Dec.15 update: Fitch Ratings, a subsidiary of Paris based Fitch Group (1 of 3 credit rating agencies recognized by the US Exchange Commission (next to S&P and Moody's), downgraded 8 of the 29 banks viability ratings (the banks are dubbed GTUB's (global trading and universal banks). The banks are Bank of America, UBS, Credit Suisse, Morgan Stanley, Barclays, BNP Paribas, Goldman Sachs and Societe Generale. According to Fitch the bank's "business models are particularly sensitive to the increased challenges the financial markets face". Even though Fitch "incorporated the significant progress it sees the banks have made in building up capital and liquidity buffers to resist market challenges" it still downgraded them by one or two notches. According to Fitch "the structural aspects of their funding, earnings, and leverage, predispose GTUBs to vulnerability to market sentiment and confidence, particularly during periods of exogenous financial stress". BNP Paribas, the largest of the European banks, was also downgraded by Moody's to Aa3 on Dec.9.
The criteria required to make the list of 29 banks?
-must have exposure to more than just a couple economic sectors
-sizeable enough so that any threat posed to them will have widespread implications for the economy as a whole, that makes them eligible for government support which lowers any associated risk.
... more specifically
Financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. To avoid this outcome, authorities have all too frequently had no choice but to forestall the failure of such institutions through public solvency support. As underscored by this crisis, this has deleterious consequences for private incentives and for public finances.Key definition - Loan Loss Reserves: A valuation of the good collateral a financial institution has on hand to cover bad or slow paying loans. The total value of the reserves changes with every charge-off (a loan that fails to meet its obligations - bank abandons collecting on it - it is no longer an earning asset). The provision for loan losses is an amount/allowance set aside (quarterly or annually) to boost loan loss reserves when they get too low. Note: some charge offs do recover (recovery rate), when they do they are added back to reserves. More on the world's largest banks here
Grmike's advice
-In the 4th quarter of 2011 tred cautiously with your investments in the banking sector; European Stability Fund bonds are not attracting as much investment as anticipated and banks, particularly European ones remain highly exposed. Obama says he's concerned about the debt problem.
-Invest in technology - The sector is still booming (Samsung - Galaxy smartphone, HTC new products are attracting a lot of attention) and Research In Motion countinues to be severely undervalued (Earnings to price ratio only 5.47 despite the company still having solid market share for operating systems & handheld devices as well as a growing list of subscribers (earnings may be lower but they have literally reached nil at Nokia and fell 42% for google between the last two quarters).
-Nordstrom (designer apparel) remains solid in terms of same store sales/growth, an indication that high end consumers are still shopping (in contrast with the low end where margins are being sqeezed).
-Don't forget about Bombardier - The producer of light rail/subway cars and most importantly small and large jets (most popular are the challenger and global families (combined produced 50 in the first half of 2011) but the aerospace division is most known for its Learjets (sold 19 last six months)). July backlog was $23B up 20% since the end of 2010. The Learjet 85 (in development since 2008) already has 60 orders even though the first ones won't be delivered until 2013. What's most attractive about Bombardier's stock is that even with all the upside to the company (backlog, new jets reaching first flight, strong order in rail cars, increasing market share for business jets, revenue up 18.2% in the quarter ended July 2011, net income up 48.9% qoq) its price to earnings ratio is currently 8.30 (Nov.5,2011) lower than key competitors Boeing (13.03) and Embraer SA (10.84). In the last five months of 2011 88 rail cars are scheduled to be delivered to Bombay's tram system.More on Bombardier
in other news..
Groupon joins the Nasdaq as GRPN exactly 3 years after its founding in November 2008 - The IPO was $700M the highest for a web based company since Google's 2004 $1.7B ipo. During the day it increased the number of shares by 1/6th (5M) with each priced at $20. Over the trading session shares rose by about 30% and by the end of the trading day Groupon was valued at $12.8 billion or 2.27 times (113%) more than what Google tried to buy it for in December 2010.
October jobs numbers: The United States created 80,000 jobs bringing the unemployment rate down to 9.0% from 9.1%. Canada lost 54,000 jobs (CDN dollar down about one cent versus the greenback on the day on which the report was released/2.4% loss over the week). Also affecting Canadian metrics: Insurance company Sun Life reported a quarterly loss ($621M/$1.07 per share) for the first time since 2009, on Wednesday November 2, 2011. Manulife disappointing results continue (loss of $2.4B). All of the 54,000 jobs lost in Canada are full time jobs, it pushed the unemployment rate up to 7.3% from 7.1%. Prior to October, 291,000 jobs were created over the last year in Canda. Labour numbers for Canada here
South Korea's tourism industry is thriving, the number of tourists visiting the country is up 47% in just the last five years. That compares to the 10% increase experienced by China. Most of South Korea's tourists come from China.
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