Friday Bank Bailout Links
Some interesting Friday links:
After Citi, is Bank of America next? (Reuters) A government rescue plan has eased investors’ concerns about Citigroup Inc, but mines lurking in the balance sheets of rivals including Bank of America Corp could still tempt short-sellers. Bank of America, the No. 3 U.S. bank by assets, has loaded up on mortgages as the world’s largest economy wrestles with the worst housing market since the Great Depression.
Citigroup bailout slammed by New Yorkers (Reuters): The bailout of Citigroup has made people in New York angrier than they were about any of the other government rescues of financial institutions this year.
Most Dividends Cut Since 1950s as Banks Conserve Cash (Bloomberg) Stock dividends are disappearing at the fastest rate in 50 years as the worsening recession forces U.S. companies to conserve cash. Citigroup Inc., Genworth Financial Inc. and New York Times Co. are leading 91 companies listed on the biggest U.S. exchanges in reducing or suspending payouts to shareholders this month, the most since May 1958, when 113 companies slashed dividends, according to data compiled by Standard & Poor’s. The reductions in November exceeded the 81 dividend cuts in October and 60 in September.
Bank lending rates could be controlled by Government (The Telegraph)
It’s almost 1984 in the UK. The Telegraph: Bank lending rates could be controlled by Government
Banks have been warned that Whitehall could take control of lending rates unless they begin supplying credit to small businesses again.
China slashes interest rates as panic spreads (The Telegraph) The People’s Bank of China cut interest rates by more than 1pc point as the economy crumbles and millions of jobs are predicted to go ahead of Christmas.
Merkel criticizes US over crisis (FT) Angela Merkel, the German chancellor, turned the tables on her international critics on Wednesday by accusing the US and other governments of making “cheap money” a central tool of their economic management, thus planting the seeds of a similar crisis in five years. “Excessively cheap money in the US was a driver of today’s crisis,” she told the German parliament. “I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the US and elsewhere and whether we could find ourselves in five years facing the exact same crisis.”
November 28th, 2008 at 2:52 pm
Come to me, BAC.
November 28th, 2008 at 3:26 pm
Next big bloated shorting victim, please….
November 28th, 2008 at 3:28 pm
BAC will indeed be in single digits soon, at which time I will likely be a buyer. If we thought Citi was “too big to fail”, then BAC is the Mother of all “too bigs to fail”.
Nothing like rewarding pathetically terrible management (the acquisitions of Countrywide and MER are prime examples) over and over and over again. I really think this time IS different (full disclosure: I’m still mostly “long” by about 60-40). This is clearly a different animal we’re grappling with and the little man behind the curtain has been revealed for what he is (a massive criminal fraud) to the percentage of the public who actually has a clue. Anyone who uses prior time period as a guide to the timing of when we’ll get out of this mess when our entire system is being called into question is highly delusional.
November 28th, 2008 at 3:33 pm
@Mannwich — I take it that, by simple extension, you are a massive buyer of Treasuries … Uncle Sam is the biggest of the too-big-to-fail crowd.
November 28th, 2008 at 3:46 pm
@constantnormal: Actually, no, I’ve been riding the waves up and down over the past several weeks trading in and out of SRS, QID, DUG, EEV, GDX and several individual stocks on the long side, including ACI, MCD, COP, (thanks leftback), and PRGM (thanks karen). I was initially too early with SRS (and SKF) where I had most of my portfolio in both, when the feds’ initial intervention scared me out for a while. I regret those moves big time but it was too risky to stay in with such big positions with the feds doing their best to prop up financial services and real estate. Since then, I’ve realized there’s very little they can do so I’m staying the course with those trades.
Overall, I’m mostly running to stand still (although I’m up 20+% in the last week) because I still refuse to make large bets on my positions (have some regret about that but like I’ve said before, I just don’t have Steve Barry’s cojones…yet) at this point and have been a touch early on some of these plays, although that will change if we have a big run up higher next week (I’ll probably go pretty close to short all-in in some of the short ETF’s above). I’m basically holding nothing long term (everything is now a trade), except for a few mutual funds (and some bear market funds) in my retirement accounts (I’m about 30 years away from retirement, so I have time to recover there).
November 28th, 2008 at 4:06 pm
“everything is now a trade”
We are all traders now.
Someone is a massive buyer of Treasuries. Any ideas on who?
I believe they are now buying oil at $135/bbl….
November 28th, 2008 at 4:12 pm
“Someone is a massive buyer of Treasuries. Any ideas on who?”
Could it be Ben printing dollars?
November 28th, 2008 at 4:20 pm
Old Angela seems to be the wisest of the bunch.
