Bank Stocks Soar!! Bank Bonds Plummet!!
Posted by Larry Doyle on March 23, 2009 1:27 PM |
The major market stock averages overall and bank stocks specifically are respondingly positively to the Public-Private Investment Partnership laid out by Secretary Geithner. In the bond market, however, prices for bank debt are responding in a dramatically different fashion.
Why the inconsistency? My sense is that long term shorts in financial stocks are being forced to cover. Investors in the bond market are reacting as if this PPIP will create losses for certain assets as it simultaneously brings liquidity for other assets.
In its totality, the conflicting signals in the stock and bond markets for banks tell me that the jury remains out on the overall effectiveness of this plan for the financial industry specifically and the economy in general.
The financial industry’s writedowns on $6.84 trillion of bank loans may almost double to 3.56 percent, exceeding peak levels during the Great Depression, according to estimates in a March 10 report by Michael Mayo, a New York-based analyst at Deutsche Bank AG.
Even with the stock rally, AIG and Citigroup are still down more than 90 percent during the 17-month bear market.
Investors “are in a pretty big state of what I’ll call denial, just hoping this stock-market rally will help them make back all their losses,” said Diane Garnick, a New York-based investment strategist at Invesco Ltd., which oversees $357 billion. “Financials are still in trouble. There’s a really good chance that bankruptcy is not out of the question.”