CautiousInvestor

Everyone Fleeing Into Stocks and Bonds Not a Good Sign - IRA

Individual investors, as measured by the flow of funds into mutual funds, are ignoring the siren song of MSM, brokers and government apparatchiks and avoiding equities. They are, though, piling into Treasuries

"Equity funds had estimated outflows of $4.16 billion for the week, compared to estimated outflows of $7 million in the previous week. Domestic equity funds had estimated outflows of $3.15 billion, while estimated outflows to foreign equity funds were $1.01 billion.

Hybrid funds, which can invest in stocks and fixed income securities, had estimated inflows of $548 million for the week, compared to estimated inflows of $489 million in the previous week.

Bond funds had estimated inflows of $12.06 billion, compared to estimated inflows of $9.84 billion during the previous week. Taxable bond funds saw estimated inflows of $9.67 billion, while municipal bond funds had estimated inflows of $2.39 billion."

Amplifying what Whalen is fearing, the Fed themselves have have considerable concerns about the collapse of CRE: "In a just-revealed presentation to banking regulators last month, the Fed lamented that U.S. banks "are slow" to book losses on commercial real-estate loans being battered by slumping property values and rental payments (see below for more on commercial rentals). "Banks will be slow to recognize the severity of the loss - just as they were in residential," the Fed warned, suggesting banking regulators are girding for a rerun of the home-lending breakdown. NY Fed chief Bill Dudley echoed similar concerns in a speech this week, saying, "More pain likely lies ahead for this sector and for those banks with heavy commercial real estate exposures."

Meredith Whitney Ratings

As I posted elsewhere today, I believe her sentiment towards Goldman is being driven by a belief that it will profit from the avalanche of debt to be issued by all levels of government.

From your chart it is easy to see she expects earnings of $3.62 from the eight banks she covers versus the consensus of $2.95; compared to the consensus, she expects Goldman to earn $1.00 more than the median estimate while she expects the other seven
to earn $.33 less. All in all she's hardly gushing over the sector, something reflected in her estimates and ratings.

In my eyes, she's making a big call on Goldman by going way outside of the envelop, a call I doubt she would make unless confident of her instincts. With much prestige and credibility at stake, if proven correct she will retain her status as a very savvy banking analyst capable of seeing what eludes others.

The Treasury's Pump and Dump Scheme for Bank Stocks

The author and I are on the same page so to speak.

I would, though, like to add two comments. First, the change in accounting rules allowed banks to blow through estimated earnings in the first quarter. Beyond reducing losses through relaxation of M2M, some of the accounting profits are arcane and in some instances stem from fluctuating bond prices. In toto, though, the changes served their purpose and investors flocked like lemmings to part with money and invest in these citadels of finance.

Secondly, and with respect to too big to fail, I know that failure of a large financial firm could have unknown and unfavorable ripple effects throughout global financial markets which could be sufficiently ominous that no one wants to experiment with a big failure. And maybe TBTF stops here but I, in a conspiratorial epiphany, started thinking about ulterior motives. Maybe the administration and Treasury want big banks around for a more sinister purpose: purchase of Treasury debt.

Historically, they have accounted for precious little but that is not to say things could not change. And with bulging deficits and the avalanche of debt to be thrown at global markets, its not impossible that a deal was struck under which "I will save you if you save me".

Capital One's Unadjusted Charge-Off Rate Hits Record 9.91%

A note for SA readers: the adverse scenario of the stress tests assumed 18% to 20% combined credit car losses for the years 2009 and 2010. With unemployment at 9.4%, home prices falling 19% YOY and credit card writedowns approaching an annualized rate of 10%, we are indeed living out an adverse scenario.

Banks Negotiate Watered Down Stress Results

Here is another gem from Calculated Risk who quotes Roubini, confirming my suspicion about giving extraordinarily wide birth to the banks for estimating "earnings" over the next twop years. The IMF calculates the entire industry will earn $300 billion while Treasury is content, if not happy, to accept $362 billion as a working estimate for the nineteen largest banks. The quote from Calculated Risk:

"Second, the capital/needs of these banks depend on a race between retained earnings before writedowns/provisioning that will be positive given a high net interest rate margin and the losses deriving from further writedowns. It appears that regulators have overestimated the amount of such retained earnings for 2009-2010. The IMF recently estimated that retained earnings (after taxes and dividends) for all US banks – not just these 19 ones – would be only $300 bn total over the 2009-2010 period. The stress tests – instead – assumed much higher retained earnings - $362 bn - for these 19 banks alone for the 2009-2010 period in the more adverse scenario. Since these 19 banks account for about half of US banks assets if one were to use the IMF estimate of net retained earnings for these 19 banks their net retained earnings for 2009-2010 would be $150 bn rather than the $362 bn assumed by the regulators. While the IMF may have been too conservative in its estimates of net retained earnings it appears that regulators may have been too generous to these 19 banks in forecasting their earnings in an adverse scenario. Thus, ex-post capital needs will be significantly higher if net retained earnings turn out to be lower than assumed in the stress tests."