November 28th, 2008 at 4:30 pm
That’s horrible stuff. Unfortunately for my immortal soul, I’m charged. I just got a great deal on a pair of Toshiba LCD TVs for the old hobo shack and they are going to be delivered early next week. They’re the newest models, too … not old distressed stuff . Toshiba is open for business and I am proud to support them via a local retailer that offered free delivery and cheap haul away.
Sorry for the problems you mentioned in your post, but I have my own and as long as I can navigate around their’s, good luck to them. Sorry the Fed, Treasury, and SEC have to work a little harder but if they weren’t slacking off earlier then they could enjoy the long weekend like me. No tears for them.
Since oil will be trading around it’s marginal cost for a long time, I strongly suspect those who lived on the sloppy end of excessive credit will continue with a few troubles for a while. The rest will bounce back more quickly than media sales people would like. Although the media will probably make Black Friday appear like the USA is on life support, I don’t believe it. The media will describe today as dismal and squalid. It’s telling people want they want to hear and it sells better good news.
Cheap oil is creating a bounce back that won’t show up in the statistics for a couple more months. Mortgage rates just dropped, too. Steam is building. Looking forward to my two new TVs.
November 28th, 2008 at 4:40 pm
@ dead hobo: I have always found Black Friday “dismal and squalid” (people being crushed to death is squalid, no?), and would rather shop on any other day of the year. Or not at all, even better. Consumerism is not my thing.
You are right that there will be a “cheap oil” bounce. But the decline in the $ will bring the end of cheap oil and doom us to a more prolonged period of economic contraction.
Of course, it’s not like it hasn’t happened before, reading the history of US financial panics makes you realize this recession/credit crisis is as normal and all-American as apple pie and Britney Spears wearing no panties:
http://thehistorybox.com/ny_city/panics/panics_article1a.htm
November 28th, 2008 at 4:45 pm
@leftback: I’m with you. I actually break into cold sweats when I walk into a mall or big box retailer. I was so averse to even going out today amidst the shopping traffic squalor that I actually raked my yard (I loathe raking from when I had an enormous yard as a kid, thankfully now my yard is puny in comparison) and refused to even go grocery shopping.
The high point of the day was walking my Spanish Harlem shelter mutt 4+ miles around Lake Harriet on what has been a spendidly gorgeous sunny day here (40 degrees) in the Twin Cities. I refuse to even go down to blockbuster to rent a movie today.
November 28th, 2008 at 5:02 pm
leftback said:
Of course, it’s not like it hasn’t happened before, reading the history of US financial panics makes you realize this recession/credit crisis is as normal and all-American as apple pie …
reply: Nailed it in 1. Good job. BTW, I shopped via the internet. If I liked crowds, I wouldn’t be a damn hobo, now would I? About consumerism … what else are you going to spend your money on? You don’t get any extra points for dying with it. Your still dead. I plan to contribute to my personal velocity of money whenever I can aggregate enough spare change to create a personal multiplier effect. Then I’ll open up some Ripple and relax for the rest of the day.
If you look again, I think you will see the dollar has risen a bit in strength over the past few months. I understand economic theory says this is implausible, but there it is. I read a lot of the dollar crisis books and think there are factors they sometimes ignore, not that it is logical. Hint: since they sold pretty well, just think how books about the coming “world ending dollar crisis” will sell. Probably as well as the $200 oil books sold … which was pretty good.
November 28th, 2008 at 5:10 pm
@dead hobo: I’m not saying the U.S. as an empire is going to fall, but do keep this in mind: no two time periods are ever the same and all empires in history blithely thought they’d live on forever too.
November 28th, 2008 at 5:22 pm
“After Citi, is Bank of America next?“
Probably no bailout until B of A drops below $5.00/share. By then Obama & Geithner will probably be the ones to decide. I’m guessing that Obama will be more conflicted than Bush was about bailing out the banks; the reason being that Obama is more inclined to bail out the “little guy” (as well as the labor unions) …. as a result there’ll be less money for the banks.
[My checking account is at B of A. Maybe I should keep an eye on this situation].
November 28th, 2008 at 5:23 pm
Mannwich,
The empires that don’t plan to live forever will do just fine, probably forever. It is the nature of existence for every thing to fall apart. Newton says that reactions have reciprocal effects. People are, by nature, amazing and excellent builders and total screw ups who make you want to scream. The biggest foul ups are those who try to hold things in a constant state or force everyone to return to a time that never was. Chill. You can’t have monumental success without having monumental idiocy as an occasional offset.
“Success” just may not fit your popular definition. Think a little more broadly.
