Banks
Banks don’t trust each other, and as a result they are hoarding cash. In addition, toxic securities on balance sheets prevent other banks from conducting any business at all. The $700 billion will be spent buying mortgage- backed securities that currently have little or no value. Such a state is not due to underlying value but to the trading environment. No bids, means no pricing.
The reality is that there are mortgages that are being paid, and that if held to maturity these securities would indeed be worth something. The economic stimulus package is meant to be a pricing mechanism for this market. Irrespective of the government purchasing these securities at a price that generates a profit or loss, banks will benefit by ridding themselves of bad assets. Theoretically, with more good assets on the balance sheets, banks can return to the business of lending. Given the decimation of values in the banking sector, the bailout bill will help this group the most.
Potential Winners
Potential Losers
- Citigroup (C)
Sector #2:
Insurance Companies
With the credit crunch we’re learning more and more about the credit derivative market or swap market. The two-party, unregulated swaps market is estimated to be in the trillions of dollars. The insurance industry, led by AIG, participated in this ghost market in a major way. So much so that its very survival was put at risk until a government bailout was put in place. And more dominos are falling.
Recently, MetLife (MET) raised $2 billion of capital to strengthen its balance sheet. The unregulated nature of the swap market makes it difficult to fully gauge the impact on the insurance industry. There are obviously ghosts in the closet here. Will the bailout help with this issue? I’m skeptical. The size of the problem here apparently dwarfs the size of the bailout. Look for insurance companies to struggle even with this bailout.
Potential Winners
- Unknown
Potential Losers
- Entire Sector
Sector #3:
Investment Banks
The biggest change with this crisis is the end of free-flowing capital through Wall Street. Gone are the Wild West days of huge leverage and capital innovation. In their place come regulation and bank holding companies.
Both Goldman Sachs (GS) and Morgan Stanley (MS) changed their charters to become bank holding companies. The attraction of being a bank instead of an investment bank is obvious. Instead of borrowing huge amounts of money to operate, these companies will be able to utilize bank deposits. It’s a cheaper form of capital with less risk, but with less risk comes lower profits. In addition, obtaining bank deposits will be a process that ultimately dilutes current share. That has already happened with GS and MS as they are both raising capital that can be used to obtain deposits.
It is a wise long-term strategy, but will current shareholders benefit? The answer is no. Net Stock Impact
Potential Winners
- New capital contributors
Potential Losers
- Current common stockholders
Sector #4:
Consumer Retail
The impact on Wall Street has been front and center. But what about Main Street? Stocks have been falling since the bailout as investors fear the worst, a consumer led recession. Clearly there is a cost of the credit freeze and the subsequent bailout.
That cost is higher interest rates, fewer jobs and lower pay. We are in a downward spiral led by the retail sectors. Yes, many of the stocks in the group are already lower. And they can fall further as evidenced by recent trading.
The winners in this environment will be the discounters. The losers will be the many retailers that are forced to slash prices and/or close stores.
Net Stock Impact: Neutral
Potential Winners
Potential Losers
Consumer Staples
It is cliché to say that investors should own consumer staples during a recession. That being said, I can think of no better advice.
As the de-leveraging process continues, consumers will pull back on spending to all but the essentials. We all need to put food on the table, and utilities like heat, water and power are a must. That means food company stocks and utilities perform better during recessions. At a minimum, investors can find a safe haven in so-called defensive stocks.
One of the biggest benefits of owning these types of stocks is that defensive companies have strong balance sheets with little debt. The bailout will have little effect on these companies. They are boring, and that is a good thing.
Net Stock Impact: Bullish Potential Winners
Potential Losers
- None
