Betfair Official Blog

Banks still wobbly even as FTSE rallies

Daily View - 1st July 2008

Banks took yet another battering yesterday even though the FTSE rallied some 96 points and the steady selling seems to now be almost masochistic (yields on Barclays are almost 12%) and the feeling spreads that 'somebody must know something'. Put option strategies written years ago are now triggering renewed selling as funds are forced to sell ever more stock to 'delta neutral' their positions and perversely more traders are buying into protection for existing positions therefore, possibly in these thin days, creating the very effect they are trying to avoid.

The bottom line is that the big funds fear that holders will end up with massively diluted holdings as the investment and retail banks are forced into more and more rights issues at worse and worse levels. Many cash calls were written at some 30 to 40pc below the valuations pertaining at that time and what happened? The stock just sold off to the rights issue price. What happens if there is another call? Will the stocks halve again?

At some point this 'elastic band effect' will reach it nadir and prices will shoot off like a rocket but that day is probably not yet. Looking back at the price action on Barclays since the start of the year we can see that even though the price has fallen some 42pc we have actually had two 30pc rallies, a 24pc, a 22pc and a 15pc rally whilst this has all been going on as investors have continually tried to call a floor. With the mortgage units on the slide in the UK, the treasury units virtually moribund due to the credit crunch and corporate lending not exactly rip roaring away it is tempting to assume that the worst has not yet been reached but at some point the big players will dip into the market (if only to pick up very cheap strategic positions). Citigroup, the worlds biggest bank by revenue, is now worth less than the amount that RBS, Fortis and Santander paid for ABN last year. No disrespect to ABN but they were never a major player and were forever playing catch up in the world investment bank league table so, with the benefit of a good dollop of hindsight, it becomes increasingly unclear as to what value the various banks ever saw in paying such a huge premium at the top of a four year bull market.

On top of all the problems that the banks are facing is a big factor marked 'credibility'. Nobody believes a word they say any more (even if it is true) and analyst poke through all data with a view to unearthing creepy crawlies under a rock rather than finding diamonds in the muck. Bradford & Bingley seem to have managed a new nadir in this respect with every pronouncement being seen to be 'economical with the truth' and every decision perceived as being self serving to the board in place and 'sod the investors'.

Many esteemed economists are now expecting the current state of affairs to last for some years to come with economies verging on a state of recession for many quarters. In this scenario it will probably be a while before the banking sector manages to get off its knees (look at what happened in Japan) so the temptation to dip a toe into the banking waters should probably be sat on for the time being.

Markets this morning are looking to be pretty much moribund with the FTSE giving up 25 points from yesterday's close and expected to open around the 5600 level. Nationwide have released their latest house price indicator which shows prices some 6.3pc off from last year. The problem with the current house price indicator is that it is distorted by factors from both the buy and sell side. Few mortgages are available to buyers but few owners are being forced to sell (and thus accept a ruinous price). If one or the other factor is first to change then we could see either (at best) stability or (at worst) crash.

Carpetright's 25p fall yesterday to 600p was explained by the numbers out this morning with data showing profits of 42.8m missing estimates by a mile and on the other extreme the 6p rally in HMV was also strangely prescient with data today showing the stores beating analysts' forecasts. Encouragingly for HMV the 'new format' stores showed sales up by 25%.

Oil is back up again at $141 having drifted lower in evening trade yesterday but dealers will probably not be too aggressive ahead of tomorrows Inventory numbers. With the dollar looking to weaken again commodity prices are getting the reverse gain once more as their prices rise to compensate for the weaker currency.