November 28th, 2008 at 5:29 pm
@dead hobo: You make a fair point but I guess I’m of the mindset that this is going to get a lot worse than people (including yourself) think and when we all start feeling the real effects of it, many of us (including maybe you, although you’ve admitted that you lack any sense of empathy for others) won’t be so sanguine about the reality of living through such a time, as opposed to cavalierly analyzing and discussing events in abstract theory. Believe me, personally I feel pretty good about MY prospects (even though my current business is in the tank). I have confidence in my abilities, have a great wife and overall life but I guess I am more concerned than you are about the big picture.
November 28th, 2008 at 5:32 pm
@DL: Agree with you re: BAC. Feds will let it go below $5 like Citi and then bail them out. I won’t short it, since I don’t short individual stocks but I may pick up some SKF and then grab BAC (and maybe UYG, which I dumped a while back for a loss, couldn’t take it anymore) once it hits that level.
November 28th, 2008 at 5:52 pm
Mannwich:
The reason I am steadfast in QID is two-fold…one, I have a much lower cost basis so I can afford to ride the massive swings. It started the year at 38, so it’s right around 100% return for the year. Second, I sleep very well at night…my IRA, college savings, emergency funds,are all in QID, TIPS, cash and FDIC insured CDs. I thought about selling QID at 100, but my target was 120 and why should I remove my protection? I’ve had friends tell me I am the only person they know with no exposure to this mess. I owe that for having the guts to quit my job a few years ago and get control of my 401k and lump sum pension.
I started a new career giving something back to society, so I don’t spend all day looking at the market anymore…that also helps ride out the swings. Nothing has changed fundamentally…housing still has 35% more to fall. Sentiment wise, I see low put/calls and minuscule short interest. If I were to architect a way for the market to continue falling, it would be low short interest in the face of a vicious slide. That’s what we have now. The rally of the last few days has had lower volume everyday – not good for the longs.
November 28th, 2008 at 6:12 pm
@Steve Barry: I agree with you and am actually rooting for a big rally next week so I can load up. I admire your conviction. Have been nibbling at QID again but am hoping to get in big at a better price. Same with SRS and EEV and to a lesser extent, DUG.
On another note (see one of my other posts above) – I knew I shouldn’t have tried venturing out today. Just went to Blockbuster to rent a movie. The place was a zoo. Waited in the longest line I’ve ever seen there only to get towards the front and have the cashier announce that their systems are broken and can’t take credit cards. I normally carry a little cash but today didn’t have any and didn’t want to run to the ATM, so I and many others proceeded to start a mass exodus from the building. No wonder Blockbuster’s business is so terrible. Every time I go in there something like that happens.
It also gave me an eerie feeling of what it must have felt like in Iceland when they went belly up. I knew I should have stayed home. Won’t make that mistake again on Black Friday.
November 28th, 2008 at 6:23 pm
@ Dead Hobo:
Regarding spending your money: I agree with you, if your personal situation allows you to buy stuff, go for it. Personally, there really isn’t a lot of “stuff” left I want; I have huge flatscreens in both my philly and shore houses – (I got a 47 inch Phillips 1080p HDTV for $749 this summer, awesome), laptop, ipod, decent car, etc. How much other useless crap do I need?
Just curious what it would take you to become bearish on the current situation? I look at this situation sort of simply. To me, almost all of the 2002-current run up was based on, well, asset inflation and debt. How much money was pumped into the economy by homeowners, realtors (residential AND commerical), mortgage brokers, WALL ST, homebuilders, and everything that was built up around these industries? Is it really unreasonable to imagine us going back to 2003 GDP levels after this all unwinds? The only difference being the level of debt (all kinds) is up tremendously from then.
Between all of this and the giant negative wealth effect from both the stock market (down 40%) and home prices (down 20%), what do you think it would take to have a poor holiday season?
November 28th, 2008 at 7:29 pm
Steve Barry, do any of the events of the last few days (Obama’s competence in reassuring markets, coming $700 billion stimulus, Citi bailout scheme as model for rest of big banks, Paulson’s new consumer programs, etc)change any of your targets for the lows on the major indexes? One would think that all these actions could put a floor on how low we could potentially go, no?
November 28th, 2008 at 8:02 pm
Ace,
Good question…I would say no. If these schemes were so great, why haven’t they been in place all the time? Why not make them permanent? Why don’t they just print out checks for one million dollars and mail them out to each family? Instant boom!
The reason why my ridiculous suggestion wouldn’t work is that you can’t create wealth by printing money…there are unintended consequences, inflation, moral hazard, inequity, etc. We are basically crushing future generations with debt. There is no free lunch.
