Posts filed under “Think Tank”

Picture du Jour: Stock markets – it’s all about confidence

Picture du Jour: Stock markets – it’s all about confidence

A key requirement for the recent stock market gains to be more enduring and for the bear’s corpse to be put to rest, is the restoration of investor confidence. A few comments regarding this issue are highlighted in this post.

As shown in Sunday’s “Words from the Wise” review, a confidence indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Not surprisingly, a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500 Index’s 12-month rate of change.

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Click on the image below for a larger graph.

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The improvement in the Barron’s indicator augers well for the outlook for equities – specifically for the return of confidence – and provides further evidence that US stock markets are mapping out a base development formation. The early January highs and 200 day-moving averages are the next important targets and a break above these levels would signal the completion of the base formation and a secular bottom (as has already been seen in leading markets such as China and Brazil). (The Nasdaq Composite Index is also already above its January high and 200-day line.) Meanwhile, the speed and magnitude of the rally argue for markets to consolidate and possibly retrace some of the past eight weeks’ gains prior to launching an attack on longer-term indicators used to distinguish between primary bull and bear markets .

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Category: Psychology, Technical Analysis, Think Tank

ADP

ADP reports that 491k jobs were lost in the private sector, much less than expectations of a fall of 645k and a big improvement from a revised -708k reading in March (down from 742k). It’s the smallest job loss since the -352k figure in Oct ’08. Small and medium sized businesses continue to see the…Read More

Category: MacroNotes

How Do You Raise Capital Without Having to Raise Capital?

According to the leak du jour, BAC needs $34b in equity capital in order to absorb the losses estimated in the ‘stress test.’ Considering that they’ve already received $45b in preferred stock from the US taxpayer, an accounting maneuver of converting that to common can, Voila, cure their capital needs without raising a penny of…Read More

Category: MacroNotes

A True Outsider’s Perspective Revisited

Good Evening: After yesterday’s launch into space, U.S. stock prices spent Tuesday settling into a comfortable, if slightly lower, orbit. The economic data out today continued to portray a slowing rate of economic decay in the U.S., enough so that some bulls are proclaiming the recession might be over and some bears are rethinking their…Read More

Category: Markets, Think Tank

Stress Tests & Tim Geithner’s Bar Mitzvah

May 5. 2009

Thursday is stress test day. Not on a treadmill, but it may just as well be so.

We are now going to add some Geithner-Bernanke-Summers-esque formula of bank strength or weakness assessment to an already long list that includes Tier 1, Tier 2, TCE, and CAMELS and BOPEC. Tier 1 and 2 capital measures are released by banks in their public disclosures. TCE (tangible common equity) can be calculated from public documents.

Two other ratings are kept confidential. They are critical to regulators; and, in an affront to democracy and transparency, we are not permitted to learn them. Banks are not permitted to reveal them and the penalties for doing so may be harsh. Welcome to modern banking in America.

The BOPEC acronym stands for the five key areas of supervisory concern: the condition of the Bank Holding Company’s (BHC) bank subsidiaries, other nonbank subsidiaries, Parent company, Earnings, and Capital adequacy. BOPEC ratings are assigned according to an absolute scale, from the highest rating of one (indicating strong performance) to the lowest rating of five (very poor performance).

CAMELS ratings are assigned to banks within a bank holding company. Since the condition of a BHC is closely related to the condition of its subsidiary banks, the off-site BHC surveillance process includes monitoring recently assigned CAMELS ratings. The CAMELS system is used by the three federal banking supervisors (the Federal Reserve, the FDIC, and the OCC) and other financial supervisory agencies to provide a convenient summary of bank conditions at the time of an exam. The acronym CAMELS refers to the six components of a bank’s condition that are assessed: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and a bank’s Sensitivity to market risk.

For a critical discussion of the coming stress test environment see Dick Bove’s guest commentary on Cumberland’s website: http://www.cumber.com/special/bove.pdf . We thank Dick for giving our readers access to his essay. We agree with him.

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Category: Think Tank

How best to deal with debt?

Ben Bernanke and the FOMC have the fed funds rate currently at zero and with a straight face in the Q&A today, he says he’s committed to price stability. He has one unspoken goal in his policies and that is to inflate our way out of this current economic malaise. The Fed and Treasury are…Read More

Category: MacroNotes

FusionIQ Market Statistics

Market internals continued to be stellar with the NYSE registering an up to down volume ratio of 19.2 to 1, while advancers beat decliners by a ratio of 5.7 to 1. On the NASDAQ up volume bested down volume by a rate of 5.19 to 1, while advancers bested decliners by a 3.47 to 1…Read More

Category: Technical Analysis, Think Tank

LIBOR continues its drop

Another day closer to the release of the bank ‘stress test’ brings us another leak in the morning papers and today reveals that 10 of the 19 banks MAY need to raise capital and/or convert preferred to common in order to improve the TCE ratio. The relevance of the outcome is only important for those…Read More

Category: MacroNotes

Chrysler Battle has Important Implications

Good Evening: Last Thursday evening, U.S. stock market bulls were fretting an aborted attempt to launch the S&P 500 into the green for the year. I speculated then that some undaunted bulls might trot out another rocket and try again on Friday. So they did, achieving a decent launch profile at Friday’s closing bell. The…Read More

Category: Markets, Think Tank

Fed’s Loan Survey

The Fed’s quarterly senior loan officer survey revealed that 39.7% of banks tightened credit standards for businesses, 5.7% considerably and 34% somewhat with the balance unchanged. This is down from a total of 64.1% of banks that tightened standards in the previous quarter and 83.6% in the one before. No bank eased standards and none…Read More

Category: MacroNotes