Professor Mark J. Perry's Blog for Economics and Finance
Posted 10:43 AM Post Link
Links to this post
Since the Efficient Market Hypothesis has recently been proven to be entirely perfect (see 9/15/08), the stock price of troubled banks must surely be correct. No way that the Fed-created liquidity has had any effect on market prices of dodgy assets. No way!"Christopher Whalen, managing director at Institutional Risk Analytics, a research firm, has analyzed financial data from the second quarter of this year that almost 7,000 banks submitted to the Federal Deposit Insurance Corporation."..."Unfortunately, that assessment shows that the number of financially sound banks is declining and that the ranks of troubled institutions are growing. Indeed, Mr. Whalen said his figures show more stress in the banking industry in the second quarter of 2009 than in the immediately previous periods."..."This downward migration is a sign that more banks are now feeling the effects of economic conditions regardless of their business models, Mr. Whalen said. In other words, even the best-run banks are having trouble escaping the impact of a sluggish economy and high unemployment."..."Surely, investors in financial companies have earned a respite from their long slog of losses, and the recent rally has been a tonic for damaged stock portfolios. But it’s simply not clear that the banking industry is out of the woods." http://www.nytimes.com/2009/08/23/business/economy/23gret.html
What (if anything) could the following do to help contribute to those rising bank stock prices?Mortgage Market Bound by Major U.S. RoleClasses of Borrowers Cannot Find Loans as Publicly Backed Debt MountsBy Zachary A. Goldfarb and Dina ElBoghdadyWashington Post Staff WritersMonday, September 7, 2009(skip)While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government's newly dominant role -- nearly 90 percent of all new home loans are funded or guaranteed by taxpayers -- has far-reaching consequences for prospective home buyers and taxpayers. The government has the power to decide who is qualified for a loan and who is not. As a result, many borrowers among both poor and rich are frozen out of the market...
Quite impressive. Of course they came back from near nothing. I am still a fan of Goldman Sachs even after cashing out recently. I don't think it's going to do anything but go up until it reports next.
Something that I haven't seen discussed is the profit potential for banks in the future. Their net interest margin (difference between cost-of-funds and the rate at which they loan out those funds) is increasing, as are the fees for lending. Reduced competition has allowed banks to greatly increase the price for their services and this soon will show in the bottom line.I think the market realizes this an is pricing it into the price of bank stocks, even though it hasn't been mentioned -- at all -- in the media.
CRE collapse, net interest margin, falling earnings, rising provision expenses, etcThe ONLY fundamental which could be supporting the financials is rising market concentration - big banks benefitting from the failure of smaller ones and government subsidies and guarantees. This is not good news.
My guess is that the KBW index is market-cap weighted so that the "too big to let fail" banks dominate the results (BAC, JPM, WFC, USB, C). Mid and small cap banks have underperformed the S&P this year.
Post a Comment
Create a Link
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.
Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
View my complete profile