Posts filed under “Think Tank”

Intel Throws Party; BAC Founder Appalled

Good Evening: The “Intel Inside” ad campaign received a boost today in the form of an Intel-Inspired equity market celebration. As the whole world watched, Intel exceeded earnings estimates last night, rose in aftermarket trading, and then paced an around the globe rally in stock prices. Setting the bar low and then leaping over it like some erstwhile superhero is an old trick for Intel, but the possibility that investors might see the good news from companies like INTC and GS and extrapolate it into imminent success for all is why I felt compelled to mention last week the potentially bullish set up for Q2 earnings season. In just three sessions this week, the major averages have already retraced most of their declines since the mid June peak. It will only take one more day like today for the S&P 500 to pierce the 950 level, so can 1000 be far behind? It’s unknowable, but what I do know is that Ken Lewis and Bank of America should be ashamed of themselves.

The “earnings beat” from Intel is really the only news that seemed to matter today. INTC’s results catalyzed a flight into risk everywhere, from Australia all the way to Brazil. The economic data was all pretty much in line with expectations and was thus a non factor. Mortgage purchase applications fell during the latest reporting week; CPI hit the mark by rising 0.7%; the Empire manufacturing survey improved a few notches; and both industrial production and capacity utilization fell — though by slightly less than had been feared. The credit card charge off data was likewise less worse, and this data point was supportive of the financial names. Taken together, the economic releases left market participants with few reasons to swim against the bullish tide rising in the wake of Intel’s earnings.

That tide started rising last night in Asia, spread to Europe, and our stock index futures were pointing to gains well north of 1% prior to this morning’s open. Once the bell rang at the NYSE, risk aversion went out of fashion, as the major averages quickly rose 2%. They never looked back, either, and the indexes marched steadily higher into the close. By day’s end, the averages were sporting advances that ranged from the 1.8% for the Dow Transports, to 3.8% for the Russell 2000. Tech and financials were outperformers, while the defensive names lagged. Interestingly, however, the VIX also went up after setting a new, post autumn low. It’s too soon to know if index volatilities are now simply too cheap to resist, or whether they are signaling tougher sledding for the rest of earnings season, but the VIX will bear watching. In keeping with the flight away from safety, Treasurys were once again throttled. Yields rose between 7 and 15 basis points. The dollar also took a hit, and the greenback’s weakness encouraged commodities to put their party hats on, too. Led by oil and the metals, the CRB index rose 1.5% on Wednesday.

Your word is your bond; a deal’s a deal. We all learn these lessons well before we become adults and pursue various ambitions. Even bankers live by this credo, especially when they are on the collecting end of a contract. Now comes Ken Lewis and the Bank of America, looking the American people straight in the face while claiming a deal isn’t a deal without a signed contract. I’m referring to the U.S. government guarantee of the assets BAC assumed after acquiring Merrill Lynch. Negotiated in the dying light of the Bush administration in January of this year, BAC trumpeted the news during a press release on January 16, containing, among other things, an awful Q4 earnings report (see stories below). The assets receiving this taxpayer-funded backstop amounted to $118 billion. It cushioned the blow of the earnings report and helped buy BAC the time it needed to raise fresh equity (which it did in May).

Coffers replenished, Mr. Lewis and his behemoth bank are trying to claim there is now no need for this guarantee, and besides, no full contract was ever executed. BAC wants to renege on paying the $4 billion it owes the taxpayers for the backstop, line of credit, insurance policy, or whatever we want to call it. “We didn’t draw on it, so we don’t owe anybody anything” seems to be BAC’s defense. I wonder if a similar defense would work if I decided not to pay my insurance premiums this year because my house has yet to burn down. And yet, the Charlotte-based banking house Mr. Lewis helped build was indeed smoldering, if not on fire back in January when he agreed to the deal and announced the following:

“In view of the continuing severe conditions in the markets and economy, the U.S. government agreed to assist in the Merrill acquisition by making a further investment in Bank of America of $20 billion in preferred stock carrying an 8 percent dividend rate.
“In addition, the government has agreed to provide protection against further losses on $118 billion in selected capital markets exposure, primarily from the former Merrill Lynch portfolio. Under the agreement, Bank of America would cover the first $10 billion in losses and the government would cover 90 percent of any subsequent losses. Bank of America would pay a premium of 3.4 percent of those assets for this program.
“On a pro forma basis, this additional capital would boost the company’s Tier 1 capital ratio to approximately 10.70 percent.” (source: BAC press release, January 16, 2009)

Remember these reassuring words you sent zinging around the world, Mr. Lewis? You wanted everyone to know that Uncle Sam stood behind you and that Bank of America would be one of the government’s hand-picked survivors of the financial crisis. Your stock closed at $8.32 on January 15, the day before this press release. This lifeline helped you raise fresh capital and your stock closed today at $13.42 — a tidy gain of 61%. And now you say you owe us nothing for this help, even though you announced the payment terms in your press release? What are you trying to claim — that you are invoking some sort of Material Positive Change clause?

Your “no signed contract” defense won’t wash, either. As any lawyer will tell you, contract law is based every bit as much on what two parties promise to do and how they perform on those promises. A signed piece of paper simply memorializes the deal and helps fading memories should a dispute arise at a later date. As your press release so clearly shows, we all know the agreed upon terms. We the People performed in allowing our leaders negotiate on our behalf; We let you make the claim We were behind you; and you used this claim to help ward off the demons that sank companies like Lehman Brothers. We performed; you and your company benefited. That, my friend, is a contract.

