The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

I thought the readers of TBP might be interested in where we are with the development of our bank ratings and also which banks we actively follow as part of the IRA Advisory Service. Of note, we’ve also built a new theme park for our consumer users: www.irabankratings.com.

Over the past four years,  we have established several objective and subjective measures for looking at bank safety and soundness benchmarking, including:

** The Banking Stress Index:  An objective stress test survey of the entire US banking universe looking at discrete measures including Return on Equity, Capital, Defaults, Lending and Efficiency.  We present as an index, with the benchmark year set to 1995 (a mediocre year) with a value of 1 and limit the maximum score to 100 or two orders of magnitude above the benchmark year.  Banks being resolved by the FDIC typically have stress score near 10, while the industry average stress is around 2.3.

** CAMELS Ratings: This is a more subjective measure that uses the regulatory, 1-5 scale for measuring Capital, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk.  The scale is 1-5, with 1 being excellent and 5 being headed for resolution.

** Economic Capital: This is a classical calculation of maximum probable loss for three buckets: lending, investing and trading.  The assets are scored  in a stressed scenario based on risk, including OBS exposures.  We then sum the three MPLs to come up with Economic Capital.  If the bank has more EC than regulatory capital, the business model is considered more risky, etc.  JPM is 4:1.  BAC and WFC are 2:1.

** Outlook: This is a purely subjective view of the immediate operating prospects for a given subject in view of current financials, and the market and economic environment, which we publish in the IRA Advisory Service.

Right now, the key tension for earnings visibility in the banking sector is between reserve build and charge-offs.  Capital markets and non-interest income are very nice to have, but credit loss is the looming issue for the remainder of 2009.   As a result, we downgraded US Bancorp (NYSE:USB) to “neutral” outlook from “positive” and kept Cullen/Frost Bankers (NYSE:CFR) unchanged at “positive” outlook.   Earlier in the week, we added Webster Financial (NYSE:WBS) to the list with a “negative” outlook.
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Mark Hulbert looks at the question of whether this is a once-in-a-generation stock market low (secular bull market)  or a mere “cyclical” low.

To figure out which, he looks to Ned Davis of Ned Davis Research.  NDR  identified seven factors to determine if any given market low is a secular low, setting up the next lasting Bull Market.

The Seven Factors: There should be:

1. Money, cheap and amply available;
2. Debt structure that’s been deflated;
3. Large pent-up demand for goods and services;
4. Stocks that are clearly cheap;
5. Investors who are deeply pessimistic;
6. Major investor groups with below-average stock holdings;
7. Fully oversold, longer-term market conditions.

Looking at these elements, how does this cycle measure ?

1. Cheap Money?  Neutral. You might think that this factor should be rated as “bullish,” given how accommodative the Federal Reserve is currently. But Davis notes that banks are also significantly tightening their lending standards. Given the heavy load of debt under which both consumers as well as corporations suffer (see next criterion), banks are finding it “increasingly hard to find ‘credit-worthy’ borrowers.”

2. Debt structure deflated? Bearish. This is the most negative of any of Davis’ seven dimensions, since by no means is the debt structure deflated. On the contrary, Davis calculates that the total credit-market debt load right now is nearly four times the size of gross domestic product, and that it takes more than $6 of new debt for our country to produce just $1 of GDP growth. That’s almost double the amount of debt required in the 1990s.

3. Pent-up demand? Bearish. Davis acknowledges that there has been improvement along this dimension from where things stood at the beginning of the bear market. But he is particularly worried by the ratio of total Personal Consumption Expenditures to Non-Residential Fixed Investment, which currently stands at a record high. At the secular bear market low in 1982, in contrast, this ratio was at a record low.

4. Cheap Stocks? Neutral. Though the stock market “got undervalued at the March lows,” it never became “dirt cheap.”

5.  Sentiment? Bullish. Davis says that past secular market lows were accompanied by an extreme amount of pessimism, and his indicators show a similar extreme existed earlier this year.

6. Stock vs cash reserves?  Neutral. While foreign investors have record-low stock holdings, according to Davis, household holdings — while low — are not nearly as low as they were at prior secular bear market lows. And institutional investors’ stock holdings “are only down to an average weighting historically.”

7. Oversold longer-term market condition? Neutral. Davis believes that, though many of the excesses of the real-estate bubble have been worked off, some still exist. That’s particularly a problem, he says, given that the stock market bubble of the late 1990s never completely deflated either. “As we saw in Japan after 1990, a double-bubble in stocks and real estate leaves it difficult to put ‘humpty dumpty’ together again.”

According to Davis, there is but one of the seven foundations of a major secular bull market in place. Three are neutral, three are bearish.

Conclusion:  This is a Cyclical Bull market . . .

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Source:
Secular bear, cyclical bull
Mark Hulbert
MarketWatch Jul 30, 2009, 12:01 a.m. EST

http://www.marketwatch.com/story/is-the-bull-market-cyclical-or-secular-2009-07-30

That worked out well yesterday with the focused daily linkfest.

Once again, 10 links:

• Dow Sends Buy Signal That’s Worked Since 1921: Chart of the Day (Bloomberg)

• Lucrative Fees May Deter Efforts to Alter Loans (NYT)

• Wall Street Analysts Keep Telling Big Earnings Lie At a time when the financial industry’s credibility is at an all-time low, you would think Wall Street’s finest would break their necks providing transparency. Not so. Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know. (Bloomberg)

• Economic crisis, and a crisis for economics (UK Telegraph)

• Will Everyone Please Shut Up About Goldman Sachs? (thebigmoney)

• Chicago Battle Royale:  Behavioral Economist and Nobel winner Richard Thaler responds to nonsense from Richard Posner, the nation’s pre-eminent Market Deifying Judge.

