2012 Prediction No#1. Will our banks raise capital?

77 Comments

1. 

   Paul Rehill
   January 26, 2012 at 10:44 pm:

   Looking at Table D05 from the RBA stats for “bank” lending classified by sector, note:
   – In Jan 1990, total mortgage lending was $60bn of which 14% was by investors.
   – Fast forward to Nov 2011, total mortgage lending was $1069 bn of which 33.2% was by investors.

   That’s compound growth in bank lending of about 14% p.a during a credit boom. What growth can you expect going forward during a credit bust? I don’t know but it’s dropped substantially to 7.8% for the 12 months to Nov 2011 for banks which is the lowest rolling growth rate on record since data was split by owner-occupied and investor mortgages in Jan 1990. Given banks ROE are typically <20% and given the substantial leverage involved, there are a lot of other stocks I'd rather hold and would prefer not to touch a bank stock for around another 5 to 10 years at least depending on how the GFC and debt stress progresses.

   The other issue is investor loans. What happens to the third of mortgages (about $356bn) if property prices remain relatively flat for the next decade? With low rental yields and capital gains vs the cost of borrowing, how will these "investors" react to their ROI? There could be some potentially nasty second and third order affects over time on credit growth and negative equity due to the cost of borrowing exceeding ROI for this substantial proportion of the total loan book. I don't really want to speculate on how this will work out in the future so I'll just focus on those businesses with high ROA (substantially better than 1% for banks) and a ROE of at least 20%.

   • 

     David H
     January 30, 2012 at 7:09 pm:

     There are two sides to the cost/revenue equation in any business or real estate venture. I have wondered for a while if the elephant in the room for real estate is rental outlook. We seem to be approaching a squeeze where renters are caught between their capacity to pay and landlords desire to find positive cash-flow. Given our constrained ability to release new housing stock, does it imply that renters will either have to incur rent increases above CPI or reduce their expectations for the quality of stock that they can obtain with their rental dollar? Perhaps the new banking paradigm is that the “economy” has to pay banks whatever it has to pay to ensure supply of accommodation stock.

2. 

   Eric
   January 25, 2012 at 9:27 am:

   Big banks told to raise capital levels
   Eric Johnston
   January 24, 2012 – 5:04PM

   Economists at the International Monetary Fund have called on Australia’s biggest banks to bolster their levels of capital even further, warning the sector may not be able to withstand the dual shock of a residential property downturn and losses on corporate lending.

   The finding follows a stress test of Australia’s banking system run by the IMF late last year which modelled the impact of an Irish-style economic crunch taking place locally.

   The views, contained in an IMF research paper circulated by economists by Byung Kyoon Jang and Niamh Sheridan, come as Australian banks are already pushing ahead to meet tougher global banking rules known as Basel III.
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   While the paper’s conclusions will have no direct impact on the running of Australia’s banking sector, the conclusions will be taken seriously by regulators and politicians. However, they are expected to be strongly resisted by bank executives who have already been critical of Basel III.

   They argued by putting aside more funds to protect the balance sheet would increase the cost and reduce the amount of funds available for lending.

   ‘‘Stress tests calibrated on the Irish crisis experience show that the [Australian] banks could withstand sizeable shocks to their exposure to residential mortgages,’’ the IMF said in its study titled Bank Capital Adequacy in Australia.

   ‘‘However, combining residential mortgage shocks with corporate losses expected at the peak of the global financial crisis would put more pressure on Australian banks’ capital,’’ the paper said.

   ‘‘Therefore, it would be useful to consider the merits of higher capital requirements for systemically important domestic banks,’’ it said.

   The notoriously conservative Australian Prudential Regulation Authority has previously said Australia’s banks and credit unions will move to new tougher Basel III standards faster than the agreed global timetable for introduction.

   The rules, due to be phased in from 2013, are intended to make banks better able to absorb economic and financial shocks by holding more liquid assets, as well as generating more lending from their own deposits.

   The IMF noted the main vulnerabilities of the Australian banking sector was their exposure to ‘‘highly indebted households’’ through residential mortgage lending, together with their large levels of short-term offshore borrowing.

   The IMF paper concluded that the four major Australian banks have capital well in excess of the regulatory requirements with high quality holdings. The sector was making good progress toward meeting the new Basel III rules, it added.

   A spokesman for Treasurer Wayne Swan said the report confirmed that Australia’s banks were strong and stable, and making very good progress on meeting new global banking standards.

   “Our banks came through the biggest stress test in 75 years during the global financial crisis, having benefited from years of tough supervision by our world-class regulators,” the spokesman said.

   “This is evidenced in Australia’s major banks being among only a handful in the world still wearing the AA-rating badge,” the spokesman said.

   Read more: http://www.smh.com.au/business/big-banks-told-to-raise-capital-levels-20120124-1qet3.html#ixzz1kPwej7YO

3. 

   Brad
   January 24, 2012 at 8:19 pm:

   Does anyone have any insight on Decmil’s expected ROI from their portable housing JV ?

   They reckon it will be high but I’d like to see a number ….

4. 

   David King
   January 21, 2012 at 9:31 am:

   Hi Roger

   We’re all having fun talking to one another on this subject, but we miss you.Come back soon.

   By the way, who noticed the yawns from the market about the downgrading of France’s sovereign credit rating? It looks like the credit once due to credit rating agencies has, in the minds of the investing public, dried right up. Who can take seriously people who rate junk securities as AAA and then expect us to believe their next downgade, or for that matter upgrade?

   • 

     Craig B
     January 22, 2012 at 5:53 pm:

     I read with interest recently a statement from S&P describing how the various departments at the firm were “siloed” and that what happened in the sub-prime disaster shouldn’t affect the confidence clients have in analysis their bond department does.

     Sure!

5. 

   Ann
   January 20, 2012 at 4:55 pm:

   I would say only if it is cheaper than overseas capital. They may use hybrids more

6. 

   Steve
   January 20, 2012 at 2:17 pm:

   I don’t work in the finance industry but have a relative who has worked for over twenty years in finance. His background is economics and commerce and he has been a high flier working for major financial institutions in senior roles such as equity analysis and fund management. I heard on the weekend that despite his qualifications and extensive experience, he has now enrolled in university to retrain in another career. Although I’m not 100% sure if his decision is due to problems in the industry or personal reasons I was suprised to hear he’s changing careers. I know in the past he complained of pressure being applied to write favourable analysis on particular companies that weren’te quality. He was once told by a manager that “we’re in the business of selling people shares” and encouranged to write overly positive research. I think poor financial advice has been rife and has benefited only the industry but now burnt many investors who now have major issues trusting financial advice. The industry has itself to blame for much of investor losses and now needs to suffer the consequences.

