Monday, September 17, 2007

Surprising Trends in Federal Reserve Data / Minyanville

Minyanville Peter does an excellent job of digging trough the details of financials. And with the financials accounting for over 30% of S&P earnings and also the largest component of almost every broader index this sector key for the further direction of the market. And until recently nobody from Wall Street finest saw this coming. And they are still far behind the curve ( see comments)..... I also highly recommend The problem with financials / Hussman with lots of additional details, charts and tables.

Hier sorgt Minyanville Peter mal wieder für Durchblick im Datenwust der Finanzkonzerne. Und da die Finanztitel der mit Abstand wichtigste Bestandteil des S&P 500 sind und bisher für knapp 30% der Gewinne verantwortlich sind sollte man diesen Sektor immer ganz genau beobachten. Die Finanztitel dominieren ebenfalls fast alle anderen gängigen Indizes in den USA. Und bis vor kurzem war für die "vorausschauenden" Analysten die Welt noch in Ordnung. Und auch jetzt noch sind Sie immer noch meilenweit hinter der Realität zurück (siehe Kommentare)... Ich empfehle zu diesem Themenkomplex noch The problem with financials / Hussman mit weiteren Details, Charts, Links und Tabellen.

Thanks to Bespoke

Minyan Peter, who has become quite popular around the 'Ville with readers and professors alike, here continues his informative series on banks. Previous entries were Bank Earnings 101, Bank Earnings 102, and Bank Earnings 103.

In Bank Earnings 103: Reading Bank Balance Sheets, I emphasized the importance of bank balance sheets as a predictor of future bank earnings. ....

Over the weekend I spent some time reviewing Friday’s H-8 to see what trends I could uncover. To make it simple for myself I looked at annualized growth trends from February to July – “the best of times” - and compared them to the annualized growth rates for the most recent four weeks reported - August 8 to September 5.

So what did I find?
The contrast in asset growth trends between small and large banks is startling. Large bank balance sheets have ballooned since early August – rising at an annual rate of almost 73% versus a 5.5% annual rate from February to July. I have written previously that credit growth in this cycle was built on an “originate for sale” business model. You really see that in these balance sheet growth statistics. With secondary markets very tight, large banks are clearly being forced to hold assets they would have previously sold.

Since early August, while large bank balance sheets are bursting, small bank balance sheets, having been flat for most of the year, are now shrinking – and at an almost 18% annual rate. The biggest declines appear to be coming from real estate related lending activity, particularly revolving home equity lines.

Large bank net assets (a Fed proxy for total capital) appear to have peaked in May and are down almost 7% since then. Small bank net asset capital, however, continues to be growing – although I would caveat that many small banks do not finalize loan loss reserves until the very end of the quarter and this may push net asset values down. As a result of balance sheet growth and lower net capital, large bank capital ratios have dropped from 12.7% of assets in May to 11.3% - still very strong, but a material decline.

The growth in large bank balance sheet assets has been largely funded through non-core deposits. Since early August large time deposits ($100,000+) have been growing at annualized rate of more than 75% (versus flat from February-July) while non-deposit borrowings are growing at a near 100% annual rate. It also appears that large banks are pulling off-shore liquidity on-shore. Net due to off-shore affiliates has grown dramatically.

Large bank balance sheet growth has not been constrained to loan portfolios. Investment portfolio growth, particularly mortgage-related securities, has been enormous since early August (+68% annualized growth rate versus less than 6% for February-July).

It appears that systemic credit extensions have also grown significantly since early August. Having declined from Feb to July, broker dealer loans and interbank loans are now growing at 100% annualized rates.

While, admittedly, four weeks is a relatively short time frame, the changes in large bank balance sheet composition since early August are significant and warrant continued focus, particularly if reported capital continues to decline.

Further, the fact that smaller bank balance sheets are shrinking raises questions to me. I will be watching small bank earnings releases to determine whether their balance declines are a symptom of weaker loan demand, more strict lending standards, or fallout from tightened available liquidity. While none is positive, weaker loan demand would represent a more fundamental economic change.

Disclosure: Short KBW Mortgage Finance Index
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Blogger jmf said...

Mortgage Turmoil Hits E*Trade Hard, Prompting Earnings Warning

The online brokerage firm E*Trade Financial warned yesterday that it had been badly bruised by the mortgage market crisis and sharply lowered its full-year forecast, sending shares plummeting 8.5 percent in extended trade.

E*Trade said its 2007 earnings would be 31 percent below its previously issued forecast as a result of increased provisions for loan losses and potential declines in the value of some securities. It also said it intended to exit the wholesale mortgage business.

10:19 PM  
Blogger jmf said...

More from Wall Street finest on Etrade

Nobody saw this coming....

A whopping 3% reduction of estimates within the last 90 days for 07 earnings......

