Mark Lamb| Wednesday, 23 July 2008

Dodge Citi

Weekly international investment round up to 22 July 2008

• Major banking index records highest gain in over 8 years

• Oil price slips

Like something out of the old American Wild West the Banking and Financial sector has had to endure an ‘OK Corral’ type shoot-out since the end of last year with much blood being spilt. Several institutions have taken direct hits, some have been wounded by the ricochets caused by the poor aim of others while the majority have been left nursing self inflicted wounds caused by shooting themselves in the foot. But have the bullets now stopped being fired?
The S&P Banks Index jumped up by 16 per cent last week, its largest gain in over 8 years. The incident that seems to have triggered this apparent cease-fire was Citigroup’s announcement of only a $2.5 billion loss for the 3 month period prior to the end of June. Under normal circumstance such a bad loss for America’s biggest banking group by assets coupled with the fact that this was their third consecutive negative quarter would not have been well received but as the markets had braced themselves for much worse figures the collective sigh of relief was quickly followed by Citigroup’s share price immediately increasing. However, this still didn’t stop Citigroup’s senior banker, Michael Klien, from being a casualty as he left the company on Monday.
Wells Fargo & Co together with America’s largest consumer bank and home loan lender, Bank of America, also released better than expected figures while Washington provided further stabilisation by unveiling dramatic moves to help US mortgage giants Fannie Mae and Freddie Mac who between them either hold or guarantee $5,000 billion dollars of American home loans. Before the news of the welcomed government intervention they had both experienced massive daily swings in their share price of up to 30 per cent.
Leading UK bank HBOS still seems to be taking cover as only eight per cent of the new shares offered through its planned £4 billion pound rights issue were taken up. This is hardly surprising. Only three months ago when the group announced the rights issue in order to raise much needed capital their shares were around 500p and shareholders were offered two new shares for every five held at the rate of 275p each. Since then the shares on the open market have dramatically fallen below the offer price making the whole exercise unattractive to shareholders. The rights issue will still go ahead however as any unsold shares will have to be bought by the underwriters of the scheme, Morgan Stanley and Dresdner.
The cavalry also arrived over the hill during the last week in the shape of falling oil prices. With many commentators predicting an uncontrollable upwards price spiral I stuck my head above the parapet and braved the crossfire in my article dated 25 June entitled, ‘Oil price to slip’ and suggested the crazy prices couldn’t continue. US light crude fell as low as $129 a barrel a drop of $18 from the record high of the previous week.
Whether the Banking and Financial stocks are finally recovering or just simply run out of bullets remains to be seen but their safe recuperation will be much welcomed.

Mark Lamb is Director of FPC Investment Consultants who are Independent Financial Advisers and regulated by the MFSA to provide investment services under the investment services act 1994. For further details please contact Mark Lamb, by email on [email protected] by phone on 21318008 or through FPC’s website www.fpcmalta.com
This article does not intend to give investment advice and its contents should not be construed as such. Information in this article has been obtained from various public sources and is given by way of information only. Readers are always encouraged to seek independent financial advice before making any investment decision