   • 

     Craig B
     January 22, 2012 at 6:05 pm:

     Classic case of incentives driving perverse outcomes re the pressure to write favourable research.

     Fans of the classical education will be in uproar, but content covering the finance industry should be part of the general curriculum at secondary school, rather than being left to specialised courses at the tertiary level.

     Too many people get screwed by guys in suits with slick haircuts.

7. 

   Greg Mc
   January 20, 2012 at 2:11 pm:

   From your Eureka Report article….

   “Chorus is a spin-out from Telecom New Zealand. It is New Zealand’s largest telecommunications utility company, a technical way to describe a business that builds, maintains and repairs existing phone and broadband lines…..Moody’s has assigned Chorus a Baa2…”

   Who said ratings agencies don’t have a sense of humour?

8. 

   Matt
   January 20, 2012 at 10:04 am:

   I knew I shouldn’t have read the comments section..now just to confirm – the macro picture is bad.

   Housing = expensive, lots of bad loans etc – Check
   Global Debt = lots of it, can’t pay it back etc – Check
   Shares = too risky,lots of downside, etc – Check
   Global Growth = Europe crappy, US aenemic, China about to fall hard – Check

   And onto the sectors..

   Resources = lack of demand, falling prices, etc – Check
   Retail = no consumer confidence, etc – Check
   Finance = enough said – Check

   Good news!

   The price of cows went ballistic. Maybe we should all become farmers, as they’re an optimistic bunch as well..

   • 

     Kent Bermingham
     January 21, 2012 at 6:00 pm:

     A number of “Analysts” agree with you but the speculators have given the US and Aussie markets there best start in 15 years.
     Doom and gloom before Xmas and by January the 21st all the problems have been solved by the same “Analysts” and there is peace and harmony in the world
     Just arrived home from taking the kids to the Qld theme Parks but there is no ride like the one we are on now.

9. 

   Matthew Smith
   January 18, 2012 at 1:19 pm:

   Who has had a look at the Galileo Japan Trust (ASX:GJT)??

   • 

     D-Man
     January 18, 2012 at 6:23 pm:

     Hi Matthew
     I hadn’t heard of that stock but after looking at it on skaffold, it doesn’t look good….C5 and it only gets worse from there (cash flow history was a shocker) so not for me……

     Cheers

     Darren

     • 

       Andrew
       January 19, 2012 at 1:37 pm:

       I agree, just had a quick look. Haven’t made a profit (didn’t last year either) and there for has return on equity over two years of 0%. net debt to equity of around 587% and depending on how generous you want to be, interest cover somewhere between 0 and 2x. So they are levaraged to the hilt. I can see they have recently sold an asset, i think this would be likely to continue and of course when you are forced into a fire sale the best are usually the first to go leaving the company with less valuable assets.

       The C5 you see on skaffold sounds about right as in the notes they have some vary interesting comments. I think Note 2- Ongoing Risk basically sums it all up. Looks like a “liquidity event” may be currently happening or soon around the corner unless they get a bit of cash into them.

       All of this is my opinion based upon my own thoughts and analysis and not to be taken as advice.

     • 

       Peter Johns
       January 19, 2012 at 11:47 pm:

       This is not really a stock for which Skaffold is designed to help you with as it is in wind up mode. Matthew the best way of looking at this stock is through the last FY results presentation issued by the company. It includes a helpful analysis of what shareholders might get back once all the properties are sold depending on whether the properties can be sold for their book value. If so, and depending on exchange rates, then you would get back a very healthy premium to the current share price. But (and it’s a big but), if the average sale price of the properties is 10% or more below book value then shareholders will get nothing.

       Since that analysis a few things have happened. Firstly there has emerged some messy legal wranglings with one of their lenders which at best will result in legal costs and at worst might result in an accelerated wind up (putting more pressure on sale prices). Secondly, three of their properties have been sold. The first for book value. The second for a 5% discount to book value and the third for a 17% discount to book value.

       On that basis, and with plenty of properties still to sell in a very tough property market I see it as an absolute lottery on whether shareholders will get any money back once everything is liquidated. I suspect not. You might as well pop down to the TAB.

       If you want some undervalued Japanese property exposure check out AJA. This is again one that Skaffold may not help with on its own (always a good starting point of course) – it really needs a close look at the accounts, the structure of the company and a reading of the last 12 months worth of company announcements. Plenty of risks and lots of gearing but on this one there are long term prospects and plenty of discount. Once a few short term issues are sorted I think they will be able to return to 30c+ annual dividends from net earnings in the next couple of years.

     • 

       Andrew
       January 23, 2012 at 10:47 am:

       I was listening to an interesting Aswath Damodaran wbecast this morning and he reffered to these type of situations and said that you could value them as if you were valuing an option.

       It’s a completley speculative play but it was an interesting way to look at it. His examples were for example a bio-tech company awaiting approval from the relevant regulatory board.

       As for the above, the value comes down to the price the trust can sell its existing properties for. It is not the game i am in so i will not spend much time on it but just thought i would share as it was an interesting concept.

10. 

    Llyod
    January 17, 2012 at 4:10 pm:

    I read on the weekend that NAB has been allocating capital from its Australian business to its UK businesses to prop up its tier 1 capital.

    The above explains to some degree (notwithstanding wholesale funding issues) why they are offering elevated rates in Aust to re balance.

    On a lighter note:

    I just got told from another prospect that every term deposit they manage to get clients to place with NAB, NAB gives them 2 pizzas!

    Talk about hungry for deposits.

11. 

    Chris
    January 17, 2012 at 2:25 pm:

    surprised that there has been little in regards to QBE on this thread. any thoughts? i purchased a portion at $10.00 with the belief that 2012 will not be as bad environmentally… fingers crossed because the interest they are earning on their investments will take a few more years before it has any real impact on earnings.

    • 

      Matthew Smith
      January 18, 2012 at 5:39 pm:

      I bought QBE as well – but my reason is that it is below my valuation – have bought under $13 last year and under $10 last week – being overweight in patience pays off.

      I believe that the majority of securities out there with thousands of eyes looking at them are mostly fair to over priced the majority of the time – its rare when outstanding businesses take a dive below even your most conservative of value estimates and it is generally when bad news strikes – so with QBE I would suggest being prepared to appear wrong for sometime.

      • 

        Kent Bermingham
        January 19, 2012 at 4:41 pm:

        I agree QBE is very much over priced, poor management, poor use of cash reserves, poor dividend payment policy, increasing rates to offset poor management practices will lose customers, combined with an oncoming recession who know what the true value of QBE will become!

