Posted by Ray on August 1, 2009 under cnbc, Economy, FDIC, Main, Markets | 
We all know there are problems within the banking sector from lack of lending, whether it is demand or banks unwillingness to lend is a matter of debate, and continuing credit losses. Banks are continuing to set aside more money for potential credit losses which indicates the road to recovery is still not clear yet. Not to mention the building commercial real estate issue which has yet to fully rear its ugly head yet, but recent numbers show commercial real estate delinquencies are up 585% over last year at this time.
However, what are not receiving much publicity is bank closures by the FDIC, which we post every Friday night when the report is issued in our piece called Friday Night Fun at the FDIC. One would think that seizures by the FDIC would have abated us by now with the massive bank bailouts which have cost us an estimated $3 trillion and has a projected cost of $23 trillion if things get really bad again.
Last year the US saw 25 banks closed through brokered deals by the FDIC with the most notable being Washington Mutual and Indy Mac. After those two closures we heard bits and pieces of other closures, but the news of closures began to dissipate at the early part of 2009. I suspect the media assumed that most banks worth saving had already been saved or they a carelessly overlooking the continuing problem.
I understand the “too big to fail” theory, but I disagreed with it in 1999 as much as I do today. In fact the greatest betrayal of our government and what is directly responsible for our current troubles was the dissolution of the Glass-Steagall Act which kept banks and investment firms separated in order to control risk. Because of the too big to fail theory those banks were saved first and very little rescue went out to smaller institutions.
As a result we have seen a tremendous increase in bank closures over the past 7 months. In fact, the closure rate is alarmingly high and accelerating every month. To date we have had 69, exhibit 1-1, banks fail in 2009 which is 276% more banks than last year and at the current rate it will double by the end of the year. Keeping in mind that in July alone we have had 24 banks closed by the FDIC which is almost 100% of all of last years closures, all were merged into new entities.
Exhibit 1-1
This should trouble you as it has an impact to the availability of credit in smaller communities. Even though most banks are merged with others having less competition could mean less credit if the new owner tightens lending standards or practices. This could also mean less jobs as many branches do get closed in these brokered deals mostly because of overlap or poor profit margins.
Most of the banks failing are “hot money” banks who dealt in brokered CD’s which offer higher paying yields than traditional brick and mortar bank CD’s. Since the bank pays more interest on these CD’s they must make higher risk loans to keep profitability intact. Most acquiring banks, especially lately, had declined these brokered CD’s leaving the FDIC on the hook for repayment from the asset sales or to make whole if not enough money was raised through liquidation of remaining assets. This costs you, the tax payer, money eventually and this is why the FDIC raised its premiums earlier this year.
Costs of Closures
Not only is the pace of closures accelerating, but the cost of the closures is also increasing at a much higher rate than you might think. Last year the loss of Washington Mutual was nothing to the FDIC, but who knows what guarantees or funding the Fed offered that we do not know about, but other closures did cost a significant amount of money to the FDIC totaling some $14.9 billion for 2008. We calculated the cost to the FDIC according to the higher end of their estimates and included all loss-sharing agreements.
During 2008 we had a real crisis with major institutions failing, but we have been told that this year things are much better and our banking system is safe. That may be true for firms such as JP Morgan and Goldman Sachs, but the truth of the matter is we have had bank failures almost every week this year. The banks are smaller, most are below $3 billion, but the net result is astonishing with the total projected costs reaching $13.5 billion, there were not even calculations of estimates in some of the FDIC press releases so we still do not have a real number. See exhibit 1-2 for a chart of the cost of bank failures
Exhibit 1-2
How can things be getting better when the banks are failing at an astonishing rate and the cost of the failures are going to surpass 2008 when we just crossed the half way point in the year. The fact that the media is not reporting on this is obscene and a disservice to the American people. The major media outlets are more interested in hearing the latest Obama speech or picking out the sparse pieces of good news proclaiming that the recession and the crisis is over all while ignoring this information.
These same pundits are also claiming we are in a new bull market and everything is just fine, but there is no mention of bank closures, none. Worse yet, we watched as many TV personalities pointed to a 3 month rise in the durable goods orders as bullish, but then turned around and said that the last report was too volatile, it is truly baffling that anyone takes these people seriously anymore.
The Bottom Line
The crisis is still here it has just been buried by the very same people you may trust on the TV. Anyone looking at these numbers, plus other evidence of the true health of the economy would not be calling for a bull market with another 20%+ to run.
