The creatively-named Moonraker Fund Management is, we think, one of the first firms to say the below relatively explicitly.
The boutique investment house is “concerned” that banks may have been using their bailout money — and no doubt some of their quantitative easing-gained liquidity — to buy equities, thereby fuelling the summer rally. The danger, they say, is that this is a relatively “thin” rally — and one which is vulnerable if banks suddenly decide to pull out and crystallise their gains.
Here’s the Moonraker press release:
September 24, 2009 – Moonraker Fund Management, the independent investment boutique, is concerned that banks may have been using their bailout money to buy equities, helping to fuel a rally that is vulnerable to a major correction if they consequently sell in thinly traded markets.
Instead of lending to businesses and homebuyers, banks may have been using some of their bailout money to buy stocks from an oversold base in March, Moonraker believes. The British Bankers’ Association’s own figures show that gross mortgage lending by the banks has fallen from a high of £21.5bn in June 2007 to £9.1bn in August 2009, while new term lending to small businesses was £796m in July, compared with around £900m last October.
Jeremy Charlesworth, Chief Investment Officer of Moonraker and manager of the Moonraker Commodities Fund and Global Opportunities Fund, commented: “Little of the bailout money given to banks seems to have been passed on to businesses or consumers. But it must have gone somewhere and it might have gone to the proprietary desks of the banks to punt the markets. Given all the calls for more transparency, it would be good if the banks could clarify this.
“The banks have every right to use the money they borrow in any way they choose. But it would be good to know how much of the bailout money has been used to buy equities. Clearly, someone has been buying, and given that it hasn’t been ordinary investors and the institutions that does just leave the banks.
“The banks’ balance sheets will certainly have benefited from their equity holdings. If they could sell these investments into a rising market then they would be in a better position to repay their debts. But there will be a problem if the public and institutions do not join the rally and the banks have to sell equities into a vacuum.”
As Moonraker notes at the start of the press release, there will also be a problem if small and/or institutional investors join the rally, only to find banks suddenly retreat from the stock market — a possibility which bank-slayer analyst Meredith Whitney warned of earlier this year.
We should also note that much of that bailout money has not necessarily been used to buy equities, but to boost banks’ capital — core Tier 1, for instance, is now at a five year high according to Barclays Capital.
Nevertheless, as Moonraker highlight, questions will remain about just who is buying this rally and by how much?
Related links:
Whitney: “I call this the great government momentum trade” – FT Alphaville
The (QE)uropean equity rally and yields – FT Alphaville
Allocating, multiplying QE - FT Alphaville