Bank of America shares is when they’ve cut so many jobs that Brian Moynihan (the current CEO) is handing out change at the teller window. Until then, we’ll stick with our gold shares.
Speaking of gold equities, our long-standing clients will know that we’ve been there for a very long time, but even if you first heard about gold stocks when our first comment recommended them in mid-June, you’d be doing alright: as a guide, the TSX gold index is up just over 19% over that period. The TSX was down over 3.25% over the same period, while the banking index went down about 7.5%. Our favorite large-cap gold stock was up almost 24% over the same period. As a reminder, we mentioned that we preferred the gold equities over the bullion itself, a call that has now been joined by such luminaries as David Rosenberg, Peter Schiff, Eric Sprott, heck, even a large Canadian bank-owned brokerage firm chimed in over the last few weeks. The rationale is simple: while gold is currently trading a hair under $1,800 an ounce, large-cap gold mining shares are pricing in $1,100- $1,200 gold. That’s a nice cushion. While it may sound like the trade is getting more crowded, before you make up your mind on that, have a look at the following two charts :
Does that really look like a crowded trade to you?
Finally, a last word is in order about those European banks. We really appreciated being able to use Treasury Secretary Tim Geithner’s quotes about the impossibility of a US debt downgrade in the piece that we wrote right after the US debt downgrade. But he’s just the gift that keeps on giving: in an interview with Jim Cramer (see quotes at the beginning of the piece), he’s now absolutely, unequivocally ruled out a Lehman-style collapse of a European banking entity. Someone else, though, begs to differ, and notably, that someone is the CEO of a large European banking entity. Josef Ackermann, currently CEO of Deutsche Bank (NYSE:DB), said a bit more than a week ago that “It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels.” Let that one sink in for a second. If the banks were carrying their assets at actual market values instead of using mark-to-make-believe, many European banks would be bankrupt, at least according to one of their CEOs. On this one, Timmy, we’re going with the guy who actually runs a real bank. And that’s the bottom line.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.