November 28th, 2008 at 8:33 pm
Shopping anecdotes:
my son texted me from the area mall, buy GAP puts! (the store was empty.) mall parking lot was crowded, however. haven’t gotten the rundown yet on which stores were busy. jcrew is having a great internet only offer that expires tomorrow… petsmart had a $10 off in-store-today-only coupon that my husband actually made a special trip to use.
i suspect that those of us that put our nose up at shopping today are older, regrettably… funny how a stick shift was quite acceptable in my 20s and 30s…
jeff, i got as far as dog beach today on my walk, about a 1.75 hour round trip… may i recommend netflix for movies? love it… less than $20/month, too.
November 29th, 2008 at 12:02 am
@constantnormal: Uncle Sam, indeed, may be the biggest of the too-big-to-fail crowd, but fail it will. In fact, I would argue this is the objective. Of course, this will take time. Give it 5-10 years. Twenty tops.
QID probably has seen its best intra-day reading just above par. It may pay another visit sometime over the next several weeks, but the path of least resistance points to the vicinity of 20 or lower over the next year or two. The market appears on the verge of a melt-up, because in many significant ways it’s like July 1932.
(That’s when the market bottomed. Subsequently — winter 1932 through spring 1933 — the banking system went into its death spiral. Still, the market did not crater. All you peeps looking at “fundamentals” should give this some thought, because once bottom registers sometime over the next several weeks, the first move up probably will be nothing short of spectacular.)
November 29th, 2008 at 12:49 am
There is a significant difference between the percentage decline from the 1929 highs to the July 1932 lows and the percentage decline from Oct. 2007 to Nov 21 this year.
In my mind that overshadows any similarities between 1932 and 2008.
A peep, whatever that is.
November 29th, 2008 at 1:00 am
So, Riskaverse, you are saying we have another leg down?
KJ, the argument is that the govt did not inject enough liquidity from 1929 to 1932. In effect, we have sped up the calendar a couple years and are now at 1932 in comparison. Will the market head back down to Dow 7800 again? I think not, but only Steve Barry knows for sure.
November 29th, 2008 at 1:14 am
A bit of theory I guess, does the amount of information a market has ensure a quick turnaround? Or will the market participants adjust quickly to it. Even though as leftback says what we are seeing has precedents, isnt the amount of information that we have about the crisis unprecedented? We are sitting on a spectacular amount of data (ok, i guess most might not see the amount of data in the US to be spectacular, but in India data is way more difficult to gather) – should nt it mean that cycles should get shorter? And what about no. of active market participants ( ok active/herd could be a problem) , I am inclined to think market participants must have increased as percentage of population (again that would be true more of India), does that determine duration or intensity of a cycle?
November 29th, 2008 at 2:00 am
Many have tried to draw analogies between the current period and the period 1929-1932. I don’t see it at all. The government response in the two cases is so vastly different that the two periods are not comparable. The present government has committed 50% of GDP to bailouts, backstops and Fed lending. During the period ’29 to ’32 the money supply contracted something like 25%, and on top of that Hoover REDUCED the deficit. (Then there was Smoot-Hawley also).
Japan in the 1990’s is more relevant to our economy now than the Great Depression. One of the differences, though, is that Japan was the world’s largest creditor (and probably still is), whereas we are the world’s largest debtor. Consequently, I see inflation in our future (perhaps 18 months from now).
November 29th, 2008 at 7:43 am
@DL: The real analogy between 1929-1932 and now already happened. Overlay the Nasdaq chart from 2000 with a chart from 1929. I saw a post on this elsewhere recently but can’t find the link now, it’s amazing how consistent they are, including the 80% drop at the beginning. To me, the Nasdaq represents our underlying economy better than anything else right now, and it shows exactly the same pattern. Huge drop, recovery of around 50% (of the way back to 5,000) over the next few years before another plunge.
If that analogy holds, we’re much closer to the end of this than the beginning, because it started in 2000, not 2008. That is a very big “if” of course. I’m not counting on it, more of a very interesting (and shockingly similar) comparison so far…
November 29th, 2008 at 9:40 am
Ok, had to get some things out of the dead file.
1) Let’s compare now to 1929. In 1929, according to Shiller, home values were at 73 (all inflation adjusted)…this time they peaked at 220 (I adjusted for inflation) and are now at 160. In 1929, housing “crashed” from 73 to 65, or 11%. Housing has already crashed 27% now, with another 37% off current levels to go in my estimation. We haven’t even felt the worse of it yet!
