There is little doubt that much of the stock market action during the past 12 months has defied traditional market rules. Nowhere is this more evident to us than in the banking stocks. Weâre still scratching our heads on the whole sector. Readers may remember an article we wrote in November 2009 entitled "Donât Bank on the Banks" in which we discussed the hazard of leverage in the banking system. If you gauge our conclusions by what actually transpired in the banking sector as a whole, we were essentially correct. Of the 986 bank holding companies in the US last year, a total of 980 of them LOST MONEY.2 And thatâs even after all the government bailouts the sector received. Hmmmm. Robust banking recovery? Not a chance. However, the remaining six banks, all of which are "too big to fail", did manage to earn a combined $51 billion in 2009, sending their stocks soaring as a result. So despite 980 out of 986 bank holding companies returning nothing but red, the sector actually fared pretty well from a market perspective. Does this make any sense to you? Here we have an entire sector that is essentially broken; where a mere handful have maintained profitability not from their own strength but thanks to the taxpayersâ bailouts; and where the government is now aiming the most powerful of their regulatory reforms â and the market decides to pile into their respective equities?
Chart A
The banking sector isnât the only equity space that confounds us â the housing stocks are as equally absurd. Despite what you may have heard from your local real estate agent, the fundamentals for US housing are looking dismal. Ever since the tax credits have rolled off, new home sales are now running at 300,000 on a seasonally-adjusted annual rate ("SAAR"), representing a new all time low this past May. For comparison, this is down from an all time high of 1,389,000 new home sales made in July of 2004.3 Reading this, you may expect the home builder stocks to have performed poorly. But no, not in this market! As you can see in Chart A, from the day that Bernanke first saw his âgreen shootsâ, the home builders index appreciated by 47% to June 30, 2010, peaking at 104% on April 23rd â all while new home sales were down 14% over the same time period on a SAAR basis.4 âThe Market is Always Rightâ, as they say, but it simply canât be with regard to these stocks. The housing âgreen shootsâ were the product of government initiative, rather than true fundamental improvement, and were thus short term in nature. Now that the government program has ended, the whole sector looks poised to fall apart.
At the end of the day, nobody should be surprised by the recent economic data. The stock market rally that began in March â09 was driven by monetary phenomena rather than anything fundamental, and based on data from CMI for 2010 it appears that we have already entered an economic contraction phase. The market is now beginning to reflect the fact that the green shoots were actually just the early signs of weeds, and it would suffice to say that virtually all the major world governments have some serious gardening to do. The recent contractions donât necessarily mean that weâll experience a repeat of 2008âs stock market performance in 2010, but it does suggest that investors should question the real fundamentals underlying their investments, lest the market begins to trade on them again.
1 Bustillo, Miguel (May 19, 2010) "Wal-Mart Same-Store Sales Fall" The Wall Street Journal. Retrieved on July 8, 2010 from: http://online.wsj.com/article/SB10001424052748703957904575252092724864622.html?KEYWORDS=wal-mart+struggles+to+to+keep+shoppers
2 Lenzner, Robert (June 3, 2010) "Six Giant Banks Made $51 Billion Last Year; The Other 980 Lost Money" Forbes. Retrieved on July 8, 2010 from: http://www.forbes.com/2010/06/03/goldman-sachs-citigroup-markets-lenzner-morgan-stanley_print.html
3 US New One Family Houses Sold Annual Total SAAR (Bloomberg: NHSLTOT)
4 As measured by the Dow Jones U.S. Select Home Construction Index (Bloomberg: DJSHMB)
