Financial Industry 02 (Sep 09 - Sep 10)

[winston]

Bank Stocks Are A Canary In The Coal Mine For The Broader Stock Market
By Mike Larson

If there’s one sector of the stock market that trades like death warmed over, it’s the financials. Bank stocks simply can’t get out of their way these days.

Take the KBW Bank Index (BKX) of 24 leading U.S. banks. You can see in this chart that it plunged in April and May, and it hasn’t been able to get off the mat since. In fact, just this week, it’s collapsing to fresh, multi-month lows.

Why should you care?

Because the banks are a canary in the coal mine for the broader stock market! The BKX topped out in February 2007 … foretelling the collapse in the Dow and S&P 500 that began several months later. And I believe we’re going to see something similar happen again.

So what’s eating the banks? Plenty!

Falling Loan Demand and Mounting Loan Losses Hammering the Banks!

Let’s start with the home mortgage market …

Housing starts are stagnating in the 550,000 range, while building permits just slumped to a 15-month low. The National Association of Home Builders’ confidence index dropped to 13 in August, a 17-month low. And the Mortgage Bankers Association’s purchase loan index is hovering around the worst levels since 1997.

That pretty much means the home mortgage business is dead in the water.

Meanwhile, commercial real estate loans are a lead anchor around the industry’s neck …


Commercial lenders are getting stuck with distressed properties at an alarming rate.

Charge offs of souring commercial real estate loans surged 155 percent in the first quarter, according to the FDIC. A stunning 17 percent of construction and development loans were noncurrent at large banks, more than double the level a year earlier.

What about commercial and industrial loans, the bread and butter business loans that banks make? There’s just no demand! Companies simply don’t want to borrow.

The just-released Senior Loan Officer Opinion Survey from the Federal Reserve showed that demand for C&I loans shrank at small banks for a record 16th quarter in a row! Demand has dropped at medium- and large-sized banks in every quarter but two over the past four years.

And then there’s consumer credit: Credit cards, auto loans, and the like. It shrank 1.5 percent in the second quarter, bringing the cumulative decline to 6.5 percent since late 2008. Credit card debt alone has plunged to the lowest level in almost five years!

Slumping demand and souring loans have caused hundreds of bank failures over the past couple of years. And the problem is just getting worse …

The FDIC now has 775 “problem” institutions on its watch list. That’s more than double the 305 institutions the FDIC was closely watching a year earlier. Those banks have a whopping $431 billion in assets combined.

Margin Shrinkage Making a Bad Banking Problem Even Worse

Then there’s the issue of collapsing net interest margins, or “NIMs.” Banks make a sizable chunk of their income by borrowing at lower, short-term interest rates and lending or investing at higher, long-term interest rates.

When the spread between short and long rates is wide and rising, it’s like manna from heaven. Banks can coin money. But when it’s narrow and falling, it’s the kiss of death. The profit margin on each dollar lent or invested can collapse.

One rough spread gauge I monitor is the difference in yield between the 2-year Treasury Note and the 10-year Treasury Note.

And as you can see in the chart below, that spread has plunged from 291 basis points in February to just 210 basis points now. That’s the lowest in more than a year. It’s going to put serious margin pressure on a sector that’s already getting hammered by rising losses and shrinking demand.

My advice?

Get the heck out of any financial stocks you may own! And get out of other sectors vulnerable to a renewed financial and real estate slump, including REITs.

http://www.dailymarkets.com/stock/2010/ ... ck-market/

[winston]

LEADERSHIP

Financial. Financials have not participated in the rally. They are not giving the kind of leadership that is going to take the NYSE indices higher or lower; they are tagging along. We will see how they respond as the market bounces.

JPM was up on Friday on good volume, perhaps putting in a double bottom attempt here. At least that will give it a foot higher, and maybe it can break through that February low and move up toward the June and July peaks. We will see. GS was still lagging. It was lagging on Friday. Even though the market was up, it was down. We sold out of our positions and it just continued lower on Friday.

It is a good thing we got out, but I am watching it. It has a ragged ABCD pattern, and we will see where (and if) it finds bottom and can rally once more. There are not a lot of good moves in financials.

WFC was up, but it is in an atrocious pattern. We will have to see how this plays out. Financials will have to participate, or the bounce will never make it out of the trading range.


Source: MarketFN.com

[winston]

Weekly Review

Financial. Financials were enjoying a nice bounce the past week.

JPM continued to move up, gapped above the 50 day EMA and continued to rally. WFC gapped to a doji right below the 50 day EMA. Not a great pattern to buy into; I am just noting that the financials finally joined in the game and the market was finally able to move higher.

It was not just larger banks that joined in. EWBC gapped higher, up for the fourth day in a row. A very strong move. It moved through the 50 day EMA, but it is at a chunk of resistance right now. It may get a pullback, and that might make things interesting for a continued move to the upside.

GS finally awoke, and it did so with a 5.3% upside day. Nice, strong volume, moved through the 50 day EMA, and it is at the next resistance now. Pretty solid pattern if you ignore the hiccup in mid July. There is an ABCD pattern of sorts. A nice, big break on Friday.

