Return to the Downside
Over the weekend, the bad news has returned with the volume turned up to a Spin Tap level of 11. This has shaken the equity markets hard. This is what I was concerned about last week and why I thought we’d trade ranges. To recap, my call was: “We’re going to need to spend time bouncing around in ranges from the S&P 500 (780-840) to the 10 year note (2.5% to 2.9%) to the US dollar (82-87) before we can gain certainty that the worst is over and that our past isn’t going to catch up to us.” Well, the past was closer than I realized as the big stories out today are the big stories for the end of 2008: autos and banks.
The Obama administration has forced out the CEO of GM by threatening to withhold additional support. Also, the Obama Autos task force rejected the turnaround plans of General Motors Corp and Chrysler LLC and warned both could be put through bankruptcy to slash debts according to Reuters. “The announcement by the White House autos panel headed by former investment banker Steve Rattner marked a stunning reversal for management at both automakers and for GM investors and creditors who had bet on a softer line. “We have unfortunately concluded that neither plan submitted by either company represents viability and therefore does not warrant the substantial additional investments that they requested,” said a senior administration official, who asked not to be named.”
Next up, US Treasury Secretary Geithner dropped this bomb on the markets from his appearance on NBC’s Meet the Press: “Some banks are going to need some large amounts of assistance.” He said this to explain why the PPIP was needed and why investors in the program should not be taxed. He added that otherwise they’ll lose confidence in the plan. During his circuit of the Sunday morning talk shows, he also mentioned that the US Treasury has only $135 billion left of the $700 billion TARP money which further underscores the need for the public-private program to aid banks. Remember, Congress last week in the budget talks made it clear they are not willing to allocate additional money for the banks that the Obama administration requested.
Unfortunately, all of these comments put the bulls-eye back on the financial sector.
Banks had a bad end to the week after being summoned to talk to President Obama. He beat them up on executive pay and warned them not to return TARP money. Today, the big banks are under pressure with JPMorgan and Bank of America Corp. dropping. The big news from Friday was that JPMorgan had a “tougher” month in March and Bank of America’s trading book “was not as good” as in the first two months of the year, chief executive officers Jamie Dimon and Kenneth Lewis told CNBC.
Again, it was HSBC and Citigroup that started the rally in equities two weeks ago when they said that they were having great quarters. Now, this is in question for the entire industry and earnings will be crucial over the next 3 weeks. The news out overnight on UBS, on a Spanish bank bailout, on a failed Scottish property lender have shown that the bank problems remain global. The G20 will not solve these issues, but the US at least has a plan to deal with the toxic assets.
The questions the world will ask the US are twofold: will the cure work and will the cure be worse than the disease?
Tags: autos, Bank of America, Banks, g20, Geithner, GM, JP Morgan