I have read a few articles late tonight that state that government stress tests show that Bank of America and Citigroup will need to raise billions more in capital. These 2 banks have already received almost 100 billion in funds through the government’s TARP program. These findings illustrate a larger problem facing US banks. IF B of A and Citi need more funds then why doesn’t PNC, Wells Fargo, US Bancorp or Suntrust need more capital? The problem in the banking system is that there is a perpetual cycle. Increases in unemployment lead to greater mortgage delinquencies which result in a decrease in housing prices. This leads to larger asset write downs which require banks to raise more capital. Until unemployment stops rising it will be impossible to predict how much capital banks need to survive this economic downturn. It is clear now that in September of 2008 that the US banking system was insolvent and without the major capital injections from the Treasury; the system would have collapsed.
Finally A Rally!
The Dow is up over 600 points the last 3 days.
General Electric (GE) has risen from the $5 level to the $9.50. I should have bought a lot more when the stock was in the high 5′s. GE rose today despite a ratings downgrade. GE dropped from AAA to AA+. Why is this important? Ratings downgrade raise the cost of obtaining capital in the credit markets. I am hoping that $5.87 was the bottom for GE.
Even American Express (AXP) and Capital One (COF)have risen over 25% the past two days. Both credit card companies still face rising delinquencies and defaults but the stocks appear to have been oversold. The companies were pummeled to the single digits.
Blue chip companies like Microsoft (MSFT), Pfizer (PFE) and Disney (DIS) have all bounced double digits from their 52 week lows set last week.
PNC Financial (PNC)might be a good short candidate. PNC is trading at $28.55 which is significantly higher than other regional banks like Suntrust and US Bancorp. I know that PNC plans to pay back TARP funds but can they really do that until they know the extent of their real estate losses?
Financials Start Cutting Dividends
US Banks are finally cutting dividends to acceptable levels to conserve capital.
US Bancorp (USB) cut its dividend 88% from $1.70 to .20 per share.
PNC Financial (PNC) has reduced its dividend from$2.64 a share to .40. a share.
Wells Fargo (WFC) is the last big bank standing that has not reduced its dividend yet. I don’t know how long this can last with the stock barely above single digits.
Now that major banks are cutting dividends look for insurers and credit card companies to start cutting next. Dividend cuts at Capital One and American Express appear likely.
Bank Dividend Cuts
JPMorgan Chase (JPM) cuts its annual dividend from $1.52 to 20 cents per share today. JPMorgan is preparing for a longer recession and double digit unemployment. JPMorgan has been deemed to be in the best financial shape of the other major banks. In the current marketplace that is like having the best seat on the Titanic. Banks are hemorrhaging and need every bit of capital that they can get their hands on. If JPMorgan is cutting their dividend then other major banks dividends are in trouble as well. Now that JPMorgan has cut its dividend, it will be easier for the following major banks to follow suit.
Wells Fargo (WFC) and its $1.36 dividend will likely go down to about 10 cents per share.
US Bancorp (USB) and its dividend of $1.70 is currently yielding over 16%. The yield is way too high. The new dividend would be about 10 cents per share.
PNC Financial (PNC) needs to cuts its $2.64 dividend with its 11.4% yield. PNC has not cut its dividend at all since receiving almost 8 billion in TARP money. PNC’s dividend should be cut to about 25 cents per share.
Suntrust Banks (STI) will probably undergo it third dividend cut in less than a year. I expect a drop from 40 cents to 8 cents per share.
Bank of New York Mellon (BK) is in the same boat as PNC Financial. Bank of New York has not had a dividend cut since receiving 2 billion dollars of TARP funds.
All of the dividend estimates are based on the Bank of America, Citigroup, JPMorgan models. Each of these banks cut their dividends to a yield that was approximately 1% of the stock’s price.
Stock Watch
Picked up more S&P 500 UltraShort (SDS) shares at $82 per share.
I have been dabbling more with options lately. Bought April 5 call options on Wendy’s stocks.
Bought Jan 6 call options on Saks. Not a fan of luxury retail but the stock looks oversold.
PNC bank looks overvalued at $52.69. I think the stock has a lot of room to drop.
I know Electronics Arts (ERTS) slashed earnings outlook. But if it drops down to 13 may be worth a look.
Final Thought: Maybe Office Depot and OfficeMax should merge so they can have a fighting chance against Staples.