You should be questioning everything from the falling dollar, which is the real reason for the bull rally besides an oversold situation, the lack of coverage of bank failures, the 35% reduced earnings expectations which were easily beat, with no top line earnings growth, unemployment is a lagging indicator, it is not in this case, and the record number of insiders selling their stock. Like it or not this time it is different than almost any other time in history because we do not loose major players like Lehman, Bear, Stearns and Washington Mutual in an average recessions.
Without questioning these things you are simply sticking your head in the sand and pretending that everything is OK, when we still have significant problems that remain unresolved. It is imperative that you do research before committing your capital to the equity markets and look at what is really going on otherwise you will get burned. If you want to hope everything is fine that is fine by me because, if the truth be known, I hope everything gets better soon as well, but do not hang your financial future on hope, that’s just crazy talk.
Subscribe to Annuity IQ's Feed
LS Blogs
Sphere: Related Content
Tags: bailout, bank crisis, bank failures 2008-2009, bankruptcy, cnbc, cost of bank failures, credit crisis, Economy, FDIC, fed, market rally, market recovery
Posted by Ray on July 14, 2009 under Main |
The PPI came out much higher than expected and we went from a good position, deflation, to an inflationary situation. We knew this was going to happen, but us being right does not make us happy. Higher inflation is really bad for the US and it is clearly here.
They could not even hide the inflation from the “core rate” which excludes “volatile” food and energy. The core rate was way up at .5% which means the prices of everything will start to climb. I hate this top line and core rate on the CPI and PPI as it distorts the truth, IMHO. If you turn on a light and eat at least once a day you do use food and energy everyday, but it is unlikely you are buying a car or TV everyday. That is how they calculate the PPI and CPI, they assume you don’t eat or use energy which is absured, but they assume you buy consumer goods like TV’s everyday.
The whole deflationary “problem” isn’t really a problem if is a way for the market to sort out what is being used and what is not being used and prices rise or fall accordingly. However, deflation has been positioned as a bad thing, but it is not and why would you be against lower prices? A great example of deflation is the 1800′s to 1913 when we had ramped deflation over almost a century, but we also had growth that was unprecedented.
Another example is smart phone, like a blackberry, prices have fallen dramatically over the last 8 years. According to the Fed this is deflation and no one wants these products. Oh really? Isn’t the smart phone the most popular product in that sector? Demand has never been higher, but innovation drove prices down. I am not saying all deflation is good, but it is a hell of a lot better than most people think.
As far as inflation, I think this is just the beginning and it will get much worse. We have so much money in the system and the dollars value is continuing to decline which will ultimately lead to much higher inflation. Other countries want the reserve currency to change and they will get their wish. I do not know when, but it will happen.
Subscribe to Annuity IQ's Feed
LS Blogs
Sphere: Related Content
Posted by Ray on July 2, 2009 under Main, Markets, The Federal Reserve |
To meet the massive needs of the US the treasury is offering 4 debt auctions next week. Although next weeks auctions are for less than last weeks record of $104 billion it is still sizable at $73 billion. The need for the massive debt offerings is to finance the governments big spending spree which has yet to offer real relief to its citizens.
While the debt is largely for Obama’s spending initiatives, it is also for debt servicing which has grown dramatically. It will be interesting to see the bid-to-cover ration, which we expect to be high as usual, with these auctions. The short-term and TIP’s, treasury inflation protected bonds, will be extremely high I am not so sure about the 30 year. Whoever would buy a 30 year treasury at 4.30-4.50% is crazy, period. I don’t know about anyone else, but I am concerned that we might find out that the Fed is doing more buying than we think.
Regardless, under the new administration the debt market has increased to $6.45 trillion and is poised to go higher. Just think if rates go up to historical levels just the servicing of this debt will cost hundreds of billions a year, perhaps trillions at this rate. The US has never actually ever paid off a bond it has always rolled the money or issued a new bond to pay back maturing treasuries. Eventually that will stop as foreign governments realize we will never pay back what we owe and there is no reward in the risk to carry US debt, especially at 4% or so.
People really see what is going on and that our debt has been, for a very longtime, been out of control. My fear is that by the time everyone figures out what has happen it will be too late. This is a national problem and it shows the fundamental flaw in the “new” US economy, we cannot be the worlds leading economy without producing things within our own borders. A service based economy with GDP largely grown through consumption is a recipe for disaster.
See the chart below of the Fed’s balance sheet, scary isn’t it? I know, people are going to say it is coming down a bit, sure, but not even close to what it needs to do. After all this was a credit problem, never a liquidity problem.
[caption id="" align="alignnone" width="970" caption="Very scary."]
[/caption]
Subscribe to Annuity IQ's Feed
LS Blogs
Sphere: Related Content
Posted by Ray on October 10, 2008 under Main |
Is the market going to crash? It already did, just not in one day, but it is not over yet. As of yesterday the Dow has lost 2,000 points this month which puts the US markets in “crash” territory. We expected another negative day, 8 straight days, but not a 7% decline in the Dow.
