Posts Tagged ‘U.S. banks’
A Fiction Called the U.S. Dollar
By Michael Lombardi, MBA for Profit Confidential
Prior to the financial crisis, the Federal Reserve bought minuscule amounts of U.S. government debt. In 2011, the Federal Reserve bought 61% of all net U.S. Treasuries issued (source: Wall Street Journal, Mar. 27, 2012).
Reread that again, dear reader, to absorb its full meaning—61% of all issued U.S. Treasuries were bought by the Federal Reserve last year.
Before the financial crisis, it was foreign countries that were the major purchasers of U.S. government debt. Since then, many countries have reduced their purchases of U.S. government debt, especially China.
In December of 2011, all foreign countries were net sellers of U.S. government debt to the tune of $21.0 billion (source: Forbes). South Korea reduced its holdings of U.S. government debt and its holdings of U.S. dollars from 63.7% of foreign currencies to 60.5% of foreign currencies.
Over the last five years, China purchased an average of 63% of all newly issued U.S. government debt. In 2010, it dropped to 45% of all newly issued U.S. government debt and now China is purchasing only 15% (source: Wall Street Journal, Mar. 27, 2012).
With the Federal Reserve being the largest buyer of U.S. Treasuries, it creates the false impression that the U.S. government debt market is functioning normally and that there is ample demand worldwide for it. However, if the Federal Reserve stops buying, who will be there to purchase U.S. government debt?
In the U.S. government debt market, like in all other debt markets, the higher the demand, the lower the interest rate one needs to pay on their debt. The Federal Reserve is creating its own demand, … Read More
Bank Stocks: Is it Safe to Buy Them Now?
By George Leong, B.Comm. for Profit Confidential
The big banks have steadily recovered since the Lehman Brothers collapse in late 2008 that sent bank stocks in a punishing downward spiral, which inevitably required hundreds of billions of dollars in bailout funds from Uncle Sam to save the U.S. banks from collapse.
In my view, this chaotic event was an opportunity that may surface only a few times and times of chaos are when you could make big money.
What was clear was that the newly minted President Obama couldn’t allow the big banks to fail even though they were responsible for the subprime mortgage and credit crisis around the world. If the big banks collapsed, this would have likely triggered a mass selloff in the U.S. and thrown the U.S. economy into a depression instead of a recession. The housing market is showing signs of improvement in spite of continued price pressures, which you can read about in U.S. Housing Market: Anatomy of a Recovery.
There was absolutely no way the government would allow the big banks such as Bank of America Corporation (NYSE/BAC) and Citigroup Inc. (NYSE/C) to fail, as it would drive down banking competition nationwide, which would not be good for competition and confidence in the U.S. banking system.
The concept of chaos generally provides a great opportunity to make some easy money. On March 5, 2009, Citigroup could have been bought for $1.02 a share. The stock is currently trading at a post-consolidation price of $36.78 after a 10-for-1 stock adjustment. A block of 100,000 shares could have made you a cool $266,000 in two years. Citigroup was trading at over $52.00 … Read More
Half of the Eurozone Downgraded:
Time to Start Worrying
By Michael Lombardi, MBA for Profit Confidential
After 36 years, France has lost its coveted AAA credit rating.
S&P downgraded France’s AAA credit rating one notch to AA+ late Friday, and the bad news didn’t stop in France.
S&P maintained its outlook as negative for the country, which means that there is a one in three chance of a further credit rating downgrade in 2012 or 2013, should France’s situation continue to deteriorate.
Considering the continued economic weakness in the eurozone, as I’ve been detailing, the challenges facing France are daunting. The country’s response to the credit rating downgrade is to announce reforms (austerity measures) by the end of the month.
The problem is that—as with any reform—there is short-term economic pain as the measures are implemented. Considering the economy is probably already in a recession, any reform threatens to exacerbate economic weakness.
S&P didn’t stop there. The rating agency downgraded Italy’s credit rating two notches to BBB+ and kept its outlook negative for the already struggling country. S&P cut the credit ratings of Portugal and Spain, and stripped Austria of its AAA credit rating as well.Germany kept its AAA credit rating, with its outlook as stable.
In total, of the 17 member eurozone countries, more than half—nine—were downgraded. Only four countries survived the carnage to retain their AAA credit rating:Germany, the Netherlands; Finland; and Luxembourg. Sounds like a great place to invest, doesn’t it?
The immediate problem is that these countries will have to pay more interest on their debt. Like a household, when it is time to renew your mortgage, if interest rates are now seven percent when you were paying three … Read More
Big Banks: Another Reason to Avoid Them in 2012
By Michael Lombardi, MBA for Profit Confidential
As if the big U.S. banks didn’t have enough trouble.
Besides the large U.S. banks’ exposure to Europe and to the derivatives on their balance sheet (off-balance sheet items, which is why no one can evaluate what they’re really worth), there is another issue—a lawsuit—that could cost the big banks billions of dollars and negatively impact their corporate earnings in a significant way.
There is a private antitrust lawsuit that has a staggering five million retailers against Visa Inc. (NYSE/V), MasterCard Incorporated (NYSE/MA), and 13 of the big banks, including Citigroup, Inc. (NYSE/C) and JPMorgan Chase & Co. (NYSE/JPM)—15 major financial institutions in total that could see corporate earnings plummet if this antitrust suit gains traction.
The plaintiffs—the retailers—are accusing the 13 big banks and the credit card companies of colluding to charge fees for credit card transactions that are much higher than a competitive market would command.
Not only are the retailers demanding compensation for overpaying for these fees—dating back to 2004—but they are also probably seeking a permanent fee reduction going forward. The defendants argue that MasterCard and Visa are public firms, which immediately implies they compete with each other for business, outside of the oversight of the big banks. There go the corporate earnings of MasterCard and Visa (if this suit progresses).
The plaintiffs believe they have a very strong case to show that this is one club—the credit card companies and the big banks are intertwined into one. As such, there really is no competition, forcing retailers to pay whatever the fees demanded are.
It is estimated that, in 2009, industry-wide, the fees amounted to some … Read More
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