I am disappointed that I missed my blog yesterday since I go to extra lengths each day to complete something – I apologize.
The S&P/TSX Composite Index Canada’s Main stock index advanced for a 2nd straight day erasing the losses from earlier in the week. Energy issues gained on stronger oil prices and financials got a boost from a smaller than expected drop in quarterly profit at Toronto Dominion Bank.
In short, the TD results were pretty good given the economic environment which contributed to a bit of a relief rally in Canadian bank shares. The banking or financial sector clearly led with a 3.1% gain. Also supporting the rally were oil and gas stocks which climbed 1.9% as oil ended higher at $42.50 a barrel (up again this morning). A U.S. Government report showed a sharp drop in gasoline inventories – okay, a build of 700,000 barrels, but analysts were expecting 2 million.
The index closed higher by 0.93% but only 5 out of 10 main sectors were higher. The gain added to a rise of 2.8% on Tuesday.
Stocks fell on Wednesday after President Barack Obama warned of stricter oversight for Wall Street, raising the specter of greater regulation that investors fear could sap profits.
In the United States, stocks fell as Obama’s comments near the market close worried jittered investors when he said “financial institutions that pose a serious risk to markets should be subject to serious government supervision.”
Whenever there is a question about how large the government role will be in private business, stock markets react negatively because stocks markets like clarity. Stocks had a yo-yo session, worried about uncertainty over Washington’s plan to shore up the banking system and weak housing sales. The stock market had turned positive (briefly) after the government gave details on stress tests of banks’ capital levels.
The Dow Jones industrial average was down 1.09%, the Standard & Poor’s 500 Index was down 1.07% and the Nasdaq Composite Index was down 1.14%.
As mentioned, the U.S. banking regulators yesterday launched a “stress test” program to assess the largest banks’ ability cope with the possibility of a deeper recession in which the unemployment rate would climb above 10% next year.
The stress tests, mandatory for the roughly 20 banks with over $100 billion in assets, will be used to determine whether the banks need more capital from a new U.S. Treasury program. The program will inject more government money into banks via preferred stock investments that can be converted into common equity.
The new Treasury program, known as the Capital Assistance Program (versus the first program called the Trouble Asset Relief Program), will be placed alongside a previous program that has injected nearly $200 billion into banks since last October. Both will draw from remaining funds in the Treasury’s $700 billion financial rescue fund (this number will likely go up if required).
The stress tests, to be conducted by end of April by the Federal Reserve, the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency and the Office of Thrift Supervision, will measure banks against two economic scenarios – current economic consensus and a more depressed scenario.
News of the test details, which were not as onerous as some analysts had expected, are intended to renew confidence and trust into the system (big brother looking over your shoulder). However, banking shares still dropped by the end of the day on comments by President Barack Obama calling “for sweeping regulatory reform on Wall Street.”
Under the stress test program, regulators will conduct “an assessment of all these banks to try and figure out how much capital they need to meet even that weaker scenario,” Federal Reserve Chairman Ben Bernanke told the U.S. House of Representatives Financial Services Committee.
“Banks will be told how much capital they need to raise, if any. Some will not need any capital, but some will,” he added. Bernanke said “banks will first have the opportunity to try to raise capital in the private market, but if they cannot do so, the Treasury will offer to buy convertible preferred shares in the bank.”
In short, progress is being made and with some considerable pain the banking system will be functional again and credit markets will recover. However, the damage has been done and the contagion has begun as economic activity has contracted pushing the economy into one of the worst recessions in the last 100 years.
Capital markets will recover before the economic figures bottom out later this year. I will provide a little more detail regarding the current valuation of stocks tomorrow.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
