Indymac is the latest in a list of bank failures that have occurred this year compiled by the Federal Deposit Insurance Corp. (FDIC). What makes Indymac interesting is its size, which puts it in the leagues of the biggest bank failures in recent history.

If we sort that list of top bank failures by date, we get the following:

1984 was the year of the Continental Illinois bank failure, also the largest ever bank failure. Here’s the performance of the DOW during that period. The red dot is the month Continental Illinois filed for assistance:

The late 80s were the era of the Savings and Loans crisis, and here’s the DOW during that time. Note the big drop during the crash of October 1987, while the red dots are the months marked by the failures of the banks in the list above.

In the early 90s, a number of large bank failures were also happening, here’s the DOW during that period. As in the previous charts, the months marked by large bank failures in the above list are marked red:

With 32 billion dollars in assets, Indymac would be 3rd on the revised list. Meanwhile the DOW is currently hovering at its lows for the year. Clearly the past largest bank failures have been interesting points preceding market rallies. But I think the key is not the bank failure per se, but what occurs during this time.

Bank failures often occur during periods of market crisis–when asset values are falling, causing massive defaults on loans collateralized by those assets. The resulting foreclosures on assets cause more depreciation, which trigger more defaults. During market crises, liquidity dries up, and in the case of really large bank failures, the US government through the Federal Reserve and legislation often enact measures to restore liquidity to the system.

Here’s an image I posted earlier on Spotting The Bottom, which illustrates the major liquidity crises and financial institution failures that have accompanied market lows (these are financial stocks):

The moves of the government during these periods are aimed to stem the crisis, and often the troubled banks are either rejuvenated or merged into healthier competitors–which makes the surviving bank entities even more robust than their predecessors.

Just recently, the FED has been lowering interest rates to stem the mortgage crisis, and a housing bill passed by legislation effectively gives mortgage institutions a lifeline to solve their liquidity dilemmas.

The question of the hour: Will Indymac prove to be a harbringer of market relief like its predecessors?

In stock trading forums such as Finance Manila, technicians always have the floor. Many a fancy or crude chart is posted right and left, and price targets and predictions are aplenty. Next to rumor-mongering, technical analysis are the most popular posts.

What about fundamental analysis?

Well, it’s not quite as popular. As to why? My guess is simple: it’s too damn hard to do. Next to fundamental analysis, all other forms of analysis are generally for lazy people.

Unlike spreading rumors, consulting horoscopes, or drawing trendlines and plotting moving averages on charts–all of which, while they could possibly take some time and effort, are really peanuts compared to the time and effort it takes to do fundamentals.

Firstly, getting access to fundamental data (i.e. financial statements), especially on Philippine Stocks isn’t as easy as pulling off price data. There’s the accuracy issue to begin with: most financial statements are restated time and again even years after the original reporting period. Then there’s the almost non-existent sources of historical data.

Second, if you had an access to financial data, if you really want to do a good analysis of a certain stock, you would probably not stop at getting the financials of JUST that stock. You would need financials of other stocks for comparison. If there’s one thing that distinguishes fundamental analysis from technicals, it’s that fundamentals are more discerned as a COMPARISON between companies–whereas technicals are more centered on the price action of particular individual issues.

Third, let’s say you already have sources to obtain many financial statements of a number of companies–the trickiest part is to select which two, or three, companies to compare each other with. In order to get a true sense of a company’s value, you will want to compare it with another company in a similar line of business, and then draw insights on how one company stacks up against the rest. This is quite a difficult endeavour since many companies listed on the PSE, if they are not engaged in multiple businesses, also change business purpose quite often–depending on expansion. A company can start out as a financial services firm, then become an IT company, then later a mining company. This makes historical comparison of financials with other companies in similar fields pretty moot doesn’t it?

Fourth, let’s say you’ve overcome all three obstacles above, and you finally have a homogenous group with historical financials to compare with each other, the exact purpose of using fundamentals can get quite muddled at this point. Most fundamental measures and metrics are designed to rank companies in terms of their efficiency and profitability as a business. However, as a stockholder, you are not only concerned about the condition of a company’s business, but how this affects the comapany’s valuation on the market–which is the true source of your capital gains. The result is that once you have conducted a thorough analysis of company operations in comparison with similar companies, you need a second batch of analyses to relate those operational and profit relationships with the movement in those companies’ share prices.

By now you must appreciate why most retail traders stick with technicals, and why fundamentals are almost strictly the province of institutional and brokerage research teams. If you’re nodding and agreeing to this I have only one thing to say to you: YOU LAZY BUM!

Chart patterns and seasonality are NOT the only things we can test our statistical tools. Fundamental analysis provides a fertile ground of testing due to the dozens of ranking and valuation measures available to the financial analyst. But before we get to the test proper, we have to overcome the obstacles I mentioned above, which I will share here for the benefit of the aspiring fundamental analyst:

First and Second: availability of data. Well you can try the PSE Website and check out each stock you want to analyze, but I’ve found the best FREE source of financial statements is Reuters. There was a time back when Reuters suspended coverage of equities outside of the US, but somehow the data is back online. Just click “stocks” and type a ticker name, followed by a .ps (e.g. TEL.ps) to get the information of any Philippine Stock. Then click Financial Statements to view Balance Sheets, Income Statements, and Cash Flow Statements. 5-years historical financials are available on Reuters–practically a treasure hoard.