Source: MarketFN.com

[winston]

Chinese Banks

Don't be complacent, China regulator tells banks

BEIJING - China must not overlook potential systemic risks in its banking system and has to keep up with global financial regulatory changes to meet new challenges, the top banking regulator said in remarks published on Wednesday.

Liu Mingkang, head of the China Banking Regulatory Commission, also said there was a need to improve the stress tests that the agency has been conducting to assess the ability of banks to withstand an increase in bad loans.

Chinese banks weathered the global financial crisis well, but Mr Liu said the country's regulatory framework was not up to the challenges posed by the latest changes sweeping global finance.

'The possible exposure of the banking sector to systemic risk should not be neglected,' he told a recent meeting of industry officials.

Chinese media reported earlier this week that the CBRC might order banks to set aside 2.5 per cent of their total loans as reserves to counter bad debt risks.

Mr Liu said banks urgently needed to pay greater attention to the quality of their loans, rather than the quantity.

The regulator, whose remarks were posted on his agency's website, www.cbrc.gov.cn, offered no specific details.

Like their European and US peers, Chinese banks have undergone regular stress tests to assess the quality of their loans to industries including property and infrastructure.

The results showed that banks could withstand a fall in home prices of up to 50 per cent without a substantial rise in their bad loan ratios.

Many economists and industry analysts are sceptical that the tests were rigorous enough.

'Banks are still weak in liquidity risk management and they need to improve their stress tests in terms of the tools and techniques used and the application of the results,' Mr Liu said.

He added that financial reforms now being negotiated by global regulators must be adapted to meet China's own national conditions, with a focus on capital adequacy and risk management. -- REUTERS

[winston]

The Chinese banks have been raising money left, right and centre. And I was wondering when the European banks would be doing it ...

Deutsche Bank to unveil 9-bln-euro rights issue

Deutsche Bank is set to raise up to nine billion euros through a rights issue to bolster its capital as global banking regulators finalise tough new rules for the industry, a report said Friday.

Germany's biggest bank aims to announce the offering on Monday or Tuesday, in what will be the largest rights issue by a European bank this year, reported the Financial Times, citing people close to the plan.

The issue will raise between eight and nine billion euros (up to 11.4 billion dollars, 7.4 billion pounds). Deutsche Bank's current market value is 30 billion euros, according to the FT.

Bank shares plunged at the start of trade Friday following the report.

Shares lost 5.41 percent to 47.32 euros as the DAX index of German blue chips opened with a decrease of 0.55 percent overall.

The news came ahead of a meeting Sunday of global banking regulation chiefs in Basel, Switzerland, to approve new capital and liquidity measures drawn up by the Basel Committee on Banking Supervision, an international watchdog.

Banks will have several years to meet higher capital ratios, but big banks are likely to move fast to reassure markets, according to analysts cited by the paper.

Deutsche is likely to use some of the new funds to increase its stake in Postbank, the German post office bank, which will probably be its main explanation for raising fresh capital, according to the FT.

But analysts believe the Postbank deal is a pretext.

The size of the offering suggests its real aim is to bolster capital at Deutsche itself and help the financial giant pull ahead of its weaker German rivals, said the paper.

Source: AFP Global Edition

[winston]

Weekly Review

Financial. JPM has made a good move off of the bottom of its range over the last two weeks. It could move higher as could SP500, but it has some serious resistance overhead, and it is not in the best entry point right now.

Same with MS. It has rallied nicely as well. Good move the prior week, a test early this week, and then a rally to close out the week. It is already at some significant resistance points. Again, not a great buy position right now. It is a bit extended off the bottom of its range.

Will it be leading higher? It is not in a great risk/reward position for a new move. It does not mean it cannot do it, but it is not in a great position. With the resistance, you would not put your money to work right here, and that typically indicates the move needs a pullback or test first.

Source: MarketFN.com

[millionairemind]

Another crisis will probably hit before the dateline is up.

Basel Compromise Means Higher Capital Ratios, Time to Comply
By Yalman Onaran - Sep 13, 2010 2:18 PM GMT+0800
Regulators looking to rein in the sort of risk-taking that caused the last financial crisis reached a compromise in Switzerland yesterday that more than doubles capital requirements for the world’s banks while giving them as long as eight years to comply.

The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends, though not forced to raise cash.

http://www.bloomberg.com/news/2010-09-1 ... ccord.html

[iam802]

Another crisis will probably hit before the dateline is up.

Basel Compromise Means Higher Capital Ratios, Time to Comply
By Yalman Onaran - Sep 13, 2010 2:18 PM GMT+0800
.....

The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends, though not forced to raise cash.

http://www.bloomberg.com/news/2010-09-1 ... ccord.html

I am not a dividend guy.

Is this a key consideration for those long term shareholders? (especially those 30-40 years type)

I would have prefer that banks be forced to raise cash.

What's the point of allowing them to continue operation if their risk management is not in place?

[LenaHuat]

Ya, banks are given a dateline and not a deadline, MM and iam802 They are too big to fail and so must be forgiven. The other day, someone wrote about WallStreet having bred a generation of mean rich. It seems like 拿他们没蛰

[Chinaman]

I am not a dividend guy.

Bro 802, for me for investment style differ from you.

Hehe, I never buy stock without paying dividend.