      • 

        Paul Kulen
        January 21, 2012 at 10:14 pm:

        Poor Management ? I believe they are regarded as the best in the world. Look at its 25 year history. Unfortunately, management cant do much about natural disasters or 0-2% interest in its key markets. These are just cyclical headwinds, QBE will come back bigger and better over the next 2-3 years. Those that have tried the high risk high return have all failed. The conservative approach used by QBE management through these tough times will be applauded in years to come.

      • 

        Kent Bermingham
        January 23, 2012 at 12:13 pm:

        Good Luck, I wish you well and will watch with interest.
        This site is the reason we are all interested to share all of our views even though we might not agree sometimes.

      • 

        Mully
        January 23, 2012 at 6:17 pm:

        I hope you’re right but I think that their growth by acquisition strategy is coming back to haunt them.

        Forty five plus acquisitions later and QBE’s share price has declined from around $35 five years ago to below $10 for the first time since 2003.

        Since December 2006, QBE has sustained an insurance margin decline on nine of its last 10 half yearly earnings announcements. Return on equity, which has more than halved from 30 per cent to 14 per cent.

        Doesn’t sound like good management to me.

      • 

        Paul Rehill
        January 26, 2012 at 10:11 pm:

        The key to QBE is monitoring their targets to get a grip on their actuarial premium pricing to adverse events.

        Targets for the Combined Operating Ratio (COR) for 2009, 2010, 2011 and 2012 are respectively <88%, <89%, between 87%-90% and 11% for 2012. This indicates that management is determined to reprice premiums to factor in past claims experience information stemming from the recent catastrophes. This is good.

        However, note that the insurance margin target changes (insurance margin is the sum of the underwriting profit margin + return on policyholders funds). For 2009, 2010, 2011 and 2012 respectively, the targets are 16%-18%, 16%-18%, 15%-18% and 15% (no range provided yet). So the midpoints are 17%, 17%, 16.5% and 15%. This alone makes it clear that IV should be expected to fall, with lower interest rates on the investment float being the main culprit.

        The problem for 2012 was the record large individual risk and catastrophe claims of 15% of net earned premium. QBE budgeted for 9% in 2011 (set higher to 10% for 2012) with the claims experience for the previous 7 years averaging 8.1%. That’s a huge difference. However, QBE still is likely to be one of the few large insurers to actually make an underwriting profit with others including Berkshire reporting large underwriting losses (its 30 June COR was 107.8%).

        Is the 10% large claims allowance for 2012 too low going forward on higher repriced premiums? Is climate change happening? If it is, don’t tell Tony Abbott. But if it is, based on their history, it is likely QBE will attempt to reprice premiums to reflect their underlying risk targeting a COR 11%.

        Watch the targets, if COR rises, then you can start to really question management. Given the scale of QBE’s business and the time for claims assessors to go in and get a grip on the incurred and reported claims and estimates of incurred but not yet reported on top of that, the 12 January reporting seemed reasonable.

        Concerning rising credit spreads causing a US$160m loss. Remember that the average fixed interest duration is 6 months and QBE holds the securities to maturity so unless there are substantial defaults (QBE reports there are none), no realised losses will occur. QBE is also expected to benefit from the rising credit spreads for interest earned going forward (currently expecting 3%).

        How will QBE fare going forward? Take a look at 2011 when they incurred an underwriting loss and look at how they responded.

      • 

        Paul Rehill
        January 26, 2012 at 10:12 pm:

        The reference was meant to be 2001 (rather than 2011) due to September 11 claims.

      • 

        Paul Rehill
        January 27, 2012 at 11:48 am:

        Sorry, the COR reference of 11% should have been 11% is the target underwriting profit margin.

      • 

        Paul Rehill
        January 27, 2012 at 11:52 am:

        I just worked out the blog’s editor doesn’t like less than or greater than signs. I’ll take 3, QBE’s target COR is less than 89% and its target underwriting profit margin is greater than 11%.

    • 

      Michael Horn
      January 19, 2012 at 12:23 pm:

      I bought into QBE years ago (2007/2008) when I first jumped into the market, and I am about 60% down. The problem has been that QBE invests its premiums in bonds, and its USA business must invest in the USA, where interests rates have been very low for years. I have always taken the view that interest rates must normalise at some time, and hung in. Had I been smarter, I would have skipped out years ago.

      As for the odd bad year occasioned by high-payout disasters, in a perverse way I treat these as good news, because it allows the insurance industry to increase premiums, and it conduces the market to take up more insurance. After all, if disasters did not happen, we would not need insurance.

      I have not done the arithmetic, on QBE in recent times, so I’ll not comment on it from the buy-sell-hold perspective.

      • 

        Brad
        January 21, 2012 at 10:31 am:

        Might be better of buying BRK

12. 

    Ian Bowditch
    January 17, 2012 at 11:11 am:

    Roger and others,
    I have no idea whether or not Banks will require additional funding. However if they do, they should treat their owners (us) not with contempt but as owners. We should have the option to purchase further shares at the same cost and in the same proportion as institutions. If we do not want to buy more shares then we should have the right to sell these rights to someone who wants to purchase them.
    regards Ian B

13. 

    nenad
    January 17, 2012 at 10:07 am:

    Who would be silly enough to offer banks the hundreds of billions of dollars in capital that they need in order to decrease their vulnerability? Only politicians.

    Bank share prices indicate in what bad shape the West’s banking system really is. Everywhere, bankers have promoted bubbles, made huge losses for investors, and have lived high on the hog through government bailouts. This is not going to change. The bankers are running the show. They pocket the profits, leave little for shareholders, and call for bailouts by the government whenever their bonuses are threatened. The politicians comply.
    Why should anyone expect this to change? It is not in the interest of senior managers of large banks to change it. They can deal with regulation. This stifles competition. But they will not tolerate free market competition.

    • 

      Ross Smith
      January 17, 2012 at 5:27 pm:

      Nenad, I agree with your pointed comments. I would also ask why should banks receive government guarantees and other subsidies while shareholders are paid out high percentages of the profits? Shouldn’t these be retained to strengthen their capital position following poor lending decisions. Answer: Politicians don’t want the fallout of falling bank share values which would certainly happen if they cut or scrapped their dividend payments and the bankers know it. Bankers and their shareholders are happy for the windfall profits associated with asset bubbles but want the public to bail them out when the bust inevitably arrives.

14. 

