More Bad News Bears / Banks 18 comments
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Two articles at the American Banker detail more bad news for the troubled banking sector. In one article, entitled "Problem Bank List Hits 15-Year High", Joe Adler reports that the FDIC troubled bank list has been increased by 36% to 416. Assets in these banks total nearly $300 billion. This number (416) is four times the number of banks already failed in the current crisis, and $300 billion is more than double the assets of the banks already failed. The reasons for this growing crisis were reviewed recently here.
In a related article, "DIF Reserve Thins; List Of Problems Expanding", the same author (Adler) describes the depletion of reserves used by the FDIC to handle the excess liabilities of failed banks when they go into receivership.
Both articles are posted at the American Banker website, which is for subscribers only. A longer abstract of the first article is available at the Financial Planning Daily website, here. In an attempt to attract more investment capital into banks, the FDIC is backing looser requirements for capital investors in banks and is lowering Tier 1 reserve requirements from 15% to 10% (raising leverage from 6.67/1 to 10/1). Read that story here.
This is a case of taking a number of steps to extend the banking problem rather than resolve it. The only logical argument for taking this course of action is to start with the assumption that the economy will improve sufficiently that:
- Some residential and commercial mortgages and loans which are delinquent will be 'cured' rather than default.
- Operations for the troubled banks will improve with the economy sufficiently to allow them to earn their way out of the hole.
- The weaker capital position of investors allowed to buy banks under relaxed 'source of strength' requirements will be improved with the economy.
If there is weakness in the economy over the next 2-3 years, these steps have little chance of success. A lot is being bet on one outcome. If the economy is weaker than expected, the future costs are increased over what current costs would be. Current actions would simply delay failures that could have been gotten out of the way now. If failure is accepted now, bad assets are isolated and healthier assets are transferred to stronger banks. The weakest banks are gone and the stronger banks are strengthened. The financial system is healthier immediately rather than several years from now.
The other negative aspect of extending lives of the weakest banks would be opportunity cost. If we wait 2-4 years to work out a financial system health profile that could be obtained now, we are simply removing the opportunity of the system to contribute to the economy (as much as it could otherwise) over that intervening time. This lost opportunity cost exists (but is less) even if the economy improves.
The zombies should be locked away in a mausoleum. If it takes more capital than contained in the DIF reserve, use some TARP money to shore up FDIC reserves. That is a better use of government money (using it to get rid of bad banks and strengthen stronger banks) than putting money into bad banks.
When you kick a can down the road enough times, you can end up with a can that is full of holes and no longer holds water. Let's not go there.
Disclosure: The author, family members and clients own shares of SKF.
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continues. U.S. workers have been pauperized over the past 28 years. Our society can no longer sustain what it did in the past.
“A lot is being bet. . . ”
Haven’t we seen this movie before? The usual suspects (WS, Washington, Tout TV) have the same game plan as the last downturn. Use “financial innovation” and propaganda to delude an over-leveraged public into relapsing back to their over-spending ways and hope “recovery” happens.
One tiny problem. Last time, the “recovery” was almost entirely offset by home equity withdrawal alone ($500B/yr). In other words, the last recovery was a mirage. That mountain of new debt is still there, the equity is not. So we need a new gimmick, Bazooka Ben and his printing press. Chris Martenson did a great post on this shell game. That and other peculiarities in various markets could be why BB, Pelosi and BHO are stonewalling auditing the Fed’s balance sheet. I suspect if it became public what they did, even CNBC wouldn’t be able to apply green shootery to that pig.
As you say John, a lot is being bet.
I will start outing the insolvent banks myself, since it appears the Fed refuses to do so.
> kack
I guess it's that policymaker favorite, the no-brainer, to pretend and extend cronies and failures at taxpayer expense. They likely make it through the next election, they say, "it would have been worse" without their costly ministrations and, hey, it might work.
Like all the overpaid suits running corporations which constitute OPM and are set up to pay them off big now for risks that hit later, politicians are by definition playing in an OPM playpen.
The only losers are the rest of us. Play on.