EPS Trends Current Qtr
Sep-07 Next Qtr
Dec-07 Current Year
Dec-07 Next Year
Current Estimate 0.42 0.44 1.60 1.83
7 Days Ago 0.42 0.44 1.61 1.83
30 Days Ago 0.42 0.45 1.62 1.89
60 Days Ago 0.42 0.45 1.65 1.91
90 Days Ago 0.42 0.45 1.65 1.92

10:22 PM  
Blogger jmf said...

BofA Warns of "unprecedented dislocations'"

Bank of America Corp., the second- biggest U.S. bank, said ``unprecedented dislocations'' in credit markets will have a ``meaningful impact'' on third-quarter results at its corporate and investment bank.

Trading and other areas of Bank of America's capital markets and advisory services unit are ``being adversely affected by all of these conditions,'' Chief Financial Officer Joe Price told investors at a conference in San Francisco today. He cited stress on subprime mortgages and in the commercial paper market as being especially severe.

``These are quite challenging financial times, and I cannot remember when credit markets in particular have been as volatile and unpredictable as they have been for the last few months,'' Price said.

10:53 PM  
Blogger jmf said...

Some Flow of Funds figures ... / Mike Larson

Collectively, home mortgage borrowers now owe $10.1 trillion, up from $9.96 trillion in Q1. By way of comparison, total business debt in the most recent quarter was $9.48 trillion.

plus other excellent observations!

11:00 PM  
Blogger jmf said...

US Residential Foreclosure Notices Doubled in August

``This is just the beginning of a wave of new foreclosures,'' Rick Sharga, executive vice president of marketing for RealtyTrac in Irvine, California, said in an interview. ``There are lots of people who bought homes they could only afford at the teaser rates, and now have very few options.''....

U.S. banks reported owning residential property valued at $4.24 billion in the second quarter, typically houses and condominiums seized in foreclosures, according to the Federal Deposit Insurance Corp. That's up from $2.29 billion a year earlier.

4:41 AM  
Blogger jmf said...

Lehman Profit Beats Estimates as Equities Offset Mortgage Woes

Keep in kind that the quality of earnings is often enough very "subjective".........

Of the nearly $270 billion in financial assets on Lehman's balance sheet at the end of the fiscal second quarter, for example, about $22 billion, or 8%, fell into what is called Level 3. The firm said in its financial filings that values in this category "reflect management's best estimate of what market participants would use in pricing the asset."

At both firms, the bulk of their financial assets -- $152 billion for Lehman and $163 billion for Bear fell into the mark-to-model category, or Level 2.

Marking Down Wall Street / WSJ

5:51 AM  
Anonymous Anonymous said...

Amazing that they can report whatever they want. As long as they keep lying everything will be fine. [/sarcasm]

6:48 AM  
Anonymous Anonymous said...

This is a big quarter because it provides a chance for (financial) companies to come clean. For Lehman they've come clean in a very positive way. It probably signals a decent buying opportunity for Lehman shares...

-David Lieberman, Advisors Capital Mgmt


6:55 AM  
Blogger jmf said...

Moin Edgar,


But it is always the reaction to the reported earnings that shows the mood of the market.

And so far Lehman is unchanged.....

6:56 AM  
Blogger jmf said...

Moin again,

This is a big quarter because it provides a chance for (financial) companies to come clean. For Lehman they've come clean in a very positive way. It probably signals a decent buying opportunity for Lehman shares...

-David Lieberman, Advisors Capital Mgmt

Excellent catch!


This is one to be reviewed later in the year. A real expert.......

7:00 AM  
Blogger jmf said...

More on Lehman

Within the bank’s fixed income capital markets business, Lehman wrote down the value of its leverage loan commitments and its positions in RMBS to the tune of a $700m hit to revenues. Losses were partially offset by hedging.

When it comes to hiring, the bank also has yet to throw the brakes on - despite the collapse in buyouts and deal-making as a result of the credit squeeze. Lehman’s headcount crept up from the second quarter and on the year

Very smart..... :-)

7:14 AM  
Blogger jmf said...

Credit Agricole warns of big unauthorized trade at Calyon

said on Tuesday that it recently discovered a unusually large, unauthorized trade at the in-house trading desk of its Calyon subsidiary in New York. Unwinding the trade will cost roughly 250 million euros, or $347 million, the company added in a statement on its Web site. That hit will be recorded in third-quarter results. Calyon's third-quarter results will be "significantly" lower than a year earlier, but the unit will remain profitable in the period, Credit Agricole said. Most of the unauthorized trading position was in diversified credit market indexes. It was built up at the end of August and exceeded the limit that the bank can engage in such markets, the company explained. The position has now been brought back within the normal trading activities of Calyon, the bank added.

10:39 AM  

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