Market Rallies on Bungled Stress Test News Release

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The Federal Reserve released its stress test results of 19 banks two days early yesterday. JP Morgan Chase forced its hand by making a public announcement that it had passed the test. Although the news was not particularly good, nor the results completely believable, U.S. stocks had their best day all year.

The Fed said on Tuesday that 15 of the 19 banks tested would have enough capital, even if they suffered a financial shock.  Citigroup (C), Ally Financial, SunTrust (STI) and MetLife (MET) failed the test. It should be considered shocking that any bank would fail a stress test after all the lavish government bailout and support programs that have funneled considerable amounts of money to them.  The U.S.  government had to semi-nationalize Citigroup and owned 27% of its stock by the time the Credit Crisis was over. Citi received approximately $45 billion in TARP funds alone and when it started paying them back, it got a $38 billion federal tax credit. And it still can't pass a stress test?

Of course, if Citi did pass a stress test, it might bring too much attention to the test's credibility. The Fed claims it set tough conditions and major banks complained that the tests were made too rigorous by considering a scenario where unemployment reached 13% and housing prices dropped 21% (presumably the Fed meant the official unemployment rate being 13% and not the actual rate). While these conditions sound tough, they aren't comprehensive, nor where the attention should be focused.

What prevented hundreds of U.S. banks from failing in 2008 and 2009 was a government willing to provide an effectively unlimited amount of money to keep them afloat.  The feds also propped up the housing market with minimal interest rates and mortgage relief programs and kept the unemployment rate (at least officially) out of double digits by running trillion dollar deficits. It should be expected that these policies will continue, so how could there be any risk to the U.S. banking system?

The policies themselves are creating the risk. Easy money is inflationary and always has been (and no, things will not be different this time). Inflation devalues financial assets and destabilizes banks.  The Fed however denies that inflation exists and that it will exist, so it is not politically tenable for it to do ever include any realistic inflation scenario in its bank stress tests.

Stress tests do not exactly have an unblemished record as is. The ECB tests in Europe passed Dexia bank with flying colors. Only three months later, it was in serious trouble and then it collapsed. Major Irish banks also passed the test, although Ireland itself had to be bailed out shortly thereafter to prevent its financial system from collapsing. Central bank stress tests are essentially public relations gambits meant to tell the public how good things are regardless of the actual state of affairs.

The release of the U.S. stress test also inadvertently revealed the true relationship between the Federal Reserve and the banking system that it supposedly regulates.  Even though the Fed was scheduled to release the stress test results after the market closed on Thursday, Jamie Diamond  announced that JP Morgan Chase (JPM) has passed the stress tests while the market was still open on Tuesday. He also stated that his bank would be raising its dividend and doing a stock buyback. Shortly thereafter, U.S. Bancorp (USB) and American Express (AXP) raised their dividends and announced stock buybacks. Wells Fargo (WFC) and BB&T (BBT) announced that they would be raising their dividend. 

Diamond's announcement forced the Fed's hand and it had to take emergency measures to move its own announcement up. The imbroglio was described by the mainstream media as a "miscommunication" between the Fed and Jamie Diamond. Oh really?  This is quite difficult to accept considering Jamie Diamond sits on the Board of Directors of the New York Fed. A more plausible scenario is that the big banks do what they want and the Fed follows their lead.  This nicely explains how the Credit Crisis came about in 2008 and why the banks will get into trouble once again.

The market rallied strongly on the news starting around 3:00PM with the Dow Jones industrials closing up more than 200 points. Anyone who knew that the accidental "miscommunication" was going to take place made a lot of money.


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

FDIC Swan Song: 8 Banks a Week

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The FDIC closed down eight banks last week bringing this year's total to 118 so far. Included in this week's closures was the notorious ShoreBank in Chicago. In a separate report, the U.S. Treasury has disclosed that the Obama administration's HAMP (Home Affordable Mortgage Program) seems to be rapidly falling apart. This could further weaken the U.S. banking system.

The FDIC is operating on both borrowed time and borrowed money. This agency is the bulwark protecting American's savings in the case of failed banks, but the FDIC itself is close to going broke. The eight closures this week alone cost the FDIC’s deposit-insurance fund $473.5 million. The deposit insurance fund was already $20.9 billion in the hole at the end of the fourth quarter in 2009. In order to plug the hole and keep going, the FDIC in December forced banks to prepay three years of insurance premiums and raised about $45 billion by doing so. That money had to pay off the deficit already accumulated and then last for the next 156 months of bailouts. There have been weeks this year when the FDIC has had to shell out close to $1 billion for bank rescues. That $45 billion isn't going to last much longer.

