Housing and Banking Reality Check

8/9/2019 Housing and Banking Reality Check

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Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com.ValuEngine is a fundamentally-based quant research firm in Princeton, NJ. ValuEngine

covers over 5,000 stocks every day.

A variety of newsletters and portfolios containing Suttmeier's detailed research, stock picks,and commentary can be found HERE.

Apri l 23, 2010 Housing and Bank ing Real i ty Check

At the beginning of April I published a monthly update to the ValuEngine FDIC Quarterly Report.My theme was that a Double-Dip Housing Crisis Will Hurt Community and Regional Banks. Ishowed weekly graphs of Housing and Banking Indices that showed that despite my bearishlonger-term view, that there was momentum for near term gains for the Home Builders andCommunity and Regional Banks. My longer term bearish views was based upon comparing theFDIC Quarterly Banking Profiles for year ends 2001 through 2009, showing just how leveragedthe banking system was relative to GDP. Today I cover the Housing and Banking Indices.

In early April, the Housing Sector Index (HGX) was up 10.1% year to date, but down 61.5% since itsJuly 2005 high. With HGX at $113.13, I stated that the short term uptrend would continue given weeklycloses above my monthly pivot at $109.85. The upside is to the 200-week simple moving average at$145.14. Today the HGX is up 23.6% year to date, but down 56.8% since July 2005. The 200-weeksimple moving average has declined to $143.76 as MOJO remains strong.

Chart Courtesy of Thomson / Reuters


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The daily chart for the Housing Sector Index (HGX) is extremely overbought creating a conundrumthat Housing Stocks are gaining as a bubble, while home demand remains subdued with home pricesmost likely to decline once the tax credits end a week from today. When a parabolic is forming itsdifficult to say how high that market can go, but when the run ends, its always painful. Keep in mindthat the NAHB Housing Market Index remains depressed with that index below 20 on a scale of zero to100. If you are trading the home builders on the long side just beware of the risk in this MOJO game. Atthe March 2009 lows they were trading below Market to Book Value versus 1.5 to 2.0 today. P/E ratioswere single digit and are now way too high. Home builders are having difficulty getting Construction &Development Loans, and foreclosures and short sales of existing homes provide tough competition.Existing Home sales rose to an annual rate of 5.35 million units in March with 44% first time homebuyers, 17% investors, 27% paid case, and 35% were depressed properties.

Courtesy of Thomson / Reuters

In early April the Americas Community Bankers Index (ABAQ) was up 12.2% year to date, butdown 47.3% from their December 2006 highs. At $166.17 I said that the short term uptrend continuesgiven weekly closes above my monthly pivot at $156.80. The upside is to my annual resistance at$195.07 and to the 200-week simple moving average at $220.32. Today ABAQ is up 24% year to dateand 41.8% below the December 2006 highs. Today the 200-week simple moving average is down to$218.62. There have been 142 buy rated financials and 216 sell rated financials. The buy names areovervalued with elevated P/E ratios. Fifth Third Bank (FITB) and PNC Financial (PNC) have been twoof the BUY rated names. The problem is that 36% of all FDIC-insured financial institutions areoverexposed to C&D and CRE loans and today is Bank Failure Friday. Most are community banks!


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The daily chart for the Americas Community Bankers Index (ABAQ) is extremely overboughtcreating a short term smaller bank stock price bubble. These banks have not been increasing lendingand have been borrowing from Main Street offering fractional Money Market rates then buying the 5-Year US Treasury. Even though bad loans declined in 2009, there is still a backlog; CRE loans are up91.6% since 2001 to $1.1 trillion, C&D loans were down 23.6% in 2009, but still up 95% since 2001 at$451.5 billion. Non-current loans were up 108.4% in 2008 and up another 55.1% in 2009 to $391.3

billion, or 526.4% higher than the end of 2001.



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In early April the Regional Bankers Index (BKX) was up 22.8% year to date, but down 56.7% fromtheir February 2007 highs. With the BKX at $52.44, I stated then that the short term uptrend continuesgiven a weekly close above my monthly pivot at $53.31. The upside is to my annual resistance at$73.12 and to the 200-week simple moving average at $76.30. My semiannual support is $40.76.Today the BKX is up a mammoth 35.2% year to date, but down 52.4% since February 2007. We areabove the monthly pivot at $53.31 and the 200-week simple moving average has declined to $75.61.The buy rated names among the bigger financials have been; American Express (AXP), JP Morgan(JPM) and Wells Fargo (WFC). JP Morgan is trading at fair value. Wells Fargo is slightly overvalued.American Express approached my monthly risky level at $47.95 in after hours trading on Thursday.


The daily chart for the Regional Bankers Index (BKX) is showing a negative divergence after settinga new high for the move on Wednesday. A concern may be the uncertainties with regard to financialreform and potential exposures to Greece. Most of the earnings beats have been based uponproprietary profits, which will be targeted in financial reform. Most of the bigger banks have beeninvolved with mortgage mitigation programs that may have slowed foreclosure procedures that couldpick up later in the year. Toxic assets remain off balance sheet and based upon FDIC auctions of sizedfinancial assets, the price could be around 22 cents on the dollar. Home Equity Loans are up 258.9%since 2001 to $661 billion. Other Real Estate Owned is up 795.8% to $41.4 billion. Notional Amount ofDerivative Contracts are an issue for the bigger banks with that exposure up 370% since 2001 to astaggering $213.6 trillion. Warren Buffet called Credit Default Swaps and Collateralized DebtObligations as financial weapons of mass destruction, and the SEC fraud allegations against GoldmanSachs has this issue on the front burner.


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Thats todays Four in Four. Have a great day.

Richard SuttmeierChief Market Strategistwww.ValuEngine.com(800) 381-5576

As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. Ihave daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters aswell as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as theValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sample

issues of my research.

I Hold No Positions in the Stocks I Cover.

Housing and Banking Reality Check

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