New round of foreclosures threatens US housing market (Washington Post)

S&P warns over America’s top-tier debt rating (via @FTAlphaville)

Local Merchants More Optimistic on Revenues, Hiring Than they Were in November (MerchantCircle confidence index)

Where The ‘Top 50 US Venture-Backed Companies’ Reside: two thirds in CA (via DJ)

European REIT Rollout Seems at Hand, led by German property group Hamborner (via WSJ)

Paris is now 50% more expensive than New York and is the priciest city in the world (The Economist)

Technorati Tags: foreclosures, REIT, short-selling, Twitter, venture-capital

Citigroup

CreditSights’ comments were followed by a bullish interview of  Vikram Pandit in the Financial Times:

… the Citi chief claims to have the formula that could take the company from last year’s $8bn loss to, if you follow his maths, as much as $20bn in earnings from its core business by 2012.

This was followed up by more of the same in Pandit’s speech to a Citi-sponsored investor conference on Thursday. (Transcript available here).

CreditSights also weighed in again after Pandit’s presentation “[O]n a relative value basis, Citigroup is still trading cheaper to peers due to the uncertainty surrounding some of the Citi Holdings’ assets,” TheStreet.com adds.

Still, we are of the view that over the next two years the stock has significant upside if the company is able to stabilize losses and return to a utility-like multiple. - CreditSights

The government’s 27% stake in Citigroup, and the knowledge that it might soon sell some or all of it, remains a damper on the upside for the stock.

Rochdale Securities analyst Dick Bove notes that Citi “is no longer a risk management business; it is no longer an acquisition specialist; and it is no longer a transformational company.”

In an interview with Bloomberg, Bove said Citigroup could double to $8.50 per share.

As MarketWatch notes, Citigroup is pretty much just a bank. “It takes in deposits and lends money. Citi made $11.2 billion in net interest income in 2009. It made $4.29 billion in commissions. Without aggressive bets on derivatives, trading and cheap cash from the government, Citi will need a lot of luck to make $20 billion.”

24/7 Wall Street’s Doug MacIntyre thinks Pandit has only a very small chance of delivering on his forecasts. “Pandit has clearly not learned one of the most important lessons for public company CEOs—under-promise and over-deliver.”

Meanwhile, Moody’s sounds a note of caution in  a new report U.S. bank asset quality stabilizes, but the pain isn’t over as does Fitch in its latest quarterly review of the US banking industry (available for complimentary download).

Loan loss provisions remain well above pre-crisis levels and will need to fall considerably more before Citi is able to generate significant operating profits. - Fitch Ratings

Other analyst comments;

Bank of America’s Guy Moszkowski had a buy rating on Mar 4 with a target of $5.10.”Despite mgt guidance for modestly higher US credit costs in 1Q10, we think C will manage to post a small profit, a positive stock catalyst. Key will then be to line up a few profitable quarters, which our forecasts currently anticipate.”

Glenn Schorr of UBS on Mar 2 remained Neutral, with a price target of $3.75.

Barclays Capital’s Jason M. Goldberg on Mar 1 held an Overweight rating with a $5 target.

Matthew Albrecht of Standard and Poor’s in a Jan 19 report had a Hold recommendation with a $4.50 target.

For latest analyst comment on Citigroup, see Alacra Pulse.

Technorati Tags: (c), Citigroup, PulseCheck

Fitch’s rating outlook for the U.S. banking sector remains negative, although many of the factors that put negative pressure on ratings are easing. We are pleased to offer a complimentary download of Fitch’s latest US Banking Quarterly, which includes  individual comments on the top 24 banks rated by Fitch.

Fitch’s negative outlook is focused mainly on the regional banks, where a large portion of U.S. Fitch-rated institutions remain with a Negative Outlook or on Negative Watch. Fundamental financial performance for the banking sector will remain generally weak throughout most of 2010, although this will not likely result in broad downgrades. For the larger U.S. banking institutions, the credit outlooks on long-term Issuer Default Ratings (IDRs) remain generally Stable.

There are some notable exceptions to the negative rating outlook among regional banks including U.S. Bancorp (USB), PNC Financial Services (PNC) and New York Community Bank (NYB). These three banks carry stable rating outlooks owing to better than average asset quality and a comparatively healthier financial outlook.

Generally, the regional banks are more susceptible to further downgrades than the larger institutions, given their concentration in traditional lending activities and greater exposure to commercial real estate (CRE) losses. Fitch continues to view CRE risk as a key area of concern for the U.S. banking sector.

