Stock Preacher

Ford Motor Co will receive nearly US$5.9B in US government loans to spur development of more fuel-efficient vehicles, the Obama administration said last Tuesday. Japan’s Nissan Motor Co Ltd will receive US$1.6B, and start-up Tesla Motors Inc will receive US$465B in advanced technology financing from the Energy Department program. “By supporting key technologies and sound business plans, we can jumpstart the production of fuel-efficient vehicles in America,” Energy Secretary Steven Chu said at Ford headquarters. “These investments will come back to our country many times over by creating new jobs, reducing our dependence on oil, and reducing our greenhouse gas emissions,” he said. The agency plans additional loans over the next several months to automakers and suppliers. Chu said the administration began talks with Chrysler Group LLC on possible energy technology loans immediately after the company stepped out of bankruptcy protection this month. It is also having “technical” discussions with General Motors Corp, which is currently reorganizing in bankruptcy proceedings. Both companies applied for financing last year but their financial distress disqualified them from consideration in the first round of financing. The US$25B program is only open to viable (real) companies.

Popularity: 2% [?]

Since the World’s credit markets seized up on September 8, 2009 many corporations are either cutting costs, waiting for government bailout money, or preparing for bankruptcy, as banks are reluctant to lend to all but the most credit worthy and then at unconventionally high interest rates.

In the center of the storm lies the US, UK and EU financial industry where it all started.
The US Federal Deposit Insurance Corporation said last week that the nation’s banks and thrifts lost US$32.1B in the Q-4 Y 2008, the first quarterly deficit in 18 yrs, compared with the US$575MM profit in Q-4 Y 2007. The industry’s net income for Y 2008 plunged from US$16.1B to US$10.2 B for the period.

In the US eighteen federally insured banks have failed so far this year. Last year the number was 25, more than the total number of the previous five years, and up from only three in 2007.
Shares of Citigroup Inc., once the most powerful U.S. bank, have fallen below 1 dollar this month. Pummeled by the financial crisis, the group has lost more than 98 % of its value from its peak in October 2007, and is down more than 95 % from a year ago.

The American International Group (AIG), covered almost daily in www.stockpreacher.com’s Stock Talk, reported this month that it lost US$ 61.7B in Q-4 Y 2009, the largest corporate loss in history. AIG has benefited since from more than US$170B in federal rescue funds with more likely needed and to come.

HSBC Holdings PLC, the largest bank in Europe, early this month reported a 70% drop in its Y 2008 profit and said it would cut 6,100 jobs as it closes its consumer loan business in the United States. It also announced that it would cut its dividend and not pay bonuses to top executives.

In the US, the DJIA sank below 6,800 on March 3, its lowest close since May 1997, losing more than 50% from its highest level in October 2007. Since then the S&P 500 has staged a 19.8% rally off of its lows in the same frame.

On March 23 when the markets were surprised by the US government’s latest plan on clearing bad bank assets and a larger-than-expected rise in existing home sales, the three main indexes all surged more than 6.5% on the day.

Some Economists suggest that financial crisis has yet to bottom out, and the real economy continues to slip as the global economic situation deteriorates.

Therefore, stimulus spending, market confidence, financial regulation and free trade will be key issues at the G20 summit of the World’s leading developing and developed economies next week in London.

Popularity: 6% [?]

Citigroup stake The U.S. government agreed to become the biggest single shareholder in Citigroup on Friday, in the latest attempt to save the ailing financial group and to shore up the country’s banking system. The partial “nationalization” will give the government a stake of up to 36 % in the troubled lender, capping a spectacular fall from grace for what was one of the world’s largest financial institutions. At last Friday’s share price, the market value of Citigroup, which has some US$1,600B in assets and operations in 130 countries, was less than US$9B.

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The White House said last week that it strongly believed in a privately held bank system, after rumors that the U.S. government could nationalize banks caused shares in Bank of America and Citigroup plummet. “Let me reassure as best I can on banks,” White House press secretary Robert Gibbs told a briefing with reporters.

“This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring they are regulated sufficiently by this government.”That’s been our belief for quite some time and we continue to have that.”

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US banks now hold over US$1,000B of cash, which is an unprecedented level and more than five times the typical amount held over the past 40 years. The Big Q: Why? The Big A: Because the banks know that they are heavily exposed to bad loans/assets on their balance sheets and, therefore, they are very reluctant to commit capital to new lending. The European and US governments/central banks can expand borrowing/lending/asset guarantee programs and create asset management companies to buy the financial sector’s distressed loans/assets all they like, but these two courses of action augur serious problems, i.e. the calculation of the transfer price of the distressed loans/assets and the accompanying loss-sharing mechanism between bank owners, creditors and the government or taxpayers.

So, governments will have to inject still more huge amounts of new capital into banks, and perhaps the selective nationalization of weak or insolvent banks, and the sooner it happens, the quicker financial stability will return. An analyst at the Financial Times in London believes that the global banks require at least US$675B of new capital, of which half is probably needed yesterday. To date there is no hard evidence in either Europe or the USA that immediate, direct and decisive government action is taking place to resolve the global banking crisis and, therefore, the eventual economic outcome could still slide from a global recession, which is already largely anticipated by global stock markets, to a deflationary depression. Where are today’s Churchhills, Rosevelts and Thatchers?

Popularity: 7% [?]

US Treasury yields have moved South to the lowest levels since the ’40s, because investors are very fearful of this global economic downturn + the potential deflation on the horizon and have rushed to purchase the US government issued debt paper considered among the safest asset classes. The fact is that this may turn out to be the biggest investment bubble to date and may be on the edge of popping. According to a article in Barron’s today, the big risk to the Treasury market comes from the potentially inflationary impact of both the Federal Reserve’s extreme accommodative monetary policy, which sent short rates to zero +, and the huge fiscal stimulus slated to come from the US government this year. It is expected that it will take higher yields to attract investors, particularly foreigners, as the US Treasury works to fund an estimated deficit of US$1T + this year. Savvy analysts are saying “get out now”. Why, because other parts of the bond market are calling including municipals, corporate bonds, convertible securities, some mortgage securities and preferred stock. The average junk bond now yields 20%, compared with 9% at the start of 2008. Triple-A-rated Muni’s with 30-year maturities are yielding about 5.25%, almost double the yield on 30-year Treasuries. The yield differential between the two markets is unprecedented. Until this year, Munis almost always yielded less than US Treasuries because of their tax benefits. A Bearish stance toward US Treasuries and a Bullish one toward the rest of the bond market represents the consensus view. Most equity and bond analysts surveyed last month by Barron’s projected the US Treasury 10-year note would carry a yield of 3% or higher by the end of 2009. At the same time, it’s hard to find Bears on corporate bonds. It’s nice to be contrary. Sometimes, however, the consensus view is right.

Popularity: 6% [?]