Will investors soon get over worries about losses from subprime mortgages? As Doug indicated this morning, the answer for now is "nope." Today overseas markets are definitely paying attention to renewed fears about credit markets. The Dow was down over 56 points yesterday and today, Asian market sectors including banking, brokerage and insurance took a plunge as well. Francis Lun with Hong Kong's Fulbright Securities told MarketWatch, "After the drop on Wall Street, people are wary about further write-downs related to subprime mortgages."
With earnings season just kicking off today with Alcoa's second quarter results after the close, should we also be bracing for worse-than-expected reports from banks and brokerages? Today hat's the sentiment in Hong Kong and other Asian markets, where the Hang Seng index fell 3.2% in overnight trading and the Nikkei lost 2.5%.
Asian regional markets were sitting on the same worries pressuring U.S. markets, according to David Cohen with Action Economics. He posited that most Asian indexes were under pressure "from the same forces weighing upon markets globally, hostage to oil prices, and fears of stagflation." This morning at least, investors are bracing for U.S. markets to get worse before they get better.
It says a mouthful when banks start to call for higher interest rates. The view of managements at financial companies may be coming around to the point where they believe inflation is a bigger problem than rates are.
According toReuters, "The chief executive of Europe's biggest lender on Tuesday called on central bankers to raise interest rates in order to combat inflation." The head man at HSBC (NYSE:HBC) fears that there is no overall plan in the financial community to keep rising prices down.
The viewpoint about inflation is probably right, but that does not mean that governments will begin to up rates. In places like the US, where people are still defaulting on mortgages at record rates, and auto loans and credit card payments are under pressure, upping interest rates would be hard to swallow.
There is also the matter that increasing banking rates may do nothing to halt the spike in food and gas prices. These are being set, to a large extent, by demand outside the US, especially in developing nations. Messing with the cost of lending is not likely to fix that.
The Wall Street Journal reported that a federal judge said that the government had "sufficient evidence" for a jury to conclude that a conspiracy to fraudulently boost the financials of American International Group Inc (NYSE: AIG) began with former CEO Maurice R. "Hank" Greenberg. That led to a transaction that artificially inflated AIG's loss reserves.
Citigroup Incorporated's (NYSE: C) Falcon Strategies fixed income hedge fund is down 75%, the Wall Street Journal reported, bad news for the three U.S. banks that invested in it to help increase returns on employee life insurance. One of the banks, Fifth Third Bancorp (NASDAQ: FITB), is suing Transamerica Life and Smith Barney, both of whom helped to arrange the investment, and some are now questioning whether Citigroup will be forced to give back some of the investments as they have with individual investors.
After it stopped offering some mortgages last month because it was swamped by volumes of new applications, the Financial Times reported that First Direct, a unit of HSBC Holdings Plc (NYSE: HBC), has resumed lending to new customers. The bank said it has continued to receive "significant interest" in its mortgages from existing customers.
OTHER PAPERS:
In an effort to raise capital from shareholders, the Telegraph reported that Barclays Plc (NYSE: BCS) is considering a takeover bid for a rival in the U.S. or UK. Sources believe Barclays may attempt to acquire an investment bank, a struggling bank or a deal in a fast-moving economy. Potential names mentioned include UBS AG (NYSE: UBS) and Lehman Brothers Holdings Inc (NYSE: LEH).
According to the Wall Street Journal, former American International Group Inc (NYSE: AIG) CEO Maurice R. "Hank" Greenberg is pressing the troubled insurer to turn the company around. He says that he and other major shareholders have "deep concern about the persistent and seemingly endless destruction of value at AIG."
Hybrid Capital Second, a Morgan Stanley (NYSE: MS) investment vehicle, increased its stake in internet start-up Livedoor to 18.15% from 12.76% in March, the Financial Times reported, superseding the company's founder, Takafumi Horie.
OTHER PAPERS:
After it incurred $3.2B of bad debts in the first three months of the year, the Telegraph reported that Knight Vinke, an HSBC Holdings Plc (NYSE: HBC) shareholder, has renewed calls for the bank to shed its U.S. consumer finance business.