Despite some signs of stability, Fitch remains cautious in its outlook for 2010. High levels of losses from consumer-related exposures (particularly mortgages, home equity loans and credit cards) likely will persist well into the current year. In addition, CRE exposure will likely necessitate considerable incremental charges in 2010. On a cumulative basis, CRE losses now stand at $25 billion since the beginning of 2008 for the banks included in Fitch’s latest U.S. Banking Quarterly report. Given their lagging effect, Fitch anticipates that CRE losses will continue to trend higher throughout 2010. These factors will pressure earnings well into the current year and potentially in 2011.

The full 40-page report, U.S. Banking Quarterly 4Q09 has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner.  After 30 days, the report will revert to its regular AlacraStore price of $275.

Also available from Fitch: 3Q09 Bank Capital Ratios (Premium)

For additional free research reports from the Alacra Store click here

Technorati Tags: (bac), (BBT), (BK), (BPOP), (c), (CMA), (COF), (FHN), (FITB), (hban), (JPM), (KEY), (MI), (MS), (MTB), (NTRS), (NYB), (RF), (SNV), (STI), (USB), (WFC), (zion), Bank of New York Mellon, Bank-of-America-Corporation, banking, BB&T-Corporation, Capital One Financial Corporation, Citigroup, Comerica-Inc., commercial-real-estate, Fifth-Third-Bancorp, First-Horizon-National-Corp., Goldman-Sachs, GS, Huntington-Bancshares-Inc., Inc., JPMorgan-Chase-&-Co, KeyCorp, M-&-T-Bank-Corporation, Marshall-&-Ilsley-Corporation, morgan-stanley, New-York-Community-Bancorp, Northern-Trust-Corporation, Popular, Regions-Financial-Corporation, State-Street-Corporation, SunTrust-Banks, Synovus., U.S. banks, U.S.-Bancorp, Wells Fargo & Co., Zions-Bancorporation

Prior to the recent credit crisis and market meltdown, there had been little complaint about the use of fair value in financial reporting. However, critics now claim that the requirements of SFAS 157 — which most companies were required to adopt right after the markets began to collapse — contributed to the credit crisis and have called for its rescission. Their argument is that heightened liquidity needs could only be satisfied by fire sales at depressed prices, which then led to a further spiraling down of prices, all of which could have been avoided if SFAS 157 had never been issued.

In an article in Complinet’s Informer magazine, Porter argues that SFAS 157 cannot be blamed for causing the credit crisis, mainly because it did not require any new fair-value measurements. One of its main contributions to Generally Accepted Accounting Principles, Dr. Porter notes, is the expanded and standardized disclosure requirements about fair value.

Unfortunately, the uproar caused by the critics was so distracting that users of financial information failed to appreciate that SFAS 157 gave them exactly what they had long been clamoring for- heightened transparency.

Further, because SFAS 157 and its subsequent interpretations accommodate the possibility of imperfect markets, the timing of its release (as the markets were collapsing) was almost perfect. Dr. Porter contends that, as a result of the structured and expanded disclosure requirements of SFAS 157, users now have more and better information about when firms depart from “mark-to-market” accounting when fair value measurements are required.

Technorati Tags: accounting, credit-crisis, fair value accounting, FASB, financial crisis, gaap, mark-to-market

Excerpts from Spanish Banks: Restructuring Delays May Weigh on Debt/Deposit Ratings If Financial Fundamentals Fail to Strengthen As Expected

Moody’s stated view since mid-2009 has been that Spanish banks’ debt and deposit ratings should prove relatively stable as future credit losses — especially for those institutions with lower bank financial strength ratings (BFSRs) — would be mitigated not only by state-backed capital injections but also by the expected benefits of upcoming consolidation in the form of mergers and other integrations. The rating agency has anticipated that these developments would put these institutions on a sounder, more competitive footing again — a view that was further reinforced after the creation of the Fund for Orderly Bank Restructuring in late June 2009.

To date, the pace of consolidation and restructuring has been much slower than we had anticipated, as has been the flow of public funds into Spain’s financial sector. We are concerned that — so far — no significant progress in this respect has been made.

Moody’s concerns focus in particular on those institutions with a BFSR below investment grade (i.e. from D+, mapping to a baseline credit assessment of Ba1, and below).

Examples include Bancaja, Banco de Valencia (BVA) , Banco Pastor (PAS) and several regional Caixa and Caja institutions.

