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US Equity Pulse
The Next Financial
Stabilization Plan
What To Look For?
Binky Chadha
Chief US Equity Strategist
(+1) 212 250-4776
bankim.chadha@db.com
Parag Thatte
Research Analyst
(+1) 212 250-6605
parag.thatte@db.com
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Sector performance over the week
-12
-10
-8
-6
-4
-2
0
2
Telecom
Healthcare
Utilities
Cons Staples
Energy
IT
S&P 500
Industrials
Materials
Cons Disc
Financials
%
Financial intermediation spread worsens
-300
-250
-200
-150
-100
-50
0
50
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
-300
-250
-200
-150
-100
-50
0
50
HG Industrial minus Financial Spread
Global Markets Research Company
Financial stocks fell hard this week (-10.1%) on concerns Q4 losses would
require further capital, diluting or wiping out existing shareholders.
The new administration has communicated it will propose “a comprehensive plan
to help stabilize the core of our financial system so that the banks that are so
critical to our economy are able to provide the credit necessary to get recovery
going again.”
What should and will the package contain, and what are the implications for
equity markets?
(i) The stakes for equity markets are high. The equity market has priced in a severe
recession. With the economy in the 14th month of a recession that the consensus
is forecasting to last for 19 months, implies we are more than half way through,
when equities have typically bottomed and recovered significantly.
(ii) Though equity markets lead economic recoveries, a bottom and a recovery in
equities is contingent on one in the economy. The latter in turn is contingent on
that in credit and therefore the financial sector.
(iii) We continue to view the various policy measures to date as limiting the
downside tail risk to the economy and the financial system but see a selfsustaining
recovery as requiring a voluntary bail-in of private capital into the
financial sector. We see the most fundamental problem in the present context as
being a lack of willingness on the part of private capital to flow to the financial (and
non-bank financial) sectors, thereby perpetuating the credit crunch. A selfsustaining
turn in the crisis requires not a bail-out of the financial or other sectors
of the economy but a (voluntary) bail-in of private capital.
The metric by which we would judge the next financial stabilization package
is therefore the extent to which it facilitates such a bail-in.
In particular, some of the elements we look for are: (a) A clarification of the “rules
of the game” for future official interventions so that private capital can reasonably
be expected to do a reasonable risk-return calculation; (b) Actions on the asset
side of the financial sector’s balance sheet; this was the original intent of TARP
and in our view the sensible approach when institutions are judged (as most if not
all currently are by the regulators) as being well capitalized and viable; it remains to
be seen how much of TARP II’s resources will be allocated to such purchases and
how much they will be leveraged; the approach of ring-fencing and insuring certain
assets while leaving them on the balance sheet was conceptually appealing but
has not so far worked as it has left investors with insufficient clarity on the quality
of assets and the contingent claims on shareholder equity.
23 January
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