As of right now the overnight markets are getting hammered. Japan is down 9 – 10% plus, its 1 AM right now, so it is unclear where it will close. The other markets are also down China is off 4% and Australia is off 7%. European markets are indicating a steep selloff when they open. All of this points to the 9th straight negative day in the US markets, unprecedented in our lifetime.
Historically, after 5 or 7 days of steep selloffs there is a rally of 10% or so. This has failed to occur and yesterday we saw a 800 point reversal with the selling happening in the last 40 minutes of the trading day. This may indicate the beginning of the bottom, but that is unclear at the moment. Certainly this is no time to bargain hunt and prudence takes first priority.
We still favor a 40% + cash position, but selling now to raise cash is a fruitless endeavor as you suffered severe losses already. Do not try and pick the bottom as you will not find it right now. If the Dow crashes through 8300 it is possible, stressing possible, to see 7300 or lower near term.
This is not a problem you can just throw money at, we tried that already and it failed miserably. In our opinion bankruptcies need to happen and the Fed needs to let the market go, it is the first step to recovery. Unfortunately, they will not let that happen.
We suspect that the Fed will cut interest rates by at least another .50% to a full 1%. We will see a FDIC brokered bank deal in the morning and an accelerated cash injection into the banking system, the Fed buying preferred stock, in the next few days. Unfortunately this will not work.
The problem is not sub-prime, that was just the catalyst, the problem is derivatives, which is a $560 TRILLION market, is that half a google? Combined with hedge funds unwinding $2 trillion in trades or a portion thereof. All of this equals severe problems for the US markets, especially with a 3 day bank holiday. Not only do we favor high cash positions, but we also favor cash under the mattress, yes it could be that bad.
Who is to blame? Easy, all the Politian’s that we re-elect all the time. All those who voted for the repeal of Glass-Steagall need to go, preferably indicted, as that is the major reason we have this issue right now. Greenspan should be drawn and quartered considering he resisted regulating the derivatives market and support the Glass-Steagall repeal. I know it is I am speaking blasphemy for blaming Greenspan, but the guy caused all of this with loose credit and monetary policy with a flare for no regulation on the banks…nice move.
Hindsight is 20/20, but it was just as obvious then as it is now that these moves were bad news. It is possible to see a 10% decline tomorrow, but we also see the possibility of a relief rally. It is a 60/40 split right now favoring a decline given the selling pressure and mounting losses for investors.
Potential possibilities are National City is sold tonight, maybe Sovereign bank as well. A interest rate cut and more cash infusions into the banking/commercial paper system. We may see the nationalization of the banking system in the near future, a good move? We think no for the long-term, but right now it would stabilize the markets. Cash remains king.
We wish the best to everyone and are hoping for the best.
Subscribe to Annuity IQ's Feed
LS Blogs
Sphere: Related Content
Posted by Ray on October 9, 2008 under Main |
Yesterday we saw 4 reversals in trading on somewhat decent volume, but the market still closed down after being up nearly 200 points. This is an indication that there is more selling pressure to come, especially since the Fed has made such strong moves to quell market concerns.
Even good news, such as unemployment and the fact that the government may buy into banks have not lifted the markets in a noticeable fashion. We hate to be the doom and gloom people and do like to see the market go up, but we feel a sense of duty to tell you what we see happening. The data still says the markets go lower.
We like 40% + cash positions still and would be selling into strength. Friday and next week will prove interesting and we believe you can buy into the markets at a much lower level. We did get some of our day-to-day predictions wrong, but cumulatively we were correct in what we predicted.
We are not rooting for a crash, but it needs to happen. We need the markets to have a swing down and close on its lows with heavy volume. That will represent a bottom and then begin to dollar cost average in as volatility will remain high for sometime to come. This, of course, is barring unforeseen problems such as further bank failures or worse.
I cannot believe we are going to even say this, because he is oh so wrong so often, but Cramer is correct on his predictions of the market. Where we do not think he is correct is in his long-term money. We think you should move some of this to cash as well, the 40% mark is a good place to start. It makes no sense to say that short-term money needs to be moved, which it does, but long-term money should suffer.
At 40% cash you have enough in equities to catch the recovery, whenever that occurs, and enough to dollar cost average back into the market to mitigate potential losses. Right now, it just make sense…unless you think that the Fed typically puts in money to bailout banks, money market funds, bonds, commercial paper and arbitrarily cuts rates overnight.
Subscribe to Annuity IQ's Feed
LS Blogs
Sphere: Related Content
