Archive for February, 2009
Quick Inter-day Update on the Markets
Posted by Jody Eisenman | Filed under Uncategorized
The markets have continued their descent based on lack of enthusiasm for either the new Treasury program or Obama’s stimulus package. Technically speaking, we are basically hanging on the edge of the S and P 500 and DJIA support levels. A relatively small decline from here could lead to a complete selloff in the markets of 800-1000 Dow points relatively quickly. It doesn’t seem that investors have much confidence in anything the government does. If history is any guide, this is not surprising, as the recession deepens and the market drops despite every plan the government has come up with so far. I’ve got my rally hat on.
Geithner and the Markets
Posted by Jody Eisenman | Filed under Uncategorized
After Geithner spoke on Tuesday, the market went into a tailspin, eventually dropping 380 points. We regained about 50 points today. I thought Geithner, like his boss Obama, spoke well. However, the speech was long on rhetoric and rather short on substance. As I mentioned Monday, he spoke about some sort of public/private partnership, but provided no specific details on how this could work. Private equity does not have a real appetite for these bad loans. There are probably hundreds of billions for sale with no real takers. Again, the problem is valuation. The banks would love to have these bad investments taken off their books at or close to face value. Dream on. There are way too many for sale, and the appetite is not great. In addition, thanks to bank secrecy rules, it is unclear what many of these loans (which are packaged in fancy names like SPVs or CDOs) actually consist of. Therefore, the only real buyers are for limited amounts at steep discounts. This does not help the banks as they are already under water thanks to their over leverage techniques.
Many people are waiting for this magic bullet that will clean up the problems, but I don’t think one exists. Any solution is going to involve a lot of pain. It is very possible that nationalization of at least the worst banks is the best solution. Meanwhile, as the recession deepens, banks continue to have difficulty earning their way out of this mess. Investment banking revenue is down sharply (although the first IPO since November was priced today and traded higher), commission and fee business is down, and credit card default rates are climbing quickly. As with the auto industry, there is certainly no guarantee that even with additional billions in aid, that the banks won’t need more money 3-6 months from now.
Meanwhile, the recession continues to spread rapidly across Main Street as businesses continue to close and the layoffs continue. The housing market has still not stabilized. Lets hope Obama’s stimulus plan can have a positive effect.
Waiting for Geithner
Posted by Jody Eisenman | Filed under Uncategorized
As President Obama warns of impending catastrophe if his stimulus package is not passed immediately, Wall Street waits one more day for Geithner to unveil his plan to revive the banking system and the economy. Although the details are still being speculated upon, it seems that part of the plan will include a provision for private equity capital to participate along with the government. The problem here is twofold:
1. Banks have had increasing difficulty in getting private capital to invest. The reason is that the sums required are enormous. In the case of really bad banks, it may be an insurmountable problem. For example, Citi has a current market capitalization (shares outstanding multiplied by the stock price) of about $21 billion according to Yahoo Finance. Suppose they need another $20 billion (it might be much more). What would an investor get for their money? Half the bank? The numbers just don’t seem to work based on current market prices.
2. When private equity has invested (such as Warren Buffets’ investments in Goldman Sachs and General Electric), they have invested under much more favorable terms than the government, and this was when the banks had much higher prices. Is the government going to give private equity a better deal than the taxpayers? If it does, be prepared to hear howls of protest. If they invest on the same terms, that would mean that either the taxpayers would get a better deal (which would be a lot more dilutive to the banks) or they have to persuade private equity to take a much less attractive deal, which seems unlikely to me.
If Geithner can pull this off, I will be enormously impressed. The markets did not do much today in anticipation of the plan, although many of the banks rallied. Geithner is due to speak at 11 AM. Stay tuned.
