Monday, July 14, 2008

Primordial Scream, Economic-Style

It's times like these I just want to tear my hair out. I just bought some FHN (under 2,000 dollars' worth, so I am not including them in my Stocks Update), as well as another 100 shares of CNB. But CNB went down around 13% today, so now I have 1100 shares and a lot less confidence in my stock picking abilities. After the Fed Reserve came out and assured everyone that FNM and FRE would not go under, small bank stocks still went down based on the IndyMac collapse, a poor earnings report from M&T Bank, and National City's woes. All three banks were having issues, which reflected on FHN and CNB.

Still, FHN and CNB are priced as if they are going to fail. That is far from the case. The "Texas ratio" is a good financial rule of thumb that assists investors in determining whether a bank will fail. The ratio is calculated by dividing a bank's non-performing loans, including those 90 days delinquent, by the company's tangible equity capital plus money set aside for future loan losses. The Texas ratio shows to what extent a bank is overleveraged; how well its loans are doing; and whether it has the capital to continue suffering losses on loans without failing or needing to raise more capital. Any ratio 100 or over means the bank may fail and is in the zone of bankruptcy. IndyMac had a Texas ratio of 125 prior to its collapse. But FHN and CNB have Texas ratios of around 25%. CNB releases earnings on July 21; FHN releases earnings on July 17 [Update: FHN released earnings today after its stock price went down 25%; in afterhours trading it was up 5%].

USB releases earnings tomorrow. It is said to be a much more stable bank, and its earnings may provide better guidance about whether CNB and FHN will have good news this week and next week.

If any major bank is going to go under, I don't think it's going to be CNB or FHN. Unless their earnings/losses are especially horrendous--and their stock prices reflect normally horrendous losses--they should be okay. The word on the street is that Washington Mutual is teetering on the brink. I have an account there, and I am not concerned because FDIC insurance will protect my deposits and my clients' deposits.

These are truly crazy times for banks and American capitalism. I hope two years from now, my readers and I can read this posting and smile. Right now, however, I am just shocked at how irrational this market is. "Encephalic apoplexy" seems like an appropriate term to describe what I am feeling, because I am used to being right about the market.

[On the bright side, I did successfully day-trade some GE shares today.]

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