    Simon Stewart
    January 15, 2012 at 6:28 pm:

    Hi Roger, I am a bit of a novice at all of this and read the comments on the blog with a lot of interest. I wonder also about the amount of private debt and how this will effect the economy. However, if you look back 40 years the rate of borrowing to buy a house was about 4 to 1 of your annual salary, usually based on a single income family. So to buy a house for $17,000 dollars you may have borrowed $16,000 which would have required an annual salary of $4000 to service. Today you find most familys have a dual income. If the same principles hold true then to buy a $700,000 house you may need to borrow $650,000 which would require a joint income of $162,500. So the amount of debt itself is not so much of an issue but the ability to service the debt that matters. The risk here is unemployment. With people approaching retirement you may find that most have bought their homes a long time ago or have traded up over the years and have not really extend their level of debt significantly. You may find most of the private debt is held by the generation some time away from retirement. When they retire in 30 years time a debt of $650,000 may seem fairly insignificant as would a debt of $16,000 accumulated 40 years ago seem today. Perhaps we are all being a little too negative?

    • 

      JoshM
      January 16, 2012 at 1:04 pm:

      I largely agree with you Simon. The current housing debt equation doesn’t look that bad on average when you look on the surface. It certainly looks a lot healthier to me than it did in 2007 (ignoring specific areas of course).

      This hasn’t turned me into a housing bull just yet though. Risk on the Income side of that equation appears to still be too heavily weighted to the downside. There’s the near term risk of further worldwide de-leveraging due to the Euro situation. The risk from this country of being heavily exposed to the commodity cycle, which despite the enthusiasm of China cannot escape it’s cyclical nature over the typical time horizon of property ownership. The slightly longer term risk from the unsustainable financial paths still being taken by the many countries not currently under the spotlight is also worrying.

      I worry about the effect these risks on unemployment and wage growth (vs real inflation). I also prefer to consider free cash flow after tax and after average non-housing non-discretionary expenses rather than just income when looking at this type of equation. Until very recently I think this free cash flow has considerably favored the current equation vs history. More recently however the expenses have been catching up – petrol, water, electricity, rates, and this year insurance costs have joined the list of non-discretionary inflation busters.

    • 

      Steve
      January 20, 2012 at 12:41 pm:

      The problem is these days you need a strong, dual incomes to afford to get into the property market. While you can argue that these price levels are affordable if on dual incomes it comes at the expense of family life. With a huge mortgage it’s very hard to take time off to raise children etc. There are many studies to suggest putting babies only a few months old into full time daycare isn’t good for them, however it’s the only way for some families to afford a property. High property prices doom many Australian families into paying strangers to raise their children or not having children at all. Another problem is these days affordable housing is also hard to come by. The market seems to want McMansions rather than 40 years ago where smaller houses were built and you could just extend it later when needed or upsize to a bigger property when your financial situation improved.

15. 

    ben
    January 13, 2012 at 11:33 pm:

    the housing market is over valued on many metrics…

    many people say its a housing shortage that is what will be holding us up. cue japan.

16. 

    Bruce Meiers
    January 13, 2012 at 3:00 pm:

    Hi Roger,
    Back in May ’11 I stated the problems facing our banks and mining sector. At that time I suggested a way of making money out of the downturn that we were going to see this year. If anybody followed my thoughts back then, they would have gained about 140+%, that includes their outgoing, producing a profit of 40%+ to date.
    My belief is this downturn could be far worse than the GFC simply because we are starting from a much weaker point, and the real problems of private debt are not being addressed by any government.
    Anybody who has read Harry Dent’s books would realise the problem the western world faces with ageing demographics, and coupled with private debt and world wide overvalued real estate creates a recipe for a major economic downturn. The markets are not factoring in this downturn although the bond market has for many months. The markets are the only ones out of step, and during February we should start to see the markets factoring in the problems ahead.

    My bet is that we will see lower highs on rebounds and lower lows for many years to come, so much for buy and hold.

    BM

    • 

      Michael Horn
      January 19, 2012 at 1:09 pm:

      I recall reading (probably in FNArena) some months ago that Harry Dent has been so consistently wrong in his calls historically, that there may be merit in always jumping in the opposite direction to what he prognosticates. The ASX All Ordinaries is about 4,300 today, so on the basis of always-be-contrary-to-Dent, I’ll proffer that the All Ords index is more likely to be up 1000 points (i.e., 5300) than down 1000 points (i.e., 3300) by EOY – that is, there is more upside than downside. If one is a stock-picking value investor who ignores the views of both the hype and gloom merchants, and does one’s own research, one should do better than the All Ords index.

      • 

        Bruce Meiers
        January 21, 2012 at 10:28 am:

        Hi Michael,
        I really wasn’t referring to Dent’s picking of highs and lows in the stock market because so many other element of asset diversification can change an out come totally. My mention of Dent was purely one of demographics and how it changes people’s buying habits as they age. Dent is primarily a demographer who tries to fit the market with aging.
        My concern for the future is the total over indebtedness of the private sector, as this produces less physical purchases and our world is based on sales. People are genuinely scared, why would you place your money in the bank for one percent interest, and Australians are saving 14 percent of their income. Unfortunately the debt will take a decade plus to reduce to comfortable levels, and will people then borrow at the same level.
        If you do your homework you will see that PE share levels during the 30,s and 70’s was significantly lower than today, so when you work that back you come up with much lower share and index values. We are now in a period very similar to the 30’s only worse, and if social security was not available it would be disaster.
        As I wrote earlier, the only one bucking the trend is the DJIA and how long did that last. After reading ‘The Big Short’ and remembering the chaos at that time it was surprising how long it took for the markets to realize their error.
        All the current indicators in the US are lagging or coincident and showing the results of the last quarter, the leading indicators have been suggesting for over a year now the US is or will be in a recession early this quarter and that will make a synchronous world wide recession.
        When this is realized by the market, then it will dip very quickly.
        BM

      • 

        Bruce Meiers
        January 21, 2012 at 10:48 am:

        Michael,
        Another point with regard to banks. The loan portfolio of banks is heavily weighted towards real estate loans, from memory the CBA is in the order of 60+percent, and when reviewing sales of real estate several points are worth noting. New homes have been falling in number since 2002 (trend line) and existing home sale have been falling since November 2009. Most new mortgage loans have been the changing of bank for a better deal or setting a fixed interest rate.
        The banks major income earner are home loans and two things are occurring, one they are reducing in volume and the dollars borrowed. Additional to this is the growing unemployment that will have an effect on repayments.
        The banks have shown their concern by the amount of capital raising they all have been doing over the last year or so, and borrowing money in Europe is expensive and difficult and this will become harder. Most bank borrowings are heavily weighted to short term so they will have problems turning these loans over.
        Watching the rise in late payments of loans over the next six months should be interesting

17. 

    Ash Little
    January 13, 2012 at 1:55 pm:

    I am not employed in the banking sector, but most regular readers of the blog would be aware that I frequently comment on the Banking sector and I won’t let this opportunity go to waste.

