This is the End of the Bull

Financials Update

· The group continues to be whipsawed by improving fundamentals on the one hand and ominous developments on the regulatory front.  One week after the market was hit by the SEC’s original charges against GS (they hit on Fri Apr 23), the WSJ reported that the US Attorney’s Office in Manhattan was conducting a criminal inquiry into the company and its mortgage trading practices.  The Journal was careful to add that referrals from the SEC to the DOJ are somewhat common and that the SEC’s own case is not seen by some to be very strong.  However, headline risk around the company appears to be escalating.  Goldman’s current and former top executives testified before a Senate Committee on Tues for more than 11 hours and in the court of public opinion, the hearings didn’t do much for the co’s image.  Meanwhile, standing firm for three votes, the GOP relented this week and permitted debate to move forward on Dodd’s financial regulatory overhaul bill.  Some of the most onerous provisions (such as the very strict Lincoln derivatives language) may wind up not making it into a final piece of legislation, but investors are on edge nonetheless.  The ratings agencies have already gave warning that multiple downgrades could be coming as a result of the legislation (which is one of the reasons why financial CDS hasn’t rallied nearly as much as financial equities have over the last few weeks as earnings have hit).  JPMorgan’s Kian Abouhossein wrote a note this week looking at the implications of the proposed Dodd/Lincoln financial regulatory reform bills – we believe that the proposed regulatory changes would have a significant impact on Global IB ROEs, declining from 19% pre-regulation to 12%.  On the earnings front, we received results out of a number of insurers this week and overall results winded up disappointing investors.  The insurers closes the week down ~3.4%, lagging the broader market and the banks.  GNW, AON, HIG, CINF, LNC, and AFL all came for sale this week on back of earnings.  XL also was hit as investors anticipated the company being removed from US indices after its domicile move to Bermuda (XL reports this week coming up).  On the upside, MET and AIZ both rallied after earnings from each came in better-than-expected.  Over in Europe, we received a bunch of earnings releases this week.  Deutsche Bank and Popular both hit Tues morning and were taken as disappointments; Greece worries hit a peak on that day and the two events weighed hard on European financial shares.  Santander (Europe’s largest bank) reported Thurs’ morning and its #s were better than feared, helping to stabilize the group.  Barclays finished out the week Fri morning w/numbers that came in below St views, w/the miss driven by its BarCap division.   

· Trading – the smaller regional banks continue to have a decent bid to them as investors are still anticipating a substantial improvement on the credit front, which should drive large earnings improvements.  On Fri, while the large IBs came for sale, the smaller regional banks caught a bid.  GS continues to come for sale and the dip buyers are increasingly reluctant to take a stand in the name given the prospects for additional headline risk. 

· To watch for the week coming up - the big focus will be on earnings coming out of Europe.  We get UBS Tues morning (recall the co has already preannounced a lot of figures for the Q), SocGen and Unibanco on Tues, BNP and Commerzbank on Thurs, and RBS and HSBC on Fri.  With all the market concern around European sovereign debt levels, people will be watching closely the numbers coming out of these European giants.  In the US, we will get some more insurance earnings (MCY, PFG on Mon, CNO, PNX, UNM, and XL on Tues, PL, PRI, and PRU on Wed, and PRE on Thurs).  We get a bunch of numbers out of the public hedge fund companies, inc. GLRE on Mon, OZM on Tues, and FIG/GLG on Thurs.  STT has an analyst meeting on Wed (coming away from earnings the St was prob. most disappointed w/numbers out of the trust banks, esp. STT) and GS has a shareholders meeting on Fri (starting at 9:30amET