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

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Note: The full text of the table (150 banks in total) is after the jump

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Earlier today we announced the preliminary Q2 stress test results for all US banks.  Gretchen Morgenson gave us great ink yesterday in the NY Times:  “What the Stress Didn’t Predict.”

The preliminaries are of interest because they exclude the large banks and thus give you a regional/community bank view. In Q2 2009 the preliminary bank safety and soundness ratings calculated by the IRA Bank Monitor using the data from the FDIC indicate a dramatic climb in the stress in the US banking industry, up 23% to 6.87 in Q2 2009 (1995=1) vs. the preliminary Stress Index value of 5.57 in Q1 2009.   The rate of change in the preliminary Bank Stress Index was lower than in the previous quarter, but the absolute stress test score is at record levels.  The final industry aggregate average Bank Stress Index calculated by IRA was 1.8 at the end of Q4 2008 and 2.36 as of Q1 2009, illustrating the degree of subsidies flowing into the larger banks, as discussed below.

IRA’s unique automated system enables us to gather and process CALL reports in real time, as they become available on the FDIC CDR web facility.  This facility cuts several weeks off the wait time for the public to access FDIC data, but some of the largest banks are still not released until the FDIC releases its own analysis of the quarterly data, roughly 60 days after the quarter close.  Since the largest banks and/or the FDIC deliberately hold back the release of certain bank CALL reports until just prior to the press conference, the sample of CALL reports available via the FDIC CDR facility just prior to the FDIC press conference allows us to view the rest of the US banking industry “ex-big bank.”

Q2 2009 “Ex-Big Bank”:  Less Worse Than Previous Quarter, But Still Climbing

Prior to the FDIC press conference in Q1 2009, IRA for the first time calculated a preliminary Banking Stress Index rating for the industry using the bank CALL reports that were available on the FDIC web site about 50 days after the quarter close.   This preliminary Bank Stress Index rating included over 7,000 institutions, but excluded the largest banks and therefore provided a perspective on the rest of the industry.
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Seems like Wall Street has ground to a halt . . .

Welcome to the working week: Here are the 10 most intriguing things I happened across this morning:

• The Mistakes We Make—and Why We Make Them (WSJ) How investors think often gets in the way of their investment success. While we know that we made investment mistakes, and vow not to repeat them, most people have only the vaguest sense of what those mistakes were, or, more important, why they made them. Only by understanding the answer to these questions can we begin to improve our financial future.

• The Man Who Sells America’s I.O.U.’s (NYT) In a city full of pompous politicians and bombastic bureaucrats, Mr. Zeck quietly runs one of the government’s truly indispensable operations. He is not a policy maker. He does not decide how much to borrow. He just makes sure the money is borrowed, in a regular and predictable way, at the lowest possible cost to the government over time.

• A front page, Goldman Sachs, 2-fer:

-Goldman’s Trading Tips Reward Its Biggest Clients (WSJ)
-Arrest Over Software Illuminates Wall St. Secret (NYT)

• China’s 2% Inflation Estimate Puzzles Economists as Prices Fall A Chinese government estimate that inflation may be 2 percent for 2009 is puzzling economists after prices fell for six of the past seven months.  The Ministry of Commerce made the estimate in a statement on its Web site yesterday, citing rising demand and gains in commodity prices.  (Bloomberg)

• Five Financial Stocks Dominating Market Volume (Zero Hedge)

• Gold bugs, rev your engines: Fed official: rates to be kept low past upturn (Reuters) Financial markets have not fully understood that the U.S. Federal Reserve’s pledge to keep interest rates exceptionally low for an extended period means they will stay low beyond when officials normally would raise them, a top Fed official said on Friday.  see also Bundesbank confirms Germany’s gold is in play (GATA)

• Employment Change by Industry (visual economics)

• Apple Highest Grossing Retailer on Fifth Avenue as iPhone Defies Recession (Bloomberg) Apple’s Fifth Avenue emporium probably has annual sales of more than $350 million, topping any of the chain’s other outlets, said Jeffrey Roseman, executive vice president of real- estate broker Newmark Knight Frank Retail in New York. The location is 10,000 square feet, putting its sales per square foot at a minimum of $35,000, based on Roseman’s estimate.

