BG08052009
I’M OK, YOU’RE OK – RIGHT?
Everybody seems to be pretty happy today – perhaps too happy?
By Neil George
What’s not to like about all of the good news in the markets today?
We started out with the first full trading day after the “official” stress test results and report by the Federal Reserve on the collection of 19 banks and financials. It seems that collectively these companies only need some 75 billion dollars give or take to make everything a-o-k – even if the economy gets worse and the credit markets slip even further.
And you know that it must have been grueling and legitimate – as even Ken Lewis of Bank of America (NYSE: BAC) fame called the test aptly named for how well it went. Heck – he’s still got his job complete with lots of perks and some 2.4 million shares in the bank.
But as I wrote earlier this week – do we really want to shift our market and stock analysis from the private to the government sector before we buy or sell a stock?
As for the bank company that I went through with my own stress test – Regions Financial (NYSE: RF) – it seems that the Fed’s stress test was a little more easygoing than mine. For according to the Fed’s – Regions only needs to raise some 400 million in core capital and some 2.5 billion to prepare for some addition potential or pending losses.
I put my own number around 6.2 billion – and I was being perhaps even a bit conservative. After all – that 6.2 billion is a multiple of the market capitalization of Regions. But perhaps that’s why the crack government stock analysts were also eyeballing when they came up with their own numbers. Too big and the market might be spooked?
And even by their own report – Regions should be ramping up losses to some 9 plus billion and even should be expected to see their core capital ration fall from the 10 percent towards the 6 percent range – which really isn’t enough, even using the too easy going Basel II international capital standards.
And if you read through more of the report – you’ll see that many of the assumptions just wouldn’t pass muster if Wall Street analysts and their salesmen were to publish and use them.
And example can be seen in taking uniform and non-geographic loss rates and non-performing loan rates for residential and commercial mortgages and property-linked and/or collateralized loans. Many of the banks – including several in the official stress test (not Regions overall) have loss rates for these classes of loans running already at over 50 percent greater than the assumed rates of the stress test modeling.
That means that while the stress test was supposed to see what if things got worse and then what would happen – instead – the test is looking at what would happen if things got much better.
Not such a great test – right?
But that’s not the point now of the test.
Instead, the 75 billion dollar number reads well in the papers – and sounds even better in the broadcast news bites. After all, most of the numbers coming out of Capitol Hill, the West Wing, the Treasury and the Fed have been in the trillions – so 75 billion is more like chump change.
But let’s then see how those trillions are adding up to some other troubling bits of news. The Treasury tried and did succeed in moving some 71 billion dollars worth of 30 year bonds this week. And this is on top of the billions the other week in the short-to intermediate maturities of US Treasury bonds.
The results of these big numbers has been that the market has been moving up crucial 10 and 30 year Treasury yields by 45 and 62 basis points (each basis point is 1/100th of 1 percent). This means that as the US government keeps trying to borrow more – we might continue to see base or benchmark interest rates in the US and US dollar denominated markets edge higher.
Not so good for mortgages, banks trying to raise new needed capital and other companies potentially in the market.
Or is it?
On the surface and in plenty of pandering newsletters – this news will be used to tell doom and gloom stories about the US. But at the same time – what they won’t be writing about is how the real core of the US dollar market – from many parts of the mortgage markets to the crucial corporate and international dollar-denominated bond markets are actually getting more bids.
This means that while Treasuries are slipping in price and rising in yield – the other parts of the bond market are getting better. This is why I continue to recommend my five core stocks that pay you in the form of the closed end bond investment companies with their stocks trading on the New York Stock Exchange that I reviewed again earlier this week.
One odd-ball bond issuer is coming to the market – and this is one that I wouldn’t recommend with a 10 or more foot pole.
PDVSA – otherwise known as the Venezuela’s government oil company is trying to get bond buyers to give it 2 billion. I can’t wait to see how this issue goes.
One fellow that I have been remiss at not noting his recent death was the head of the Bank of England (BOE) – at 70 years.
Eddie or “Steady Eddie” George was a long-serving member of Her Majesty’s government and for a decade – he was the leader of one of the leading central banks on the planet.
While many might question his judgment and knowledge of the “plumbing” or inner workings of Britain’s money markets as helping to lead to some of the current mess – to his heavy credit – Eddie worked tirelessly to move the Bank away from being a puppet of Parliament and Number 10 and more towards being an independent central bank.
Neil George is editor By George and Stocks That Pay You.
The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.
Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.