    Rumours are that the Big 4 Banks are about to cut a combined 2000 staff. If we assume an average salary of $70K then that’s a combined saving of $140M…Impressive savings you may think but it would alter the final profit change by less than 1 %.( 140M/23B).

    The real costs for the banks are their funding costs. Just by way of example let’s just assume the cost of funding of the foreign debt of $310.B goes up by a mere 20 basis points (Note the Italian Governments cost of fund has gone up 200 basis points so 20 is insignificant) this would cost the banks an addition $621M which will be needed to be passed on to us peasants..

    The real problem that I see is most retail investors think banks in Australia are great “safe” investments…Why do they think this……Like most investors they look back over the past 10 or 20 years and projecting that forward for the next 10 or 20 years………And why wouldn’t they, the returns have been fabulous……I don’t want to use share prices as they can be misleading so I will use Buffets crude proxy for IV (book value) and list below the 10 year increase in IV of our top 4 banks..These returns are plus your dividend and are compound returns.
    ANZ .8.21%
    CBA 4.93%
    NAB 1.98%
    WBC 9.09%

    Forgetting NAB who totally stuff up with overseas problems if you include fully franked dividend this was the place to be in the nougties….GFC and all this is spectacular!!!!!

    But was it so spectacular…….I know for a fact that if Hassian Bolt was running against cyclone Yassi type headwinds and I was running with them In my youth my time would be better than his. The point being that that banks have had the wind in their sales over the last 20 years…Credit growth 2 3 or even 4 time nominal GDP growth in that time………..All the had to do was clip the tickets on the debt binge .Really how hard was it too look really good…..Like the last girl at a bar full of 50 drunk guys……It’s not hard to be pretty!!!!!!

    The Banks had a huge tailwind for 20 years but the world (and Australia is one of the worst offenders) simply has too much debt. Credit growth will be terrible or worse negative over the next 10 years……That is the only rational conclusion you can reach if you look at the numbers. In sailing terms the banks are now headed back straight into the winds they have just sailed through……..To say it will be tough is an understatement

    But I digress, back to capital raisings

    They really should raise money now while the sp is high but I think the chances of a capital raising in 2012 are lower than 2013….

    Despite what I have said about our banks they are well capitalised. Tier one at about 10% and our tier one is real unlike euro banks who have included in their tier one the pfiigs (Portugal France Ireland Italy Grecce and Spain) Bonds which won’t be repaid in full (Yes they are all broke)

    The current problem facing our banks is not a solvency problem’ (not at the moment anyway) It’s a funding and liquidity problem……….Funding is hard to get and when you can its expensive…Our banks can get it but it’s expensive……

    We have seen that central banks can solve liquidity problems easily (The long term effects will not be good but short term it’s fine) No reason why the RBA won’t go the liquidity route as well.

    As you have said the canary in the coal mine is bad debts but the Australian economy is still growing albeit slowly and we are unlikely to see bad debt problems in 2012.At least not in the first half anyway.

    Mike Smith might change that though as it’s a chance he will have an underwritten dividend in 2012(This is a capital raising in disguise) I think he knows best about what is happening so watch what he is doing

    The Banks currently have terribly low bad debt provisions and a slow growth economy could even trigger a rise in provisioning and the need to shore up their balance sheets with a capital raising but I favour 2013 for this not 2012 but I just don’t know.

    I have been saying for awhile now that at some stage in the future (and I don’t know when this will be) Australia will have a recession, the Banks will make losses and big ones and will trade at their book value… It will be hard to guess the book value with the bad debts that will come through but the market will get it right….

    How do I know this? Because it has happened this way in the past in countless countries and banks and it’s never different this time.

    Just my view

    • 

      Ronnita Jones
      January 16, 2012 at 4:35 pm:

      Hi Ash!!!!…… Great Post!…..I totally agree with you.

    • 

      Emily
      January 18, 2012 at 8:59 pm:

      Ditto. I love the sailing analogy. I’ve been following what you’ve been saying for a while about the banks and it’s totally changed my view.

      • 

        Ash Little
        January 19, 2012 at 8:15 pm:

        Thx Emily,

        Look forward to catching up on my next trip to the big smoke…..LOL

    • 

      Brad
      January 21, 2012 at 10:36 am:

      Quite different here compared to the US where banks are borrowing at say .5% and lending at 3.75% for home loans up to 7% for commercial

      They’re making a fortune…..

      • 

        Ash Little
        January 31, 2012 at 2:47 am:

        Brad,

        Bernie Madoff would be so happy with this ponzi scheme.

        Clearly the most sustainable thing I have every seen.

        Tounge firmly in cheek

        Cheers

    • 

      Garry J
      January 28, 2012 at 12:57 pm:

      Hi Ash

      You always seem to make astute comments and manage to simplify the complex. Can I ask you what you think will be the long term problems associated with all the central banks cranking up the printing presses. Stocks in the US have gone up as a result of QE 1 and 2 whereas our market has flatlined without such a stimulus. Are stocks (commodities, etc.) the only refuge? Surely cash is going to get eaten up by inflation. What to do???

      • 

        Ash Little
        January 31, 2012 at 2:43 am:

        Thanks for your comments,

        May I recommend you read an excellent book called “This Time Is Different:
        Eight Centuries of Financial Folly” by Carmen M. Reinhart & Kenneth S. Rogoff

        The book was written in 2009 and looks back at 800 years of banking crisis around the world. I won’t give too many spoilers away but……………………………………… “it’s never different this time”,

        I was lucky enough to buy the book when it was first published and it is playing out exactly as all other banking crisis have in the past.

        The book predicted the current sovereign debt problems and from an extract of Reinhart & Rogoff’s latest update paper that was sent to me courtesy of a friend (Thanks Russ) the sovereign problems are only going to get a lot worse from here.

        So that the Author can made some money I won’t give you the next thing that will happen… But suffice to say I do have a reasonable position in physical gold and silver…Not to mention a few listed asx miners in this area.

        Be warned though the authors are no Mathew Riley with seat of the pants action. The book is hard going even for a nerd like me.

        BTW you say stocks in the US have gone up but what are you measuring it against………..The US dollar……If you measure against say corn it would be down but just not as much down as the us dollar

        Cheers

18. 

    Gabe
    January 13, 2012 at 12:45 pm:

    Hi Roger and Others
    No business at the moment wants to come out and give a downgrade in profit – It would be far better to give other reasons
    like conditions challenging and reducing costs etc. and keep the shareholders in the dark for a little while longer or until the opposition makes likewise statements. I sold all my bank stocks late 2011 it is my belief I can buy them back less 20% before end financial year. The QBE result only enforces my concerns about business and the timing of their announcements to the public and their dishonesty in dealing with others and the lack of disclosure.
    I would like to mention their are worse stocks than the banks I wish I could freely tell you about our Financial Services companies

19. 

