Monday, June 23, 2008

Financials Having a Harder Time Raising Capital

Last Tuesday Goldman Sachs issued a report that sent the markets lower.

But Goldman Sachs stock researchers helped stamp out the rally in financials, warning that banks would face accelerating losses in the third quarter, forcing them to raise an additional $US65 billion in capital.

"Goldman rained on everyone's parade by reminding them that the financials are in serious trouble, and have yet to come up with business plans that are going to convince investors they're going to make money," said a trader at a mid-sized Wall Street firm. "It's hard for the market to rally when 20 per cent of (companies on the S&P 500) are under water."


But now it's getting harder for banks to raise capital:

As banks rack up billions of dollars in losses from bad loans and blundered investments, large investors are becoming skittish about pumping more money into them.

In the past several weeks, bank executives have encountered unexpected resistance from investors, who have expressed reluctance to participate in the capital-raising transactions sweeping through the industry, according to people familiar with the situation. Already bruised by big losses and fearing that bank shares haven't yet hit bottom, some of these investors are choosing to tighten their purse strings.

"The window for capital-raising is closing," says Brad Evans, a portfolio manager for Heartland Advisors Inc., a money-management firm in Milwaukee that invests in small, regional banks. "Investing in a bank right now means investing in a large portfolio of loans that are essentially a black box."

The change in sentiment could have sweeping implications for financial institutions that are trying to shore up their balance sheets by issuing stock and other securities to their investors. Some may be forced to lure investors with sweeter terms, further raising the costs of doing these deals.

Before announcing plans earlier this month to raise $1.5 billion, KeyCorp, of Cleveland, quietly reached out to more than a dozen of its largest institutional shareholders to gauge their interest in participating in a transaction, according to people familiar with the matter. A number of those investors rebuffed the offer, expressing concern about their existing exposure to the poor banking environment, these people said. KeyCorp's stock price fell 24% when it announced the capital-raising deal. It is down 3.8% since then.


Personally, I laughed for days when Bank of America bought Countrywide Financial -- an then split my sides when BAC said they still thought it was a good trade. Countrywide is a walking lawsuit, nothing more. But it is indicative of the entire industry. For the next few years there are going to be tons of announcements from this sector -- none of which is going to be good. How do I know this? Take a look at this chart:



Above is a chart of the XLF's -- the ETF for the financial industry. It's been moving lower on a consistent basis for the last year. Let's take a look at the 3 month chart to see what it says:



Note the following:

-- Prices are about 20% below the 200 day SMA

-- Prices are below all the SMAs

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

This chart says "short me....please". This is not a market where people find bargains yet. This is a market waiting for someone to declare bankruptcy.

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