Market Outlook: Bank Failures and Overbought Markets

by: Richard Suttmeier

Bank Failure Friday costs $7.3 billion in one weekend. I estimate that the FDIC Deposit Insurance Fund is in arrears by $36.8 billion. GDP is up for the third consecutive quarters without job creation. The Housing and Banking Indices appear to have peaked. My call for the Dow remains, “Dow 8,500 before Dow 11,500”.

Bank Failure Friday – Seven banks-- three in Puerto Rico-- were closed on Friday, and the total cost for these failures was $7.3 billion in one weekend. Five of the seven banks were publicly traded and four of five were on the ValuEngine List of Problem Banks.

The failures of the publicly traded banks were not anticipated in the share prices of Frontier Bank (OTCPK:FTBK) which was trading at $7.90 per share a week ago and closed Friday at $3.57. This is why investors should have a subscription to the ValuEngine List of Problem Banks. The other publicly traded bank failures were R-G Premier Bank of Puerto Rico (OTC:RGFC), Westernbank (WHI) and Eurobank (EURK). WHI closed at $5.31 on Friday, (OUCH). EUBK traded at $1.50 on April 26th.

  • Only 25 banks failed in 2008, as the FDIC was slow closing community and regional banks.

  • There were 140 bank failures in 2009 with a peak of 50 in the third quarter.

  • In the first quarter of 2010 there were 41 failures, and so far in Q2 the total is 23 for a year to date total of 64. At this pace 192 banks will fail in 2010.

  • Since the end of 2007, the FDIC has closed 229 banks.

All seven of Friday’s bank failures were overexposed to C&D and / or CRE loans.

  • Six of seven were overexposed to C&D loans with exposures of 129.5% to 1810.0%.

  • All seven had overexposures to CRE loans with exposures between 470.7% and 6626.6%.

  • Five had loan pipelines of 85.1% to 98.9% of loan commitments funded. The other two failures had relatively healthy loan pipelines.

  • The ignored regulatory guidelines are 100% for C&D loans and 300% for CRE loans.

The Deposit Insurance Fund (DIF) was tapped for $6.5 billion in the first quarter of 2010 and another $9.4 billion for just the first month of the second quarter. This brings the estimated DIF deficit to $36.8 billion excluding the prepaid $46 billion that sits on the sideline for 2010 through 2012. After applying the $15,333 billion prepaid assessments for 2010 the DIF is in arrears by $28.0 billion. After you apply the total $46 billion prepayments, there is only $9.2 billion left that is supposed to cover all losses through 2012. It looks like the FDIC will have to tap its $500 billion line of credit with the U.S. Treasury, which will put tax payers on the hook yet again.

Three Quarters of GDP Growth lacks real job creation

On Friday we learned that the Advanced GDP for Q1 2010 was up 3.2%, which was below many of the estimates I saw. This followed a 5.6% rise in Q4 2009, but where are the jobs? Even with current dollar GDP at a record high of $14.6 trillion it will be difficult for the NBER to time stamp Recession’s end. The labor market is their most important determinant, and unemployment was 4.6% when Recession was time stamped at the end of 2007. At the end of March, unemployment was 9.7%. And even if 200,000 jobs were created in April, the unemployment rate will remain more than double the rate of when the Recession began. GDP may have been up 3.2% in Q1, but Home Investments declined 10.9% and that’s key to the economic recovery on Main Street USA.

  • Consumer spending is said to be at the fastest pace in three years, but keep in mind that gasoline prices, food prices, and healthcare costs are up significantly from a year ago.

Many economic experts say that we are recovering from the worst recession since the Great Depression, but now its hard to even compare the two with current dollar GDP going to an all time high after declining only 1.3% in 2009. It seems to me that if our banking regulators did their jobs that the near collapse of the banking system would not have occurred in the first place. In hindsight that was caused by unregulated short selling of bank stocks including naked shorts and the establishing and trading of mortgage related and company specific derivatives which should have never been allowed. It was Wall Street greed at the expense of Main Street, USA.

The “Great Credit Crunch” is not over as there remains too much leverage in the banking system relative to current dollar GDP. This table shows the overleveraged statistics that are only starting to be unwound.

The Housing Sector Index (HGX) is overbought and is set to Decline on the risk of a Double-Dip in Housing

Housing Sector Index ended April up 21.8% year to date, but down 57.4% since its July 2005 high. The overbought reading suggests that the 200-week simple moving average should be strong resistance at $143.33. This average was a strong support from July 2006 through July 2007. Support for May is $105.96, and weekly closes below the five-week modified moving average, now at $117.32 signals a bear market for housing stocks.

Click to enlarge:

Chart Courtesy of Thomson / Reuters

Despite continued stress, Community and Regional Banks have led stocks higher so far this year.

The America’s Community Bankers’ Index (ABAQ) is up 19.9% year to date, but is down 43.7% from its December 2006 highs. The index is extremely overbought with my monthly support for May at $105.96, and my semiannual and annual resistances at $181.00 and $195.07. The April high at $184.90 thus tested this resistance zone. The 200-week simple moving average declined to $218.05.

Click to enlarge:

Chart Courtesy of Thomson / Reuters

The Regional Bankers Index (BKX) is up 30.5% year to date, but is down 54.0% from its February 2007 highs. The index is extremely overbought with my monthly support for May at $49.20, and my semiannual resistance at $59.12. The April high at $58.81 came close to this resistance. This high was just above the 38.2% Fibonacci Retracement of the decline form the February 2007 high to the March 2009 low. The 200-week simple moving average has declined to $75.35.

Click to enlarge:

Chart Courtesy of Thomson / Reuters

Daily Dow: The high of 11,258 was a test of uptrend resistance. We now have declining MOJO with the Dow below its 21-day simple moving average at 11,052, which is a negative chart profile. This indicates risk to the 50-day and 200-day simple moving averages at 10,795 and 10,144.

Click to enlarge:

Chart Courtesy of Thomson / Reuters

Weekly Dow:The Dow ended last week above its 200-week simple moving average at 11,134 with the 61.8% Fibonacci Retracement of the October 2007 to March 2009 low at 11,246. This level was tested on Monday with a new high for the year at 11,258. MOJO has become even more overbought. The weekly chart remains positive but overbought on a close this week above its 5-week modified moving average at 10,879. My annual pivot is 11,235 with semiannual resistance at 11,442. I still predict Dow 8,500 before Dow 11,500.

Click to enlarge:

Chart Courtesy of Thomson / Reuters

That’s today’s Four in Four. Have a great day.

Disclosure: No Positions

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