Equities shares rallied along with the US dollar, and precious metals were smacked in the wake of massive bank writedowns at UBS and Deutsche Bank.
Let’s take a look at UBS and Deutsche Bank starting with the record $19 billion writedown at UBS.
UBS AG, battered by the biggest writedowns from the collapse of the U.S. subprime mortgage market, reported a 12 billion-franc ($11.9 billion) first-quarter loss and said Chairman Marcel Ospel will step down.
UBS rose the most in two weeks in Swiss trading after announcing plans today to seek 15 billion francs in a rights offer to replenish capital, on top of 13 billion francs already raised from investors in Singapore and the Middle East. Zurich-based UBS will write down $19 billion on debt securities, bringing the total to almost $38 billion since the third quarter of 2007.
“Behind closed doors they have been cleaning up very swiftly and the capital increase will put them back onto a solid foundation,” said Joerg de Vries-Hippen, who oversees about $26 billion, including UBS shares, as chief investment officer for European stocks at Allianz Global Investors in Frankfurt. Still, “it will take years to repair the bank’s reputation,” he said.
Raising capital again will mean UBS has to renegotiate the terms of the mandatory convertible bond it sold to GIC and the Middle Eastern investor.
Raising capital a second and third time gets to be expensive. It appears that UBS had ratchet provisions in the deal with GIC.
For more on ratchet provisions, please see Cost of Capital “Ratchets Up” at Citigroup and Merrill.
$3.9 Billion Writeoff At Deutsche Bank
Bloomberg is reporting Deutsche Bank to Write Down EU2.5 Billion in Quarter.
Deutsche Bank AG, Germany’s biggest bank, will write down 2.5 billion euros ($3.9 billion) of loans and asset-backed securities and said markets are deteriorating. “Conditions have become significantly more challenging during the last few weeks,” Deutsche Bank said today in a statement.
Deutsche Bank gained in Frankfurt trading on speculation the worst of the losses in the banking industry may almost be over. The German bank, which increased earnings in 2007, said a week ago its 2008 pretax profit target is under threat because of “difficult” market and economic conditions.
“The subprime crisis is catching up to Deutsche Bank,” said Konrad Becker, a Munich-based analyst at Merck Finck & Co. who recommends holding the shares. “This means that Deutsche Bank is at risk of reporting a first-quarter pretax loss.”
“The immediate stock reaction is hope among investors that we’ve touched bottom,” said Derek Chambers, an analyst at Standard & Poor’s Equity Research in London who has a “hold” rating on Deutsche Bank.
The Market Reaction
It’s not the news that matters, it’s the market’s reaction to it. In this case the dollar rallied, equities rallied, and precious metals sank.
Bloomberg is reporting Dollar Advances Most in Almost Two Weeks as UBS Seeks Capital.
The dollar rose the most in almost two weeks against the euro after UBS AG said it will raise about $15 billion, signaling the world’s biggest financial institutions can ride out the freeze in credit markets.
The U.S. currency also appreciated against the yen after a Bank of Japan report showed a slump in business confidence in March. The euro also weakened after Deutsche Bank AG said it will take a record $3.9 billion writedown and described market conditions as “significantly more challenging.”
“U.S. banks have already disclosed their problems and now Europe is following suit,” said Geoffrey Yu, a currency strategist at UBS who says the euro may decline to $1.47 by the end of the quarter. “It’s time for value investors to come in and buy the dollar at its lows while the euro is starting to feel the transmission effects from the U.S. slowdown.”
“The news out of the rest of the world is just as bad, if not as worse, as in the U.S.,” said Adam Cole, the London-based head of currency strategy at Royal Bank of Canada, the nation’s biggest lender. “The dollar bear market is in its final stages and at some point, we’ll see a substantial bounce.”
“Global growth is recoupling to U.S. growth and other central banks will have to start to play catch-up in terms of rate cuts,” said David Forrester, a Singapore-based currency economist at Barclays, which forecasts the dollar to gain to $1.50 per euro in three months.
With the dollar rallying and the market unconcerned about additional writedowns (at least for the moment), one might expect gold and silver to tank. And indeed that’s what’s happening.
click on chart for sharper image
click on chart for sharper image
Gold and silver corrections tend to be very sharp. Just like this. What we do not know is if this is the start of something very serious, or if it’s just another quick scary pullback. What we do know is European banks are arguably in as bad a shape as some US banks, the US$ may (or may not) have caught a bid, and gold and silver seasonality are unfavorable through July. All in all, it’s not a great environment for metals.
Is the Bottom In Equities In?
It’s extremely unlikely. The biggest most reckless financial experiment in the history of the world cannot be corrected in a six month stock market decline. The structural problems still exist: Unemployment is poised to soar, credit card and home equity writeoffs are coming, commercial real estate is headed south big time, and there is a huge problem with marking to market $500 trillion in derivatives that could waterfall at any time. However, none of that is today’s business.
Today’s business is UBS, Deutsche Bank, and Lehman successfully raised capital, the US dollar rallied, and the bulk of the subprime problems may now be behind us or at least postponed for a later date. I talked about this idea in Closer Look At The ARMs Reset Problem.
Of course the Alt-A and Pay Option ARM problems are as bad if not worse than the subprime problem was, but the market does not seem worried about that now.
All in all, there was simply too much bearishness at the end of the first quarter. Those playing for a bounce, got one. Time will tell how far the bounce goes. And time may be more important than price. The markets declined for six months, so the markets can easily rally for two, even if the bulk of the rally is now be behind us.
Mike “Mish” Shedlock
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