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Why the New Bank Issues Will Suck the Life Out of the Market

madhedgefundtrader's picture




 

Feed the ducks when they’re quacking.

That’s the refrain I heard endlessly on the trading floor at my alma mater, Morgan Stanley. If the clients want something, give it to them in spades, whether it makes any sense or not. So the sky must be darkened with uncountable flocks of our avian friends when I see three of the biggest equity issues in history hit the market at once, $25 billion for Bank of America (BAC), $25 billion for Wells Fargo (WFC), and $20 billion for Citigroup (C).

This new abundance of wallpaper is further proof that we still don’t have a functioning SEC. Besides diluting the daylights out of the existing shareholders, the great problem I have with these issues is the terrible fundamentals that still bedevil the industry. You know these guys are engaging in blatant window dressing to get these deals out the door, extending and pretending, until their noses grow to Uzbekistan. Sure, by borrowing at zero and lending at 5%, 6% and 7%, even bankers can make money. So on paper anyway, the cash flow looks great.

But as toxic waste dumps, their balance sheets put the Love Canal to shame. Their willing co-conspirator is the Federal Reserve’s Ben Bernanke, who used the nuclear option of zero interest rates to engineer one of the greatest stock rallies in history to get bank shares out of the toilet. Revenue quality is terrible, earnings visibility is nonexistent, home foreclosures are still accelerating, and commercial defaults may not crest for another three years. You know whatever capital they are raising now is already spoken for by imminent loan write offs, and more capital raisings will have to follow. Napoleon’s 1812 retreat from Moscow immediately comes to mind.

For me it’s deja vous all over again, because every time the Nikkei tried to rally in the nineties, it was slapped back down by a tsunami of new bank equity issues that sucked the life out of the market and left gullible investors choking to death.

If someone is pointing a gun at your head forcing you to buy bank shares on pain of death, only look at the small ones that couldn’t gain access to Ben’s exclusive country club, like Hudson City Savings (HCBK), Westamerica (WABC), and Bank of Hawaii (BOH). Given the dreadful fundamentals, you’d think traders would be flooding into the leveraged short financials ETF (SKF) by now, which is down a humbling 92% from its high.

I guess bank stocks can keep inching up until Ben runs out of Kool-Aid. With the stock market within spitting distance from the top of a multiyear range, I’m afraid that the investors in these big issues will end up as dead ducks.

For more iconoclastic and out of consensus analysis, please visit www.madhedgefundtrader.com .

 

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Tue, 12/29/2009 - 06:04 | 176588 Anonymous
Anonymous's picture

I think Mark Beck has it.

B of A rumored to be dumping 6x last years foreclosures on market over 2009 starting in new year - Karl D said this week -

Citi - in trouble with everyone over its stock positions offerings and unhappy present holders -

and that is just the start of it...

Somewhere last week on some elliott wave blog 'no follower of elliott wave theory has any significant cash in commercial banks' - no, really?

they will hold up the banks they choose to hold up - sure japan's banks still stand - but how many us banks have imploded in the last 2some years?

i'm still not convinced this is not a JP/Goldman takeover - prove it's not and i'm all ears - when jp/goldman own all the banks and the sec, treasury, congress and executive branch, do you think they'll be satisfied? or do they need to run the imf, ecb, wb, and all the rest as well?

I mean, they already run the fed - or is that vice versa? never too sure how that game plays...

just wondering...
or did i miss it and they already own it all and are just rearranging those of us who will pay them?

Tue, 12/29/2009 - 04:35 | 176579 Mark Beck
Mark Beck's picture

This is a clear sign that these big banks are in trouble and need to raise capital before Q1 financials are released.

----------

Without systemic risk, Treasury and FED will not bail these guys out again. However, they may come up with some creative FDIC quick bankruptcy strategies though. Perhaps they will not even mention the B word. Call it debt restructuring or some other FDIC spin-ocracy.

Treasury and FED are scrubbing bad real estate debt through the GSEs, they have made their choice. The banks are on their own.

----------

So who will be first to threaten the Treasury and FED with insolvency?

Should be interesting. I would really like to hear the conversation.

Ultimatum from B of A CEO to Treasury and FED, for example; "Bail me out or I will file for bankruptcy". FED; "No problem here is the FDIC's phone number, good luck with that bankruptcy, and by the way Goldman may want to bid for some of your assets before you emerge.

