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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.

Bloomberg offers:

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.”

Read how Bank Bond Spreads Endanger S&P 500 Index’s Advance.


  • fiscalliberal

    Larry – Your blurb last night on Insurance agencies was very interesting .

    My company Savings and Security Plan (401k) has a Fixed Income Plan which is run by Blackrock and 96% invests in Met Life and 4% Reserve

    Annuallized Total Return is 4.7%

    Is it reasonable to speculate, based on your show last night, that the income on this fund could go up because of their need to retain and get capital?

  • Larry Doyle

    Well, the question begs whether they will pass along the income to investors. I am not so sure they will. Met like every other insurance company will be hard pressed for capital. If they generate more incoe they may use it to offset hits to income from asset deterioration.

  • Andy

    LD: I was eager to read your take on today’s announcement; thanks for this post and the previous one with the house purchase metaphor.
    I just heard Krugman on NPR All Things Considered (came soon after 5pm EST). He seems quite skeptical…

    Would be interested to know what you think of what he said.
    In case you missed it; the audio will be available here after 7 EST:

    The reporting from others is quite misleading: they just sound giddy about today’s rally …


    • Larry Doyle


      As I think this through, I am not as pessimistic as Krugman nor as optimistic as the administration or the markets today.

      Ultimately our banking system needs a lot more capital. This program will bring some capital into the industry but not enough. The better run banks will benefit, plenty of banks will end up being taken over and liquidated. Certain assets will be sold, others won’t.

      I do think there will be some investors that make sizable returns and taxpayers will bear the long term costs.

      Ultimately it will buy more time and prolong economic underperformance.

      I also think that the administration is counting on the American consumer to revert to spending our way out of this.

      I don’t envision that happening.

      Add it all up and I think we are going to have a very challenging 3-5 year stretch in front of us.

      One thing I definitely think will happen and that is rates are headed higher, regardless of our economy.

  • Andy

    I also head that in part, the stock market rally today is b/c of the higher than expected house sales (up by 5.5% ) in February; but they warn that was a “weather related blip” (what that does mean?)
    and that part is b/c of prices being so low or from foreclosures …

    What say you?

    • Andy

      meant “I also heard…”

    • Larry Doyle

      Andy…what that means is that the data was skewed by beneficial weather. In a similar vein, if the report was particualrly weak but there had been very bad weather in various parts of the country, it would be discounted for the same reason.

      I personally was not aware that the weather had been all that good around the country to support housing. The weather this Winter in the NE has been pretty harsh.

      • Andy

        Agree, I live in NE also and early Feb was horribly cold…

  • Larry Doyle

    Andy…running out for dinner. Will check later this evening and let you know what I think.

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