Banks & Interest Rates Archives - Page 31 of 62

February 22, 2016

S&P 500 still flaky

From Howard Silverblatt at S&P Indices:

“With almost 90% of the Q4 2015 earnings reported, 67.6% of the issues are beating estimates (the historical rate is two-thirds), but only 36.8% beat As Reported GAAP rule based earnings estimates and less than half, 46.8%, beat sales estimates.

Explained ‘responsibility’ for any short fall on the cost side includes currency costs and a growing list of special one-time items (never to be repeated, of course). On the income side, helping earnings, are the ‘difficult decisions made’ by companies under the heading of cost-cutting (as layoffs and location changes appear to be on the rise).”

As Reported 12-Month Earnings Per Share (EPS) for the S&P 500 has fallen 12.5% from its Q3 2014 high, with 88.5% of companies having reported.

S&P 500 EPS

While same-quarter sales will fall an estimated 2.6% in December 2015.

S&P 500 Quarterly Sales

Manufacturing activity is declining, with the PMI Composite index below 50 signaling contraction.

PMI Composite index

Growth in the Freight Transportation Services Index has also slowed.

Freight Transportation Services Index

But electricity production recovered from its alarming downward spike in December last year.

Freight Transport Index

The jobs market remains bouyant, with annual manufacturing earnings growth rising 2.5%.

Annual Change in Hourly Earnings

Inflation has kicked upwards as a result.

CPI and Core CPI

While profit margins are likely to remain under pressure.

Nonfinancial Profit Margins

Light vehicle and retail sales are holding their own.

Light Vehicle Sales

Retail Sales (ex-Gas and Automobiles)

And bank lending continues to post steady growth.

Bank Loans and Leases

But net interest margins have fallen below their 2007 lows.

Bank Interest Margins

With rising spreads warning of a credit squeeze.

10-year Baa minus Treasury Spreads

Conclusion

Sales levels are reasonably healthy, but rising wages and competition from imports is putting pressure on profits. Rising credit spreads and falling margins suggest all is not well in the banking sector, which could impact on broader economic activity.

Housing starts remain slow.

Housing Activity

Only when this sector (housing) eventually revives can we expect to see a full recovery.

Cement and Concrete Production

February 10, 2016

Janet Yellen on financial market turmoil

Federal Reserve chair Janet Yellen before the House Financial Services Committee:

Janet Yellen

“…..As is always the case, the economic outlook is uncertain. Foreign economic
developments, in particular, pose risks to U.S. economic growth. Most notably,
although recent economic indicators do not suggest a sharp slowdown in
Chinese growth, declines in the foreign exchange value of the renminbi have
intensified uncertainty about China’s exchange rate policy and the prospects for
its economy.

This uncertainty led to increased volatility in global financial markets and, against the
background of persistent weakness abroad, exacerbated concerns about the outlook for
global growth. These growth concerns, along with strong supply conditions and high
inventories, contributed to the recent fall in the prices of oil and other commodities. In
turn, low commodity prices could trigger financial stresses in commodity-exporting
economies, particularly in vulnerable emerging market economies, and for commodity-
producing firms in many countries. Should any of these downside risks materialize,
foreign activity and demand for U.S. exports could weaken and financial market
conditions could tighten further…..”

…No rate rises any time soon.

December 18, 2015

CBA: big four to raise another $32 billion of equity | afr.com

From Chris Joye at AFR:

On the question of whether the majors are done and dusted on capital raising, investors need go no further than CBA’s chief credit strategist, Scott Rundell, and CBA’s head of fixed-income strategy, Adam Donaldson, who on Thursday published a report arguing the big four are short $32 billion of CET1 capital.

“Capitalisation [is] likely to be a source of credit strength for banks as they build toward meeting APRA’s expected ‘unquestionably strong’ capital requirements,” Rundell and Donaldson said. The authors reiterated previous analysis that suggested the majors’ target CET1 ratios will settle at “around 10 per cent to 10.5 per cent”, which “would put the majors at the bottom of the top quartile” of global competitors.

November 23, 2015

Fed: Who Is Holding All the Excess Reserves?

Ben Craig and Sara Millington at FRB Cleveland say “liquidity is not diffusing through the banking system, but is instead staying concentrated on the balance sheets of the largest banks.” Banks from the European Union (EU) have also substantially increased their holdings of excess reserves at the Fed.

Hat tip to Barry Ritholz

November 8, 2015

US October payrolls justifies December move

From Elliot Clarke at Westpac:

Recent softer gains for nonfarm payrolls cast doubt over labour market momentum, giving cause for some to question whether the FOMC would be able to deliver a first hike before the year is out.

The October report changed that view, with the 271k gain for payrolls taking the month-average pace back up to 206k as the unemployment rate declined to 5.0%.

There is certainly more room for improvement in the US labour market. But subsequent gains need to come at a more measured pace.

We continue to anticipate that a first rate hike will be delivered at the December FOMC meeting.

October 16, 2015

Aussie big four banks overpriced

Australia’s big four banks have raised significant amounts of new capital as the realization finally dawned on regulators that they were highly leveraged and likely to act as “an accelerant rather than a shock-absorber” in the next downturn.

Chris Joye writes in the AFR that the big four have raised $36 billion of new capital in the 2015 financial year:

Before Westpac’s $3.5 billion equity issue this week, the big banks had, through gritted teeth, accumulated $27 billion of extra equity over the 2015 financial year through “surprise” ASX issues, underwritten dividend reinvestment plans, asset sales and organic capital generation via retained earnings. If you add in “additional tier one” (AT1) capital issues (think CBA’s $3 billion “Perls VII”), total equity capital originated rises to about $32 billion, or almost $36 billion after Westpac’s effort this week.

