Banking Sector Problems Continue
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Banking Sector Problems Continue

Banking Sector Problems Continue


Trading Features / Strategies from Simon Denham of Capital Spreads.

And so the pieces all start falling into place. The UK’s huge dependence on debt to finance everything from that holiday in ‘Majorka’, a new ‘motor’ every few years or little Johnny’s absurdly expensive School fees are now coming back to haunt us. Home owners have become used to ‘unlocking’ the value in their houses to buy today what they probably could not even afford tomorrow.

The belief that the good times would go on forever has now cost us two banks with a third clinging on for grim life. Santander’s audacious bid for Alliance and Leicester looks to be going through on the nod to the relief of all concerned (shareholders, Treasury, BOE and FSA) and little will be made of the fact that they are paying a valuation that was in the market just two weeks ago. What a difference ten trading days can make!

For those who argue against short sellers being allowed yesterday’s action in A&L will come as something of a lesson. This is exactly the type of risk that ‘shorters’ take. Some £150m was probably lost in just a few minutes by funds betting on continued weakness, as the A&L stock was one of the most heavily borrowed stocks on the block. The price opened some 40% to the good from the close on Friday and nobody had a chance to get out. The stock rallied to well above the Santander offer even though the chances of a competitor bid appear slim (although not impossible) as shorts were forced to cover at any price.


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The market relief did not last long for other banking shares as the initial boost to Barclays, RBS and Bradford and Bingley had pretty much drained away by the close. And, after the Dow’s dismal performance last night followed by a 2-3% drop across the Far East, this morning we are likely to open lower again. After Eleven years of Labour ‘growth’ the investment value of UK plc is now well below its levels of 1997 (taking out all the foreign members of the FTSE 350). Even the slightly more overt Fed backing for Fannie Mae and Freddie Mac did not help out. The fact is that whilst the US Treasury might guarantee the debt (for fear of a total collapse of US debt markets) this will not aid the share holders. This is potentially a Northern Rock US style. The US Treasury may effectively take on the entire multi trillion dollar mortgage book to avoid an implosion and just wipe out the stock.

This will be yet another call on US public funds and, with the Middle Far East being virtually the only major buyer left for US T Bonds, there must be a fear that indigestion will eventually limit buyers continued appetite for US debt. Other US financial stock is also looking a tad fragile with the banks due to report soon on first half ‘performance’.



The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.


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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'Banking Sector Problems Continue' edited by SD, updated 15-Jul-08



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