Thursday, February 12, 2009

Roubini: Nationalize Insolvent Banks/ THE GREAT RECESSION/HIG, DOW, HTGC

Roubini argues that the best way to deal with the banks is a temporary receivership and restructuring of the insolvent banks.     Tech Ticker, Yahoo! FinanceThis would wipe out the common and preferred shareholders.  This would be similar to what the FDIC did with Indy Mac.   I do not see that any of the remaining too "big to fail" banks have the capability to absorb large insolvent banks anywhere close to the size of Washington Mutual, National City, or Wachovia.  To the extent that the banking industry continues to deteriorate throughout 2009, any large regional bank failure will most likely have to be seized by the FDIC and worked out as Roubini suggests.  I do not see his recommendation as viable for Citigroup, Bank of America, Wells Fargo or J P Morgan.  However, if C or BAC need more government money, I would just seize the one that asks for another nickel.    Roubini's recommendations might be the best model going forward for banks the size of a Regions  Financial, Fifth Third, Suntrust or banks of similar size, and I am not suggesting that any of those mentioned are in a currently foreseeable danger of seizure.  However, any regional bank with a ton of commercial mortgage loans may very well see their problems accelerate in 2009.  And, who really knows which banks will pass the treasuries new stress test?
Can anyone say now that any large bank can pass a stress test?

Forty five per cent of existing home sales in the 4th quarter of 2008 were "distressed" homes which includes foreclosures.   The median price of existing home sales fell to the level last seen in the second quarter of 2003.Yahoo! Finance

The new phrase gaining status to describe our current predicament is the "Great Recession", one likely to last 3 to 4 years according to some.    Yahoo! Finance   This may be the Great Recession but its duration is far from certain.  Another year would be a reasonable estimate now, whereas a total of 4 years in the toilet would be too pessimistic in my opinion- unlikely but nonetheless plausible and certainly not an outrageous forecast easily dismissed.  This debate does have bearing on what to do now.  If we are in the second year of a 4 year down cycle, then it would pay to wait to make new commitments to common stocks for 2 or more years.  A two year down cycle would mean it is time to gear up and to at least be ready to ease back into positions.  The current recession will probably be tagged in the future with some descriptive phrase to distinguish it from a merely nasty recessions like the one in 1973 to 1974.  The Great Recession or a mini-Depression are my two choices at the moment but I am not going to rule out yet The Great Depression II.  

I was listening to an interview with the Abbot Labs (ABT) CEO who said that he did not expect the recovery to start until 2010 or beyond, and then it would be a gradual recovery.  

The best explanation for the recent market decline is the increasing amount of pessimism about a second half recovery. Economists have been revising their forecasts downward the past few weeks. Economic Forecasting Survey Finds Hopes for Second-Half Recovery Fading -
I have just about given up on 2009. I am currently operating on the belief that the 4th quarter of 2008 will be revised down from the initial number and the first three quarters of 2009 will show a decline in GDP, with the first quarter of 2009 being the worst.  My forecast would then have a very modest increase in GDP during the 4th quarter of 2009,  and a return to 3% GDP growth by the middle of 2010. If the declines continue throughout the year and into 2010,  however, then a stock market recovery could easily be pushed out to late winter, which would be consistent with, and explain the recent weakness.  

Hartford Financial (HIG) received a reprieve of sorts from the Connecticut insurance department that allowed two accounting changes which would improve surplus capital by almost 1 billion.  UPDATE 1-Hartford gets regulatory relief, boosting capital | Markets | Markets News | Reuters  The company previously cut its common stock dividend to a nickel from 32 cents. Hartford Financial cuts dividend to a nickel: Financial News - Yahoo! Finance

Based on the recent price action in Gannett, I would have to conclude that the market would be shocked if that company maintained its dividend.  I would expect now a 50% hair cut at the minimum.  The price on the Strategic Hotels preferred stock issues suggests a deferral of its cumulative preferred dividends.  The current yield on BEEPRA, which I own, is around 47%.  The common stock is trading below a buck and the common dividend was eliminated last quarter placing the preferred shareholders at risk. 

Dow Chemical cut its dividend.  Yahoo! Finance Apparently, Dow is going to argue in court that requiring it to proceed with the Rohm acquisition would cause it to become insolvent or nearly insolvent, although the company is not using that word yet to my knowledge.   TheStreet.comI am just staying away from both the common and debt of Dow Chemical.   Harley Davidson also slashed its dividend.Yahoo! Finance

Another problem for dividend oriented ETFs, mutual funds, and closed end funds, other than a heavy concentration in banks who are in a race to cut their dividends to zero or near zero, is their exposure to companies like Dow and Gannett, even GE which may re-evaluate its commitment to the current dividend in the second half of 2009.   BusinessWeek    

The WSJ seems to think GE will be a big winner from the stimulus bill . 

There was a meeting of the Masters of the Universe convened by the main Master at GS after Geithner gave  his speech. G Yahoo! Finance  Goldman denied that there was an emergency meeting Yahoo! Finance  The market took a dip on the first report which characterized this as an emergency meeting, and started to recover after the Goldman's denial. The market thereafter picked up some steam after a report that the Obama administration was working on a plan to subsidize trouble mortgage loans.  Yahoo! Finance
It just seems to be that the problem needs to be attacked at its source.  Throwing money at the banks does not appear to be working and the public has legitimate concerns about how much of the 350 billion was used to line the pockets of every doofus in a suit (or a pant suit as the case may be).  

Hercules Technology Growth Capital, one of my small cap position under water, reported earnings after the close and declared a dividend of 32 cents a share, a reduction of two cents.  Hercules Technology Growth Capital Announces Record Fourth Quarter Net Investment Income EPS of $0.34 and Fiscal Year 2008 Financial Results: Financial News - Yahoo! Finance  One of its portfolio companies, Portola Pharmaceuticals, entered a licensing agreement with Novartis on a anti-clotting drug.  Yahoo! Finance

The Fed estimates that the average net worth of Americans has fallen 22.7% since November 2007 through October 2008.  Yahoo! Finance   See also, MarketWatch

Newell Rubbermaid (NWL) and Patterson-UTI (PTEN) cut their dividends.   I read an article just yesterday at MSN Money written by Harry Domash that had Patterson as one of his five stocks which would not cut their dividends.MSN Money - New Investor Center  That proved to be a good prediction for one day.  Masco (MAS) also cut its dividend to 8 cents from 23 cents.  The dividend cuts just by the S & P 500 companies this quarter total 15.2 billion on top of the record 15.9 billion in the 4th quarter of 2008.  

One of the small caps that I follow, Valueclick (VCLK), had a positive earnings report assuming one ignores the 327 million dollar impairment charge. ValueClick Announces Fourth Quarter 2008 Results: Financial News - Yahoo! Finance

One of the companies that was on my mid cap monitor list, Speedway Motorsports (TRK) was just moved to the small cap list.  I am going to take a closer look at it. 

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