Investment News Briefs: US Home Prices Plunge, Citigroup, US Trade Deficit

Home Prices Record Plunge; U.S. Trade Gap Grows; Social Security Funds Running Out Early; Citigroup Lends Most TARP Money; Big Shipper Maersk Posts Loss; EU To Do Bank Stress Tests

• U.S. home prices posted their biggest drop on record during the first quarter, with the median price falling 14% to $169,000 from a year earlier, the National Association of Realtors said. Prices fell in 134 of 152 metropolitan areas, with values plunging the most in Florida and California.

• The U.S. trade deficit grew 5.5% to a smaller-than- forecast $27.6 billion, dropping for the first time in eight months.  The gap widened as exports slumped to a two-year low, overwhelming shrinking imports, reflecting reduced American demand for goods made abroad. The report buoyed hopes that a record contraction in global trade flows may be easing. “It’s one more indicator that things are getting worse at a lot slower pace than before,” said John Ryding, chief economist at RDQ Economics LLC in New York, Bloomberg reported.

• The Social Security trust fund will run out of assets in 2037, four years sooner than previously thought, a report by the fund’s trustees said yesterday (Tuesday).  The same report said spending on Medicare, the health insurance plan for the elderly, will reach a legal limit by 2014.  Payroll tax contributions to Social Security and Medicare, the two main safety nets for American retirees and the elderly, are declining due to the recession just as the baby-boom generation begins to retire, Bloomberg reported.

• Citigroup Inc (C: 3.55 -0.11 -3.01%) is using almost all of the $45 billion in U.S. taxpayers’ money it received from the TARP program to make new loans.  A committee at the bank, appointed to oversee the use of the money it received from TARP, approved $44.75 billion in lending initiatives as of March 31, according to an AP story, which appeared on the New York Times website.

• A.P. Moller-Maersk, the owner of the world’s biggest container shipping business, swung to a bigger net loss than expected in the first quarter and warned that the full year might end up that way too.  The company posted a net loss of $390 million for the first three months, as the dive in global trade and freight rates hit shipping and low oil prices hit its oil business even harder than expected, Reuters reported.
• Bank regulators in all 27 countries of the European Union will conduct confidential stress tests by September, stepping up scrutiny of risks after lenders absorbed more than $1 trillion of losses and writedowns in the global financial crisis, Bloomberg reported.  Finance ministers and the EU’s executive agency will get private reports and industry data from regulators.  Results for individual banks such as Spain’s Banco de Santander S.A. (STD: 9.38 -0.49 -4.96%) or Barclays Plc (BCS: 14.7786 -1.4414 -8.89%) won’t be released.

Forex Trading: British Pound Getting Hit Hard Across The Board

The GBP continues to get hammered across the board following some very cautious statements from the BoE’s King and an Inflation Report noting slow UK recovery.  The GBP/USD has hit a fresh session low of 1.5159 as the pair is moving down to the 100 Hour Moving Average.

BoE’s King: UK in worse position than many other countries

- Economy needs a period of healing
- Output decrease reflects decline in confidence
- Adjustments taking place in an uncoordinated fashion
- UK savings rate will need to rise

BOE QUARTERLY INFLATION REPORT: SEES RELATIVELY SLOW RECOVERY, CPI BELOW 2% UNTIL 2012
- Economy aided by stimulus plan and weaker GBP
- Uk economy still vulnerable to further shocks

 

Non-U.S. Banks - Opportunities And Weaknesses

In general, we believe it is still a bit early to get involved with non-US bank stocks as the fundamental outlook remains weak - asset quality will continue to deteriorate as individuals and companies default on loans, and revenues should continue to fall as loan growth falters and investment banking faces a dearth of new business in the face of economic slowing.

Consumer job losses and sluggish business conditions are increasing worldwide, which will tend to dampen demand for credit, even assuming banks are capable of lending more. Moreover, these factors will also hurt asset quality and increase losses on the existing “good” loan portfolios, even apart from considerations of toxic assets. Combined with top-line pressure due to weakening economic conditions, non-US banks face a daunting outlook.

