Finance Banter's  Instablog

Source: Moody’s

The regionals are by far in the worst shape. So far in 2009, the FDIC has seized 123 banks, up from 25 in 2008 and only three in 2007. How do those numbers compare to past banking crises? Two decades ago in 1989, during the S&L crisis, 531 banks failed during the peak year with several hundred failures in the years preceding and following. While industry consolidation has greatly reduced the number of banks outstanding in the US, we still have a long way to go before the failures will subside. For clues on who is next, the FDIC has listed over 400 more banks on their “troubled” list. The number of regional bank failures will continue to increase until this group shows that they either have adequate capital ratios to cover losses or the number of troubled loans diminishes significantly.

Market implications are that the flight-to-quality in bonds will continue and it is obvious that government intervention as a backstop in buying agency mortgage-backed securities is artificially keeping the loan market afloat. Expect credit conditions to remain strained well into 2010 and 2011 and don’t expect the FED to even think of raising rates while the exposure on troubled loans keeps going up.

Resources: FDIC, Moody’s

Disclosure: None

Source: Moody’s

The regionals are by far in the worst shape. So far in 2009, the FDIC has seized 123 banks, up from 25 in 2008 and only three in 2007. How do those numbers compare to past banking crises? Two decades ago in 1989, during the S&L crisis, 531 banks failed during the peak year with several hundred failures in the years preceding and following. While industry consolidation has greatly reduced the number of banks outstanding in the US, we still have a long way to go before the failures will subside. For clues on who is next, the FDIC has listed over 400 more banks on their “troubled” list. The number of regional bank failures will continue to increase until this group shows that they either have adequate capital ratios to cover losses or the number of troubled loans diminishes significantly.

Market implications are that the flight-to-quality in bonds will continue and it is obvious that government intervention as a backstop in buying agency mortgage-backed securities is artificially keeping the loan market afloat. Expect credit conditions to remain strained well into 2010 and 2011 and don’t expect the FED to even think of raising rates while the exposure on troubled loans keeps going up.

Resources: FDIC, Moody’s

Disclosure: None

Not surprisingly, human nature makes it easy for our view and actions to be manipulated. There is little doubt that the recent market rally has become a bit of a momentum chase, as money managers who were too bearish earlier in the year when things looked much more bleak are starting to pile in now that stocks are rising and they missed out on previous gains. Fundamentally this is not a smart move (chasing stocks) but emotions take over and many managers fear their job security and feel pressed to join the crowd. Such actions, however, are exactly what you should not be doing.

Successful investing requires discipline and that includes not being sucked into a strong market if the projected long term returns are not as attractive as they should be. Most of the money made in the markets comes from acting aggressively when the time is right. You might leave a few percentage points of return on the table by missing the last five or ten percent of a rally, but saving your cash and being ready to pounce when a great opportunity presents itself will earn far more profit for you.

I have been holding cash levels of between 10 and 20 percent since S&P 1,050 and although we are now above 1,100 I am staying on track. We will undoubtedly get a ten percent or more correction sometime in the next six or twelve months and there will be excellent buying opportunities to be taken advantage of whenever that occurs. I have found that as soon as you abandon your strategy and start chasing stocks as they rise, the odds are good that the rally will lose steam. You are then left asking yourself why you didn’t remain disciplined when it seemed so obvious stock prices were overextended in the short term. Stick to your convictions.

Disclosure: None

Not surprisingly, human nature makes it easy for our view and actions to be manipulated. There is little doubt that the recent market rally has become a bit of a momentum chase, as money managers who were too bearish earlier in the year when things looked much more bleak are starting to pile in now that stocks are rising and they missed out on previous gains. Fundamentally this is not a smart move (chasing stocks) but emotions take over and many managers fear their job security and feel pressed to join the crowd. Such actions, however, are exactly what you should not be doing.

Successful investing requires discipline and that includes not being sucked into a strong market if the projected long term returns are not as attractive as they should be. Most of the money made in the markets comes from acting aggressively when the time is right. You might leave a few percentage points of return on the table by missing the last five or ten percent of a rally, but saving your cash and being ready to pounce when a great opportunity presents itself will earn far more profit for you.

I have been holding cash levels of between 10 and 20 percent since S&P 1,050 and although we are now above 1,100 I am staying on track. We will undoubtedly get a ten percent or more correction sometime in the next six or twelve months and there will be excellent buying opportunities to be taken advantage of whenever that occurs. I have found that as soon as you abandon your strategy and start chasing stocks as they rise, the odds are good that the rally will lose steam. You are then left asking yourself why you didn’t remain disciplined when it seemed so obvious stock prices were overextended in the short term. Stick to your convictions.

Disclosure: None