trendanalysis's blog

Where will US banks get new capital from?

It has been estimated by an analyst that US banks will need to raise $1 trillion in order to be adequately capitalised.

So where will all this money come from? Even if the analyst is wrong and the banks only need half that, $500 billion, it will still be a tall order raising that sort of money without diluting shareholders away. The banks will only want to take capital from the government as a last resort, and I think there is only about $100 billion left in TARP anyway, and that could easily disappear on the auto companies.

Ironically, now that the mark to market rules have changed the banks are reporting profits. Do people think there is going to be any desire by Congress and the US public to stump up billions more, when they see the banks reporting profits? It was hard enough getting the original TARP through Congress, when the banking system was close to collapse. That would leave the private sector to stump up the money, but again does this sector have the desire and ability to do so, and at what price?

Markets

On the markets the line in sand is 875 on the S&P 500. Above that there's a chance of 905, and maybe 935. A close below 850 on the S&P could set up a correction into 835, below that 826, and then 800.

Nasdaq 100 is right up against its 200 day exponential moving average, the standard DMA is not much higher, coming in at just under 1400. I went short the Nasdaq 100 the other day. If this is just another bear market rally than selling the 200 day moving average will be very rewarding.

Note this rally now has many more bulls than it did after the first week of April, despite being at roughly the same price on the S&P 500.

Gold has wobbled recently in a low liquidity sell off IMF / Central bank selling threat. Major support around $840, although we could see support around $870.

The Denominator Effect

Full Meredith Whitney interview from Last Friday.

Always worth a watch!

F

Indeed.

Panmure bearish on house builders

Mark Hughes and Rachel Waring run through the big house builder names one at a time. Three of the verdicts are:

* Barratt – current shares trade at 152p but they say ‘sell’ now as their target is a fall to 75p in Barratt’s share price
* Bellway - "sell" as the target of 667p is well below today's trading figure of 755p
* Redrow – gets a “sell” rating as the current 202p is stronger than the target of 158p

Hughes and Waring say a dilutive fundraise is likely to be taken by Barratt within the next 18 months. The current NAV at Barratt is 419p but they see this falling to 75p as a result of additional shares pouring into the market.

Operating Earnings V As Reported Earnings

2009 Estimates for the S&P 500 are at.

$55 operating
$28.51 as reported.

Operating earnings are before interested and depreciation, and any other so called one off charges.

As reported earnings are the numbers that are actually filed to the tax office!

With the S&P 500 currently trading at 929, this gives an operating forward P/E of just under 17 times, and an as reported forward P/E of 32.58. So if we take the operating number then the P/E is above the historical average and becoming expensive, if however we use the as reported number, then this market is ridiculously overvalued at 32 times.

The historical average P/E for the S&P is around 15 times. 15 times operating earnings would have the S&P at 825, while 15 times as reported earnings would put the S&P at 427.

However, is the economy in an average state? I think not, credit is still contract and the banking system is propped up by all sorts of government support programmes, we have deleveraging, high levels debt and defaults, and high levels of unemployment. Clearly some sort of discount must be made to the historical average PE of 15, to allow for the risks that are present. Being generous one may chose to only discount a point to 14 times, but the case for 12 times could also be made.

Let's do the numbers at 14 and 12 times.

14 x $55 = 770 S&P 500
14 x 28.51 = 399 S&P 500

12 x $55 = 660 S&P 500
12 x $28.51 = 342 S&P 500

Personally I think 14 times $55 is fair which would put the S&P at 770 and not the current 929. However, the recovery to $55 need to be delivered and there are no guarantees yet that it will, despite the bullish euphoria in the markets. I dread to think what will happen to these markets if the so called green shoots fail to flower.

Good Luck.