Since leveraged short ETFs like SKF and SRS decay in value very rapidly if the market isn't tumbling (both are down over 90% since their highs last fall) you must feel that another financial meltdown is imminent if you put your family friends and clients into an Ultra Short ETF. These tools are definitely for traders and not for investors because of their quick decay. I take it then that you must feel very certain that there is another train wreck right around the corner here. I share your opinion that there is another meltdown coming but I am curious about what makes you certain that it is going to happen so soon.
A lot of malevolent jokers in the deck are about to get played.
I have felt a retracement in financial stocks was imminent for almost two months. I have been wrong. My reason for entering SKF positions was to partially hedge S&P 500 index fund positions. Commitment to SKF has been at a ratio of 5% to 10% of S&P 500 investment. The ratio has diminished to almost half of the entry levels because the S$P 500 has gone up and SKF has gone down.
My decision for the fall is whether to decrease (sell some) S&P 500 positions or increase SKF. I haven't decided yet. All I know is I am seeing more and more froth in the market combined with candlestick patterns indicating increasing indecision by investors. Something is going to happen, but I can't figure out how much. In June I thought a 10% correction was a lock. The correction was less than 10%. I expected any rally in July to be weak. It was very strong. My expectation for September/October is for a strong decline, perhaps approaching 20%. The majority of analysts who are predicting a pullback are saying 10% or less. And perhaps only 50% or so are predicting a correction.
So, that is my resume and track record. Listen to my opinion at your peril.
PS: Your observations about tracking error for SKF (and most leverage ETFs) are correct. Holding a leveraged ETF for several months is something I don't normally do. This time has been different, to my regret.
On Aug 28 11:19 AM Eduard Fischer wrote:
> Hey John,
>
> Since leveraged short ETFs like SKF and SRS decay in value very rapidly
> if the market isn't tumbling (both are down over 90% since their
> highs last fall) you must feel that another financial meltdown is
> imminent if you put your family friends and clients into an Ultra
> Short ETF. These tools are definitely for traders and not for investors
> because of their quick decay. I take it then that you must feel very
> certain that there is another train wreck right around the corner
> here. I share your opinion that there is another meltdown coming
> but I am curious about what makes you certain that it is going to
> happen so soon.
In my Insta I wrote last week, "Sept./Oct. These Are Dangerous Times," I pointed out the many times the markets have tanked during the upcoming months.
I suspect there will be a pullback in the next month or two. But it won't be a deep one; too much sideline money out there will prevent a deep setback, unless H1N1 spreads quicker than expected.
My WFC broker compared the situation for the hedgies who are still waiting for a pullback akin to a, "Christian Scientist with a broken appendix."
Fact is -- it's VERY difficult (by design) to easily short financials. Hard to borrow actual stock. Options has the same problems as ETFs.
I have some FAZ now -- but I keep tight stop and never hold for too long. Today's topping stick in AIG makes me wonder if a very fast correction is starting right now -- to last a week or two. In which case FAZ could move up 50% or more. But it'll give it all back on the bounce. So fast fingers wins.
For all the frequent, lengthy and gloomy assessments that Mr. Lounsberry makes, I would not consider a 5%, or even 10%, hedge a remotely meaningful short position in a portfolio that, by his own admission is 90-95% long. In reality, contrary to his protestations, Mr. Lounsberry is massively long the market.
It sure seems to me that those religiously following Mr. Lounsberry's forecasts of doom might be better served by following this adage, "watch what he does, not what he says."
I never mentioned how much of my accounts are invested in stocks. Depending on time horizons and risk tolerances, all my accounts are between 10% and 36% invested in stocks.
On Aug 29 11:27 AM Tack wrote:
> Mr Lounsberry reports above that he entered SKF market hedges of
> "5-10%" against his long position in the SPX index fund. He reports
> that through continued upward moves of the market his hedges are
> now worth only 2.5-5% of his portfolio value.