• 7 Ways to (Finally) Fix Housing Not that I agree with most of these, but they are at least thought provoking (Pethokoukis/Political Risk)

• Flaws in the Case Shiller Methodology (Advisor Perspectives)

• Notes on a real estate trip in China (China Financial Markets)

• This is an instant classic: YOU SUCK AT CRAIGSLIST

Thats 10 — anything else capture your eye?

Chart of the Day provides this job dropping perspective on the current earnings environment: 12-month S&P 500 earnings, relative to the peak in Q3 2007.

With 38% of S&P 500 companies reporting Q2 2009 numbers, on a real basis, earnings have declined over 98%.

This is the largest decline on record going back to 1936.

The folks at Chart of the Day note that if current estimates hold — and that’s a big “if,” as  they are most likely too low — then Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.

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Inflation Adjusted S&P500 Earnings

via Chart of the Day

You probably got a bit poorer last year amid the market meltdown. So did most of us. But one group thrived, making an average of $215,000 as their industry collapsed. Any guesses?

The 7 year note auction was good as the yield was about 3 bps less than expected. The bid to cover of 2.63 was above the average seen in the previous 5 of 2.4 but below the June auction of 2.82. The level of indirect bidders totaled 62.5%, below the 67.2% seen in June which was the first auction that reflected the new methodology. After the poor 5 year yesterday, yields backed up enough to find buyers today, especially with yields at the highest level since late June. The results are a relief in terms of government funding. Does it reflect a benign outlook on inflation and not as much of a confident growth outlook as the stock market has and/or is it comfort that government deficits will continue to have little problem getting financed? Or is it as simple as yields backed up over the past month and buyers took advantage? In two weeks we’ll get the benchmark 10 yr auction followed by the 30 yr. That will be the real test in terms of sentiment.

With another run today higher, the 14 day RSI (relative strength index) in the NDX is now at the highest level since Jan 2000. Momentum such as this that brings us overbought can keep us overbought for a continued period of time so it’s never a one stop timing measurement but it at least brings us some perspective on the strength of the rally. The RSI in the SPX is at the highest level since May ’07.

Tim Iacono is a retired software engineer and writes the financial blog “The Mess That Greenspan Made” which chronicles the many and varied after-effects of the Greenspan term at the Federal Reserve. Tim is also the founder of the investment website “Iacono Research” that provides weekly updates to subscribers on the economy, natural resources, and financial markets.

Today, he looks at the question of whether the Housing market has bottomed or not  yet . . .

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Now that a number of recent housing reports are generating some incredibly positive headlines and the global economy appears to be slowly digging its way out of an enormous hole that was created last fall when the world nearly came to an end, the burning question on the minds of millions of people is … Has the housing market hit bottom?

There is no shortage of answers.

Unfortunately, most of them are far too simple and, in most cases, the individual or organization providing the answer has a bias of some sort.

I’m no exception.

We sold our house about five years ago and have been renting ever since.

We plan to buy again, but not until at least next year and we hope to get a lot more house for our money than we could today.

That’s the soonest that I think the bottom in home prices is likely to occur around here in the price range we’re looking, though a bottom in home sales may already be behind us, and this is what makes the recent discussion of a housing bottom so complicated – “hitting bottom” means different things to different people living in different parts of the country.

The discourse on this subject is full of misinformation and deception from parties with vested interests that will inevitably lead people to make horrendously bad decisions that they’ll regret in another year or two while others may postpone decisions that would be best made today.

With my biases out of the way, a few thoughts on a housing market bottom are offered here. In this article, regional differences will largely be set aside and the focus will be on three sets of national housing data – new home sales, existing home sales, and existing home prices.

New Home Sales Have Bottomed

First, let’s look at the home building industry, which, up until a couple years ago had accounted for about 10 to 15 percent of all home sales. Then, the homebuilders’ share gradually sank to about half that amount as waves of foreclosures started hitting the market at much lower prices, cutting into their business dramatically.

Ironically, many of these foreclosure sales were homes that the builders had built and sold a couple years prior. Disgruntled home buyers who, in 2006 and 2007, complained about how builders were slashing prices on Phase III after they bought in Phase II ultimately had the last laugh in 2008 and 2009 when they walked away from their almost-brand-new home and the bank sold it at a 40 percent discount to the going prices for Phase III.

Don’t feel too sorry for the homebuilders – they had a few very good years.

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Mike Panzner sends along these 2 charts — and magazine covers — and wonders what they might mean:

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all data via Bloomberg

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The contrary read to the Newsweek piece is that the Recession isn’t over.

There is a sleight caveat with the Newsweek cover:  The author of the Newsweek piece is Dan Gross, who is no stranger to contrary indicators and/or bubbles. He wrote a few books (Popped! Why Bubbles Are Great for the Economy and Dumb Money) and has been pretty savvy about the current state of affairs.

Note the Asterisk on the inflating “Recession is Over.”  Its states “Good Luck Surviving the Recovery.”

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Click for full size Newsweek Cover

Be sure to see the hilariously TDS  video of Timothy Geithner’s inability to sell his 5 Bedroom, 4 1/2 bathroom, Larchmont home posted earlier today — including Prof Bob Shiller’s bemused take on the issue.

Astonishingly, Geithner is asking more than he paid for buying in 2004 — $1.635 million versus the $1.6m he paid.

The takedown is classic Daily Show . . . I love the auction portion.