On Friday, I wrote that the new banking capitalization rules
coming out of the weekend meetings in Basel, Switzerland would be a non-event. For
U.S. banks, that’s pretty much true.
After all, U.S. banks were
required to raise capital after the Treasury Department’s “stress
Bloomberg, banks must have 4.5% common equity and 6% Tier 1
capital. Current rules require banks to have common equity equal to 2% of
total assets and 4% Tier 1 capital.
Bloomberg also reports that 7 of the 24 biggest
U.S. banks fall short of the new
capital requirements. Bank of America (NYSE:BAC) and Citigroup (NYSE:C) are among them. But
Zack’s reports that BofA and Citi have Tier 1 capital of
10.7% and 12%, respectively, so it seems as there are conflicting
In any event, the new rules, called Basel
III, represent a fairly big jump in
capital requirements. But, at worse, the new rules are also in line with what
was expected. Some may see the new requirements as better than
And even though Basel III
might mean that Bank of America may not be able to start
paying a dividend for a couple years, I expect the fact that the new rules
weren’t more harsh than expected may give BofA some upside.
I would say the same about Citi were it not for the
Treasury’s steady selling pressure. (Readers may recall I recommended Citi as
a short-term play ahead of 2Q earnings because the Treasury had suspended its
sales of Citi stock.)
Readers should note, too, that Bank of America has a meeting scheduled on Tuesday where
it is expected to outline exactly how it will achieve growth in the years
ahead. I would expect the dividend issue to be addressed as well.
Basel III seems like it will be tougher on
some European banks. Deutsche Bank (NYSE:DB) has already announced that it
intends to raise $12 billion or so by selling stock.
In total, German banks may need $134 billion in new capital.
Italian and Greek banks may need cash, too. Asian banks are reportedly in
fine shape, with Tier 1 capital in the 10%-12% range.
signs that China‘s economy is
growing strongly, and avoiding overheating that many China bears have predicted. There’s no doubt
that Chinese stocks are cheap, but so far that has not sparked any investor
But when investors remain skeptical of U.S. stocks, it’s no surprise that Chinese
stocks are further down the list of investments. I suspect we will have to
see investor sentiment turn positive for U.S.
stocks before we see any action in Chinese stocks.
And that’s fine. We can wait. There are doubles and triples
waiting amongst Chinese stocks. Puda Coal (Nasdaq:PUDA) remains one of my
I receiveda most
excellent letter from JB. It’s a little long, but worth the read:
I have a few of these recoveries under my belt, born in
46 and have been the business community one way or another for 40+ years. I
have a couple of thoughts.
1. They are always “jobless recoveries”, everyone. A lot
has to happen before hiring begins, the worst the recession, the longer it
takes, and this was a monster. Job growth, unfortunately is a trailing
indicator. By the time jobs are humming along we are well past the recession,
at least technically.
2. I agree with you about the consumer and his
sentiment, confidence, etc. He [the consumer] is an economically twitchy,
spastic, knee-jerk, reactionary. He seldom pays any attention to anything
except what happened in the last few days. He will tell you he is scared to
death about money and walk into Best buy for a cable and plunk down his cc
card for a big ticket item in 30 minutes. One of my favorite purchasing
axioms (which I have observed and experienced personally) is “buying
decisions are made emotionally and justified logically”. I found this to be
as true as water is wet.
3. At a time, pick a time, when he should be buying, he
isn’t, when he shouldn’t be he is. With interest rates for housing are at
levels I have never seen before, and prices rolled back, he will not buy a
house. I understand, some can’t; has one he can’t sell, can’t qualify, etc.
But hundreds of thousands are not in either situation. When the dow hits
about 11,500 to 12,000, he will be ready to get back into the market. Go
Here is what I think is a bigger problem. Too much of
our economy today is based on consumer spending. This is a problem now
because he has spent everything he could beg, borrow or steal. He has no
money left. He used his house for an ATM and that isn’t what it used to be.
This is not an economically sound foundation.
The problem in the longer term (which has been going on
for a time and is starting to catch us structurally) is that average consumer
never really makes enough money to sustain us, and himself, in the first
place. If he saves too much, he personally is ok, but the economy is in the
toilet, which comes full circle back to him because he loses his job, which
eats his savings. The Japanese are an example. The savings rate is 25%, plus
and they call the nineties “the lost decade”-deflation. Back to our consumer,
if he spends all of his money and contributes his share to the booming
economy at his personal peril, he has no money for his old age, his
medication, etc. He costs us (which is really him, and you and me) more than
he contributed by spending his way to the poor house in the form of long term
health care and old age maintenance. It is less than a zero sum
So how do we get out of this mess? Where do we put our
economic muscle? Please don’t resort to the old saws “cut spending, cut
taxes, or fund govt programs for jobs, there are huge holes in both sides of
those political tag lines.
Thanks for reading, I enjoy your work.
Let me start by saying that JB’s long-term perspective is
refreshing. Unemployment is a lagging indicator. It will be the last thing to
recover. And of you wait to enter the stock market until unemployment
improves, you will have missed much of the stock market’s advance.
Daily Profit readers know my stance on real economic recovery. One, energy costs are
a bigger drag on recovery than most acknowledge. When your energy inputs have
tripled in the last 6 years, it’s clear that productivity and profit margins
will suffer. We could also say that the buying power of the dollar is
diminished because more is spent on energy.
So we need investment in alternative energy. That would
provide jobs and slowly reduce out trade deficit.
Two, one of the biggest pockets of unemployment is in
construction. The bursting of the housing bubble put construction workers,
and other people associated with real estate out of work. Many of these jobs
simply aren’t coming back.
While I support tax credits for hiring, any jobs bill must
include provisions for re-educating and re-training. And if they went
hand-in-hand with alternative energy investments, all the better.
As always, let me know what you’re thinking: