Enzio's Clock

Background

1. Obama popularity waning

In this week's Economist, we read that independent voters in America now prefer Republicans to Democrats, and that Mr. Obama's approval rating is where George W. Bush's was at this time during his first term. This is not good news, and sadly vindicates our long-held view that Mr. Obama has a long way to go before really getting the credibility that he must have. 

Obama's waning popularity means that if Dr. Geithner's Public-Private Investment Program (PPIP) needs Congressional approval,  it will be watered-down to much that it becomes ineffectual: the vested interests will emasculate it.

2. Why should banks want to sell?

If London's G-20 week end protests are anything to go by, then 'bankers" are today what the"military-industrial complex" used to be for us Viet Nam-era Americans in the sixties: anathema.

According to said Economist  (p. 12), Dr. Geithner's Public-Private Investment Program (PPIP) "... aims to  buy $500 billion - $ 1 trillion of the loans and hard-to-value securities that have swamped the banks' balance sheets since the collapse of the American mortgage market in 2007."

But there sadly we are skeptical of his PPIP:

1. Congressional approval. Seems like Congress will have to approve it. Well, with Obama's popularity waning (see above), the Administration will be under even greater pressure to pander even more to vested interests that run the Hill, so expect the final PPIP to be a ghost of its former self;
2. Tax payer revolt. If the week end's G-20 marches are anything to go by, it seems like the public at large are getting angry at bankers. This will further diminish the appeal of tax payers having to fund even more bank bail-outs, and that groundswell of disgust, in turn, will result in an even more watered-down version that Congress ultimately approves (if at all), and
3. Banker revolt. "For every buyer there must be a seller" is some circular logic that we all learned at school. Even if there are buyers: banks won't be so keen to sell their toxic assets within this PPIP. Why so? Because banks don't want to devalue their toxic assets and thus have to raise more capital. To cite said Economist, p 14: "Many banks value their assets well above the prices they would fetch in an open...market. They have incentives to keep them there: the lower the price, the more capital they need to raise; in these capital constrained times, that means the closer banks are to insolvency...' Adding salt to the wound, Dr. Geithner wants to conduct stress tests to see if America's biggest banks actually have enough capital. According to said Economist, "...the stress tests could force the banks to come clean about their balance sheets and lead to the forced sale of assets into the government's toxic asset programme, If a bank cannot raise the capital to offset its losses, it should be deemed insolvent and temporarily nationalized."

3. How to Make Money Off This Idea

1. Always consult your financial adviser first.
2. If you agree with our assessment that banks are going to come under huge stress, then load-up on that ETF that shorts the US financials sector, SKF:US, something that we recommended first on 23rd March 2008.  It currently is attractively priced, having plunged from $250 on 6th March to $90 by 26th March!