ShoreBank was the most significant bailout this week. The bank was founded in the South Side of Chicago in 1973 and was the nation's first community development and environmental bank. Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Citigroup (C), Bank of America (BAC), American Express (AXP), GE Capital (GE), and Wells Fargo (WFC) were investors. The bank has indirect ties to a number of members of the Obama administration. The bank was under a cease-and-desist order from the FDIC for more than a year before it was finally closed down. Its remaining assets will be transferred to a newly created corporation, Urban Partnership Bank. Some of the same executives from ShoreBank will be running this newly chartered bank (once they drive Urban Partnership Bank into the ground, it too will be bailed out). It looks like the investments of the too-big-to-fail, or even lose any money, big bank funders will also be protected under this arrangement by transferring them to Urban Partnership Bank.

Meanwhile, the poorly thought out and even more poorly run HAMP program is not making a big dent in slowing foreclosures. Nearly half of the 1.3 million homeowners who enrolled in the Obama administration's flagship mortgage-relief program have already fallen or more likely been pushed out. Mortgage holders blame the banks for not cooperating and banks blame the mortgage holders. According to RealtyTrac, the nation is headed toward more than one million foreclosures this year - a higher amount than the 900,000 homes repossessed in 2009. Boy, HAMP is certainly doing a great job in significantly reducing the number of foreclosures. Well, I guess it's just too much too expect that something will be accomplished for only $75 billion in taxpayer money.

Based on this week's events, I have written the following theme song for the FDIC (maybe Sheila Blair will sing it at the next board meeting) to be sung to the tune of the Beatles 'Eight Days a Week':

Oh I'll bail out your bank babe,
Guess you know it's through,
Hope you like the money banker,
When I'm funding you,
Spent it, Lost it, Pay Me, Save Me
Don't do nothing but bailouts,
Eight banks a week


Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Dollar Watch; Bad Earnings are Good; Natural Gas

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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While no one was watching, the U.S. dollar got awfully close to its break down point yesterday. The low for the trade-weighted dollar index ETF DXY was 78.58. A drop below 78.33 would be technically negative. Meanwhile, earnings season will be winding down soon and so far the picture is dismal overall and even worse for the financials. You would never know it though, from the mainstream media reports which have been glowing and gushing with good earnings news. Many commodities have started to rally again, with natural gas still being very under priced.

Almost without exception, the large financial companies have had dismal earnings in their banking business, which continues to erode. Trading and accounting gimmicks have made the top line numbers look rosy however. Massive money gifts from the federal government don't hurt either. Imagine if someone deposited $45 billion into your bank account. You would look a lot more financially sound as well. Wells Fargo is out with earnings this morning, with quarterly profit up 47%! Looks good on the surface, although acquiring the giant albatross Wachovia was responsible for much of this. Within the report was the statement, "the bank expects credit losses and nonperforming assets to increase". It is also generally acknowledged that Wells Fargo needs to raise more capital. Even the 'see no evil' government stress test found that it had a $13.7 billion capital shortfall. But hey, earnings are great, except in the bank's banking business of course. For some reason, I think this doesn't make any sense.

Natural gas has been getting a lot of press in the last few days. UNG the natural gas ETF is awaiting approval from the SEC to issue more shares. They already made 300 million additional shares available on May 6th. The CFTC is trying to limit UNG's role in the natural gas market based on excessive speculation driving up prices even though natural gas is trading at a multi-year low. Seems to be rather contradictory. Media reports are filled with commentary from traders and 'experts' about how you should stay away from this market. They rarely if ever point out that natural gas tends to hit some type of low in July. I have yet to see any discussion of the production costs for natural gas and whether the price has fallen below this level. There is every reason to believe this is the case. The number of active U.S. rigs pumping natural gas has fallen to a seven year low of 665 from a peak of 1606 last September 12th. When the market cost gets too close to the production cost for a commodity, production shuts down and this is clearly happening with natural gas.

The dollar will either bounce soon or fall below its break down point and the powers that be will try to then save it. Note that once again that the stock market has been rallying when the dollar has been dropping. Will a government induced dollar rally cause the opposite? We will have to wait and see.

NEXT: Bernanke and Natural Gas

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.