Third: homogenous group. This can be any group of stocks you can select at your leisure. Popular groupings with decent populations of stocks are Telecoms, Property, Mining, and Energy. However, for the purpose of my tests, I selected probably the most homogenous and inert grouping of stocks on the PSE: Banks. Although on a micro level, some Philippine Banks listed engage in non-bank activities, on a general level all of them do the same thing: get deposits and grant loans. Furthermore, the banking sector never has members that suddenly changed business purpose (never heard of mining companies becoming banks, or vice-versa)–which makes historical financial comparison pretty viable. Also, unlike another homogenous group: Mining, Banks are generally profitable and have a steady stream of existing business, which makes more financial ratios relevant compared to assessing mining companies which have no production yet.

Fourth: Two-step analysis. We won’t dodge the confusion, but will face it head on. The structure of the tests are simple: a) Relationships between banks will be drawn based on standard and non-standard fundamental measures and b) Relationships will then be drawn between the results of those fundamental measures and the resulting gain/loss of those banks’ shares in the period following the construction of the measure. This will allow us to easily determine how a fundamental relationship (say profit margin) affects stock prices.

Sound simple? OF COURSE NOT YOU LAZY BUM!

However, tedious as it was, the exercise was more than worth it. Compared to knowledge of chart patterns and technical oscillators, fewer people know historical effects of posted financial statements to the action of the market subsequently. These and more insights will be posted here in the days to come… stay tuned!

Earlier this year, I posted on Finance Manila about the relative value of gold against currencies other than the dollar. This is sort-of a follow-up to that, focusing on the actions of world central banks.

I just received via email the latest data from the World Gold Council on the gold reserve holdings of central banks, and the trends on the central bank actions are quite interesting.

Anyway to start, it isn’t a mystery that gold, along with other commodities, have been rallying for some years now:

Unlike other commodities however, gold isn’t really consumed, but rather held as a reserve currency against existing fiat currencies. From the reserve asset statistics of the World Gold Council, it’s possible to have a look at Central Bank reserves for the same period as the rise in gold above. Here are the top 16 holders of gold, as measured in metric tonnes, as of 1st quarter 2008:

The first Central Bank Gold Agreement (also known as the Washington Agreement on Gold) was announced on September 26, 1999. The agreement to limits on central bank sales of gold was reaffirmed five years later; the second agreement came into force on September 27th 2004 and will run until 2009.

The agreement was a communique from the following banks:

Oesterreichische Nationalbank
Banca d’Italia
Banque de France
Banco do Portugal
Schweizerische Nationalbank
Banque Nationale de Belgique
Banque Centrale du Luxembourg
Deutsche Bundesbank
Banco de España
Bank of England
Suomen Pankki
De Nederlandsche Bank
Central Bank of Ireland
Sveriges Riksbank
European Central Bank

In the interest of clarifying their intentions with respect to their gold holdings, the above institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.
2. The above institutions will not enter the market as sellers, with the exception of already decided sales.
3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tonnes and total sales over this period will not exceed 2,000 tonnes.
4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.
5. This agreement will be reviewed after five years

In light of this agreement, from the data above, it’s possible now to construct a table that computes the net change, quarter-on-quarter of the gold holdings of those respective reserve banks. This can be charted as a quarterly change:

One trend is that, at least for the largest holders of gold reserves, they have been largely selling into the gold rally. Note the large selling of the Swiss early in the early stages of the gold rally, and the French and ECB in the more recent years.

Actually, comparing the average gold spot price with the level of gold reserves shows along with France and the ECB, it’s been the European banks who have been selling into the gold rally.

You can contrast this with reserve banks of Venezuela, China, and Russia, who have been buyers into the rally.

From this data, there are a number of questions that arise? Why are the European banks selling gold?

Julian Philips wrote an article last June 2007 about the Swiss National Bank’s annoucement then about their planned sale of 250 tons of gold. From the data above, looks like this is already taking place as we speak. The reasoning cited by Philips was that Switzerland, being a haven country for a lot of foreign capital, so has vested interest in maintaining a spread of foreign currencies as reserves.

So does the same logic hold for the other European banks, who have joined the selling? A more recent article argues that Europeans are defending the Euro from following the dollar’s decline. So the gold sales help drive european reserves to help protect the Euro considering the value of the dollar has also declined against the Euro and Swiss Franc over the same period as the rise in gold.

First developed in 1935, it wasn’t until 1967 that the Automated Teller Machine (ATM) began seeing widespread use. This was due to the general lack of acceptance amongst banking customers as to the security and reliability of ATMs.

Nowadays ATMs are taken for granted as the most convenient way of getting cash from your bank account without having to go to an actual bank teller. The machine has entered such widespread use that people no longer view the ATM with as much doubt and skepticism.