But if you still are unclear as to what I’m talking about, let me give you an example that hits close enough to home for you to understand. When BAC issues a company a revolving line of credit or a standby Letter of Credit, BAC receives both an upfront fee and an annual maintenance fee — WHETHER OR NOT THE LINE OF CREDIT IS EVER DRAWN UPON. If a client tries to renege on paying these fees because the line isn’t used, you would take them to court and demand payment.

Isn’t it bad enough that your poor stewardship of one of America’s premier banking franchises contributed to the mess we now find ourselves in? The financial crisis has cost taxpayers trillions of dollars and cost millions of workers their jobs. You’ve kept your job, Mr. Lewis, so do yourself, your shareholders, and the American people a favor and pay up. It shouldn’t require a U.S. Congressman to tell you it’s the right thing to do. Bank of America’s founder, A.P. Giannini, hated Wall Street in part because of behavior like this. I’m guessing he would be appalled to see what you’ve done to what he used to call “the people’s bank”. For Mr. Giannini, a deal was most certainly a deal, and his word was always his bond. Care to reconsider now, Mr. Lewis?

– Jack McHugh

U.S. Stocks Rally, Dow Jumps Most in Three Months, on Intel
U.S. Economy: Factory Gauges Signal Stabilization After Rout
Bank of America Said to Balk at Paying Backstop Fee
Bank of America Urged to Pay U.S. for Merrill Accord
Bank of America’s deal with Uncle Sam — Summary of Terms
Bank of America Earns $4 Billion in 2008

Category: Markets, Think Tank

First Appointments to the to Financial Crisis Inquiry Commission

It is modeled on the Pecora Commission, a Senate panel that investigated causes of the Great Depression during the 1930s. The Pecora Commission led to major changes in federal law. Speaker and Majority Leader appointed Phil Angelides as chairman of the Commission. Angelides was elected California State Treasurer from 1999 to 2007 House Speaker •…Read More

Category: Markets, Think Tank

CIT is Not the FDIC’s Problem

The team of Treasury Secretary Tim Geithner and OCC chief John Dugan are trying to paint Sheila Bair and the FDIC as the villains in the CIT situation. CK this missive I just got from one of the members of the working press: “The lobbyists are ready to string Bair up and claim this could…Read More

Category: Credit, Markets, Think Tank

Pick your poison

On the same day Treasury Secretary Geithner said “It is the policy of the US and it will remain the policy of the US to remain committed to a strong dollar” and that it will “remain the principal reserve currency,” the $ index is back below 80 and a close here would be the lowest…Read More

Category: MacroNotes

King Report: Who Pays Taxes?

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Last night Bill O’Reilly, in a segment about ‘connected firms’ profiting from cap & trade, stated
Goldman made $2B in 2008 but PAID NO FEDERAL INCOME TAXES!

Long-time readers know that we regularly inveigh against US policy that allows corporations to run two sets of books – one for investors and one for taxes. So when the usual suspects appear to whine that US corporations need tax relief, remember that many US corporations pay little or no income taxes while they report great earnings…How much federal income tax will Goldman pay this year? Where’s Congress?

A few weeks ago we warned that just like the previous two years, BLS seasonal adjustments prevented early spring commodity inflation (rallies) from appearing in PPI in CPI; but in June the seasonal adjustment process would inject the inflation that occurred early. This occurred yesterday with PPI.

Though PPI at 1.8% was double expectations, in reality inflation was not that strong in June. The BLS understated energy and food inflation in the spring and will overstate inflation in June & July.

Press releases noted that energy inflation (+6.6%, gasoline +18.5%) was the reason for the jump in PPI.

Once again we have better than expected retail sales (+0.65% m/m) due to inflation. ‘Core retail sales were 0.26%… Ex-food services, retail sales declined 10.3% y/y…Why won’t the government report ‘core retail sales’ (ex-food & energy) like it does for PPI and CPI?

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Category: Markets, Think Tank

industrial Production

June Industrial Production fell .4% and is the 17th month of decline in the last 18. It was .2% better than expected but May was revised down .1% so overall it was about in line. Capacity Utilization fell to 68% from 68.2% in May but was a touch more than the consensus of 67.9%. It’s…Read More

Category: MacroNotes

Economic data

The July NY Fed survey was -.6, above expectations of -5 and up from -9.4 in June. New Orders jumped to +5.9 from -8.2, the first positive reading since Sept ’08 but Backlogs fell 2 points to -12.50. Employment was up a modest one point at -20.8 but it’s the least negative reading since it…Read More

Category: MacroNotes

A nice shift in focus to business from political science

The good thing about earnings season is that it allows us to focus our attention again to company fundamentals and less so on what the government will do to ‘fix things.’ Regardless of whether it was just inventory restocking or signs of a real recovery, Intel’s results being well received has a better feeling to…Read More

Category: MacroNotes

Taleb Offers Positive Black Swan on Otherwise Dull Day

Good Evening: Yesterday’s stock market rally continued today when neither the earnings reports nor the economic releases contained any bombshells. CSX, JNJ, and GS all reported positive earnings, though only Goldman really surprised to the upside. Of course, since GS had its rally yesterday after the Whitney upgrade, the company’s shares barely managed to hold…Read More

Category: Markets, Think Tank

What Is Goldman Sachs?

> Jim has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors. Prior to founding…Read More

Category: Earnings, Think Tank