The effect of deleveraging is clearly visible on the ASX 300 Banks Index [XBAK].

ASX 300 Banks Index

Having broken primary support, the index is retracing to test resistance at 84. Bearish divergence on 13-week Twiggs Money Flow, followed by reversal below zero, both warn of a primary down-trend. Respect of resistance at 84 would strengthen the signal, offering a (medium-term) target of 68* for the next decline.

* Target calculation: 76 – ( 84 – 76 ) = 68

Matt Wilson, head of financial research at the $10 billion Australian equities shop JCP Investment Partners, says the bad news for those “long” the oligarchs is that “we are still only halfway through the majors’ capital raising process at best”.

Chris calculates the remaining shortfall to be at least $35 billion:

Accounting for future asset growth, I calculated the big banks will need another $35 billion of tier one capital if the regulator pushes them towards a leverage ratio of, say, 5.5 per cent by 2019, which is still well below the 75th percentile peer.

One of the big four’s most attractive features is their high dividend-yield and attached franking credits, but Chris compares this to the far lower dividend payout ratios of international competitors and quotes several sources who believe the present ratios are unsustainable.

JCP’s Wilson does not think payout ratios are sustainable and accuses the big banks of “over-earning”. “Bad debts of 0.15 per cent are running at a 63 per cent discount to the through-the-cycle trend of 0.40 per cent,” he says. “Should we see a normal credit cycle unfold, then payouts will be cut significantly due to the pro-cyclicality of risk-weighted assets calculations and bad debts jumping above trend.”

He concludes:

Aboud [Stephen Aboud, head of LHC Capital Fund] reckons artificially high yields also explain why the big banks’ “2.5 times price-to-book valuations are miles above the 1-1.5 times benchmark of global peers”, which he describes as “a joke”.

Plenty of food for thought.

Read more from Chris Joye at Hedge funds that shorted the big banks | AFR

September 1, 2015

China: It just got worse

China: It just got worse – more bad news and more policy mistakes: http://t.co/h6pwguOJl9 #China #PBoC #EndOfTheDollarBloc @bill_easterly

— Lars Christensen (@MaMoMVPY) September 1, 2015

August 29, 2015

China’s conundrum: Capital flight or deflation

China's conundrum: Selling FX reserves to support the yuan threatens deflation. But falling yuan fuels capital flight http://t.co/XGz6S4HPz6

— Colin Twiggs (@Colin_Twiggs) August 29, 2015

AND capital flight causes collapsing stock and real estate prices, which could lead to…… deflation.

August 24, 2015

Why we should not blame the ECB for low returns on German savings | Bruegel

From Guntram Wolff, originally published in Die Welt:

Real Interest Rates

….what drives this decline in real interest rates? Real rates are determined by a whole set of economic factors, including growth prospects. Ultimately, it is economic performance that drives the return in investments. In a fast growing economy that is still building up its capital stock, real rates should be high as economic growth prospects are high. The opposite is true for an economy in a recessionary environment or an economy with already high capital stocks.

August 16, 2015October 5, 2017

Anat Admati: Regulatory reform effort is an unfocused, complex mess

Telling it like it is. Anat Admati is Finance and Economics Professor at Stanford GSB and coauthor of The Bankers’ New Clothes.

Anat Admati

The financial system is not serving society well right now, certainly not as well as it can. It is a drag on the economy. Finance is fraught with governance problems. Free markets don’t solve these problems. Effective laws and regulation are essential.

……the regulatory reform effort is an unfocused, complex mess, both in design and in implementation. Some regulations end up as wasteful charades. They provide full employment and revolving opportunities for numerous lawyers, consultants, and regulators without producing enough benefits for society to justify the costs. Some of the complaints from the industry about these regulations have merit. In this category I put living wills, stress tests, risk weights, TLACs/cocos/bailinable debt (whatever the term for today), and liquidity coverage ratio. I am also concerned that, as implemented, central clearing of derivatives does not reduce, and may even increase, the concentration of dangerous risk. In all these contexts we see the pretense of action, the illusion of “science,” a false sense of safety, over-optimistic assessments of progress, and counterproductive distortions [emphasis added].

Lost in this mess are simpler, more straightforward regulations that would counter the incentives for recklessness and bring enormous benefits to society by making the system safer and healthier, as well as reducing unnecessary, unproductive risk that is a key source of system fragility, and the many distortions……..

Banks are not acting in society’s interests but their own. Not even primarily in the interests of shareholders but those of senior management. And they are doing their best to frustrate, obfuscate and capture regulators.

Finance is about money and power. Money and power can corrupt. So unlike in the airline business, in finance it is possible for the industry, regulators and politicians, to harm and endanger, to spin narratives and cover up the harm, and to be willfully blind, without any accountability. DoJ and the SEC must do their job, but they can’t deal with nonsense and capture.

So the biggest challenge in regulation is political. The details hardly matter if there is no political will. Unfortunately, most politicians put other objectives ahead of having a stable and healthy financial system. Ordinary people, meanwhile, may not be aware of what is going on or get confused by the spin. Not enough people understand why regulation is essential and what type of regulation makes sense.

What can be done? Here are some concrete ideas. First, increasing the pay of regulators may reduce revolving door incentives. Second, effective regulators might be industry veterans who are not inclined to go back. Third, we must try to reduce the role of money in politics.

To fix this, we need to break the feedback loop between Wall Street and government — the revolving door between regulators and the financial sector and between lobbyists and elected representatives. Otherwise the system will remain hijacked to enrich a few at the expense of the many.