This has allowed unscrupulous intentions to take advantage of people’s trust of ATMs, and over the last few years, a number of clever ploys have emerged to part ATM transactors with their cash.

Here’s an email making the rounds right now about a very popular ATM Cash Trick:

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PLS. BEWARE OF THIS ATM  MODUS OPERANDI !!!

We may already have  heard about this scam many times before, but sometimes we forget and need to be reminded, especially this coming Christmas season.

I was withdrawing last Saturday, Nov 17 10pm at a Bank of Commerce ATM near McDonald’s corner Pasong Tamo and Gil Puyat in Makati. There seemed nothing wrong with the ATM but no cash came out of the machine. I automatically thought it was just a machine error and that my account was  debited because when I checked my balance, it was deducted by the amount I was supposed to withdraw.

But since I wanted to be sure and I needed cash, I waited for a few more  seconds and carefully checked  where the cash should come out. I noticed  a light blue steel bar where the cash dispenser should be and looked underneath it. There was no outlet where the cash should come out. Suddenly remembering the ATM scams I’ve heard about, and now feeling sure that that bar shouldn’t be there, I took a photo of it then tried removing it from the machine. It had to take a lot of effort but when I finally got the  bar off, I was surprised to see my money caught in  the bar with black glue (probably put inside the bar to keep the cash from going back to the machine).

So please, please carefully check the ATMs you use and as much as possible withdraw only during daytime, or on guarded ATMs to avoid being scammed.

Here’s from another email about smarter scammers:

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Bank ATM’s Converted to Steal IDs of Bank Customers

A team of organized criminals are installing equipment on legitimate bank ATM’s in at least 2 regions to steal both the ATM card number and the PIN.

The team sits nearby in a car receiving the information transmitted wirelessly over weekends and evenings from equipment they install on the front of the ATM (see photos). If you see an attachment like this, do not use the ATM and report it immediately to the bank using the 800 number or phone on the front of the ATM.

The equipment used to capture your ATM card number and PIN are cleverly disguised to look like normal ATM equipment. A “skimmer” is mounted to the front of the normal ATM card slot that reads the ATM card number and transmits it to the criminals sitting in a nearby car.

At the same time, a wireless camera is disguised to look like a leaflet holder and is mounted in a position to view ATM PIN entries. The thieves copy the cards and use the PIN numbers to withdraw thousands from many accounts in a very short time directly from the bank ATM.

Banks don’t have to fail in order to hurt customers with whom they do business. Even as financial problems are just beginning to develop, the bank’s operations may begin to deteriorate, and ultimately the bank may need to rein in its growth.

When banks run into financial problems, they behave like any other troubled company. They sometimes try to hide problems and limp along as best they can. For the customer, services can quickly deteriorate. Growing companies can be especially hurt because most rely on their banks to expand credit lines. On the contrary, too often a troubled bank will call in its loans because the bank needs the money–not because the customer is at any growth risk.

Ironically, thousands of customers are unnecessarily hurt. Many could have avoided problems by watching for early-warning signals of bank weakness. Typically, these distress signals show up as early as two years before an outright failure.

Chances are good, of course, that your bank is among the majority of healthy ones. But ignoring the signs of problems now adds to you future risks.

Most recent bank problems stem from decisions to grow aggressively. Some banks that failed funded an ambitious growth strategy with “purchased” funds (such as high interest time deposits), as opposed to standard deposits from their customers. That strategy puts them on shaky ground.

Customers that have dealt for some time with banks in this situation usually sense something is wrong:

• There’s high turnover among the officers.
• Paperwork and record-keeping become sloppy.
• The bank encourages customers to extend credit when officers know it isn’t necessary.
• Outrageously high interest offers on new deposits compared to the competition.

But even when customers suspect that a bank is going through some sort of change, they rarely take the trouble to find out if it’s merely because of routine personnel problems, for instance, or because of more serious financial trouble.

Essential steps: If a friendly bank officer has recently quit, invite him to lunch and ask him tough questions about his former employer.

If you think there’s a problem, get a copy of the bank’s statement of condition. This is a published quarterly document that has data that tell the financial conditions of a bank. (In fact, regardless of whether a customer senses trouble, his finance officer should routinely get reports for banks with which the company does business).

Although statements of condition are public documents, not all banks make copies available (usually obtainable from the bank’s shareholder relations department). But if a bank balks, copies are available from the Central Bank or the SEC.

What to look for: By comparing figures of statements of condition over time, a customer can read the warning signals. These include:

• Rapid expansion as reflected in a big increase in loan yield relative to other similar-sized banks.
• Loan recovery rate of less than 20%. This is the percentage of written-off bad loans that a bank is ultimately able to recover. It should be well over 20% annualized and is an excellent indication of how riskily the bank is willing to operate.
• Low return on assets for a bank its size (can range from 0.6% for large banks to over 1% for a small bank).
• High overhead ratio. Failed banks had overhead expenses that amounted to nearly 80% of their income base, compared with an average of 56%.