    David King
    January 13, 2012 at 11:58 am:

    The Big 4 presently have about $13.67 billion in redeemable hybrid securities due to be cashed or exchanged for shares between 2012 and 2016. Of these all but ANZ’s latest issue of $1.34 billion would fail to meet Basel 111’s requirement to meet a “Common Equity Capital Trigger Event.” That is, all but ANZ’s latest issue will be redeemed on time because (a) their terms of issue require fixed date redemption and (b) they will no longer be Tier One capital. (NAB’s issue has no redemption date but presumably will be redeemed sooner rather than later for the same reason) You may have thought that Basel 111 would spoil the party in future, because hybrid holders of new issues will carry a slight risk of receiving less than face value on redemption, but the recent success of ANZ’s latest issue, rising from a planned $750 mill to $1.34 billion, suggests that hybrid issues are getting more popular than ever. Investors like them because they pay a fixed margin over the 90 day bank bill swap rate, they usually run for 5 or 7 years BUT are tradeable on the ASX, and they are seen as less volatile, and rank above ordinary equity.

    As the new wave of boomer retirees hits the beach from about right now, I see lots of new hybrid issues coming from the banks, and being oversubscribed I am curious about how many of those about to be redeemed will exchange for shares rather than cash, with consequent dilution of the share pool. Many will go for shares if they see value at time of redemption.

    By the way, as interest rates fall, the margin on these hybrids becomes an ever increasing percentage of the total dividend (called “coupon”) paid to holders, and so gives the banks further ammunition for their calls of “margin squeeze.” (They will presumably always have to pay on this formula, because when Macquarie Bank for example decided to offer a fixed rate hybrid in 2008, it was at 11.098 % fixed, market value at the time but way over the odds today.)

    I predict term deposits and hybrid issues will easily fill the hole created by overseas funding droughts, albiet at higher rates than Europe was charging. And then there’s China and Japan.

    Dividends will remain solid, share growth will slow. Why? Because like most public company executives on $2million to $8million a year, the number one priority is to maintain their high paying jobs which to most means maintaining the status quo. No-one wants to copy Eddie Groves or Ray Williams. And because there’s a lid on over-borrowing throughout the economy because naked fear is everywhere. The only real business-building entrepreneur I can see among all the bank execs is Mike Smith of ANZ, and whatever you may think of ANZ, its recent incursions into Asia shows the boss has cojones. Who else does?

    How many people do you know who earn $2 million to $8 million a year running their own business? I know one: he earns about $6 million from his $50 million investment in liquor shops. He drives one of his own delivery vans and can’t sleep for fear of what Coles and Woollies are trying to do to him.

    Can you imagine what most of these bank executives would do to earn this sort of money if out of a job? No, neither can I. So, that leads us to cost cutting. “Margin squeeze” means sacking lots of middle and lower order slaves, going to instant coffee and making people bring their own ball point pens. That’s what we’re about to see. “Ensuring shareholder value” and “in the best interests of all stakeholders” and that kind of stuff. Oh, and let’s see. How about removing the 30 year old Islay single malt from the boardroom, and installing 12 year old Chivas Regal? No-one will really notice, eh!

20. 

    Manny
    January 13, 2012 at 11:23 am:

    I think the key factor for banks is

    1. Aussie Housing market says stable
    2. Unemployment stays stable

    I don’t expect that either of them to go down or up by much in 2012. We will be going sideways. Also I think the defaults in Australia of bad home loans will not be very high simply because our rules are different from America. In US they can simply walk out if there is negative equity in their home. This point is very important and under rated amongst commentators. I believe there can never be mass defaults in Australia because of this excellent banking policy/rule/regulation.

    So in a nutshell I think banking stocks (if they fall 10% from here) will give a decent MOS to buy more.

    I totally agree with someone else who commented in this blog regarding banks getting rid of “dead wood”. This is so true and having worked in big private and public sector organisations this is a normal practice and best way to get rid of the “FAT” in the organisation under the pretext of slow/bad economy.

    Happy New Year all

    Cheers
    Manny

    • 

      Adam
      January 16, 2012 at 3:49 pm:

      I believe that the ‘non-recourse’ argument may be a generalisation, often pushed by proponents of property investment. Searching the internet you’ll find that out of the 50 US states, only 11 have non-recourse mortgages.

      If that is true (which it appears to be if you search for a 2010 study from the Federal Reserve Bank of Richmond) – then hopefully that is why most commentators ignore it.

21. 

    Ralph Norris
    January 12, 2012 at 10:33 pm:

    I work for one of the big four. What do I see for 2012?

    Increase in arrears- there has been an uptick in 30-60 arrears of late, which is a good lead indicator for further delinquencies 90 days +. This has also been across the board (retail and business).

    Liquidity pressures- Increase competition for deposit funds. Although lending growth is anaemic, banks are sensing that it’s better to hold the cash now in anticipation for higher funding costs due to Euro issues and increased wholesale funding costs. Basel III is also a factor. I expect competition to remain aggressive for 2012.

    Repricing of back book – Expect to see higher margins across business lending especially in SME/Corporate due to lower economic profits. ANZ is starting, however expect the rest to follow.

    Further divergence from market rates (BBSY) to ‘Bank Bill’ rates loaded up with margin.

    Clients are deleveraging however at a snail’s pace.

    Banks seeking higher return on fixed costs = Staff will be loaded up with more clients.

    Increase in compliance (APRA) = lower productivity.

    Job cuts have started (mostly middle management) with the expectation of more within the next 12 months primarily due to slower growth.

    ‘What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets and society no longer have an appetite for it’ – Bill Gross.

    • 

      Ash Little
      January 16, 2012 at 10:27 pm:

      Hey Ralph,

      Nice Mate Thanks for the info.

      I know it’s difficult to raise interest rates against home loans but have considered the economic problems that would accrue by pushing all the funding increases on the SME/ Corporate.

      I am not liking this and as Bad debts with will accrue I am are sure your shareholders wont either.

      Just my view

      • 

        Cameron Clyne
        January 19, 2012 at 11:51 am:

        Hi Ash

        Thank you for your suggestion to my friend Ralph. I am thinking much of the same thing…let me talk to my people who will get in touch with your people.

      • 

        Ash Little
        January 19, 2012 at 6:59 pm:

        Hi Cameron,

        My People are a sum total of one.

        and worse In the backwaters of South West Qld.

        Your guys will find it difficult to get in touch and I am not sure I can help with your predicament very much.