According to people familiar with the matter, the Wall Street Journal reported that American International Group Inc's (NYSE: AIG) airplane-leasing unit is considering a split from the company. The people said International Lease Finance Corp have grown "increasingly concerned" the company will be hurt by AIG's financial troubles.
Royal Dutch Shell Plc (NYSE: RDS.A) and Spain's Repsol YPF SA (NYSE: REP) are pulling out of one of Iran's biggest gas projects, the $10B-plus development of phase 13 of South Pars, the world's largest gas field, the Financial Times reported.
WEB SITES:
Bloomberg reported that HSBC Holdings Plc (NYSE: HBC) set aside a smaller-than-forecast $3.2B for bad loans in the U.S. The bank also said its Q1 profit was higher than Q107.
MOST NOTEWORTHY: Sunoco, Ryanair and HSBC Holdings were today's noteworthy downgrades:
JP Morgan downgraded Sunoco (NYSE: SUN) to Underweight from Neutral citing expected margin pressure due to high leverage to sweet crude. Goldman also downgraded shares of Sunoco to Neutral from Buy.
Deutsche Bank downgraded shares of Ryanair (NASDAQ: RYAAY) to Sell from Hold as they believe the European airlines sector will trade well below book value until the companies deal with higher oil prices.
UBS cut HSBC (NYSE: HBC) to Neutral from Buy to reflect the potential for higher losses at the company's household unit and weak performance at its U.S. bank.
OTHER DOWNGRADES:
Broadpoint lowered MTS Medication (NYSE: MPP) to Neutral from Strong Buy.
HSBC cut Southern Peru Copper (NYSE: PCU) to Neutral from Overweight.
Goldman downgraded CNH Global (NYSE: CNH) to Neutral from Buy and PetroChina (PTR) to Sell from Buy.
TheStreet.com's Jim Cramer wonders -- can we handle this giant's failure?
As always, it is Citigroup (NYSE: C) (Cramer's Take). My smartest guys tell me that Citigroup has billions in assets it can sell, that there is ample opportunity for the company to reliquify, that Vikram Pandit has things under control and the slow bleed cuts are going to work to get costs down.
Now I have total confidence in Treasury, particularly in Bob Steel, to take care of the shorts and to create brilliant shotgun marriages that reward the rich banks and punish the poor.
BUT, I have no faith in Citigroup, which because of the moronic acquisitions and bizarre off-balance-sheet liabilities may technically be insolvent. When you consider it is too big to fail, you have to begin to wonder -- what's the plan if it can't make it? How far can forbearance go? Will we tolerate this bank being majority-owned by the sheiks or the communist Chinese? Seems far-fetched, but when I read Meredith Whitney's words this morning over at OPCO I know that the losses are going to be too big for the current base of capital.
HSBC Holdings (NYSE: HBC), a United Kingdom-based banking and financial services company, closed at $80.40 Thursday. HBC April option implied volatility of 39 is above its 26-week average of 29 according to Track Data, suggesting larger price movement.
Credit Suisse (NYSE: CS), a global financial services company, closed at $49.48 Thursday. CS overall option implied volatility of 55 is above its 26-week average of 34, suggesting larger price movement.
Deutsche Bank (NYSE: DB) closed at $112.26 Thursday. DB April option implied volatility of 44 is above its 26-week average of 33, suggesting larger price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
The Wall Street Journal also reported that executives at Microsoft Corporation (NASDAQ: MSFT) met with Yahoo! Inc (NASDAQ: YHOO) executives earlier this week to discuss Microsoft's takeover offer for the company, marking a breakthrough in communication between the two companies.
HSBC Holdings Plc (NYSE: HBC) wants to expand its operations in sub-Saharan Africa, the Financial Times reported, as the region becomes increasingly significant for the bank's Asian and Indian clients.
OTHER PAPERS:
Due to its plunging stock price and the expected departure of millions of subscribers this year, sources are speculating about the fate of Sprint Nextel Corporation (NYSE: S). While analysts believe a company such as Deutsche Telekom AG (NYSE: DT) may look to buy Sprint, the Associated Press reported that neither Sprint nor its potential suitors are commenting.