That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments, similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising, and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren’t as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed the S&P 500 (^GSPC: 892.01 -16.34 -1.80%) year-to-date, increasing 19.2% and 10.0%, respectively, versus a 0.7% gain in the S&P 500, and compare to a 2.0% decline for Zacks-covered banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices will continue to be volatile, reflecting economic uncertainty and headline risk in the coming months.

OPPORTUNITIES

Specific banks that could outperform include Itau Unibanco Banco Multiplo S.A. (ITU: 13.32 -0.74 -5.26%) in Brazil, Banco Santander Santiago (SAN: 37.32 -0.78 -2.05%) in Chile, and HDFC Bank Limited (HDB: 76.00 -2.80 -3.55%) in India.

ITU is the largest bank in Brazil, following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A. (or Itau), with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at yearend 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS: 11.62 -1.76 -13.15%) and Lloyds Banking Group plc (LYG: 5.18 -0.33 -5.99%) in Britain and Allied Irish Banks (AIB: 2.48 -0.39 -13.59%) and The Governor and Company of the Bank of Ireland (IRE: 5.30 -0.83 -13.54%).

In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raises issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV: 11.22 -0.65 -5.48%) and Banco Santander Central Hispano, S.A. (STD: 9.38 -0.49 -4.96%), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain’s unemployment rate was 17.4% at the end of March, more than double the level a year ago.

India Stock Market: Sensex Down 138.38 Points On Wednesday

Sensex down 138.38 points on Wednesday (May 13, 2009)
-investors cautious ahead of exit polls

Sensex (^BSESN: 12019.65 -138.38 -1.14%) fell 138.38 points or 1.1% to 12019.65.
Nifty (^NSEI: 3635.25 -45.85 -1.25%) fell 45.85 points or 1.3% to 3635.25.
Mid Cap index fell 0.1%. Small Cap dipped 0.5%.
BSE 500 was down 0.8%. Sensex losers: 23
All 13 BSE Sectoral indices, 12 posted losses.
Advancers: 1142, Decliners: 1346, Unchanged: 92
Decliners outpaced advancers by a ratio: 5:4.

Sensex Day’s Range: 12256.43 - 11934.44
Nifty Days Range: 3709.60 - 3610.20
52-Week Range: 17497.36 - 7697.39
52-week % change: -31.30

Sensex losers included Tata Steel -3.8%, Sterlite Ind -3.3%, Maruti -3.2%, JP Associates -3.2%, Mahindra & Mahindra -3%, ONGC -2.9% and State Bank -2.6%.

Sensex gainers were ACC +2.9%, HDFC +2.6%, Grasim +1.7%, Ranbaxy Labs +1.1%, Tata Motors +0.6%, Reliance Infra +0.2% and Hindalco +0.1%.

Metal index fell 2.1% led by Tata Steel -3.7%, Sterlite Ind -3.5%, ONGC -3.4%, JP Associates -2.9%, Maruti -2.7% and State Bank -2.6%.

IT index dipped 1.6% helped by NIIT -6.1%, HCL Tech -3.9%, NIIT Tech -3.7%, Financial Tech -3.4%, Aptech -2.9% and TCS -2.4%.

FMCG index tanked 1.5% aided by United Breweries -3.8%, Tata Tea -2.4%, Nestle -2.2%, ITC -1.9% and HUL -1.5%.

PSU index slipped 1.5% assisted by STC India -5.3%, Neyveli Lignite -5%, ONGC -3.4%, UCO Bank -3%, Hind Copper -3%, SAIL -3% and NMDC -2.7%.

Other sectoral losers were: Oil & Gas -1.4%, Bankex -1.1%, Power -1%, Realty -1%, Teck -0.9%, Capital Goods -0.6%, Auto -0.5% and Healtcare -0.5%.

Consumer Durables was the only sector, which rose 0.1%.

Volume Shockers on the BSE:
DLF 179.85 million shares, Unitech 22.26 mln shares, Suzlon 21.71 mln and Rel Natural 13.69 mln shares

Buzzers:
Take Solutions +20% at Rs 26.40, Hitech Plast +18.9% at Rs 53.80, Elecon Engg +14.1% at Rs 55.50, KEC International +13.4% at Rs 305 and GMR Ferro Alloys +11.1% at Rs 28.90.

