What you don't read in newspapers will fill volumes. This is true of the remainder of the financial media as well. Today, the Non-farm Payrolls report indicated that the economy lost 539,000 jobs. The financial media has embraced this as a sign the recession is ending. AP Economics writer Jeanine Aversa believes that this is part of the data which is "piling up" that the recession is ending. The recession may be moderating, but the Non-farm Payrolls (a lagging indicator) headline number cannot be taken at face value. For one, the data was helped by the addition of 63,000 temporary government census workers. Also, prior months reports were revised downward. The March NFP number was adjusted downward to -699K. When one digs deep into the data, the job situation has not improved much.
Admittedly, NFP is a lagging indicator. However, Jobless Claims are considered to be coincidental. Much noise was made about initial jobless claims coming in at a better-than-expected 600K. Two things to consider here. First, 6ooK newly unemployed workers is bad no matter how one slices it. Secondly, continuing claims continue to rise. With delinquencies and defaults of residential and commercial mortgages, as well as credit cards, expected to rise, the employment situation may not be quite ready to rebound.
What about the strong data coming from retailers such as Walmart? It is true that retail sales did rise in April. However, there was an unsustainable bit of stimulus last month. That stimulus came in the form of tax refunds. Consumers spent tax refunds to replace worn goods and perform typical springtime home repairs, yard work, etc. We saw a similar sales increase last June when the tax rebate checks were distributed.
How about better-than-expected stress tests? The stress tests were not that stressful. Fortunately most large banks were better capitalized than fearmongers would have us believe. However, there were some problem children. Bank of America needs to raise $33.9B of common equity to satisfy government regulators. The bank plans on doing so by issuing new common equity and converting institutional preferred shares. BAC also issued its first non-TLGP bond since before TARP. BAC like other large banks, with the exception on Citi, to get themselves out from under TARP. Also, BAC will not convert its government preferreds to common equity. BAC wants the government out of its hair and rightfully so.
Speaking of Citi. Will someone please tell CNBC's Charlie Gasparino that Citi did not need to raise "only" $5.5B. Citi had previously began a preferred exchange which would raise up to $54B of tangible common equity. This is something no other large bank has done. Get with the program Charlie.
Kudos to Citi CEO Vikram Pandit. This much-maligned executive, who had absolutely nothing to do with Citi's plight, was optimistic yet honest with employees at today's town hall meeting, according to sources. Mr. Pandit acknowledged that Citi will not focus on repaying TARP at this time. This is likely due to the fact that the government is still providing a $300 billion backstop on very troubled assets on Citi's balance sheet. Another factor is that the government will own 36% (the largest single piece) of Citi following the preferred to equity exchange. As Illinois Senator Dick Durbin pointed out in a letter to the Wall Street Journal, Citi has been on board with government mortgage relief efforts. The government may be looking to use Citi as another GSE. Citimac has a certain ring to it. Citi is on the right track, as long as the government takes a passive role.
In spite of my shooting holes in media and market bulls optimism on the economy, all is not bad in the fixed income markets. Corporate bonds in the financial sector sold off more than they should have during the panic of a few months ago. Although prices of said bonds have rebounded as credit spreads have narrowed, outstanding values abound. I mean really, 6.00% to 8.50% returns for senior bonds issued by the "Big 19" banks? Baby-boomers should be all over these bonds.
Preferred stock investors who are enjoying significant price increases due to preferred to equity exchanges should consider swapping them for corporate bonds or at least trust preferreds. This is the first time in my over two decades trading bonds that investors can pick up yield by moving up the capital structure. Make no mistake, once the preferred to equity exchange offers end, preferreds eligible for exchange will suffer significant price depreciation, However, bonds and trust preferreds should perform better as bank balance sheets are repaired. Take the profits and increase your quality. Bulls make money, bears make money, but hogs get slaughtered.
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