By William Patalon III
Executive Editor
Money Morning/The Money Map Report
Barring some dramatic – and unforeseen – news this week, expect investors to tread water until Thursday, when the government is expected to release the results of the bank stress tests it conducted on the 19 largest U.S. banks.
The stress-test results are expected to show that the 19 banks may have to raise between $100 billion to $150 billion – or even more – in new capital. Investors will cause the shares of the strong players to zoom northward, and will likely savage the shares of the weakest players.
"I can't think of a time since I've been watching banks when there's been so much uncertainty about the true value of a key set of assets," Douglas Elliott, a fellow at the Brookings Institution, a Washington think tank, told Reuters.
The U.S. bank stress tests have transfixed the world financial markets for weeks, exacerbating the ongoing financial crisis – worsening the U.S. recession and shaking economies around the world. That’s escalated the burden on the still-new Barack Obama administration and on the U.S. Congress.
The banks being tested include Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), and Goldman Sachs Group Inc. (NYSE: GS). All told, the 19 banks hold two-thirds of total U.S. bank assets.
"Most banks will have to raise capital in some form," Friedman, Billings, Ramsey Group Capital Markets Group (NYSE: FBR) managing director Paul Miller told Reuters. "The capital raises will be much bigger than people think."
Miller said that uncertainty about what the tests might reveal has made banks stocks "uninvestable" in the near term.
The issue for investors is that “you just don't know how the government is going to view it," Miller said.
Public release of the stress test results is set for Thursday. The government is scheduled to brief the top officials of the banks themselves tomorrow (Tuesday).
Although all but one of the 19 major U.S. banks the government has stress-tested reportedly passed, many skeptics believe the banks are still using all sorts of accounting dodges to keep from revealing just much they still hold in toxic assets and bad loans, National Public Radio reported.
Why wait for the U.S. Treasury Department’s bank stress test when Money Morning can highlight the four secrets that will let you separate the winners from the losers in the U.S. banking system?
Call it the “Money Morning Bank Stress Test.”
Money Morning Contributing Editor Martin Hutchinson last week evaluated the 13 largest U.S. banks and rated them as either “Zombies,” “Walking Wounded,” “Risky But Proud,” and “Hidden Gems,” and concluded that nine of the banks pose some degree of risk. But he also found that four of the financial institutions are “Hidden Gems” that might be worth a look for investors.
On Thursday, we’ll finally see how it all plays out.
Market Matters
Chrysler LLC filed for bankruptcy and then forged a potentially “game saving” partnership with mighty Fiat SpA (OTC ADR: FIATY), Italy’s largest car manufacturer. General Motors Corp. (NYSE: GM) will be saying good bye to its Pontiac brand (any interest, Fiat?). Bank of America’s Ken Lewis was stripped of his board chair, but will continue to put out fires from the chief executive office. Earnings season moved forward and Exxon-Mobil Corp. (NYSE: XOM) did NOT set a new record for a change. International Business Machines Corp. (NYSE: IBM) bucked the cost-cutting trend and actually raised its dividend.
With Treasury set to release the stress test results on Thursday, rumors are circulating that Bank of America and Citigroup may be in need of additional capital, though both are pleading their cases. Meanwhile, Citi began lobbying for permission to pay retention bonuses to key employees [it worked for American International Group Inc. (NYSE: AIG) and Merrill Lynch (NYSE: SQD)], who may seek the greener pastures of other (ailing) financial institutions.
Telecommunications firms were in the spotlight early in the week as chipmaker Qualcomm Inc. (Nasdaq: QCOM) raised its revenue outlook and Verizon Communications Inc. (NYSE: VZ) actually announced increased earnings in the first quarter. Verizon may be teaming up with Microsoft Corp. (Nasdaq: MSFT) to develop its own touch-screen cell phone to cut into Apple Inc.’s (Nasdaq: AAPL) iPhone market share.
Drugmakers Pfizer Inc. (NYSE: PFE) and Bristol-Myers Squibb Co. (NYSE: BMY) posted quarterly results that beat Wall Street expectations, as did The Dow Chemical Co. (NYSE: DOW) and Starbucks Corp. (Nasdaq: SBUX), though the latter’s major restructuring (store closures) prompted a 77% decline in profits.
MasterCard Inc. (NYSE: MA) confirmed that 2009 will be a challenging year, though rival Visa Inc. (NYSE: V) beat earnings estimates, as debit card usage increased, resulting in greater fee income.