Mark Beck

Mon, 12/28/2009 - 21:53 | 176442 Anonymous
Mon, 12/28/2009 - 19:33 | 176326 Anonymous
Anonymous's picture

Perhaps the Plunge Protection Team or The Fed or some such is buying the shares.

Mon, 12/28/2009 - 19:25 | 176319 Anonymous
Anonymous's picture

We could seek a new game. However, we ought to do something that will end the existing game. I personally like the idea of complete cancellation of all debts, often given the name "Jubilee." Yeah, one huge RESET command. This action by itself would not provide punishments for the perpetrators of fraud, theft, murder and other crimes committed in the run-up to our present horror. Perhaps we would feel a little better if we punished the most flagrant wrongdoers. Then again, most of us are variously guilty of condoning evil by doing nothing. What do we do to ourselves? At minimum, we need to make a solemn commitment to be less tolerant of sin. Damn, does that mean we have to stone Tiger Woods to death, and beat ourselves for our untold transgressions? How far are we willing to go for a virtuous world?

Mon, 12/28/2009 - 16:21 | 176138 orangedrinkandchips
orangedrinkandchips's picture

Is it me or is this market being held up in a never ending fashion by Da Fed?? WTF?

Mon, 12/28/2009 - 22:13 | 176453 zhandax
zhandax's picture

Only on days they let the dollar up for air.

Mon, 12/28/2009 - 16:19 | 176135 orangedrinkandchips
orangedrinkandchips's picture

That is the kicker folks...it's spoken for already.

 

So much like getting paid and you have that time when the checks have not cleared yet (if you use checks still). Youre rich! nah. that money is spoken for...

Mon, 12/28/2009 - 16:15 | 176133 Anonymous
Anonymous's picture

Exactly! This money is already spoken for to take the place of the dead part of their balance sheet.

It's already spent. Direct deposit but the checks have not cleared yet folks....

slap it down like a ho-cake...

Mon, 12/28/2009 - 15:46 | 176108 Anonymous
Anonymous's picture

The music will only stop after all shorts have lost their shorts...once the predators like bears are gone, then the insiders will feed on carcass of the dead herds of prey like the vultures they are.

Mon, 12/28/2009 - 15:37 | 176099 chinaguy
chinaguy's picture

Business as usual up on the Hill

1) Fed bails out banks with TARP & several trillions of USD of other hand out programs.

2) SEC encourages various fantasy accounting rules so the banks don't fail

3) Fed permits TARP repayment so bankers still get their bonuses...and then some

4) SEC permits huge bank equity issues knowing full well the bank's assets do not justify the issues.

Business as usual. Used to shock me...........

Mon, 12/28/2009 - 16:30 | 176147 Shameful
Shameful's picture

I hear you, it's the new "normal".  At least now they can no longer claim that they are doing it for the shareholders...well they can but to be met with a mix of stunned silence and laughter.

Mon, 12/28/2009 - 14:54 | 176078 Bruce Krasting
Bruce Krasting's picture

C at 3.35 looks like a wet sack of cement.

Mon, 12/28/2009 - 14:50 | 176075 Gimp
Gimp's picture

Let's all put our heads out of the nearest window and scream "Ponzi Scheme", maybe the investing public will get the message before it is to late.....

Mon, 12/28/2009 - 14:40 | 176069 Anonymous
Anonymous's picture

OT a little - I was reading some article today where a guy was making the case that a double dip recession was almost assured to start in Q3 (will be close)or Q4 (this was the quarter where the return clearly was diminishing) due to the peaking and then the diminishing returns of the stimilus package (he didnt even talk about the housing tax break ending either) because it is a measure from quarter to quarter and with the weak growth that it falling off like that will be enough for the measure to go negative again. It sure looked like Q4 would be negative for sure unless we really picked up by then. Do you buy into that at all?

Mon, 12/28/2009 - 14:11 | 176046 Anonymous
Anonymous's picture

I've been hearing this quite a while since the offerings of all those banks.
But I also hear things like CITI will have its best year ever since 2007 now.

So when everybody thinks he should run for cover, you should jump in.
It's now the most unlogical thing to do, but in today's market, unlogical is the most logical guide.

Mon, 12/28/2009 - 22:52 | 176474 dnarby
dnarby's picture

Good idea...  Except you're nine months too late.