Technorati Tags: (BVA), (PAS), (SAN), Bancaja, Banco Pastor, Banco Santander, Banko de Valencia, Spain, spanish banks

Analysts remain divided on the prospects for the video rental industry and who the winners and losers may be.

In our last roundup of analyst comments at Alacra Pulse on Mar 3, Netflix (NFLX)  had just been downgraded by Bank of America Merrill Lynch, Susquehanna Financial and Kaufman Bros.

Now Cannaccord Adams has initiated coverage with a BUY rating and a price target of $85. ”

We remain confident that the company can benefit from aggressive new subscriber adds due to the digital transition as the majority of new web-enabled CE devices come with Netflix preloaded.

“Netflix stands to be a major beneficiary of the oncoming OTT TV/video product cycle. Despite being predominately a mail-order DVD rental company today, already 25% of the company’s subscribers are capable of direct video streaming to their TVs, and we expect this to explode with the rapid increase in web-enabled CE devices and brand awareness of Netflix.”

Ben McClure at Minyanville argues that Netflix  “is almost priced for best-case scenario growth.” Using a discounted cash flow model he generates a share valuation of $74, close to the current level.

Cannaccord’s Jeff Rath also initiated coverage of Coinstar (CSTR) at a BUY and set a $39 target. In a research note, he asserts that the company has “a solid plan in place” to expand the number of Redbox video kiosks it has installed, “with plenty of runway ahead before full market penetration becomes an issue.”

Zacks today upgraded TiVo (TIVO) to Neutral from Underperform on its better-than-expected fourth-quarter 2010 results driven by higher revenues.

Despite being hit by the recession, TIVO has held up better than most companies that depend on discretionary consumer spending.

TiVo is also benefitting from winning its long-running patent infringement dispute (since 2004) against EchoStar Communications Corp. (SATS), the parent company of Dish Network Corp.

This led to JPMorgan analyst Bridget Weishaar hiking her rating to Overweight from Neutral. Much of the company’s growth will come from agreements with cable providers and telecommunications companies, she believes, rather than sales of its set-top boxes. The margin on such agreements, she projects, will be about 80 percent.

Weishaar’s new price price target for TiVo is $23, up from from $15.

Meanwhile, Blockbuster (BBI) took a few more steps down the road to oblivion when Moody’s downgraded its debt to junk status Caa3 with a negative outlook and  Roth Capital analyst Richard Ingrassia cut the stock to “Hold” from “Buy” a week after disappointing Q4 results.

All in all, the various company initiatives, including a stock split or a sale of convertible debt, are likely not to prove enough in the near term for the stock, and could actually upset shareholders in the case of a convertible deal, writes Ingrassia.

And Business Insider’s Dan Frommer is unconvinced by CEO Jim Keyes suggestion that Blockbuster’s retail legacy will be helpful in its switch to digital.

Sorry, but Blockbuster’s brand carries zero equity on the Internet. That’s like making the argument that Sam Goody or Tower Records could steamroll Apple’s iTunes just because it once had a large offline presence.

Dan Rayburn also makes a lengthy case for why Blockbuster is doomed at Streamingmedia.

Technorati Tags: (BBI), (CSTR), (NFLX), Blockbuster, Coinstar, DVD, Netflix, PulseCheck, streaming media, Tivo, video

Some points of interest in the briefing include:

• In 2007 the percentage of accelerated filers with a director departure was 37.5% as opposed to 33.8% for all filers.
• The percentage of departures among directors of banking entities increased by 7% between 2005 and 2008.

Banking entities experienced a sustained increasing trend in director departures starting in 2006 whereas director departures for all filers peaked in 2007.

The full report Director Departures – Five-Year Overview is available free of charge to Research Recap users for 30 days by special arrangement with Audit Analytics, an Alacra content partner.  After 30 days, the report will revert to its regular AlacraStore price of $49.00).