The Procter & Gamble Co. (NYSE: PG) struggled last quarter, with weaker sales, as shoppers traded down to lower-priced consumer goods. Exxon-Mobil, Chevron Corp. (NYSE: CVX), and Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) were victims of the declining global demand for oil. Still, Exxon’s long-term outlook remains strong as the company continues pouring money into development projects to be fully prepared once the recession ends. In fact, management even boosted its stock dividend.
|
Market/ Index |
Year Close (2008) |
Qtr Close (03/31/09) |
Previous Week |
Current Week |
YTD Change |
|
Dow Jones Industrial |
8,776.39 |
7,608.92 |
8,076.29 |
8,212.41 |
-6.43% |
|
NASDAQ |
1,577.03 |
1,528.59 |
1,694.29 |
1,719.20 |
+9.02% |
|
S&P 500 |
903.25 |
797.87 |
866.23 |
877.52 |
-2.85% |
|
Russell 2000 |
499.45 |
422.75 |
478.74 |
486.98 |
-2.50% |
|
Fed Funds |
0.25% |
0.25% |
0.25% |
0.25% |
0 bps |
|
10 yr Treasury (Yield) |
2.24% |
2.68% |
3.00% |
3.17% |
+93 bps |
Economically Speaking
While the U.S. Federal Reserve seemed to offer some “cautious optimism” about the overall direction of the economy, the policymakers avoided any sugarcoating and hedged their comments for fear of an unforeseen development (such as the “swine flu,” also known as the A/H1N1 flu).
While the virus quickly expanded across the globe, most of the worst cases have been limited to Mexico, where the already depressed economy will be further impacted from business closures and travel restrictions.
When SARS (Severe acute respiratory syndrome) hit in 2003, China’s gross domesic product (GDP) was estimated to have been hurt by about 1%; According to early projections by Moodys Corp.’s (NYSE: MCO) Economy.com, the Mexican economy will contract by 6.2% in 2009 (revised from the -4.5% estimate to account for the flu).
The Fed plans to leave rates at near 0.0% and stands prepared to purchase more Treasury and mortgage-related securities to keep the economy moving in the right direction.
The first quarter’s gross domestic product (GDP) highlighted a relatively hectic week on the economic front. While the economy contracted from January through March at a worst-than-expected 6.1% clip, analysts found some positives deep within the release, as consumer activity actually picked up during the quarter.
The spending component rose by 2.2%, after falling by 4.3% in the fourth quarter. Additionally, a decline in inventories hindered the release; however, economists point out that such a reduction indicates that manufacturers have scaled back production and will not be burdened with excessive supplies that may need to be deeply discounted to be sold. As demand slowly returns, they will be able to boost production once again.
Meanwhile, consumer confidence surprisingly soared to levels not seen since November 2008, which is especially good news, since the consumer accounts for about two-thirds to 70% of the activity in the economy.
Weekly Economic Calendar
| Date |
Release |
Comments |
|
April 28 |
Consumer Confidence (04/09) |
Unexpected increase results in best showing since Nov. |
|
April 29 |
GDP (1st qtr) |
Largest than expected 6.1% contraction |
|
|
Fed Policy Meeting Statement |
Reflects some signs of “modest” improvement |
|
April 30 |
Initial Jobless Claims (04/25/09) |
Slight decline in new claims |
|
|
Personal Income/Spending (03/09) |
Larger than expected decline in both consumer reports |
|
May 1 |
ISM – Manu (04/09) |
Sector contraction, though better than expected results |
|
|
Factory Orders (03/09) |
Hurt by reduced sales abroad |
|
The Week Ahead |
|
|
|
May 4 |
Construction Spending (03/09) |
|
|
May 5 |
ISM – Services (04/09) |
|
|
May 7 |
Initial Jobless Claims (05/02/09) |
|
|
|
Consumer Credit (03/09) |
|
|
May 8 |
Unemployment Rate (04/09) |
|
|
|
Non-farm Payroll (04/09) |
|
[Editor’s Note: For more insight into the bank stress tests, check out this related story, which appears elsewhere in today’s issue of Money Morning. The report is free of charge.]
News and Related Story Links:
- NPR:
Will Bank Stress Tests Soothe Public Fears? - Money Morning Banking Analysis:
Money Morning’s Bank Stress Test Says These Three Banks Are the Strongest. - Money Morning News Analysis:
U.S. Auto Industry Spins Out of Control, as Chrysler Goes Bankrupt and GM Struggles to Reverse Course. - Guardian Unlimited:
Spain leads Europe in swine flu cases with 40. - Wikipedia:
Severe acute respiratory syndrome. - Money Morning News Analysis:
Data Shows Unemployment, Consumer Spending Close to Turning a Corner.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.