Danger: Open Trench
By Frank Barbera CMT. July 1, 2008
Things continue to take a dim turn for the worse, and it is a story that is getting more and more difficult to chronicle with each passing week. To the casual observer, the stock market is not doing well, the economy is not doing well, but perhaps there is still some ray of hope. Perhaps there won’t be a recession, perhaps things will be getting better sometime soon. We sincerely wish we could be that hopeful, that detached from what is truly taking place. As an observer of the stock market, it is crucial to understand the environment within which one is attempting to operate. In order to do this, a strong dose of stone cold reality is needed. One cannot conveniently ignore facts, brush past unseemly data, and only look at the rosy side of the fence. To do so is suicide – an invitation to let Wall Street and the markets separate you from your hard earned money, not to mention what this could do to your client’s accounts and their hard earned capital.
In every cycle, there is a time to take risk and a time to protect capital. In this cycle, we are experiencing the grand-daddy of all down cycles, one which is clearly destined to occupy its own very tragic chapter in American History, as what is emerging now is far worse than a recession. The phrase ‘systemic collapse’ is rarely used in financial circles, but with housing collateral values in continued decline, there is an enormous financial margin call rippling through the system. In the OTC derivative market, values are unable to be quantified as increasingly spreads are widening and illiquidity becomes more acute. An accident is at hand. To the unweary, this is off the radar, unseen and unnoticed. Yet, looking through a wide array of charts this past week, I was just struck by the enormity of the damage to the financial sector, especially the damage taking place in broad banking system.
On my desk, I maintain TC 2000 which is a good software program for tracking the relative strength of sectors and individual shares, and I used it a lot for stock screening. Under Banking, TC 2000 breaks out 9 different groups: Foreign Regionals (18), Global Money Center Banks (41), Regional – Northeast Banks (109), Regional- Midwest Banks (62), Regional Mid-Atlantic Banks (104), Regional Southeast Banks (51), Regional Southwest Banks (35), Regional Pacific Banks (73), Savings and Loans (144). Excluding Money Center Banks and Foreign Banks, there is a total of 578 regional banks and S&L’s. Amazingly, flipping through chart after chart, it was actually quite difficult to find names that were not down 15% to 20% at least. While it is true that there were a few names that were actually unchanged or up, by far the mass majority of institutions I observed were easily down 40% or more. Carnage on a scale seldom seen.
Within the system, TC 2000 creates its own index for each category. Being an index, the index is usually more conservative in its estimate of what is actually taking place. In the current instance, there are many names that have under-performed the sector index. I say this because, looking at the charts of the individual regional bank indices, the absolute numbers for percentage decline are themselves daunting.
Above: TC 2000 Index of Mid-Atlantic Regional Banks down 43.94% from all time highs and still accelerating lower.
In the chart above, we start with the Mid-Atlantic regional banks, down almost 44% from the high last year, and absolutely plunging to new lows over just the last few weeks. For anyone hoping that the worst was behind us, that things are getting better, etc.. this chart all by itself is a huge bucket of cold water. Next, we see the Mid West Bank Index, which has also accelerated sharply lower in recent weeks and is now down a striking 52% since last February.
Above: an even longer range chart of Mid-West Banks hitting decade lows with the index now down 52.39% from its all time high set on 2/20/07 (the week before sub-prime) at 999.33.
Above: Regional NorthEast Banks are presently down 29.64% from all time highs.
Less hard hit, have been the Northeast Banks, which in the aggregate are down ONLY about 30% from last year's highs. Yet, here again, notice the huge downside spill over the last few weeks. Can things really be getting better, and if so, how come these bank shares are falling off the cliff? Under the header of truly scary, come the West Coast banks where the downside fireworks have been unrelenting. So far, the Pacific Coast Bank Index is down nearly 54% and still counting over just the last 12 months.
Above: Regional Pacific Coast (California Exposed) Banks sinking like a brick down 53.38% from the all time high at 1174.42 on 4/19/06
Above: Financial Armageddon for Banks in the South East down an astounding 70.53% (as a collective)
and now reaching the lowest values seen since 1996, -- 12 years ago.
In the South, we see a huge dichotomy, with banks in the South East by far the worst performers, down over 70% in the last 12 months while Banks in the South West are essentially unchanged. This latter category is smallest in number with only 35 names, and also by far the smallest in terms of market capitalization. Holding up the index and obviously less affected by all the bad news is the BOK Financial Group (symbol: BOKF), Cullen Frost Bankers (CFR), Commerce Bancshares (CBSH), UMB Financial (UMBF), and First Financial Bankshares (FFIN). Among the more stable names in this list, (others include: OSBK, BANF,CASS, PRSP, IBOC) we see a number of Oklahoma and Texas Oil patch banks, where the prior Housing Boom was not pronounced and where high energy prices have led to better returns on lending.
Above: Regional Banks in South West – barely down… smallest group of all sectors,
with a few high cap names holding up the sector index, mostly Oklahoma and Texas Oil patch names.
Above: the S&L’s apparently very mislabeled as “thrifts” have managed for the second time in 10 years to collapse shareholder value. This index is down 57.22% from its all time high of 1620.27 on 12/27/06.
