Don’t Talk About Record Stock Prices to Owners of These Shares – Bloomberg 08-27-14

Salient to Investors:

  • Analysing what parts of the market have lots of ground to make up to reclaim highs is a good way to gauge how much more the market can rise or fall.
  • The NYSE Arca Airline Index is 59 percent below its peak.
  • The S&P 500 Information Technology Index needs to rise another 49 percent to reach its  March 2000 high. The Nasdaq Composite needs to rise 10 percent, and the Nasdaq 100 Index needs to rise 16 percent to reach previous highs.
  • The KBW Bank Index is 41 percent below its peak. The S&P 500 Financials Index needs a 62 percent gain to reach its previous high.
  • The S&P Supercomposite Homebuilding Index is down 55 percent from its record.


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Fear Thaws Out for Investors as Online Brokers Defy Funk – Bloomberg 06-30-14

Salient to Investors:

Analysts expect earnings to fall this year at Goldman Sachs, JPMorgan Chase et al, but rise  20 percent or more at discount brokers.

Chad Morganlander at Stifel, Nicolaus said household investors are getting more confident as their fear thaws out – volatility terrifies retail investors.

James Gaul at Boston Advisors said retail confidence tends to come later in an economic cycle than institutional confidence – optimism is very high now.

Client trades at E*Trade, Schwab and Ameritrade have averaged 390,838 a day in 2014 versus 108,835 at the peak of the dot-com bubble in 1999.

When the VIX hovered above 13 from 2004 to 2006, Schwab’s earnings increased at an annual average of 31 percent and E*Trade’s at 41 percent. The measure, known as the VIX, is below 12, compared with its two-decade average of about 20.

Charles Peabody at Portales Partners said smaller firms are not as driven by turnover as they are by asset level values, whereas the big firms need turnover of volume.

This rally is over 5 years old versus the average 4.1 years for bull markets since WWII.

The S&P 500 is at 17.9 times earnings.

Matt McCormick at Bahl & Gaynor said the firm has no plans to own any large money-center banks.

Dan Veru at Palisade Capital Mgmt said despite the risk of a correction and expected decline in profits at bigger financial firms, bank stocks will be a go-to group for investment once the Fed raises interest rates.

James Bullard at FRB St Louis said the Fed will raise interest rates in Q1 2015.

John Carey at Pioneer Investment Mgmt said the benefit to big banks from higher rates will be more muted than for the brokers, where there is a clear relationship between higher rates and better earnings.

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Dividend Tip Sheet: Where the Payouts Are Growing Fastest – Bloomberg 01-27-14

Salient to Investors:

  • Three banks top the list of companies expected to boost their dividends the most over the next three years.
  • 130 S&P companies expect to increase their dividends over 3 years.

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It’s Not Too Early to Start Worrying About Banks Again – Bloomberg 09-20-13

Salient to Investors:

Jonathan Weil writes:

Comptroller of the currency, Thomas Curry, cautioned that some banks seemed to have been scrimping on their allowances against their loan losses – a fancy way of saying they may be fudging their numbers.

Several large US banks, including JPMorgan Chase, Bank of America and Wells Fargo have been “releasing reserves” – often referred to as “low-quality earnings.”

The banking industry’s loan-loss allowances are more robust than they were during the years leading up to the financial crisis: 2.1 percent of total loans and leases versus 1.1 percent in early 2007.

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Banks Seen at Risk Five Years After Lehman Collapse – Bloomberg 09-10-13

Salient to Investors:

Policy makers and some Wall Street veterans see a banking system still too leveraged, complicated and interconnected to withstand a panic, and regulators ill-equipped to head one off — the same conditions that led to the last crisis.

Stefan Walter said we are safer, but not safe enough.

More than 50 bankers, regulators, economists and lawmakers disagree about what needs to be done. Some said the 6 biggest U.S. banks have only gotten bigger since 2007 making it harder to let them fail. Others are not troubled by bigness or a system that requires government intervention every now and then and say it an inevitable cost of financing global business. Some say leverage is still too high.

David Komansky at BlackRock said banks are too big, and are going to have to be too big and he doesn’t mind government intervention.

