Thursday, September 11, 2008

The Untold Story of U.S. Banks and Other Market Observations

Playing It Safe - While the NYSE Composite Index is poised to open today at new bear market lows, Consumer Staples stocks (XLP) are hovering near their bull highs. Check out charts for PG, CLX, and CL; no bear market evident there. It's also interesting to see the relative strength in WMT and MCD. Investors are rewarding companies that offer perceived value in a time of recession. Meanwhile, note the vicious decline in gold, as inflation themes have retreated to the back burner. A total of 66% of XLP stocks are trading above their 200-day moving averages; only 32% of SPX stocks overall are above that benchmark.

Treasury Tells - Treasury instruments have been a great tell for risk aversion and risk assumption, with yields moving in tandem with equity indexes.

Risk Aversion is Worldwide - Notice how emerging markets (EEM) continue to underperform the U.S. (SPY), with political problems weighing on Russia; weak commodity prices weighing on the resource-rich economies; and economic tightening affecting China. I noticed recently that Indonesia cancelled a bond offering; it could not get bids at acceptable yields.

Going Different Directions - It interested me yesterday to see New Zealand cutting rates and Brazil raising rates. Meanwhile, the U.S. is staying steady and low, and the ECB is staying firm and higher. I continue to suspect that the inflation fighters have it wrong; their tightening will exacerbate a significant recession. Some interesting pairs trades have been coming out of this difference in central bank priorities.

Regional Variation in Bank Performance - With the help of the Barchart site, I revisited the performance of commercial banks as a function of their geography. Specifically, I looked at the number of banks with stocks that are up on the year and the number of banks that are down 50% or more on the year. Here's how it shakes out by region:

Southwest: 8 banks up, 2 down big
Northeast: 36 banks up, 4 down big
Midwest: 19 banks up, 4 down big
Southeast: 29 banks up, 14 down big
West: 16 banks up, 13 down big

As you can see, 27 of the 37 banks that are down 50% or more on the year are located in the southeast (think Florida) and the west (California, Nevada). The story relatively untold in the media is the number of banks that are up year-to-date in their stock market performance--an astounding feat, given general market and financial sector weakness.