• SENTIMENT ANALYSIS: Mining the Web for Feelings, Not Facts (NYT) An emerging field known as sentiment analysis is taking shape around one of the computer world’s unexplored frontiers: translating the vagaries of human emotion into hard data.

• Time’s 50 Best Websites 2009

Anything else worth reading this week ?

-Real Time Economics

Another weekend, another few banks go belly up:

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Chart via Ron Griess of The Chart Store.

As a follow up to my morning comment, today is another of mixed messages being sent by the stock market and the US Treasury market as stocks continue to power higher while the 10 yr bond yield moves lower. Just since the Friday Aug 7th close, the S&P 500 has rallied 2.1% while the 10 yr bond yield has fallen by 8.6% (33 bps) from 3.85% to 3.52%. One major factor in the argument against the V shaped economic recovery and the stock market’s strong rally is that consumer demand is still missing and the US economy can’t have any sustainable rebound unless end demand starts to stabilize. Interestingly, with the rally in US Treasuries specifically since the Aug 7th close, coincident drop in yields, and rise in the major stock market indices, the XRT (the broad retailer ETF) is down by almost 3%. This discrepancy in markets will hopefully be answered as we finish Q3 and clarity for Q4 begins to shape up.

The Bank of Israel has become the first global central bank to raise interest rates as they moved their benchmark to .75% from .50%. They cite 3 main factors for moving. 1)Over the past few months, inflation data was above the target range of price stability, 2)the most recent economic data has shown a turnaround with still a question of the expected rate of growth, 3)interest rates are expected to remain unchanged at the leading central banks till the end of the year and “possibly even to the middle of 2010. However, unlike in Israel, inflation in those countries is expected to remain low both this year and next.” They believe the move to raise “strikes a balance between the need to moderate inflation and the need to continue to support the recent recovery in economic activity given that unemployment is expected to continue increasing in the next few months.” They say .75% still represents an expansionary monetary policy.

The consensus out of Jackson Hole was that central banks would keep policy easy for a continued period of time so this may be an outlier but is still worth noting that rates have only one way to go from here. To illustrate how easy the Fed is, current inflation expectations in the TIPS are expected to be almost 1.9% over the next 10 years. With the fed funds rate at zero to .25%, real rates are currently negative by 1.5-2%. Historically, the fed funds rate is 2-3 % points above the rate of inflation. We’re obviously not in normal times but when it comes time for the Fed to exit its current strategy, it will not be a quick process.

I have mentioned this in the past, but its one of those absurdities that refuses to die:

“Whether it’s a matter of ignorance or greed, people are still buying General Motors stock, even though the company and the government have warned that the shares will someday be worthless.

Investors are picking up millions of shares every day, thinking they’ll profit from what is really a hodgepodge of outdated factories and a pile of debt left behind when the new General Motors Co. exited bankruptcy court protection. Instead, they could end up losing money very quickly. The price of the shares, currently under $1, has ratcheted up or down as much as 50 cents in one day.

On Thursday, investors traded 13.9 million shares, and the stock closed at 85 cents, down 4.1%. The old GM stock had a higher trading volume than big, viable companies like retailer CVS Caremark, banker Capital One Financial Corp and consumer products maker Procter & Gamble.”

Irrational seems to be the standard (and we didn’t even have to write a book to prove it).

Don’t come crying to me when they halt GM trading on a permanent basis.

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Previously:
Why Isn’t GM $0.00 ? (May 27th, 2009)

http://www.ritholtz.com/blog/2009/05/why-isnt-gm-000/

Source:
Traders keep buying old GM stock, despite warnings
Tom Krisher and Tim Paradis
Associated Press, August 20, 2009

http://www.usatoday.com/money/autos/2009-08-20-gm-old-stock_N.htm

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Be sure to check out Andy Xie’s Boom & Burst discussion in the Think Tank.

He writes: Don’t be fooled by false signs of economic recovery. It’s just the lull before the storm. . .

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