Tangible Common Equity

Tangible Common Equity (TCE) is defined as equity capital (common stock) of a bank, less goodwill and other intangibles (net worth). It indicates the borrowing capacity or strength of a bank or what common shareholders would get if the bank were dissolved. Intangible assets like goodwill don't produce any income and therefore don't have a cash equivalent value.

Regulators have determined that TCE is the key indicator to follow in their stress test evaluations. Some experts believe that a TCE ratio of 4% to 5% should indicate enough strength for a bank to stay solvent in a deep recession. The nineteen top US banks received TARP funds in the form of preferred stock which carry a dividend of 5%. The Obama administration hopes to convert the preferred stock to common stock thereby eliminating the 5% dividend and increasing the banks cash flow. This conversion would increase the TCE ratio for the bank and dilute common shareholders. The only bank that has agreed to convert is CITI which will see its' TCE ratio go to 5% or above after the conversion.

In summary, on May 4th regulators will release the results of the stress tests which will indicate which other financial institutions will have to dilute their shareholders by converting the TARP preferred stock to common stock.

Random thoughts....Swine flu is the talk of the day.....will the markets ignore it and go up anyway? ..GM unveiled another restructuring plan ....will it succeed....Obama's first hundred days are over...what do you think? ...look for regional banks with large commercial real estate loans to get low grades from the stress tests.....potential large banks that will have to raise capital include Wells Fargo and Bank of America...

The Stock Market Rally of 2009 & Susan Boyle

The Stock Market has been up for the last six weeks leading experts to ask, " Is this rally too far, too fast?" Since March 6, 2009 major indexes have gone up about 30%. One year ago, the Dow was trading around 13,000 and the NASDAQ was 2,500. The Dow (8,130) is still down 37.5% in twelve months while the NASDAQ (1,673) has lost 33%. In fact, a 50% recovery for the Dow from the low set on March 6 would be around 9,700. My conclusion is that we fell so far so fast that it is possible to rally much further than experts envision. I expect a pause in the rally in the next few weeks as we wait for the results of 'stress tests' for financial institutions. The market needs unexpected good news like an uptick in housing or strong retail sales. As the overnight success of Susan Boyle shows us, anything can happen when we least expect it.

Random thoughts....this may the time to convert your IRA's to Roth IRA's...it is worth an email to check with your tax advisor....this week Microsoft, Bank of America, IBM and Apple report Quarterly Earnings....If Goldman Sachs, Wells Fargo & JPMorgan want to pay the TARP back (over $60 Billion) will Las Vegas be a buy again....only time will tell...

Do you want to buy a BAB?

Under President Obama's 'American Recovery and Reinvestment Act', tax-exempt issuers are allowed to sell taxable bonds. The issuers can either pass on a federal 35% tax credit or take the subsidy themselves as cash. Babs (Build America Bonds) are a new financing tool for municipalities and can be issued until the end of 2010. You may ask, 'why would a tax exempt municipality want to issue taxable bonds?' The answer is as of today, US Government bonds are yielding much less than Municipal Bonds. For example, a highly rated General Obligation bond due in twenty years yields about 4.68% while a similar US Government bond yields 2.92%. The success of BABS will giver issuers a chance to lower their Net Interest Costs (NIC) and therefore help our cities and states. Potential buyers of these bonds include foreign investors, pension funds and tax-deferred portfolios.

Random thoughts.......1Q Earnings Reports this week include Goldman Sachs, Morgan Stanley, Citi, Intel and Google.....the market has the potential to go to 8600-8800 in the short term......financials must continue to lead this rally....if we were to get great earnings from Bank of America or Citi...the shorts better cover.....it appears that the residential housing market is within months of bottoming.....look for the commercial real estate market to continue to struggle into next year.....

The potential CMBS disaster

Commercial Mortgage Backed securities (CMBS) are backed by mortgages on commercial properties (like office buildings, apartment complexes, retail malls) rather than residential real estate. This $800 Billion market has over $20 Billion of loans in 'special servicing' (indicating a potential default). If the economy continues to weaken, we may see over $40 Billion in delinquent CMBS loans this year.

President Obama is trying to halt the Great Recession of 2009 by a combination of fiscal and monetary policy. The easing of the 'mark-to-market' accounting rules will help ease pressure on financial institutions who are very active in this market (JP Morgan, Morgan Stanley, Hartford Insurance). The basis for the payment of commercial mortgage loans is the level of occupancy of the project and the timely payment of rents by it's tenants.

Hopefully, President Obama's economic stimulus plan will work and halt the potential CMBS disaster.

Random thoughts.....The market has been up for four straight weeks...a 50% retracement of the decline of the DOW JONES from 11,500 would be 8,500-8,900...a close above 9,000 in April would be extremely bullish for 2009....it seems that the market will probably trade between 7600 and 8900 for the next few months...we know that the first Quarter earnings reports will be disastrous.....look for an improvement in Q2..

ps...the John Hancock office building shown in the picture above just sold for $660 Million ...about 50% of its' value in 2006 ($1.3B)