Wednesday, April 22, 2009

Banks Are Lending Lies

The Great Garbage Rally of 2009 is un-backed by Bank Lending

This great rally of 2009 has been lead by the worse most levered companies in the stock market, Bloomberg reports "The 130 companies in the S&P 500 and Europe's Dow Jones Stoxx 600 Index with debt-to-equity ratios above 50 percent and a return on assets of less than zero... rose an average of 82 percent from March 9 through April 17."
What seems to have trigged it was a expectation that banks are out of the woods with chances of lending again with now positive earnings and the economy is reaching bottom as the 'second derivative' improves.

As far as bank lending is concerned, its simply not happening
Fed H8 Bank Credit Report. This fed report shows that bank credit has gone down every month in 2009, meanwhile cash assets in banks balance sheets continues to soar
Deposits in banks are down more than $100b in Apr, that is the side effect of a rising stock market and improved confidence, banks get less funding(therefore can lend less) as people take risks and stop hiding behind FDIC guaranteed deposits and deposit taking too big to fail institutions.

As far as bank capital is concerned Geithner just said 'everything is ok, most don’t need any money', which means there is trouble coming down the pipe. The treasury doesn’t have the money to plug in the holes so its natural they would say more money is not needed, the last thing they would do is to say "Guys there is a $500b hole in the largest banks and we don’t have the cash!!", I mean what are the chances that the additional capital needed somehow will be conveniently less than the $130b in TARP money left when they report results in May 4? I'd say the odds are pretty high, the odds are also high that we are being mislead. If it looks too much like a made-up coincidence it probably is

As far as bank earnings are concerned we had a few groups those who became hedge funds ‘earning’ their money from trading and other highly volatile revenue streams(JPM, GS) those revenue streams can easily lose them money as it happened in the Q4, those who mislead equity investors about their reserves(WFC) and those who have more rare non-recurring one time items than an art gallery(C, BAC).
Since housing is still collapsing at a fast pace with CA stuck in a looming foreclosure crisis, with notices-of-default soaring nationally, credit card lines getting cut hurting the consumer and unemployment still jumping there is little or no hope for bank earnings recovery in 2009

This suggests that this great garbage rally is unfounded, these levered companies cannot refinance their debts, they cant pay it all off, they need either raise equity or go bankrupt there is no way around it. GGP will be just one of a bunch, there will be a heck of a lot more companies going bankrupt because of maturing debt obligations. Reits, airlines, utilities and other levered sectors are in for a new downleg when the market finds out there is still little credit or liquidity coming into the markets

No comments:

Post a Comment