Stock Markets Shrug Off Yet More Dire Data

By: PaddyPowerTrader

There was a perverse reaction to the dismal employment news from the US last Friday with indices rising throughout the session. Looks like no one wanted to be caught short with THAT bank bailout master plan coming tomorrow (16.00GMT) and today's fiscal stimulus. Note that the NASDAQ is now back positive for the year to date with Google (+54%) and Apple (+26%) showing strong leadership. Banks have bounced back strongly albeit from almost penny stock status! So a pivotal few days ahead.

But why do I feel that despite the hype its just more huge cheques without balances. The stimulus seems light on shovel ready projects. The banking ‘final solution' looks anything but that; the markets hate delays and wait for no one. The euphoria may be very short lived as pinning ones hopes on a government response to a ever deteriorating economic reality has not proven a winning strategy over these last 18 months.

Today's Market Moving Stories

• Overnight the far eastern markets were weak though a smaller than expected drop in December machinery orders numbers brought it off its worst levels.
• Swiss newspapers over the weekend carried leaks that the countries two largest banks (UBS and Credit Suisse) are likely to announce combined whopping losses of another $25bn for 2008. The now customary culling of 1,000's of staff will accompany the results.
• The Telegraph had a piece yesterday saying that the UK Treasury's insurance scheme against losses on bank's toxic assets is likely to amount to £400bn. The fees would be £12-16bn per bank.
• The latest survey by the UK Royal Institute of Chartered Surveyors (RICS) indicates that demand for office and retail has fallen at the fastest pace on record, with 70% of respondents indicating a fall in demand in Q4. The retail sector was the most pessimistic with 80% recording a fall. Worryingly for landlords, despite falling rents and capital values (down one-third from peak), over two-thirds of replies reported an increase in supply.
• FT Deutschland has obtained a paper prepared by the Commission for today's Economic and Finance Committee meeting in Brussels, which includes a detailed set of procedures European governments should be following in setting up bad banks . The Commission wants the toxic assets written off at market value, and that any write-offs will first have to come out of shareholders' capital. Once the capital falls below the Basel ceilings, it is up to the government to provide new capital, or to force the bank into bankruptcy procedures. All fine and good, but how about the small problem that there is no market for most of these assets, and thus no market price? The Commission wants to leave that little detail to the bank supervisory authorities. Nice idea but unworkable as I don't think the banks have enough capital to write assets down to nuclear winter levels.
• And it's hard times indeed for former top bankers in Ireland and the USA .

Obama To Push Stimulus Plan Along
US Treasury Secretary has delayed his speech to outline the next stage of the bank assistance program until Tuesday. This will ensure President Obama gets maximum exposure for his stimulus plan, and also gives the Treasury more time to work on a new twist to the bad bank . Following last week's wranglings in the Senate over the stimulus plan (amendments had swelled it from $819bn to $920bn, and the Senate is now trying to whittle that back to $800bn), Obama is due to make a speech on the importance of his proposals today and try and hurry the Senate along.

Meanwhile, Geither is taking another look at the bad bank angle of the TARP. It is believed that there are now four branches to the plan:

1. fresh equity injections,
2. programs to help those facing foreclosures,
3. an expansion of the Term Asset-Backed Securities Loan Facility (TALF),
4. an aggregator bank.

So that fourth point pops back up! A public/private sector joint initiative which sees the bad bank take its initial financing from the TARP, but receive the mass of funding from private sector investors . The aggregator bank holds the toxic assets and then allows investors to participate in any profits another day.

The Never Ending Irish Banking Saga
Back in Ireland the long and (un)winding road of bank recapitalisation finally appears to have reached a conclusion after much needless dragging of heels and grandstanding. The only new twist in the plan which will see a €7bn preference share injection into AIB and Bank of Ireland at a cost of 8%, which is cheap compared to the pound of flesh Buffett got from Swiss Re and Goldman Sachs. The new warrants give the government the right to acquire 25% of the equity in five years at today's prices. This will reduce over time of course IF the debt is repaid. The Sunday Times reported that the government may extend the current two year guarantee to 2014. EBS has written off €100m in bad debts. They are still said to be in talks with Irish Life & Permanent about a takeover.

Equities

• Barclays came in with better than expected results this AM.
• Élan is considering selling a 19% stake to Switzerland's Roche, which would give it international rights to some of its drugs. Élan is due to report tomorrow.
• Irish brokers this morning are writing that strong results posted by Beacon Roofing in the US and HeidelbergCement bode well for CRH despite difficult trading conditions.
• Korean carmaker Kia rights issue failed.
• Nissan, as expected, announced a loss of $913m this morning party due to a drag from Renault (in who they own a 40%+ stake). They are to slash 20k jobs worldwide.
• Normura is off 10% on a planned rights issue of up to $3.3bn.

And Finally… Use Stimulis For Economic Growth

Disclosures = None

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.

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