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Thursday, January 10, 2008

Capital One, Freddie Mac, Money Markets and Hammers

Its ‘hammer time’. Yesterday the markets staged an impressive recovery from the lows around 2:30 PM. The result was a rally in excess of 1% on all the indices and a powerful ‘reversal’ candle on all the charts. The Hammer candle.

Capital One Cuts 2007 Profit Forecast on Loan Losses (Update3): “Capital One Financial Corp., the largest independent U.S. credit-card issuer, reduced its full- year profit forecast by about 20 percent because of swelling loan losses in a weakening U.S. economy.

The company expects 2007 profit of about $3.97 a share, down from a previous forecast of about $5. The decline was caused by about $1.9 billion of loan-loss provisions and $80 million in legal reserves in the fourth quarter, McLean, Virginia-based Capital One said in a statement today.

Capital One dropped 3.5 percent in German trading to $41.85. Chief Executive Officer Richard Fairbank said last month that a slowing economy may cause bad debts to exceed $5 billion in 2008. Fallout from the collapse of the U.S. subprime mortgage market has led to more than $97 billion of writedowns and loan losses at the world's largest financial companies, eroding earnings and stock prices.”

Futures were doing fine before this came out pre-market. This is just another piece of evidence that the consumer isn’t doing well.

Freddie Mac's Strength Rating May Be Cut by Moody's (Update5): “Freddie Mac, the U.S. mortgage company that reported its biggest loss last quarter, may be downgraded by Moody's Investors Service because the damage from loan defaults could be worse than the ratings company expected.

Moody's said it may lower Freddie's financial strength rating from A-, the second-highest grade. The McLean, Virginia- based company's top Aaa senior long-term debt rating and the Prime-1 rating for its commercial paper or short-term IOUs won't be cut, Moody's said.

Chief Executive Officer Richard Syron has attempted to shore up Freddie Mac's finances by selling $6 billion of preferred stock, slicing its dividend in half and reducing its mortgage assets by $30.9 billion to $701.4 billion in the three months to Nov. 30. The government-chartered company may need to take similar steps again, Moody's said.”

In the end this little bit of tinkering won’t make a difference. Fannie and Freddie both have trillions of dollars sitting on a capital base of about $30 to $30 billion each. At some point the government will end up having to prop up both these guys.

Credit Default Swaps in Freddie were active early this morning, rising again…

Citigroup Gains on WSJ Report of Foreign Investment (Update2): “Citigroup Inc. rose in Germany and Japan after the Wall Street Journal reported that the biggest U.S. bank is seeking as much as $10 billion from foreign investors as mortgage-related losses deepen.

Merrill Lynch & Co., the largest brokerage, also is in talks with investors and may get $3 billion to $4 billion, the Journal said earlier today, without citing any sources. Citigroup has already received about $7.5 billion from Abu Dhabi and Merrill said last month that it's raising as much as $6.2 billion from Singapore's Temasek Holdings Pte. and New York-based money manager Davis Selected Advisors LP.

Banks and securities firms in the U.S. and Europe have turned to Asian and Middle Eastern governments for about $34 billion to prop up balance sheets battered by writedowns from the collapse of the U.S. subprime market. New York-based Citigroup and Merrill want to secure additional financing before they report the extent of their fourth-quarter losses next week, the Journal reported.”

When this mess finally settles out, Asia and the Middle East will end up owning a serious chunk of the American financial system.

Money-Market Rates Fall as Bank Action Eases Crunch (Update1): “Money-market rates fell for a ninth day, stoking optimism a squeeze on short-term credit is abating after central banks injected a record amount of emergency cash into the system.

The three-month euro interbank offered rate, or Euribor, dropped 1 basis point to 4.59 percent, the European Banking Federation said today. It was at a seven-year high of 4.95 percent on Dec. 12, when policy makers announced a concerted drive to defuse the logjam in interbank lending. The comparable pound rate fell 5 basis points to 5.6 percent, the lowest since April 2007, the British Bankers' Association said.

A surge in borrowing costs has eased since central banks responded to about $100 billion of losses at financial institutions on securities linked to U.S. subprime mortgages. Citigroup Inc. is seeking as much as $10 billion from foreign investors as its mortgage-related losses deepen, the Wall Street Journal reported today.

Rates “continue to drop due to the aggressive bank- liquidity injections and expectations of falling interest rates,” a Citigroup team led by Tom Fitzpatrick, New York-based global head of currency strategy, wrote yesterday. “It remains to be seen how successful the central bank injections will be but the initial signs are certainly quite encouraging.”

Things continue to stabilize in the credit markets. After eight straight days of declines, the major equity indices put in a bottom yesterday. They all look set to bounce. The failure of a bounce to materialize would lead to rapid deterioration in the markets as panic selling ensues.


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