Here is a chart showing the number of transactions that involve acquisitions of an asset management business by year. It tells us about a couple of trends developing in recent years.
Themes for today:
The US faces political constraints in a cyclical downturn that will limit government response
The US private surplus is under assault
Europe is improving and upgrades to bank stocks are bullish
The Fed tends to tighten before wage growth becomes sustainedEM hidden external debt in eastern Europe makes Ukraine a potential point of contagion
EM hidden external debt is large in China, Brazil and Russia
Loan growth rate in the US, while better than in the Eurozone, remains on a downward path. The latest figures suggest that loans are increasing at less than 2%, while deposits continue to grow at 6-7% per year.
Owning shares in a bank is the functional equivalent of owning a call option on the bank’s future operational earnings, and if the share price contains little intrinsic value (i.e. the value of its assets does not exceed the value of its liabilities by a large margin, and may even be less than the value of liabilities), by definition most of its value consists of time value, and so is extremely sensitive to changes in expectations.
European banks continue to be engaged in deleveraging. It is partly driven by new capital requirements and partly by preparing for the next year’s ECB’s asset quality review and stress test. The deleveraging process includes reducing assets and boosting regulatory capital. Italian and Spanish officials are finding creative ways to help the banks.
The higher demand for leveraged loans is helping to gradually increase leverage of buyout transactions. But a more alarming trend is the sharp relaxation of lending terms – the so-called “cov-lite” (covenant-light) deals. Over 70% of recent deals for example have been structured as covenant-lite.
Editor’s note: The following press release was issued by the FDIC last week regarding bank accounting gains in the quarter through 31 March.
One of the most contentious topics in America is the impact of the Federal Reserve’s policy of “Quantitative Easing” – otherwise known as ‘QE’. The Federal Reserve has committed to spending $85 billion every month buying a wide range of bonds from banks, until such time as the US unemployment rate falls below 6.5 per cent. The Fed has implemented this policy because it believes it is the best way to stimulate demand in a depressed economy. Its critics oppose it because they believe this massive amount of ‘money printing’ must inevitably lead to ruinous inflation. I reckon they’re both wrong, and in a seriously wonky post I’ll try to explain why.
Regarding Cyprus, recently I heard someone claim that depositors are not creditors of a bank despite the fact that deposits are bank liabilities. This is bollocks. Depositors are indeed creditors, particularly in Europe where they are legally pari passu with other unsecured creditors. Below is an extract from a presentation given by an ECB expert on bank resolution schemes addressing who gets preferential treatment in carving up the losses.
Many of the largest technology companies are making so much money that they are rapidly accumulating cash on their balance sheets. While on could argue that this cash should be stripped off the balance sheet for valuation purposes, I would argue that the cash is worth less than face value because having excess cash on the balance sheet is an invitation to wealth-destroying acquisitions. The excess cash should be returned to shareholders as quickly as possible in the form of dividends or share buybacks to prevent such an outcome.
Below are a number of articles I feel are worth reading on the Hewlett Packard acquisition of Autonomy and the accounting scandal associated with writedowns from that acquisition. I want to briefly analyse the fallout from this episode from a number of different levels from the economy-wide macro to the company specific and investing. First, looking at the autonomy acquisition […]
As I wrote yesterday, government deficits are the biggest driver of elevated corporate margins. This is significant in the US given the looming fiscal cliff and the already ongoing margin mean reversion. Using the financial sectoral balances approach, it is clear that larger government deficits allow for larger non-government surplus. The question is how those surpluses are distributed amongst the four […]