Wait. There’s Something Wrong With the Big Banks?

On Thursday the US equity market was down a lot with people blaming the lousy Philly Fed number and the Moodys downgrade of 15 global investment banks which was widely reported to be coming at the close. Credit Suisse was reduced three notches, several others were cut two notches and a bunch more were dropped one notch. You can click through to this link for the particulars. The ironic thing is of course that the downgrades makes it more difficult for these presumably weakened banks to conduct business which sort of interjects the ratings agency into the story.

The Philly Fed Index printed a negative 16.6 which was the second negative print in a row. In one of Bespoke Investment Group’s emails yesterday they talked about negative Philly Feds being a harbinger of recession.

As for the financials this is simply another shoe that has fallen. I have been saying for years that there will be more shoes to drop for the big banks and I believe this continues to be the case and will continue into the future. Zooming out a little, the big banks still have all sorts of problems with future writedowns, gaining the public’s trust, what still appears to be a lousy housing market and an economy that somehow still seems to have very little natural demand. We continue to avoid the big US and European banks. For our financial sector exposure we own a Canadian bank, Chilean bank, a foreign stock exchange, and index provider and recently we added a very small domestic bank that did not take TARP funds.

As for a recession on the horizons it has been several years since the recovery started and of course it has been shockingly anemic as recoveries go. For now the threat of fiscal cliff is still alive, Washington DC has not been functional for many years now but for whatever reason markets and the economy seem to be relying on something to come from DC to help “fix it.” Regardless of what you think about that it does appear to be true; markets want government action from a government that cannot function and if Obama wins in November the stalemate could continue for the duration of his second term.

The longer term story is far more favorable in select foreign markets but this fact (if you even accept it as fact) has not mattered for stock prices in the short run. I have unyielding faith that better fundamentals do matter in the long run so part of the story here must be patience. For anyone new, select foreign markets does not include the Eurozone or Japan.

Last summer I thought we had headed into recession as some numbers did deteriorate. This go around either is a recession or it isn’t but we know the current economic cycle will end because they always do. It is likely that the stock market will drop a lot whenever the next recession comes along and in so doing will breach its 200 DMA or any other defensive trigger point important to you. In this context you don’t have to correctly predict a recession you simply need to be disciplined to your strategy. You might have an opinion but the fate of your portfolio does not have rely on your opinion, just your ability to be disciplined. Being disciplined should be easier than correctly predicting the timing of the next recession.

8 Comments

  1. being disciplined might also include buying stocks when the market is below the 200 dma.

    Reply
  2. if that is a strategy that you laid our before the event then yes.

    Reply
  3. Just announced:

    Vanguard 500 index fund’s quarterly dividend is up 13.25% from same quarter a year ago.

    Just thought I would throw that out.

    Reply
  4. Its scary. There are so many foreclosures and auctions happening still, we need a stable security plan to help get past the rough times. Its not hard to keep track of finances when there are none. Good people and families are suffering because no one can tell them what is the right path to take to recovery.

    Reply
  5. Roger, I think you hit a very important point directly on the head when you said, “if Obama wins in November the stalemate could continue for the duration of his second term.” While Democrats and Republicans will interpret/demagogue the rationale 180 degrees apart, I think businesses will basically sit on their collective hands in regards to real growth until Obama is gone.

    Reply
  6. Saying and waiting for the other shoe to drop, is getting a little long in the tooth, and seems wrong to me against the backdrop of improving bank fundamentals. Capitalization, reserves, deposits, and loan profitability are all moving in a direction not consistant with the “shoe drop” scenario. I have not even touched on book value.

    I might be more concerned with a Chilean bank that depends on an economy propped up by commodity prices, which as you know, just entered a bear market, and if past commodity cycles repeat, could remain there for several if not many years.

    Have you stress tested your Chilean bank under that scenario?

    Reply
  7. the downgrades potentially threatens much of what you believe has improved.

    Reply
  8. I think the scenario built into the current prices of banks, as represented by valuations of 50% of book, and stuffed with capital, will not be bothered by a Moody’s downgrade.

    After all, Moody’s is paid to make headlines (after the horse is out of the barn, of couse).

    Reply

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing

Wait. There’s Something Wrong With the Big Banks?

On Thursday the US equity market was down a lot with people blaming the lousy Philly Fed number and the Moodys downgrade of 15 global investment banks which was widely reported to be coming at the close. Credit Suisse was reduced three notches, several others were cut two notches and a bunch more were dropped one notch. You can click through to this link for the particulars. The ironic thing is of course that the downgrades makes it more difficult for these presumably weakened banks to conduct business which sort of interjects the ratings agency into the story.

The Philly Fed Index printed a negative 16.6 which was the second negative print in a row. In one of Bespoke Investment Group’s emails yesterday they talked about negative Philly Feds being a harbinger of recession.

As for the financials this is simply another shoe that has fallen. I have been saying for years that there will be more shoes to drop for the big banks and I believe this continues to be the case and will continue into the future. Zooming out a little, the big banks still have all sorts of problems with future writedowns, gaining the public’s trust, what still appears to be a lousy housing market and an economy that somehow still seems to have very little natural demand. We continue to avoid the big US and European banks. For our financial sector exposure we own a Canadian bank, Chilean bank, a foreign stock exchange, and index provider and recently we added a very small domestic bank that did not take TARP funds.

As for a recession on the horizons it has been several years since the recovery started and of course it has been shockingly anemic as recoveries go. For now the threat of fiscal cliff is still alive, Washington DC has not been functional for many years now but for whatever reason markets and the economy seem to be relying on something to come from DC to help “fix it.” Regardless of what you think about that it does appear to be true; markets want government action from a government that cannot function and if Obama wins in November the stalemate could continue for the duration of his second term.

The longer term story is far more favorable in select foreign markets but this fact (if you even accept it as fact) has not mattered for stock prices in the short run. I have unyielding faith that better fundamentals do matter in the long run so part of the story here must be patience. For anyone new, select foreign markets does not include the Eurozone or Japan.

Last summer I thought we had headed into recession as some numbers did deteriorate. This go around either is a recession or it isn’t but we know the current economic cycle will end because they always do. It is likely that the stock market will drop a lot whenever the next recession comes along and in so doing will breach its 200 DMA or any other defensive trigger point important to you. In this context you don’t have to correctly predict a recession you simply need to be disciplined to your strategy. You might have an opinion but the fate of your portfolio does not have rely on your opinion, just your ability to be disciplined. Being disciplined should be easier than correctly predicting the timing of the next recession.

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing