Stocks have turned on a sixpence and risky assets are starting the week on the wrong foot on bankruptcy fears in the US auto sector and renewed banking woes. The Obama administration has asked GM and Chrysler to overhaul their recovery plans with deeper concessions if they want further taxpayer aid.

Today’s Market Moving Stories

• February industrial production in Japan fell 9.1%, in line with expectations, driven by weak overseas demand and high level inventory. This made for a horrific –38.4% yoy read. This will contribute to an awful Q1 GDP reading of possibly –15% on an annualised basis. Asian stocks are trading heavily following Friday declines in the US, with investors cautious ahead of the G20 summit and Japanese financial year end.
• Geithner warned that “some banks are going to need some large amounts of assistance.” We do not know whether or not the statement follows from preliminary results on the stress tests that are being run at 19 banks. Geithner estimates that the Treasury has about $135bn of TARP money left and declined to say whether more money will be needed.
• Government-financed bankruptcy remained an option for both GM and Chrysler. Both have been set new timetables – GM has 60 days to restructure itself to the satisfaction of the government while Chrysler has 30 days to come to an alliance with Fiat or forfeit the $6bn needed to survive (note that the taskforce warned that Chrysler is simply not viable as a standalone company). Rick Wagoner is to step down from his position as CEO of General Motors. Although there’s no official comment on that, sources at first said it was linked to government’s loan package and a result of a request from the White House. While the UAW union continues to negotiate around issues connected to healthcare costs, Obama commented that all sides will need to take a “set of sacrifices”. He said the management of the autos firms, along with shareholders, creditors, suppliers and dealers will all need to accept significant restructuring.
• The German government agreed on a further capital boost into Hypo Real Estate. Hypo announced a €5.46bn loss for 2008. The government will take an initial 8.7% stake in Hypo. J. Christopher Flowers and Richard S. Mully, who lead a group of investors that together owns 23.7% in Hypo Real Estate, are leaving the lender’s supervisory board because of “possible measures to be taken by the German government against Hypo Real Estate shareholders.”
• OECD has reported that “by the end of 2010 the unemployment rate could be approaching double digit figures in all G8 countries with the sole exception of Japan, as well as in the OECD area as a whole.” This is a frightening reminder, ahead of Friday’s US employment report, of the gigantic slack that is growing within the world economy, which we fear will feed deflation fears over the coming quarters.
• The Irish banks are in talks with Finance Minister Brian Lenihan over the valuations of property development loans, as the government presses ahead with plans to set up a state backed vehicle to absorb these assets. Sources for the newspaper do not believe the asset management company (AMC) will be announced before the budget but a “roadmap” is set to be unveiled by then. The idea of the AMC was proposed by Peter Bacon and the banks will be expected to write-down any bad debts before they are transferred to the AMC which is set to be run by the National Treasury Management Agency.
• Note that there are massive RIOTS planned for the 1st and 2nd of Apr in the city of London – they could get VIOLENT. The following link shows all the hit list targets. Just looking at one of the maps the protestors (who are taking time out between Blockbusters and Countdown) have published online with addresses of every finance related institution in London for next Wednesday and Thursday.
• Everyone wants a weak currency at the moment and the beggar your neighbour approach is highlighted by Singapore’s decision to effectively devalue their currency.
• It’s comforting to know that all that the finance theory we learnt in college is bunkum.

AIG Becomes A Pure Money Laundering Operation
The headline in the hyperlinked blog is “AIG was responsible for the banks’ January and February profitability“. If this is true, it means that essentially AIG has become a pure money laundering operation. Rather than unwind its trades at favorable terms for itself, it’s offering banks excellent trades on the taxpayer dime.

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were:

1. one-time in nature due to wholesale unwinds of AIG portfolios,
2. entirely at the expense of AIG, and thus taxpayers,
3. executed with Tim Geithner’s (and thus the administration’s) full knowledge and intent,
4. were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

The conspiracy thickens.

A Look Ahead To The G20
Nobody expects earth-shattering policy measures from the G20 but they’ll have to come up with more than platitudes to keep the recent optimism alive.

The diplomats have been working for weeks to draft a communiqué that is sufficiently short on detail for their bosses to safely sign. It was published in the Financial Times, with a few blanks in the IMF section for the sums to be inserted, and brackets around their aspirations for the impact of the fiscal expansions produced so far on world growth (2% increase in output) and employment (20 million jobs). There is a renewed commitment to free trade,to an “open economy based on market principles” and a broad commitment to reforming financial regulation.

The London summit comes earlier into the depression and fiscal and monetary responses are already well advanced – except poor Europe is again being held to ransom by a central bank that is fixated on inflation and defending the euro. Having stabilised the financial system, the task of the G20 leaders now is to rescue globalisation and trade. That will take more than a vague confirmation of their ‘commitment’.

Equities Briefs

• The pain in Spain continues with news that Spanish retail bank Caja Castilla La Mancha has been taken over by the government.
• Meanwhile,in the UK, the government is seeking to broker a takeover of the failed Dunfermline Building Society. As I write it is being mooted that Nationwide BS has stepped up to the plate.
• Banking and automakers stocks are under pressure in early European time with Deutsche and Daimler in particular being sold off.
• Travis Perkins, one of Grafton Group competitors in the UK, is preparing for a £300 million rights issue to help reduce some of the £1 billion debt load.
• M&S trading statement is due tomorrow. Weekend press suggests that M&S will report Q4 trading down around 7%, in line with the fall in Q3. Price cutting in response to falling sales is expected to have had a severe impact on pre tax profits, which are now expected to be down in the region of 40% to £600m. Whether or not M&S cuts the dividend, which will be crucial in determining what the rating agencies do, may not be confirmed tomorrow.
• Irish Nationwide Building Society (INBS) is expected to announce losses of between €350 and €400 million due to sharp writedowns on its commercial property exposure. The losses compare with profits of €390million in 2007. INBS has an important funding deadline approaching with €1bn due in May and a further €750m due in October 2009.
• The weekend news has been far weaker for U.S. banks with the chief executives of JPM Chase and Bank of America both saying that business conditions had got tougher since they reported being profitable for January and February.

Date Today
February UK lending to individuals and M4 is out at 09:30. Worth looking at as a starting point or benchmark for judging the success of quantitative easing.

March Euro area sentiment is released at 10:00. This is a very good coincident indicator of the euro area business cycle. Overall, the market expects a small decline to 65.4.

And Finally… The Stimulus Package

Disclosures = None