HSBC Holdings PLC ADS (NYSE: HBC) shares are trading higher this morning after the company reported a 21% rise in profit in 2007, to $19.1 billion, beating analyst expectations. While the bank suffered loan impairment charges of $11.7 billion in 2007, net operating income rose 13% to $61.75 billion. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on HBC.
After hitting a one-year high of $99.52 in October, the stock hit a one-year low of $69.25 in February. HBC opened this morning at $77.95. So far today the stock has hit a low of $77.63 and a high of $79.35. As of 11:00, HBC is trading at $78.61, up $3.36 (4.5%). The chart for HBC looks bearish but improving slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $65 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 6.4% return in just one and a half months as long as HBC is above $65 at April expiration. HSBC would have to fall by more than 17% before we would start to lose money.
HBC hasn't been below $69 at all in the past year and has shown support around $75 recently. This trade could be risky if the worldwide economic situation continues to worsen, but even if that happens, this position could be protected by the support the stock might find around $70 where the stock bottomed over the past month.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in HBC.
According to people familiar with the matter, the Wall Street Journal reported that Anheuser-Busch Companies Inc (NYSE: BUD) and InBev may be one possible coupling in the fast-consolidating brewery industry; the people familiar said the two have already held talks.
HSBC Holdings Plc (NYSE: HBC) yesterday launched its first two retail branches in Japan, according to the Financial Times. The bank also kicked off its "HSBC Premier" services, which aim to tap into Japan's budding market for wealth management.
OTHER PAPERS:
Despite rumors that none of those interested in struggling bank Northern Rock Plc (OTC: NHRKF), the UK Guardian reported that Sir Richard Branson will submit a bid by Monday's government deadline. Investment group Olivant is also expected to submit a bid for Northern Rock.
WEB SITES:
TechCrunch has "gotten word" that Yahoo Inc (NASDAQ: YHOO) will acquire Maven Networks for $150M.
The Wall Street Journalreports thatCitigroup (NYSE: C) and HSBC (NYSE: HBC) may sell units to raise capital. Citi has an auto loan unit and a piece of a credit card company in South America. However, with potential write-offs in the billions of dollars still expected in the fourth quarter, the sales of small units may not be enough.
It is more likely that if Citi is pressed for cash it may sell a large unit like Smith Barney. There are no public numbers on what the unit is worth, but the opeartion does have over 9.3 million clients and almost $1.3 trillion is assets. Giving that TD Ameritrade (NYSE: AMTD) is worth about $8 billion with just over six million clients, Smith Barney may be worth a great deal.
If recent news about Citi's problems are right and the bank may be facing a dividend cut, selling a large unit may be the bank's best chance at making its financial picture more stable.
Douglas A. McIntyre is an editor at 247wallst.com.
Citigroup (NYSE: C) did what it probably had to do by bringing $49 billion in SIV assets onto its balance sheet. The "Super Fund" set up to help the structured vehicles was not getting much interest from potential investors. Several other big banks like HSBC (NYSE: HBC) had moved their SIVs in-house.
Whether the move contributed to it or not, Moody's downgraded Citi's debt one notch to Aa3. "The bank will probably "take sizable writedowns'' for securities backed by home mortgages and collateralized debt obligations," Moody's Senior Vice President Sean Jones said in a statement picked up by Bloomberg. Moody's is concerned that the bank's weak capital ratios may keep it from getting out of harm's way anytime soon.
That leaves the markets to ponder what will happen to Citi over the next year or two. The bank is probably still too big to be bought by another large money center bank, unless its stock falls further. It has already lost almost half of its value this year and now trades around $30 on a good day.
Citi is almost certainly faced with more write-downs, leaving it with very few options. It could go to a sovereign fund again. Those in the Middle East and Singapore have shown a taste for risk. Or, the Fed may have to step in with special loans, if things get bad enough.
The conventional wisdom is that Citi is "too big to fail." But wisdom cannot see the future.
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