>
> For all the frequent, lengthy and gloomy assessments that Mr. Lounsberry
> makes, I would not consider a 5%, or even 10%, hedge a remotely meaningful
> short position in a portfolio that, by his own admission is 90-95%
> long. In reality, contrary to his protestations, Mr. Lounsberry is
> massively long the market.
>
> It sure seems to me that those religiously following Mr. Lounsberry's
> forecasts of doom might be better served by following this adage,
> "watch what he does, not what he says."
I do not consider my purpose on Seeking Alpha to make investment suggestions, although they sometimes creep in. I try to analyze and discuss the "background music" that should be listened to by readers who are making their own investment decisions. Sometimes that does lead to discussion of specific investments, sectors and asset allocations.
If you want to read articles that are more specific about specific investment ideas that I think should be considered, those articles are on TheStreet.com. (See Real Money Featured Commentator list.)
Disclosure: In my accounts, I did not participate substatially in the rally from March 9, only increasing equity holding slightly in March. I started using short-term short hedges in June. SKF is the only one that I have kept in place for more than two weeks. As things have turned out, that was not a good move. I used bought SKF in an amount of 5% to 10% of the size of U.S. stock holdings in each account. My expectation was that, on a pullback, financials would drop 2-3 times the S&P 500. Thus I attempted to hedge 10% to 30% of the drop. The drop has not occurred (yet).
Tack, I thank you for commenting and giving me the opportunity to explain why I am contributing to SA. If you want stock tips, I am not your guy. If you want to distract yourself from finding the latest and greatest with analysis of the issues I feel are important for investors as a community, we may have future discussions here.
While you and I may interpret some of the macro data and its implications differently, I, too, am wary of a short-term pullback (~10%) after such a robust surge. Similar to your own timing, I bought some SSO puts as a hedge, which have mostly been "donations to charity" (so far).
I do, however, see the huge liquidity overhang that's building in savings and bank reserves to be future "fuel" for the economy and for continued up moves in the market, assuming some new shock doesn't derail now-forming confidence in economic recovery.
I was fortunate to benefit significantly in the recent upsurge by being specifically focused upon and heavily weighted in the preferred shares and exchange-traded debt of numerous financial firms, the values of which I thought drastically undervalued. My reasoning was that as soon as it became apparent that these firms were not going under, their debt and preferred shares would resume trading at values more akin to typical interest-rate spreads, rather than at bankruptcy yields. And, if such recovery was delayed, I anticipated that the outsize yields would be far less subject to cuts or suspensions than their common-share cousins.
For the most part, this judgment proved to be correct, although I still consider some preferred and debt issues undervalued.
Third-quarter earnings reports will be very critical to the "V" vs. "W" debate. Although, we could have a "V" followed by a "hyphen."
On Aug 29 02:16 PM John Lounsbury wrote:
> tack - - -
>
> I do not consider my purpose on Seeking Alpha to make investment
> suggestions, although they sometimes creep in. I try to analyze and
> discuss the "background music" that should be listened to by readers
> who are making their own investment decisions. Sometimes that does
> lead to discussion of specific investments, sectors and asset allocations.
>
>
> If you want to read articles that are more specific about specific
> investment ideas that I think should be considered, those articles
> are on TheStreet.com. (See Real Money Featured Commentator list.)
>
>
> Disclosure: In my accounts, I did not participate substatially in
> the rally from March 9, only increasing equity holding slightly in
> March. I started using short-term short hedges in June. SKF is the
> only one that I have kept in place for more than two weeks. As things
> have turned out, that was not a good move. I used bought SKF in an
> amount of 5% to 10% of the size of U.S. stock holdings in each account.
> My expectation was that, on a pullback, financials would drop 2-3
> times the S&P 500. Thus I attempted to hedge 10% to 30% of the
> drop. The drop has not occurred (yet).
>
> Tack, I thank you for commenting and giving me the opportunity to
> explain why I am contributing to SA. If you want stock tips, I am
> not your guy. If you want to distract yourself from finding the latest
> and greatest with analysis of the issues I feel are important for
> investors as a community, we may have future discussions here.
Thanks for taking the opportunity to clarify where you are coming from.