RBS and Lloyds Receive Yet More UK Government Funding

It's hard enough keeping track of the latest nuances of the US banks' various government bailouts, paybacks, comp battles etc. Who has time to keep an eye on the UK? But today's headlines from across the pond are fairly ominous and worth mentioning. RBS and Lloyds will receive a total of $51 billion in a second bailout from UK taxpayers. RBS is set to receive 25.5 billion pounds bringing the government's ownership stake up to 84% from 70%. Lloyds is opting to do most of its new capital raising from money managers, accepting roughly a quarter of the 21 billion from the government, allowing the mortgage lender to avoid near-nationalization. However, both banks have agreed not to pay cash bonuses to any employees earning more than 39,000 pounds this year. That is quite a concession. In fact, the scrooges at the UK Treasury make the US Pay Czar look like the tooth fairy. Mark my words, nobody from AIG is going be lured away by 39,000 pounds in cash and the balance of comp in RBS or Lloyds stock.

In any event, bailouts of this size from two of the UK's largest banks foreshadow worse to come for some of our problem banks. They're in the same business, just in different countries. RBS has essentially been nationalized, and Lloyd's is struggling to avoid the same ultimate fate. Think of RBS as the Citibank of the UK and Lloyds as the Bank of America. Both Bank of America and Lloyds/HBOS pursued disastrous value destroying mergers when it appeared that the worst would be over. Right before things got much worse. I am absolutely shocked that financial stocks in the US are taking this news in stride today. But it's not the first time that the recent bullishness of this market has surprised me.

BOE, ECB Slash Rates as Economic Conditions Worsen

The Bank of England slashed its benchmark interest rate by 1.5% to 3%. the lowest since 1955.  The European Central Bank lowered its interest rate for the second time in less than a month by 50 basis points to 3.25%.  Here in the US, the fed funds target sits at 1% (for those who have lost track due to all the frenzied slashing.)  Market participants expect the Fed to lower rates even further, with some economists anticipating a Japanese-style zero interest rate environment.  Today's reported 1.1% rise in productivity has been the only positive economic news to hit the tape in some time, although an increase in productivity generally means that companies are cutting labor expenses.  The market is bracing itself for a truly horrendous employment report tomorrow.  Yesterday's ADP employment report showed that companies cut 157,000 jobs in October.  This prompted many economists to revise their estimates higher for the number of jobs lost when the non-farm payroll number is released.  

As if a bad payroll number wasn't enough, GM is also slated to report earnings tomorrow.  Yesterday, a top GM executive claimed that the next 100 days were critical for GM.  With auto sales dropping like a stone and financing scarce, the company is pleading for a government bailout.  Given all of this scary news, investors should expect a horrendous earnings report from the automaker.       

ECB and BOE Leave Rates Unchanged To Combat Inflation

Choosing to ignore the threat to growth, The European Central Bank left rates unchanged at a six-year high to stave off inflation. The Bank of England also left rates unchanged, despite a slump in the UK housing market that threatens growth in the region. ECB President Trichet said "inflation rates have risen significantly since Autumn. As we have said, inflation rates are expected to remain high for a rather protracted period of time before gradually declining again." The ECB and BOE appear to be taking an alternate view from the one expressed by US Federal Reserve Chairman Bernake, who advocates stimulating growth in the face of rather obvious inflationary pressures. Despite the Fed's recent habit of dousing the market with dollars with the appearance of any economic panic, whether real or imagined, a few talking heads are beginning to signal that the days of easy money may be behind us.
The IMF's deputy chief John Lipsky gave a speech where he declared that inflation is back. Giving credence to his moniker, Mr. Lipsky gave some serious lip to the Fed by claiming that the problem of surging energy and commodity prices was only compounded by low central bank interest rates and a falling dollar. Meanwhile, Fed Bank of Kansas City President Hoenig also gave a speech claiming that "serious" inflation pressures may compel the central bank to increase interest rates. What exactly is "serious" inflation? $4 a gallon gas? Skyrocketing food prices? It shouldn't be a surprise that Walmart and Costco reported higher sales than expected, while other retailers suffered. When the average American is trying to fight off inflation in his own household, he chooses to shop at a discounter.