Heavy Losers:
Savera Hotels -11.1% at Rs 23.50, EPIC Energy -9.9% at Rs 27.25, Venus Ventures -9.8% at Rs 27.95, IST Ltd -9% at Rs 66, Parle Software -9% at Rs 59 and Polaris Soft -7.5% at Rs 78.05.

Blue Star Info surges 12 pct:
The shares of Blue Star Info surged over 12 per cent to Rs 72.85 on announcement of good results. The company posted an EPS of Rs 15.6 on a small equity of Rs 10 crore and declared a dividend of 50 per cent.

Suzlon promoters sell 2 pct equity:
The Tulsi Tanti family, promoters of wind turbine company Suzlon Energy, raised about Rs 230 crore by selling about 2% of their stake in the wind turbine company, according to sources close to the development. The family which after the stake sale owns about 64% in Suzlon, said in a statement on Wednesday that it sold the 30 million shares.

Piramal Lifesciences hits upper circuit of 5 pct:
Shares of Piramal Lifesciences hit the upper circuit limit Wednesday following the company’s announcement that it has received regulatory approval by the Drug Controller General of India to conduct two Phase I/II combination studies for its cancer molecule P276 for pancreatic and head and neck cancer. The share surged 5 per cent to Rs 51.50 on the BSE.

HDFC up after upgrading:
Housing Development Finance Corp rose 2.6 percent to Rs 1,897.10 rupees after Morgan Stanley upgraded the stock to “overweight” from “equalweight” and raised its price target to Rs 2,150 from Rs 1,600.

Inflation expectation:
India’s annual inflation rate is expected to have fallen back towards zero at the start of May after rising in the previous three weeks, a Reuters poll of analysts showed on Wednesday.
The median forecast of 11 analysts was for 0.3 percent rise in the wholesale price index in the 12 months to May 2, compared with a 0.7 percent rise the previous week.
Crude:
An unexpected drop in US crude inventories propelled oil prices to near $60 on Wednesday on indications that demand may be picking up.

China factory output growth slows, retail sales surge:
China’s factory output growth slowed in April, providing fresh evidence a day after poor export data that recovery in the world’s third-largest economy is not yet on a rock-solid footing.

However, the pace of retail sales growth surprisingly accelerated, offering encouragement to policymakers that consumers, who bought cars last month at a record clip, are helping to compensate for weakness in the industrial sector.

Asian Markets:
Straits Times was up 1.2% and Jakarta Composite gained 2.09%. Shanghai Composite and Hang Seng went up 0.65% each. Nikkei, Kospi and Taiwan Weighted rose 0.3% each.

European Markets:
European markets were ruling mixed; FTSE -1.1%, DAX -2.2% and CAC -1.1%.

Concern:
A weak coalition could emerge just as the country battles an economic slowdown

Are Those “Green Shoots” Growing?

Now that the equity market seems to be on teeter totter as it ponders its next move, I recently wrote that:

Now that prevailing sentiment has moved from “Armageddon is around the corner” to “green shoots”, the next turning point will likely occur when the fast money ponders the question of what happens next, now that we seem to have stabilized.

The next test
Certainly the macro picture is improving. There are sporadic signs of green shoots here and there. In addition to the US data, Brad Setser reports that there are also tentative signs of recovery in East Asia as the Korean data, which is the most timely, is pointing to recovery. After the close, we saw Intel, which is an economically sensitive semiconductor company, making positive noises about its 2Q outlook.

On the other hand, the Pragmatic Capitalist indicates that there is no sign of recovery in US rail traffic data. Moreover, Obama’s tax proposals could significantly diminish investors’ risk appetite (but then, someone has to pay for those enormous deficits).

The market has a way of saying “what have you done for me lately?” Now that a recovery is getting built into investor expectations, these negative fundamentals could prove to be a nasty surprise in the near term.

Watch out for the downside.