Mon, 12/28/2009 - 14:10 | 176045 JR
JR's picture

Powerful! Says it all. This contribution by madhedgefundtrader makes you pause as to how important Zero Hedge is, i.e., to find such contributions.

As Cursive said December 22:

I LOVE the threats that we are constantly subjected to.  The market this, the market that… We live in a society, not a …market.  These shills and hucksters can't get enough of the market. It is the lens through which all stories most be viewed.  It is the all-seeing, all-knowing eye that watches over us.  I swear, I have a vision of Mordor, radiating from above the Masonic pyramid.

In the end, the economy rules

Mon, 12/28/2009 - 13:47 | 176031 Anonymous
Anonymous's picture

Did the banks go belly up in Japan over the last 12 years? No. And they won't go bust here either, not as long as the federal government is still around to support them. Anybody shorting bank stocks right now is a fool. All you are doing is giving Wall street a chance to fleece you.

Mon, 12/28/2009 - 21:34 | 176428 Paul E. Math
Paul E. Math's picture

Excellent point and I couldn't agree more.  You need look no further than Fannie and Freddie to see the depths to which the Treasury is willing to go to support the status quo.

F+F are where the biggest banks will be in 3 years.  The banks are now essentially GSEs.  They are just being bailed out by a different path.

F+F stock rose how much today, 20%?  Don't bet against the house - it always wins.

Tue, 12/29/2009 - 01:15 | 176527 Dr o love
Dr o love's picture

Paul, are you really the dumbass your post implies?  FRE was $68 the middle of last year.  It's $1.68 now after a 24% rise today.

 

FNM was $70 at the same time last year and closed today at $1.22 up a whopping 21% for the day.  If you call that winning, I'd hate to see what you consider losing.

Tue, 12/29/2009 - 01:48 | 176542 bonddude
bonddude's picture

Since things have changed a lot since last year I think you are being a little naive.

I don't claim to be brilliant but I certainly understand and agree with the party you think is a

dumbass. 

"I am Spartacus" as well.

Mon, 12/28/2009 - 13:41 | 176029 besodemuerte
besodemuerte's picture

Sometimes I notice a guest on the television I can't help but easedrop on mention hints of this happening, then the current host immediately spins the guest to look like a bad person, a downer, anti-capitalist, or whatever.  It's so obvious the media is trying their hardest to hide this from the public.

Mon, 12/28/2009 - 14:53 | 176077 Cognitive Dissonance
Cognitive Dissonance's picture

"It's so obvious the media is trying their hardest to hide this from the public."

I agree the media are selling us a snow job, though so much of it is self censorship. We must always remember that the mass media are buffeted by the same winds money managers are. You can't be the first to break ranks or you'll look stupid and more importantly, lose money. It's all about relative performance; how well you do compared to the competition, be it another money manager, your peer group or the TV station across town.

So ya gotta dance until the music stops.

Mon, 12/28/2009 - 15:45 | 176096 Miles Kendig
Miles Kendig's picture

Ya, sooner or later folks just gotta recognize that the only tunes they're dancin' to are funeral marches and the birds singing outside of their window are buzzards. - Thanks CD, or as the author of this article would say; "Feed the ducks". 

Mon, 12/28/2009 - 13:19 | 176015 jmc8888
jmc8888's picture

To 175947

 

Any day, month, or years from now.

They're all dead, we just don't know WHEN the music will stop.

Of course when it breaks, how much will the gov't give the banks to prevent the derivatives collapse? All it takes is one of those in the derivatives circles to go bust, to ignite the rest. Of course, that's not the only way.  The other way is for the sick economy to drag a few in the circle from making their derivatives payments, which at this point could be anything.  Stock market reversal, CRE, probably not residential as Big Ben has Freddie and Fannie scooping all that up. 

So if you want to invest in ANY bank stock, just remember, one day it's at 200 a share, the next day it could be at 0.  This is the environment.  This is the reality.  The poison pills are everywhere and big ben is manufacturing even more and handing them out all around.  It will pop, when, who knows.  The next major event? possibly.  After 10 sequentially bigger events? Almost certainly.  Somewhere between the two is the most like scenario, and when it comes, last year will look like a good ol family reunion and good times.  It wasn't good times you say? You'll think so after the next one or few crashes. 

