4/28 Morning Note

Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).

This is his most recent commentary:





The news this morning is absolutely unequivocally making my point about the banks. On the one hand, you have reports that the government is apparently going to have C and BAC raise billions more in capital in order to increase their capital base. We know the private market is not going to come forward with the necessary money, not all of it at least, and as a result the government is going to have to plug the holes with additional capital. With preferred to common conversions all but assured, I maintain my belief that Citi emerges from this situation as a fully functioning arm of the federal government. BAC is probably not far behind but this is only one side of the debate. On the other hand, you have NTRS announcing that they are planning on raising more than one billion dollars in order to help repay the TARP injection. NTRS follows other banks including GS and JPM in laying the groundwork for TARP repayment. The specifics of the sale do not matter for this discussion but rather we need only focus on the intention. GS, JPM and NTRS are healthy banks. We knew this and we know this. C and BAC are unhealthy banks. We knew this and we know this. Creditors know this. Depositors (I hope) know this. The returning of TARP funds by any of the aforementioned banks does not in any way draw attention to less healthy banks in terms of making people aware they are unhealthy. This is not October. This is April and the amount of information we have now compared to October is significantly larger. There are, of course, broader questions about the health of the overall banking sector and the economy at large. NPA are up, loan loss reserves are increasing and credit deterioration is an ongoing battle but the fact remains that if you are GS, why should you be subject to an intrusive and draconian Congress simply because of mismanagement at other institutions? The answer is you shouldn’t.

In a somewhat related story, the Chrysler and GM discussions continue. In the case of GM, it now appears that in any restructured company the US Government will be the largest shareholder. In fact, as one analyst put it, the US Government is going to own more of GM than the French government owns of Renault. That is not an encouraging development. The problem, as best I can tell, is that GM creditors think they’re going to do a-okay in any bankruptcy preceding and such a move is probably in their best interests as it is becoming increasingly clear that the UAW is winning out in any discussion. I’m not an auto analyst so I won’t go too deeply into this but I will ask what business is it of the US government, at this point, to be dictating bankruptcy terms to any of the involved parties? Yes they had to inject money in order to stop the company from failing but if bankruptcy is the best option for creditors, than bankruptcy it should be. Let us not forget that in an ordinary world, creditors own a company not the US government. I was in favor of the capital injection in order to buy some time for GM. I thought the economy and public confidence couldn’t handle the shock of a GM bankruptcy last year and I believed that the company was worth a shot in terms of trying to stave off bankruptcy, but much like the banks, things have changed. It is time to let this company enter bankruptcy proceedings and let the chips fall where they may. Bankruptcy is the only way to be sure that the company will be a viable entity in the future. Any other measure delays the inevitable.

All around the world

This was a real tough day around the world with most markets down more than 2%. The Nikkei was down 2.67% while the Yen is trading higher after Honda said profit is going to drop over 70%, DoCoMo reported an operating profit below estimates and Daiwa Securities reported a third straight quarterly deficit. Additionally, retail sales in Japan fell yet again, the seventh consecutive month but March’s 3.9% YOY drop was smaller than the 5.7% YOY drop seen for February. That all said, Bloomberg has a great article out entitled “China Demand Means Asia Exporters May Be Past Worst of Trade Slump.” It talks quite specifically about the positive effects of China’s stimlus plan and its benefits for the surrounding countries. In the case of Japan, an increase in Chinese demand would be quite helpful and in an overall sense, with exports representing about 20% of Japanese GDP, any pickup in external demand would be beneficial (note: broadly speaking, financial crises such as the one in which we find ourselves are often ended with an export boom. As one example that happens to be the most recent, Japan was really helped by the increase in demand for its goods earlier this decade. Unfortunately, the current crisis is global and an export boom does not appear to be on the horizon any time soon. How we emerge from the current malaise remains to be seen).

Over in Europe, markets are also generally to the downside as bank capital concerns are weighing on stocks and the earnings report from DB is also having an effect. In the most recent example detailing my capex concerns, BP cut its target spending rate again. Following the rise in Italian and German consumer confidence we saw yesterday, French consumer confidence rose a touch for March which was above last month’s level and above expectations. Returning to Italy for a second, business confidence picked up as an increase in orders is playing into the “Worst is over” belief.


The week gets going today with Case Shiller at 10 where we’re looking for a slightly less forceful price decline of 18.7% or so following last month’s 19% decline. Needless to say, this would be the very first time since the start of the housing collapse that the YOY rate was better. This is going to get major play on TV and in headlines and while a less intense decline is certainly encouraging, it by no means suggests that “things are getting better” but merely the fact that “things are getting worse at a slower pace.” Of course any recovery must start with a leveling off so some encouragement is warranted. We also must keep in mind that the large number of homes in “shadow inventory” is eventually going to come to market and further positive housing headlines are probably going to have an effect on inventory levels.

Also out at 10 is the Conference Board’s measure of consumer confidence which should show improvement echoing gains in other confidence measures we’ve seen as of late. Following the tentative improvements we’ve seen in weekly jobless claims, I will be keeping an eye on the labor components of this release in order to see if some positivity is seeping in.

And lastly, the two day FOMC meeting begins today. We’ll have more on this tomorrow but it goes without saying that there will be no movement on the rate front, but perhaps the statement will provide further clarity with respect to the ongoing plans already put in place. I would also just add that I expect the statement to note some improvement in terms of slowing contractions across the economy.

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