        Sorry

22. 

    kent Bermingham
    January 12, 2012 at 2:25 pm:

    Roger hope you and all the graduates had a great Xmas and are in good healthy to start the new Year.
    Three of the Big 4 I have with some margin of safety ” at the moment” and the storm clouds you highlight may present some great opportunities in the near term for the patient investor.
    The Australian population is growing ” at a good clip” and poor performing banks throughout the rest of the world will undoubtedly produve maany bargain acquisitions in the future.
    Times may get tough and I believe CBA, ANZ and WBC will be able to come through the storm, with a lower cost base, more effecient, more customers and a better market penetration and the “valuation” should be substantially less.
    Patients is vital as I too sold out of JBH and QBE before “Mr Market” got to them but will relook at the valuations once we have better and morew accurate analysts consensus.
    Good investing to all Graduates in 2012.

23. 

    John C
    January 12, 2012 at 10:54 am:

    Thanks for this post Roger. I’m also noting Ash’s caution re-Oz Banks, and I’m currently avoiding them in favour of low (or no) debt ASX-listed IT & Industrial companies (mainly) with similar or higher dividend yields (plus a couple of consumer discretionary stocks – JBH and TGA – with similar high yields, but higher gearing).

    On a different topic, Forge (FGE) went into a Trading Halt this morning pending an acquisition announcement, then immediately announced that they had poached David Simpson (from UGL) as Forge’s new CEO. Any thoughts anyone on this move and the (as-yet-unnamed) aquisition? We know they have aggressive growth aspirations (and that’s all good), but I hope they don’t pay too much (for the new CEO or the aquisition).

    • 

      John C
      January 13, 2012 at 1:34 pm:

      OK, so the acquisition is CTEC, for a max payment total of $38.6m over two odd years, and CTEC has a uninvoiced order book of $600 million over the next 30 months. Expected to contribute annual revenue in the range of $200m to $250m, & EBITDA of $15m to $20m, and additional work for FGE’s subsidiaries Abesque & Cimeco of (hopefully) over $100m. Looks like FGE is paying the lot (up to $38.6m) in cash (out of reserves), and they’ve got some decent checks and balances in there to ensure that the key employees (4 of them) stay with the company for the period of the sale (through until post FY2013), plus the usual due diligence safeguards. FGE is to provide finance or guarantees for $25m to allow CTEC to complete two major contracts (West Angelas & Diamantina Power stations). Provides FGE with EPC contracting & EPCM exposure into the Energy sector. Sounds good so far. Initial reaction from Mr. Market is positive.

    • 

      Matt
      January 14, 2012 at 12:52 am:

      Don’t know much about CTEC yet, aquis has been awhile coming and hopefully return is over 25%. out of cash reserves is good.. i’d rather know npat than ebitda but that’s just me..

      ps. i’ve held a part of this company for 3 years and slept ok so far

    • 

      Michael Horn
      January 15, 2012 at 10:23 pm:

      Your words “I’m also noting Ash’s caution re-Oz Banks, and I’m currently avoiding them in favour of low (or no) debt ASX-listed IT & Industrial companies (mainly) with similar or higher dividend yields (plus a couple of consumer discretionary stocks – JBH and TGA – with similar high yields, but higher gearing)” suggests TGA has relatively high debt, which is not the case – it is below 8%, if my memory serves me right,

      In a sense TGA’ core rental business competes with banks – it finances folk who want something now that can be paid for over time. Thorn Equipment Finance will horn in on the lending-to-SMEs business as it ramps up. CashFirst lends small amounts to folk who the banks would not touch. One should not think of TGA as being in the same mold as JBH TGA’s core competence is not retailing, it is in finding an excuse for the cash-%-credit constrained to commit to paying TGA s stream of repayments, and then managing these debtors.

      I hold ANZ, WBC and TGA, but I like the last mentioned the most, holding about five times the value of ANZ and WBC combined. I do not feel confident enough in my knowledge of ANZ and WBC to comment on them. I seem to recall that some months ago Roger wrote something about banks, and there were comparable metrics, which included a USA bank in which Warren Buffet had shares, and Australian banks were manifestly more profitable per employee.

      • 

        Michael Horn
        January 16, 2012 at 12:27 pm:

        In respect to my earlier reply, the article that Roger wrote earlier was “Are the banks robbing sensible investment returns?” dated 16 November 2011 see http://rogermontgomery.com/category/a1/. Wells Fargo, in which Warren Buffet is the largest investor, is the USA bank mentioned. Wells Fargo’s metrics are listed together with the Australian Big Four. The metrics suggest that the Big Four are far superior to Wells Fargo, which beggars the question as to what Warren Buffet sees in Wells Fargo, and why does he not invest in the Big Four.

        The Big Four make excess of 15% return on equity, which is a pass mark in my book. The dividend yield is about 50% of that, which is OK. I am happy to hold ANZ and WBC in my SMSF, and if they retreat, one can be fairly sure that the entire economy will be in trouble, and real estate, the ASX generally will all retreat, and in time rise again (with the advantage of having a few smaller competitors having gone down the gurgler). In such a bear-market situation, firms like SGH and TGA, which I hold too, should do well, but in spite of the fundamentals, negative sentiment will drag their SPs back too. I’ll hold my SGH and TGA shares on the basic logic that with time the SP will reflect their real value. I am not smart enough to know when to skip into cash, gold or whatever, and then skip back into equities at just the right time.

        I have no feeling for the matter of capital raising, but on balance I think it will not happen as an overt share issue, but it may, and probably will, happen via the issue of convertible bonds.

      • 

        John C
        January 20, 2012 at 2:12 am:

        Michael – excellent article on Buffet in latest Time magazine – he’s the cover story – and a bit of an insight into his “buy American” mentality there. One reason why WB would have preferred Wells Fargo to the Australian Banks is simply that it’s American, despite the comparatively unfavourable metrics.

      • 

        David Sinclair
        January 20, 2012 at 10:07 am:

        Some other reasons that may be behind his preference for Wells Fargo are a) that he understands their accounts better than those of the Australian banks and b) that he considers Wells Fargo to be higher quality/lower risk. From what I have read about Buffett, a) would pretty much automatically lead to b).

      • 

        John C
        January 16, 2012 at 1:54 pm:

        Hi Michael. I did not word that well. I meant that JBH and TGA had higher gearing than my IT & Industrial picks, not higher gearing than the banks – sorry about that.

24. 

    Jason
    January 12, 2012 at 8:24 am:

    Hi Roger,
    I think the main reason banks roll out job cuts the way they do is to clear out staff they do not wish to keep – “dead wood”. It is much easier to do it quoting falling profits/margins than poor staff performance.

25. 