My personal advice is if you're going to trade Bank stocks, hell ANY stocks, just realize the crap could hit the fan at ANY time, and that you should watch your investment pretty much every minute the market is open.  If that's too much, don't buy 'em.  If you're not the first seller, good luck.

Great article.  The perpetually broke banks will need to do exactly this.  If they don't the derivatives trip wire is set off and kaboom goes the world economy, forever in it's current form.  Meaning big ben will have to keep printing to keep re-inflating the bubble, so these broke zombie by a million times banks can float another day or quarter. 

My question is, how long does it take before the people see this cycle and go, no, no bonuses, you'll be in hock by the middle of next year again and we'll be bailing you out.  Which could come form TWO areas.  Shareholders, and the general public over the bailouts/bailout mechanisms.

Or they can stop printing and everything collapses. 

There's no getting out of what we're in, and continuing down the same road.  No matter how long we wait, or how many trillions or quadrillions we throw at the problem.  It's broke, it's breaking down even further, and it will never return. Never.

Hamiltonian American Credit System, with the appropriate measures are needed.  All that needs to be passed has already been written, and already been shown to congressmen.  Why they don't act, and the people don't demand them to act, is all of our faults.  Glass/stegall, HBPA of 2007, LaRouche 4 powers plan.  Among many other pieces of legislation that need passed, and are sitting on our Congress's desks.

They think they can put humpty back together again.  Which is impossible.  But even now, after so much needed to flow upwards, and continues to, to keep things running, in a crappy fashion, is it even worth it? Of course not. 

If the powers that be needed every piece of wealth in the world to fix their problem, they would take it from you to do it.  Guess what, they're already 10x that with 1.4 quadrillion in derivatives.  If you don't own derivatives, you're a nobody.  I guarantee their 1.4 quadrillion trumps whatever you have and will get serviced first by congress.

Recap

big ben keeps the inflation machine going

stock market goes up

Broke Banks (all of em) issue new shares, shoring up capital base from continued declines of CRE and regular ol mortgages

Sending stock market tanking

Oh yeah, and this is the best-case scenario where nothing else curb checks the economy and allows the banks to do this.  Possible, sure, at least short term.  probable no, at least not long term. 

You can bet that everyone but the central bankers will either be caught off guard when this happens, or will be trying to make the fed look like idiots via other factors rates, gold, etc. 

Even if the fed could control what it's doing perfectly, the outside factor could destroy their goals.  Either way we're screwed as a whole because everyone is still rolling the monopoly dice when it's clear the whole game is over because the same person owns all the properties.  We should be looking into a new game, not still playing the already decided one. 

Mon, 12/28/2009 - 12:37 | 175981 Eternal Student
Eternal Student's picture

Has anyone looked at who's buying up this garbage? The top suckers (err, investors) on that list would be golden for those who want to make some serious money off of them.

Mon, 12/28/2009 - 12:12 | 175953 SteveNYC
SteveNYC's picture

Excellent post.

Mon, 12/28/2009 - 11:58 | 175947 JACOB5CD
JACOB5CD's picture

BUY FAZ? BUT WHEN DO THE BANK STOCKS GO DOWN THE SHITTER

Mon, 12/28/2009 - 12:37 | 175982 El Hosel
El Hosel's picture

"BUT WHEN DO THE BANK STOCKS GO DOWN THE SHITTER"

  After you hear the flushing sound, not a minute before.

Mon, 12/28/2009 - 12:36 | 175980 Cursive
Cursive's picture

"BUT WHEN DO THE BANK STOCKS GO DOWN THE SHITTER"

Been asking myself this question since October.  You'd think the rise of foreclosures, the declining economy (yes, it's declining, the constant equity raises, and the prospect of having to comply with the new FASB rules next quarter would have had some effect.  Alas, no.  The equity markets operate in a world of suspension of disbelief.

Mon, 12/28/2009 - 14:26 | 176058 Anonymous
Anonymous's picture

The large bank stocks are all off their 2009 highs and have been much weaker than the market for several months:

http://finance.yahoo.com/q/bc?s=C&t=3m&l=on&z=m&q=l&c=jpm,wfc,bac,gs

Mon, 12/28/2009 - 12:31 | 175975 Anonymous
Anonymous's picture

Right after the flush.

Mon, 12/28/2009 - 12:31 | 175974 Anonymous
Anonymous's picture

"BUT WHEN DO THE BANK STOCKS GO DOWN THE SHITTER"

Right after you hear the flush.

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