Audit Analytics also has released Financial Restatements – A Nine-Year Comparison ($149.00), which indicates that the impact of the Sarbanes-Oxley Act on Internal Controls over Financial Reporting (ICFRs) has been beneficial.  Some highlights of the report are:

• For the third year in a row, the total number of restatements in 2009 declined, falling by 27% from 2008.
• For the third year in a row Audit Analytics found an equivalence or reduction in the severity of the restatements:
• The restatements with the largest negative impact on net income dropped from $605 million in 2008 to $357 million in 2009.
• The average cumulative impact on net income per restatement dropped from $7.1 million in 2008 to $4.6 million in 2009.
• The average number of days restated dropped from 510 in 2008 to 476 in 2009.
• The average number of issues per restatement dropped from 1.67 in 2008 to 1.48 in 2009

For additional free research reports from the Alacra Store click here

Technorati Tags: complimentary research, corporate directors, corporate-governance, restatements, SOX, U.S. banks

Guest Post by Oxford Analytica

Prior to the 2008-09 financial crisis, it had become widely accepted among international financial institutions and many leading national policymakers that the benefits of liberalizing capital flows outweighed those of capital controls, which anyway might prove ineffective in achieving their objectives. Yet the crisis jolted this consensus:

• Bubble caution. The crisis created a step change in awareness among policymakers about the need to try to avoid the formation of asset price bubbles and ensuing financial market instability. As a result, increased regulation of financial activity and capital markets has become more widely sought, and capital controls are a potential element of this.
• Perception check. At the height of the financial crisis, sudden flight of short-term capital away from emerging markets illustrated lingering risk perception associated with developing countries. The financial instability in some emerging markets generated by these sudden outflows raised the attractiveness of capital controls as a way to mitigate future volatility.
• Recovery pressures. Perhaps most important of all, the rapid return of capital to emerging markets in the current recovery has generated pressure in favour of capital controls.

The dynamics of the global recovery are generating interrelated reasons for developing country governments to consider implementing capital controls:

• Exchange rate. Many floating developing country currencies have risen dramatically since March 2009, undermining export competitiveness.
• Liquidity. The large amount of liquidity in the global economy as a result of monetary and fiscal stimulus efforts worldwide aggravates the risk of economic dislocation through sudden inflows or outflows of short-term capital.
• Inflation. Inflationary pressures so far are only of major concern in some asset classes within certain countries. Some countries, such as China, are attempting to stem inflationary pressure by taking further domestic measures, including constraining bank credit growth.

As a result of these pressures, several countries over the last year have moved to constrain foreign capital inflows, including Brazil, Taiwan, Indonesia and South Korea.

There are three main categories of capital controls:

1. Price-based. These include taxes on investments; taxes on interest paid in local currency; and taxes on foreign debt issuance by domestic residents. A key benefit of price-based controls is that they can be variable according to maturity, which means they can be used to promote longer-term investment.
2. Quantitative. These usually consist of limits on the amount of foreign funds that can be invested in local currency. Such limits are often used in countries that do not have floating exchange rates, such as China.
3. Regulatory. These require the depositing of part of the value of an investment in a specified local currency instrument, indirectly reducing the investor’s total yield.

While controls may only be effective temporarily, they can still be useful in constraining local currency appreciation and diminishing financial market volatility.

While the choice of capital control depends on each country’s specific circumstances, there are general reasons why most controls have limited impact:

• Evasion. The effectiveness of capital controls on short-term capital inflows is usually temporary, as investors tend to find ways to evade them. However, this does not mean that they are not useful as a temporary and/or partial brake on inflows.
• FDI strength. Debt and portfolio capital inflows may be dwarfed by foreign direct investment (FDI) inflows, particularly if a recipient country enjoys political stability and a supportive business environment. Governments are usually far more reluctant to deter FDI than short-term debt, as FDI is directly associated with increasing productive capacity.
• Foreign dependence. Countries that are particularly reliant on foreign capital remain unlikely to impose capital controls despite the changing global sentiment towards their adoption.

Technorati Tags: capital controls, capital-inflows, emerging-markets, FDI, foreign-direct-investment

Excerpts from S&P European Sovereign Issuance Survey Predicts Record Borrowing Of €1,446 Billion In 2010 On Large Budget Deficits (Premium)

Among the five largest European sovereign borrowers, we expect the U.K. to borrow an estimated €38 billion less than in 2009, after very high gross MLT borrowing of €257 billion in 2009. Our estimates of gross borrowing are higher by €41 billion in Germany, and by €26 billion in France, reflecting our expectation that there will be a deterioration in their public finances in 2010. We also estimate large absolute increases in MLT borrowing in Spain (€21 billion), Russia (€20
billion), Turkey (€19 billion), and The Netherlands (€13 billion).