    Greg Mc
    January 12, 2012 at 7:22 am:

    G’day Roger,
    Hope you had a pleasant time down here in God’s country. Did you try that fishing spot I told you about? Beats the river where it is standing room only at this time of year.

    I do get the feeling that 2012 will be an interesting year. For what it is worth – which is not much – I half expect a slow motion train wreck in Europe, with leaders managing to stave off outright collapse for a while through short-term measures that ultimately do not work. I wouldn’t be surprised for it to take considerable some time for it to occur and be accompanied by volatility in the sharemarket as emotional participants (investors?) follow the ups and downs caused by the politicians. Overall though, a fair bit more down than up. I also don’t think the gloom will be confined to 2012. Now that people have mostly returned from their Christmas holidays, I think the benign market of the past 3 weeks could break any day.

    Who knows, though?

26. 

    Mr Banker
    January 11, 2012 at 7:46 pm:

    I work for a socially responsible mid-tier bank that does not tend to shed staff like the big 4 or have the same level of risk exposure outside of residential mortgages, however for the purposes of the blog it shall remain nameless. The Bank is tracking well based on many metrics and recent activity, however I have noticed quite an increased push for cost savings in other areas such as contractors, travel expenses etc. just recently that tells me that expectations across the banking sector may be heading in a certain direction per Roger’s comments. The calibre of candidates applying for jobs has also improved apparently which indicates that there are probably some retrenched staff out there looking for opportunities.

27. 

    garry
    January 11, 2012 at 7:35 pm:

    Hi Roger,
    after reading your article “are investors giving up” I made an appointment with westpac today, to organise a line of credit. Just to have some extra cash incase the opportunity arises in the near future to add some stocks to my portfolio.
    I had a meeting with the loans manager, who has been doing the same job with westpac for over 20 years, so i believe he probably understands as good as most. And what was strange is that in our conversation, he brought up the topic of the problem westpac is faced with in the coming months of having to roll over a huge amount of there debt. They last rolled over this amount just before the GFC. He voiced how concerned he and the bank was, and by the sounds of it, they are praying nothing happens in Europe before they are able to complete it.
    I commented that i had moved most of my cash into another bank because the interest rate on an “on call savings account was 0.6% more than I was offered at westpac (ANZ 6.1%). He said that “westpac are about to raise there savings rates to be more competetive, and embark on a advertising campaign, because they now believe they will have a shortfall for lending by the 3rd quarter, so will fight more aggressively for the domestic savings $”. Even if there debt is rolled over without a hitch. He also said “they realise that they must become more dependant on customers savings”.

    The reason for my comment, and uncanny how you wrote this article today, is that when you have staff concerned, and voicing their concerns to customers, there is surely something brewing. I believe your article on the chances of an equity raising could be right on the money.
    Another point he raised was that on average their margin on loans is a meagre 0.8%. What happens if the RBA cuts rates next month?? They could not possibly follow suit, could they???
    Another point, probably irrelevant, is that i went into borrow an amount, and walked out with 50% more than i wanted..Not my call but his..
    regards Garry

    • 

      David V
      January 13, 2012 at 9:30 am:

      As a previous employee of one of the Big 4 it is also important to throw into this mix the increased cost of borrowing that will occur as the financial system is pressured by the increasing rate of defaults at a consumer, business and country level. The bank’s ability to borrow funds will increase as the rating agencies start slashing credit ratings. Recently, South Australia has been wanred that it will probably lose its AAA credit rating. As defaults mount, there is a chance that this will also occur to the Big 4 (and definitely to smaller banks). In addition, the ability to raise funding through securitisation will be limited. One area that will contribute to the raise in bad debts will be in our housing market where the government has allowe significant ‘over capitilisation’ to occur, by offering grants and allowing lenders to lend in excess of 100% of the value of a property. As housing prices fall and unemployment increases, many new property buyers will make the distinction that simply handing back the keys and declaring bankrupt will be the most effective way to address their financial concerns. I think this impact could be signiifcant as Generation Yers do not attach the same stigma to ‘bankruptcy’ as the Baby Boomers or Generation Xers.

28. 

    Nick Mason
    January 11, 2012 at 6:55 pm:

    Welcome back Roger, great to read your insights once again.

    When such an experienced stock market pundit as yourself is so concerned with not only Australia’s macro economic headwinds but Europe, America and China’s as well my spirits lift. “The time of maximum pessimism is the best time to buy.” Sir John Templeton

    I came up with a corollary to this which goes “The time of greatest disinterest is the best time to buy.” And I measure disinterest by monitoring headlines and stories for reasons why I shouldn’t invest in stocks.

    Of course ‘maximum pessimism’ can only be determined in hindsight although with such lethargy and pessimism abound in the financial community we must be close.

    Best Wishes.

    • 

      Greg Mc
      January 12, 2012 at 1:54 pm:

      G’day Nick,
      I don’t think we’re that close to maximum pessimism. Some people are talking about dark clouds on the horizon but maximum pessimism is when people capitulate and cannot see any chance of the market recovering ever again. In my opinion, the process is only really starting.

      • 

        Nick Mason
        January 12, 2012 at 6:45 pm:

        Perhaps Greg, although if you stick to the basics of buying small parts of businesses you’d like to own outright when they’re selling at a discount to a value you find fair you’ll likely do okay in the long run. Remember that a lot of these doomsday scenarios are already priced into the market to a certain extent and that economic ‘experts’ who try and predict the future often end up looking very amateurish. I plan on leaving the forecasting to the professors and will continue to invest in the stock market as spare cash becomes available and as the opportunities arise. Best Wishes to you.

      • 

        Dave T
        January 12, 2012 at 10:22 pm:

        Hi Greg,

        I have been reading a lot about q ratios in financial media recently, which attempts to value the entire share market on a macro scale. According to the main supporters of q ratios, Smithers & Co, the US market has been overvalued since about 1990, except for a brief stint during the GFC.

        Food for thought.

        Dave.

      • 

        Jason P
        January 13, 2012 at 10:58 am:

        Thanks for the useful info on q ratios.

29. 

    Campbell
    January 11, 2012 at 1:40 pm:

    Hi Roger, I wholeheartedly agree with your concerns about the banking sector. While the media and a lot of the population bang on about excessive profits, a point to remember is that those profits are only (very approximately)1% of their assets, such is the extent of their leverage. I don’t know what percentage of their assets are housing loans but I imagine it’s fairly high – the point is it wont take too many of those loans to go bad and those profits will disappear very very quickly. Opportunities for revenue growth seem very limited which is evidenced by the banks shifting their focus onto costs; combine this with all the downside risks you’ve referred to and it seems to me like the absolute best case scenario for the banking sector is simply treading water . . . .the worst case scenario doesn’t bear thinking about!