The largest banks remain Byzantine, with hundreds of subsidiaries around the world. JPMorgan has 3,391 legal entities in more than 100 countries. Six US regulators with overlapping authority often clash and are besieged by an army of highly paid lobbyists.

There is little transparency about banks’ trading and derivatives businesses or their counterparties.

Anil Kashyap at the University of Chicago said the basic model has not changed much, and remains fragile, and banks need much more capital and liquidity.

Kimberly Krawiec at Duke University said bank executives, lobbyists and lawyers logged more than 700 meetings with regulators on a section of Dodd-Frank that seeks to curb banks’ trading for their own account. Regulators still have not finished the Volcker rule.

Davis Polk & Wardwell said that more than 3 years after Dodd-Frank was enacted, only 40 percent of 398 rulemaking requirements were completed.

David Skeel at University of Pennsylvania said the big banks still have had an enormous amount of influence, and there was no serious effort to neutralize them as they were seen much more as partners than as problems.

Anat Admati at Stanford University said the fact that banks find counterparty exposure limits so onerous shows you how interconnected they are.

Gary Gorton at Yale said while notional values exaggerate the extent of the risk, netting underestimates it and provides hidden leverage to banks, so you cannot really see how big the banks are or what risks they’re taking by looking at their balance sheets – we don’t really know where the risk is.

Daniel Neidich at Dune Real Estate Partners said big banks are a condition of modern life and how global and interrelated it is, and the benefits of that interconnectedness are tremendous.

Hank Paulson said more needs to be done to fix the repo markets, and some of the most serious problems in the US financial markets lie in the so-called shadow-banking market.

John Reed said Wall Street has not changed as dramatically as it should have and worries that a recovering economy, record stock prices, and hefty bank profits might lull people into complacency. Reed said the world looks pretty benign right now, but it always does until it is not.

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Weil’s View on Finance, Afternoon Edition – Bloomberg 08-30-13

Salient to Investors:

Steve Hanke at Johns Hopkins University said inflation is always and everywhere a monetary phenomenon, but hyperinflation is always and everywhere a political phenomenon.

Ricardo Hausmann at Harvard says the Fed’s planned tapering is not the only reason why emerging-market stocks and bonds are down. Hausmann said for most emerging markets, economic growth from 2003 to 2011 was caused by terms-of-trade improvements, capital inflows, and real appreciation, and these mean-reverting processes are reverting and the buoyant performance of the recent past is unlikely to return any time soon.

Gillian Tett at the Financial Times said most hedge fund leaders have done a dismal job of orderly succession.

Yves Mersch at ECB said investor confidence has been damaged by the perception that some supervisors have not been tough enough with their domestic banks. Mersch said the average price-to-book ratio of large and complex banking groups in the euro area is only 0.5, which implies that investors think banks are overvaluing their assets, will not meet their required rates of return, or will require new capital.

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Americans With Best Credit in Decades Drive U.S. Economy – Bloomberg 08-05-13

Salient to Investors:

Joseph Carson at AllianceBernstein said:

  • Household finances are in the best shape in decades, and the US is entering a new, stronger growth phase as healthier finances revive borrowing, spur consumer spending, generate business investment and jobs.
  • Household wealth measured by net worth rose to $70.3 trillion in Q1, up almost $20 trillion from its recession low.
  • The two-quarter average for the financial-obligations ratio was 15.2 percent in March, matching the lowest since at least 1980.
  • Household liquid assets rose by $10 trillion in the past 4 years, and the ratio of coverage for liabilities is 2.43, the highest since 2000.
  • Credit demand and supply have been slow to recover because the housing rebound was delayed, unlike after most recessions, but home sales are rising, foreclosures have waned and banks are more willing to lend against an asset that’s gaining value.

    The rebound in housing and employment needs to be sustained for credit to pick up.

  • All the easy monetary conditions won’t work if the consumer does not take advantage of credit and banks are not willing to lend.

James Paulsen at Wells Capital Mgmt said:

  • The credit-driven cycle is good for investors and could help the S&P 500 to double-digit gains in 2014 after an advance of as much as 20 percent in 2013.
  • Financials like banks will continue to outperform as they are at the heart of the credit-creation process, which is becoming noticeable.
  • Industrial, materials and tech stocks are attractive.
  • Consumer cyclicals have less room to rise after outsized increases, but if unemployment falls close to 6 percent, expect a lot more demand for credit and spending.
  • The improvement in borrowing and lending is not yet strong enough to get front-page coverage

  • We won’t get another bubble economy or Gekko environment.

Keith Leggett at  the American Bankers Association said bank-card delinquencies in Q1 were the lowest since June 1990, and said we are on the cusp of a trend toward more risk-taking, with consumers becoming a bigger contributor to economic growth.

Michelle Meyer at Bank of America said property prices may jump 11.8 percent in 2013 after climbing 7.3 percent in 2012, and mortgage debt as a share of disposable income will continue to fall. Meyer said consumers will provide a bigger lift to consumption over time as the housing recovery helps to heal households’ balance sheets.

Barry Bosworth at Brookings said Americans said the Fed may keep the federal funds rate near zero until 2015.

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Banks on Brink of S&P 500 Supremacy as JPMorgan Beats Microsoft – Bloomberg 07-28-13

Salient to Investors:

Banks, brokers and insurance companies make up 16.8 percent of the S&P 500, almost double the level from 2009 and versus tech companies at 17.6 percent. Banks were the largest US industry during the bull market that began in 2002, and financial firms grew to 18.8 percent of the index in the late 1990s,

Bulls contend the change signals banks will lead the economy even after the Fed begins to taper. Bears say S&P 500 profits would be down this quarter if not for banks, and the last time financials were the biggest industry, in 2008, the consequences were disastrous.

Kevin Caron at Stifel Nicolaus said the reasonably good performance of the banks provides confidence in the underlying economy – without the financials working, all the rest would not be working.

Analysts expect S&P 500 earnings to climb 3.3 percent, led by a 27 percent increase in bank profits: ex-financials industry, S&P 500 earnings would contract 1.2 percent. Banks are beating analyst estimates by 8.9 percent. Economists expect GDP to increase 1.8 percent in 2013, and 2.7 percent in 2014, and versus the average of 2.4 percent since 1990. Computer makers and software designers have reported earnings 0.4 percent below analysts’ estimates on average.

Jeff Saut at Raymond James said we are rebounding as the banking system is getting healthier and eventually that flows into the economy in making it easier to get a loan.

JPMorgan, Goldman Sachs, Bank of America, Citigroup and Morgan Stanley controlled 95 percent of cash and derivatives trading for US bank holding companies at December 31, 2012.

Stanley Nabi at Silvercrest Asset Mgmt said the regulators are going to look over the shoulders of the banks and make sure that they are not raising their risk profiles.

Matt McCormick at Bahl & Gaynor said expectations are ahead of themselves, so prefers tech over banks in 2013.

Dan Veru at Palisade Capital Mgmt said banks will continue to tread higher as investors are starting to say that they need to invest in the sector.

Todd Lowenstein at HighMark Capital Mgmt said financials were hit hardest in the crisis we are still in the early innings of recovery.

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S&P 500 Climbs for 4th Week to Record on Earnings, Fed – Bloomberg 07-19-13

Salient to Investors:


  • 73% of 103 S&P 500 companies so far reporting have beaten estimates
  • 53% have beaten revenue estimates.
  • 80% of S&P 500 financial companies have beaten estimates by an average of 8.7%. Banks and insurers are predicted to report earnings growth of 26% this quarter. Excluding financial stocks, S&P 500 companies are expected to report a 2% drop in profit.
  • 17 tech companies in the S&P 500 so far reporting earnings have missed estimates by an average 3.6% versus 2.7% above forecasts for all index stocks.

Tim Leach at US Bank Wealth Mgmt said Bernanke made it clear that the Fed will remain flexible, while earnings are well supported going forward by economic activity and strong corporate balance sheets.

Vincent Lowry at VTL Associates said there is a broad-based move by retail investors into the equity markets, which are the place to be because they will be able to absorb any gradual increase in interest rates. ETFs are attracting money at the fastest rate since September 2008.

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