We also believe it is likely that net MLT commercial borrowing (that is, gross debt net of maturing debt) will reach another peak in 2010 at €762 billion, up €82 billion from its 2009 level, and almost six times the level of 2007. We believe falling amortizations are the main reason for the even stronger increase in net borrowing. Short-term debt levels also remain high at 10.9%, well above their share of about 7% before the economic and financial downturn, but slightly down from 11.7% in 2009.

In our view, debt-related sovereign vulnerabilities have increased, particularly in the Eurozone, where we expect deficits and government borrowing will likely rise further to new peaks.

Changes in sovereign risk characteristics, as well as in risk perception by investors can lead to significant changes in financing costs, as experienced by a number of sovereigns over the past 18 months, Greece being the most recent example. Furthermore, because central banks are set to phase out liquidity support to the financial sector, as well as quantitative easing measures over 2010, the ensuing drop in demand for government debt could lead to rising benchmark yields. The resulting fiscal pressure from a sustained increase in financing cost could be significant in our view. We estimate that a sustained 300 basis points (bps) shift in the yield curve would by 2015 amount to extra annual interest payments of 3.9% of 2010 GDP for Greece, 2.6% for Portugal, and 2.5% for Italy and the U.K.

Technorati Tags: Europe, France, Germany, Italy, Netherlands, Portugal, Russia, sovereign-debt, Spain, turkey, UK

Getting older has its comforts.  One of them is that you get to experience a number of historic events and can gain perspective on consequences that result from those events.

It’s been well over a decade since the Japanese economy imploded.  That implosion was based on a speculative frenzy that drove values to the extreme, where it was discovered the effects of gravity could not be overcome.

The Japanese government’s response to this dramatic situation was to slash interest rates and rapidly increase government spending.  (Note:  they did not substantially increase their money supply.)   The government claimed to be making substantial efforts to correct the impact of the shrinking private economic sector.  The private economic sector, while paying lip service to growth opportunities, continued to stagnate as the banking/industrial complex refused to take risks.  The national economy floundered between underwater loans and lack of demand.  To this day, over a decade after the implosion, Japan is still struggling with lackluster economic growth.

That sounds a lot like déjà vu, doesn’t it?  Of course, in the “good old U.S. of A.,” we are different – or so we say.  As best I can tell, our response to date looks much like Japan’s response of a decade ago.  The Fed has lowered the cost of short-term borrowing to nearly Zero (a rate that discourages long-term savings) and increased government spending to the point where the credit of the United States is in jeopardy.  Financial institutions continue to stagger under the weight of non-performing loans.  Industry is reluctant to invest without evidence of a pick-up in demand, while consumers’ wealth and savings have dropped so precipitously they are reluctant — or unable — to spend.

One can only hope that the rapid increase in money supply, both domestically and globally, will result in a different outcome than that suffered by the Japanese.  I would not like to see the U.S. endure a protracted economic struggle.  However, if we look specifically at the actions of our commercial banking system, we find little comfort.

Commercial banks hold over $1.7 trillion of commercial real estate, and are reluctant to write down their holdings.  In fact, FASB has changed its interpretation of FAS 115-2 and FAS 124-2, making it extremely easy to avoid recognizing loss in value.

According to the Congressional Oversight Panel, over 2,988 commercial banks are classified as having a high commercial real estate concentration. The FDIC currently has 702 publicly-held banks on its watch list.

Much like Japan, we have turned a blind eye to a major potential implosion, and in fact, are working hard to cover it up.  Of course the banks are taking FASB’s lead and not writing down assets.  Remember, unwillingness to fairly reflect values was a criticism placed on Japanese banks one decade ago.  .

Bank charge-offs of the 4th Quarter of 2009 totaled $59 billion, an increase of 47.7% year over year. The bulk of these charge-offs related to single-family home loans – not to distressed commercial real estate.  I believe the real charge-off rate should be three to four times higher than the banks are willing to admit.

A charge-off rate that more accurately reflects commercial real estate values would drive banks into a substantial negative earnings position.  That’s a position no one likes to be in, but denying it does not change the fact that a bank in that kind of financial distress represents a substantial risk to stakeholders, taxpayers, and the economy overall.  We’ve seen the impact “Extend and Pretend” has had historically, and the results are not pretty.

Below is a select list of mid-sized commercial banks that I believe are representative, to a greater or lesser degree, of the problems the industry faces.  They are all talking a good game.  I certainly endorse the power of positive thinking – but not when it is used to distract investors from the truth.

Technorati Tags: commercial-real-estate, regional-banks, U.S. banks