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May 10, 2006
The potential impact of housing on banks, Wed., May 10, 2006, 9:59 AM
Probably the biggest weighting in most portfolios is banks. Why? Simply because the big financial companies now control mutual funds and IPO's and finance the mergers and acquisitions business in an evil axis with "private equity", and are the biggest advertisers of Financial Enterainment TV. Their sell is non-stop.
Look at it this way, if you made a product and had to sell it, you'd be inclined to put on your best face, your best clothes. You'd try to make yourself look like a million bucks.
Well some of these banks are actually looking like a trillion bucks these days. Man, are they slick. They are so slick, you'd actually think there's not much risk involved in buying their products. They even have the boiler plate risk statements down pat " don't buy this product for all the risks discussed herein. (Did a skull & crossbones on a pack of cigarettes ever stop a smoker?)
You see, they know you are going to buy whatever they sell because, you know, they are the bank.
So periodically comes a report that delves into the problematic issues of banking. Here is one on the housing market, and its potential impact on banks, should house prices fall, and so forth. It's a terrific report from UBS, dated today. Download UBS file on Housing and Banks
UBS, as you know, is one of the world's biggest banks. This reminds me a little of Microsoft's Steve Ballmer who in 4Q99, at the risk of losing billions personally and for employees and shareholders, had the guts to say to the world that the pre-Y2K boom was a bubble.
I'll never forget that nugget of brutal honesty.
Even if you don't trade the banks, you'll probably be interested to read what UBS has to say about the housing market.
Posted by Posted by Bill Cara on May 10, 2006 09:59:45 AM | Category: 40 Financials
Discourse
g034, simply put, thank you.
And generally, as rates rise so too do the commodity producer stocks rise.
Rates fall during disinflation (and deflation), and rise during periods of inflation.
There is a link between Producer Price Inflation (PPI) and higher commodity costs. And soon after PPI rises, these costs are passed through to the consumer in the form of higher prices. That increases CPI.
It's amazing to me that many Talking Heads belong to the Flat Earth Society. They'll waste your time on Financial Entertainment TV by trying to explain the many ways that pigs can fly, or that what goes around won't come around.
They do that because they want people to believe that the market is part of rocket science, and you need their help to figure it out. NOT.
Posted by: Bill Cara ![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
May 10, 2006 11:18 AM [link]
Great report, but I do not agree with their assessment of the potential impact of a drop in the value of MBS portfolios on the bank's income and balance sheet. They make important statement that MBS comprises much greater % of the banks investment portfolios than in prior cycles, but do make the connection between the credit risk in the MBS portfolio and the credit risk in the bank's own operations.
Maybe some of the banks are well hedged in their lending operations, but they are still holding the same mortgages on their balance sheet in the form of the MBS investments. So even if they sold off the loans - limiting their credit risk, they bought in back in the form of MBS.
Best regards,
BG
Posted by: Soulek1 at
May 10, 2006 12:09 PM [link]
Here is a good link I just found to sector weights of the S&P500. They stopped doing this in November of 2005, but it goes back pretty far.
If anyone knows a better source, please post. Thanks.
http://www.barra.com/Research/SectorWeights.aspx
Best,
LB
Posted by: LB at
May 10, 2006 1:30 PM [link]
Posted by: Soulek1 at
May 10, 2006 1:39 PM [link]
Materials is still at the bottom of the list...that's a good sign.
LB
Posted by: LB at
May 10, 2006 1:57 PM [link]
Another reason that banks grew in portfolios is the effect that falling interest rates had on financial stocks through the last bull market - as rates fell, prices of bank stocks rose.
In 1982, financials held a small percentage in the S&P 500 while energy held one of, if not the largest weighting. The next 18 years saw a reversal of those weightings (energy fell and financials rose) as interest rates dropped.
Now as interest rates are rising again, we are seeing another reversal.
The trend is your friend.
Posted by: g034![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
May 10, 2006 11:04 AM [link]