2) In 1929, total credit was at 170% of GDP (it spiked to 260%, after the crash, as government created all those programs and GDP tanked)…this time we are at 357% of GDP and climbing as of last data. By 1940, total credit had returned to a reasonable level. This tells me that the New Deal worked…it temporarily raised debt levels to prime the pump and when the Depression softened, they sopped up the excess debt.
Now, Credit per GDP must contract 250% to get to a sustainable level, and that hasn’t even started yet! A New Deal now would take credit /GDP to what, 500%??? I can’t say how this will play out…it is unprecedented, except maybe for the fall of the roman empire, and I have no stats for that period.
3) It would be well within its 100 year inflation adjusted uptrend for the Dow to hit 3500.
http://www.geocities.com/WallStreet/Exchange/9807/Charts/SP500/Dji200_0710.gif
November 29th, 2008 at 10:49 am
cfischer asked:
Just curious what it would take you to become bearish on the current situation? ….. what do you think it would take to have a poor holiday season?
reply:
There’s already enough people who are bearish on the current situation. They don’t need me. Roubini counts for at least 10 normal people, although he has been right for the most part. I don’t think he has a feel for consumers. He sees them as an abstract mass that acts in concert rather than an uncountable number of cockroaches that scurry in all directions. He has absolutely no people sense. He’s good on the big stuff, though.
BR published an amazing normal distribution of stock market returns since 1825. Learn some statistics so that you have an intuitive feel for what the numbers mean, as opposed to being able to put together an impressive and most likely totally useless equation. Really, a little SPC will carry you a long way. Anyway, this chart promotes huge optimism. (Plus, when the Chardonnay kicks in I just think everything is great.)
Where’s the next bad news going to come from? Commercial loans are the new fad to bleat about. But I suspect most aren’t securitized so terms can be adjusted as required. Most of the retailers who are distressed have sucked for a long time so this is normal for them to go out now. Credit cards are always in the news for one reason or another. Failure is a normal part of success.
This Xmas will probably rock, although not at the level when people were spending cash based on phantom asset values.
November 29th, 2008 at 11:52 am
Steve Barry @ 9:40
“Now, Credit per GDP must contract 250% to get to a sustainable level, and that hasn’t even started yet! A New Deal now would take credit /GDP to what, 500%…?”
I’m looking at this from a political perspective as much as an economic one. Politicians are very much in the business of pushing off problems into the future; minimize pain now, worry about the costs later.
It may very well be true that “credit … must contract 250% to get to a sustainable level”. But who says that 2009 will be the year when we get to a sustainable level? The Fed and Treasury right now are moving heaven and earth in an effort to pump up yet another bubble. My bet is that they will succeed.
However, I also think it’s possible that in inflation-adjusted terms, the SPX in the year 2015 will be no higher than it was in 2000.
November 29th, 2008 at 1:05 pm
Merkel is correct.
November 29th, 2008 at 3:30 pm
@Dead Hobo:
You know, you’re right. I analyzed that chart. After the latest rally I think it moves the YTD over 1 notch into the -40/-30, leaving 1931 in the -50/-40 category. But 1931 was bracketed around 1929(-10/0) 1932 (-10/0) 1930 (-30/-20.) Hmm, wondering where we wind up if that repeated. Good thing we’re not under a ton of government and consumer debt like we were then! (oh wait. that’s now and not then.)
Speaking of statistics, in the whopping 150 years or so of market history, everyone tends to dismiss the 29-32 period as some outlier. Why? Yes, serious mistakes happened back then with regard to monetary supply, but I’m not convinced the current issues of the day are any less serious. The market still isn’t cheap by historical measures, and I see a lot of less to be optimistic about now then back then. At least back then our high schools math and science students were competitive with the rest of the world.
Where is the bad news going to come from? Let’s see, GDP decreasing by a significant amount (hasn’t happened in a very long time) leading to more bankruptcy, job losses, defaults, dropping home values, deflation, etc. Feel free to stick your head in the sand and dismiss this outright, but I don’t see in the current data makes people think this can’t happen.
As far as this Christmas season “rocking”, well, I’m short a lot of amazon.com because I disagree. I think we see a significant drop in spending (-5% to -10%) from last years numbers, with the entire consumer spending situation getting far worse in Q1 of 2009..
Guess time will tell.
November 30th, 2008 at 9:54 am
cfischer:
Re the chart: You appear to see a straight line that will continue in the same direction forever. I see a process that is in control and maybe possibly an outlier moment. I see the economy at one end of a range. A process that is in control has points on both sides of the process mean. Too many on one side or the other tells of problems. So far, I see normal activity, just a bit extreme. If true, then points on the other side of the process mean are coming soon. The process mean may change over time, but that is normal.
Re the Xmas rock: the news on TV this morning agrees with me.