Of course, as should be little in the way of a surprise, the S&L’s take the title of “two time losers” having managed to lend themselves into a major cataclysm for the second time in 10 years. What was that old saying, “Fool me once, shame on you, Fool me twice shame on me” or as George Bush Jr. and Roger Daltry put it, “we won’t get fooled again.” Well, guess what? The S&L are by far the largest group (144 names) and had 49 names on the list that were down 50% or more from the high of the last two years. In the entire list of 144 S&L’s, only six names were either up or near break even. On the very strong side was (Hudson City Bancorp -HCBK) followed by more modest positive performance at Dime Community Bancshares (DCOM), Flushing Financial (FFIC), Essa Bancorp (ESSA), Capitol Federal (CFFN), New York Community Bancorp (NYB), and First Niagara Financial (FNFG), Northwest Bancorp (NWSB) Provident New York Bancorp (PBNY). After that, the list turned quite ugly in a hurry, with more then 100 S&L’s down 20% or more, and nearly half the list down 30% or more.
Above: the TC 2000 Moneycenter Bank Index down 37.16% from its all time high last July 17th at 1094.59, last reading 687.83.
Dovetailing with the huge breakdown in regional shares has been the Money Center banks which continue to plunge moving back to levels not seen since late 2004. Breadth within this group has been quite negative with about a dozen primarily foreign names (STD, ITU, BNS, TD, WBK,BLX, RY,SAN,HBC, PNC,MTU,SBP) still holding up. Three of these are all related to the Banco Santander Group (SBP,SAN,STD). In the US, only Bank of New York (BK) is holding up well, while among huge money centers, HSBC (HBC) continues to be well supported, although it should be noted that HSBC has potentially huge derivative exposure. As a result, we continue to feel that with major names like JP Morgan, Bank America and Citicorp leading the list of New Lows, that a crisis atmosphere continues to brew. A snapshot of a number of badly damaged names is perhaps a short list of crippled banks wherein the next financial crisis may begin with a serious banking failure. To date, much of what has been put aside for a rainy day assumes individual banking problems, but not a clustered grouping of multiple banks all failing at the same time. That makes this occasion something of a brave new world. For investors, it is possible that going forward the best concept to apply may be the idea of seeking out a bank which can provide the return OF your money, rather then the bank which pays the best return ON your money.
Above: Eastwest Bank (EWBC), a familiar name in California with branches all over Southern California
is now down 50% in just the last 23 trading days going back to May 28th, 2008 when share price
was $13.97, now under $7.00. Down 83.45% from the high last June.
Above: National City Bank (NCC) huge in Chicago and the mid-west, now down from above $38 to under $5 in just over one year, an 87.58% wipe out and still counting…
Above: Washington Mutual (WM) – from over $46 in 2007 to under $5 in 2008, an 89% wipe out.
Above: Marshall and Iisley (MI) over $40 to the mid teens, down 64% in last 12 months.
Above: Fifth Third Bank (FITB) over $70 a few years back to under $10 with a drop of $60% in just the last 7 weeks.
Above: Suntrust Corp (STI) from just under $90 last May to recent low of $32 a decline of 64% and counting…
Above: All but done, IndyMac Bank (IMB) plunges under $1.00 in the last few days, now a penny stock,
down from a $49 number last May…a loss of 98.7%.
Above: Deustche Bank (DB) huge – massive top... Tremendous selling pressure prevails.
Among the big Money Center names, DB, UBS, BCS, Citicorp along with other financials like LEH, FNM, FRE, are most likely candidates for triggering the next phase and continues to be a near perfect financial storm. In the case of these first four names, weekly MACD Momentum studies are making new lows with price and have bearish momentum profiles that suggest prices could slip a great deal lower from current quotes. We in no way suggest readers ‘chase’ these shares as short sales (high risk), but instead point these names out to alert would-be “bottom fishers” that from our studies, these shares are nowhere near what should be considered potentially final lows. What looks cheap can on some occasions actually get a lot cheaper, and to that end, we would be very cautious with attempting to bottom pick anything in the financial sector. In our view, for most investors, the idea of putting money in the financial sector at this time should be viewed as akin to that of a construction site, with a flashing sign that reads “Open Trench.” Be careful where you go, or you just might end up falling into the open trench and where the financials are concerned -- it could be a derivatives laden, bottomless pit.
Above: Barclays Bank PLC (BCS) – another disaster in the making…
Above: UBS – Union Bank of Switzerland – price action is very bad.
Above: Citicorp © heading toward $5? More problems ahead, waterfall action…?
Above: Lehman Brothers (LEH) – the next Bear Stearns?
Thus, for most readers, this is definitely not the time to be increasing risk. The economy is still sinking fast, and right now, some of the best things one can do are (a) paty down debts, (b) build up savings, and (c) protect valuable capital. As the banking problems become more widespread, new credit will be harder to obtain, and the credit crunch will intensify. That means growth will remain at risk for some time, and that equity market capital could continue on a long downward slope in the hands of a major bear market -- yet another ‘open trench.’
In the final chart, I show the GST Equity Market Unweighted Index, which tracks 1500 shares. Ex the Energy patch (which carries less weight in this index), the stock market is actually a good deal lower than it appears, with this index already back in the range seen in 2004 to 2005. For the S&P 500, that equates to prices in the 1100 range and for the DJIA, the low 10,000 range. Mind you, before this bear market is over, I continue to believe that the S&P will revisit the 2002-2003 lows near 780 and the DJIA the former lows near 7,500, so potential downside risk remains huge making this a good time to be extra careful.
That’s all for now,
© 2008 Frank Barbera