Banks Negotiate Watered Down Stress Results

Thanks John.

I was frustrated with both the outcome and its presentation; after downloading the file from the Fed, I could not reverse engineer the math used to calculate the SCAP requirements. Part disclosure and part politics.

Picking up on your theme, the original SCAP buffer estimated for BAC, WFC, FIFT and C was $105 billion; this was later negotiated down to $54.3 under the now familiar arguments abouts earnings and the ability to sell stuff. This accomodation, which results in a reduction of required additional capital to the tune of 48%, dilutes the the integrity of the entire exercise.

It was either in Time or the WSJ that someone quoted as saying these reduction are reflective of the entire process, suggesting the exerecise was unterdtaken more to calm jittery markets than it was to really discover and repair the health of the nation's banking system.

Using Fed numbers from the stress test, we can under the adverse scenario, which is now the expected case, look forward to an additional $600 billion in bank losses through 2010. We can also expect banks to offset $362 billion of this number through earnings; this represents annual returns on risk weighted assets of 2.3%. BAC earned 2.2% in 2006 and 1.1% in 2007.

In addition to fudging the numbers to make everybody happy, we are essentially desiging a system wherein the banks can earn there way out of this mess. And in constructing the system, we probably have maximized the potential for bank earnings and, perhaps, understated likely losses.

TARP: Bailout or Money Pit?

I think the problem is larger than money; I think the fundamental problem is that investors do not believe the administration has a viable plan to restore stability to the banking system and systematically deal with the core issues facing the sector.

Under both Bush and Obama, the TARP program has lacked clear goals, has been implemented in piece meal fashion and has suffered from lack of transparency. From the very beginning, the U.S. government made the mistake of addressing each major bank failure differently: aiding the takeover of Bear Sterns by JPMorgan, allowing Lehman Brothers to go bankrupt and then dumping $180 billion into AIG.

Under Geithner, there has been his underwhelming perfromance as a speaker and his inability to inspire confidence by communicating a thoughtful, comprehensive plan. Details of the stress test were slow to materialize and then there were the nagging questions of which capital ratios were to be used in guaging solvency. And there is the suggestion that purchases of preferred shares will be calibrated as losses occur.

Finally, when the government increased its stake in Citi to 36% and infused more capital into AIG, the markets took this to mean the problems are large, never ending and too big to be fixed. TARP has lost credibility with the market.

Have Banks Turned or Burned? - Barron's

I think you have to look at each bank on a case by case basis........but I would still argue there is insufficient data to make an informed decision.

In looking at banks as an investment class, there is only looming uncertainty. We can only expect downside surprises from the stress tests which are to be complete by the end of April. We are not going to simply take the word of banks that adequate loan loss reserves are in place; expect regulators to take a firm stance with the distinct possibility of further writedowns.

Then, for the banks that need addtional capital, banks have six months to raise private equity before the government buys another layer of preferred stock. I can see all kinds of things happening during this window as the the economy deteriorates further, things start to unfold in Eurpope and surprise losses spur emergency measures similar to Citi.

There is a reason Obama and Geithner has asked Congress for another $750 billion on top of the $700 billion for TARP.

Have Banks Turned or Burned? - Barron's

I think you have to look at each bank on a case by case basis........but I would still argue there is insufficient data to make an informed decision.

In looking at banks as an investment class, there is only looming uncertainty. We can only expect downside surprises from the stress tests which are to be complete by the end of April. We are not going to simply take the word of banks that adequate loan loss reserves are in place; expect regulators to take a firm stance with the distinct possibility of further writedowns.

Then, for the banks that need addtional capital, banks have six months to raise private equity before the government buys another layer of preferred stock. I can see all kinds of things happening during this window as the the economy deteriorates further, things start to unfold in Eurpope and surprise losses spur emergency measures similar to Citi.

There is a reason Obama and Geithner has asked Congress for another $750 billion on top of the $700 billion for TARP.