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Markets Catch the Flu, Down 2% Overnight

Posted by Larry Doyle on April 28, 2009 6:48 AM |

The global equity markets are down approximately 2% overnight for a variety of reasons, including:

1. Citi and BofA will likely be forced by regulators to raise more capital. Company shares are down 7-8% on this news. It also seems likely that regulators will force changes on the boards of these companies. Do not be surprised to see management changes as well. Has Ken Lewis become a government liability based upon his assertion of being pressured by Hank Paulson and Ben Bernanke to complete the BofA-Merrill Lynch merger?

Is this story of increased capital needs really news? I don’t think so.

On the regional bank front . . . Suntrust, Regions Financial, and KeyCorp are speculated to need increased capital.

When it is widely accepted that our domestic banking system still has $750 billion to $1 trillion in embedded losses, it can’t be the case that all the banks are fine. In my opinion, Geithner did investors a disservice last week in promoting the overall health of the banking industry.

Bloomberg provides more insight: Citigroup, Bank of America Decline on Capital Report.

2. Markets are also down based upon some weak earnings news, increased loan loss provisions at NAB (National Australia Bank), and price declines in commodities due to the impact of the swine flu outbreak.

In my opinion, the markets and investors have gotten somewhat complacent given the rally in equities since early March. I still view risks as very high. It is growing increasingly likely that we will have a meaningful government presence as equity holders in some critical industries for a protracted period. This development will not only occur in the United States but in many regions globally. The impact of this government presence will effect not only specific companies but, in turn, industries as a whole.

In regard to today’s price action, Bloomberg offers:

“The combination of stress tests and swine flu and mixed earnings are weighing on the market,” said Suki Mann, a credit strategist at Societe Generale SA in London.

The two-day slump snuffed out a six-week rebound by the MSCI World Index. The gauge of stocks in 23 developed countries had advanced 28 percent from March 9 through last week as investors speculated government efforts to fix the banking system would pull the economy out of a recession.

While almost 67 percent of the S&P 500 companies that reported first-quarter results have beaten estimates, analysts predict profits will decline through September, dropping 34 percent in the first quarter and 33 percent in the second.

U.S. Steel Corp., the nation’s largest steelmaker, reported a first-quarter net loss that was more than twice analysts’ estimates and cut its dividend as prices plunged after the close of trading yesterday. The Pittsburgh-based company’s shares slid 6 percent to $26.05 in Germany.

Daimler AG, the world’s second-largest maker of luxury cars, declined 5.4 percent to 25.91 euros. The Stuttgart, Germany-based company posted its first back-to-back quarterly losses in at least 10 years as the recession led to a drop in sales of Mercedes-Benz cars and trucks.

While the markets have been amazingly resilient of late, it strikes me that picking individual stocks with real earnings power will become more prevalent versus expecting appreciable market returns from the market as a whole.

Bloomberg’s full review: Stocks, Commodities Fall on Flu; Banks Decline on Stress Tests.


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