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Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com. ValuEngine is a fundamentally-based quant research firm in Princeton, NJ. ValuEngine

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Februar y 9, 2010 – Stress will Return to Community and Regional Banks

Community and Regional Banks face continued stress of bad consumer and real estate loans.

Taxpayers face unlimited costs from Fannie and Freddie, while lending standards tighten. Themessage from the daily charts for yields, gold, crude oil and the dollar. Stocks are in thatdifficult state where the oil of fundamentals does not mix with the water of technicals.

The America’s Community Bankers Index (ABAQ) is just below breakeven year to date and justabove its 200-day simple moving average at 146.34. 

Chart Courtesy of Thomson / Reuters

ABAQ is an index of more than 500 publicly traded community banks and many are overexposed toConstruction and Development Loans and Nonfarm, Nonresidential real estate loans where the threecategories define a risk category called CRE loans.

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Four of my ten predictions for 2010 are the result of the fact that nearly 3,000 community banks areoverexposed to C&D and / or CRE loans.

The FDIC will close 150 to 200 banks in 2010 on the way to 500 to 800 by the end of 2012 into 2013.Banks in receipt of TARP will join the failed bank list. 181 banks have failed since the end of 2007. 

The FDIC will tap its $500 billion line of credit in 2010, as the three year Deposit Insurance Fundprepaid fees of $45 billion will run dry. I estimate the DIF to total $23.1 billion at this time. 

Loan Defaults and Foreclosures will continue to rise due to waves of Alt-A mortgage resets and asunemployment pulls prime mortgages into default. 

The FDIC List of Problem Banks will exceed 700, as the FDIC attempts to keep up with the nearly3,000 community banks overexposed to C&D and / or CRE loans. 

The Regional Banking Index (BKX) is still up 3.3% year to date, but these bigger banks are subject tothe “Volcker Rule” and other measures to remove the mantra of being “too big to fail”. The BKX hasbeen above its 200-day simple moving average at $42.29 since July 27 th, but this support appearsvulnerable given exposures to European countries such as Portugal, Ireland, Italy, Greece and Spain(PIIGS).

Chart Courtesy of Thomson / Reuters

When the FDIC releases its Quarterly Banking Profile for the 4th quarter on 2009 later this month wewill see that away from the profits resulting from the zero percent funds rate, bad loans are rising andreserves for future losses are rising as well. Banks must gradually bring off balance sheet trusts backon their books beginning this year through 2012.

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Total assets in the banking system should continue to decline as a leading indicator that after strongGDP growth in Q4 2009, that GDP will be vulnerable for a double dip in 2010.

Another one of my predictions for 2010 is that Fannie Mae and Freddie Mac will continue to draintaxpayer money as the Treasury provides unlimited lines of credit through 2012. The line of credit to thetwo GSEs will be $400 billion plus all losses over the next thirteen quarters. The FHFA estimates thatthe hit will be around $55 billion in 2010, which seems optimistic to me.

The yield on the 10-Year US Treasury favors continued risk aversion with that yield richer than mysemiannual pivot at 3.675. Monthly resistance is 3.504. Today risk aversion is tested with the auction of$40 billion in 3-Year notes. My annual pivots are 1.292 and 1.139.

Comex gold has been above its 200-day simple moving average at $1020 since January 23, 2009 withresistances this week at $1083 and $1085.

Chart Courtesy of Thomson / Reuters

Nymex crude oil held its 200-day simple moving average at $70.75 with the 200-week simple movingaverage as resistance at $76.18.

The Dollar Index has exceeded its quarterly resistance, now a pivot at $80.23. Last week’s close wasat the 200-week simple moving average at $80.55. This week’s resistance is $80.90. The euro is belowits 200-week simple moving average at 1.3872.

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Chart Courtesy of Thomson / Reuters

The weekly chart for the Dow is negative with the broken Ascending Wedge and with the Dow backbelow the down trend that goes back to October 2007. That’s the breakout followed by the fake-out.

Chart Courtesy of Thomson / Reuters

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The 21-day simple moving averages are below the 50-day simple moving averages for the Dow, S&P500, Dow Transports and the Philadelphia Semiconductor Index (SOX). A negative crossover is highlylikely for the NASDAQ today and for the Russell 2000 on Wednesday.

ValuEngine shows eight of eleven sectors as undervalued which means that the oil of morepositive fundamentals is not mixing with the water of negative technicals. I am not going to become abull on stocks until all eleven sectors are undervalued as they were on March 5, 2009, when theundervalued readings were between 32% and 42%.

Send me your comments and questions to Rsuttmeier@Gmail.com. For more information on ourproducts and services visit www.ValuEngine.com 

That’s today’s Four in Four. Have a great day.

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Richard SuttmeierChief Market Strategist

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As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. Ihave daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters aswell as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as theValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sampleissues of my research.

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