Today large banks such as Well Fargo (WFC) derive a large amount of income from their insurance divisions. The following chart lists the Top 50 U.S. Bank Holding Companies Ranked by their Total Insurance Income for year 2008:

Click to Enlarge

Source: Michael White Associates and American Bankers Insurance Association

Source: The Wall Street Journal

From the WSJ:

“The stockpile — the world’s largest currency reserves — grew by $177.87 billion in the quarter to $2.132 trillion, the largest quarterly rise on record. In May, China also increased its importance for U.S. policy makers, lifting its Treasury holdings by $38 billion to a total of $801.5 billion.

While Japan and Russia cut their Treasury holdings in May, China ramped up its purchases, posting the biggest one-month increase since October. China now has more than 20% of total Treasury holdings among foreign central banks and nearly matches the total amount Japan and Russia hold together.”

Graph

Source: Australian Commodities, June quarter 09.2

The total value of all Australian commodity exports is forecast to be around A$160.5 billion in 2009-10, a fall of 18.1 %  in 2008-09. Out of this metals and energy exports are projected to account for A$124.4 billion.

More detailed information on Australian Commodities and Export Markets can be found by clicking  on Australian-Commodities-Report-June-2009

After setting a record above $1,000 an ounce during March 2008, Gold bullion prices have been volatile. Accordingly Gold stocks have been volatile as well during the past few months.Gold prices 5-year-char:

Since early Jun, gold stocks have been heading dowth. In the past 12 months gold stocks have lost their upward momentumas well.

A recent article  Gold stocks: neutral to souring from Mineweb lists the most valuable listed The Top 10 Gold Stocks. This list includes:

Barrick Gold Corporation (ABX)
Goldcorp Inc. (GG)
Newmont Mining Corp. (NEM)
Zijin
Kinross Gold Corporation (KGC)
AngloGold Ashanti Ltd. (AU)
Newcrest
Gold Fields
Agnico-Eagle Mines Ltd. (AEM)
Zhongjin

As the Shanghai Composite  Index has soared this year, Chinese gold miners Zijin and  Zhongjin have made it to the list. The world’s largest gold miner is Barrick Gold of Canada. Currently Barrick (ABX) has a market cap. of about $28B. It has operations in North America, South America, Australia Pacific and Africa. The number two miner Goldcorp  is also a Canadian mining company with a market of about $26B. Denver-based US miner Newmont Mining (NEM)  has operations in five continents. Newmont is also one of the world’s largest gold producers. It is also the only gold company included in the S&P 500 Index and Fortune 500.

In an article titled Germany’s Export Champions Slammed by Economic Crisis  Der Speigel says that there is no recovery yet in the manufacturing sector. Southern  Germany, home to many engineering and auto parts manufacturer, has been especially hit hard since they depend highly on exports.  Export orders have plunged anywhere from 30 to 50%.

From the article:

Is there any glimmer of hope? “I don’t think so,” says Peter Zimmermann, the CEO of Mink, a company based in the town of Göppingen near Stuttgart. A family business in its sixth generation, Mink is the world market leader in specialized industrial brushes. Zimmermann is incensed when he hears people say that the worst is over. “This isn’t a crisis,” he says. “It’s a catastrophe.”  (emphasis added)

Exports:

Source: DerSpiegel

The GDP contracted sharply as shown in the graph below:

Source: Federal Statistical Office

The GDP in 1Q,2009 was 3.8% lower then the GDP in 2008 for the same period and the downtrend acclereated relative to 4Q, 2008.

Foreign Trade

Source: Federal Statistical Office

Related ETF:
iShares MSCI Germany Index (EWG)

Economic growth by quarters:

1st Quarter, 2009 : 6.1%
2nd Quarter, 2009 : 7.9%

The main reason for the strong growth was the government’s massive 4-trillion-Yuan ($586 billion) stimulus program. In a statement announcing the latest figures, the Bureau said:

“all regions and departments effectively implemented the policies and measures set by the central government on fighting against the global financial crisis and promoting the sound and fast growth of national economy, overcame the difficulties in the progress, the national economy stabilized to recovery with increasing positive changes“

Last year when the stimulus program was announced there were many skeptics in the West who questioned the strategy, the validity of the huge amount announced, etc.However the stimulus program primarily focused on infrastructure is working and the government is also stimulating domestic consumption by offering subsidies for consumer goods such as washing machines to folks in rural areas.  The idea behind these moves is to make the Chinese economy less dependent on foreign exports and more dependent on local demand.

Foreign trade is still down. Exports in the first six months fell by 21.8%  and imports was down 25.4%.Unlike many other countries, China has a trade surplus. It stood at US $96.9B.

A few other key takeways from the stat report  include:

• The income of urban and rural residents continued to grow with large increase in transfer income
• The industrial production picked up quickly, and the decreasing rate of profits made by industrial enterprises slowed down
• Investment in fixed assets enjoyed fast growth with improved investment structure
• Sales on domestic markets continued to accelerate, with higher growth rate at or below county level than that in cities
• The money supply grew rapidly with sharp increase in loans of financial institutions

Related to the last point, the  growth of money supply (M2) was 28.5% on a year-over-year basis for the first two quarters as financial institutions increased lending due to the stimulus program.

Finally the report added a note of caution saying “The base for recovery is still infirm, the momentum for picking up is unstable, the recovery pattern is unbalanced, and thus there are still uncertain and volatile factors in the recovering progress.”

Related ETF :

iShares FTSE/Xinhua China 25 Index Fund  (FXI)

Source: The Wall Street Journal

Last month there was a minor upturn in auto sales after many months of drastic declines. And gas prices  rose last month as the price of crude went up. Hence the Journal says “U.S. retail sales rose in June, but mostly because of higher gasoline prices and volatile auto sales, the Commerce Department reported Tuesday. Meanwhile, businesses continued to slash inventories.Retail sales climbed 0.6% in June from a month earlier on a seasonally adjusted basis to $342.1 billion, according to the Commerce Department. Excluding gas and autos, retail sales actually declined for the fourth consecutive month.”

The left part of the above chart clearly shows that sometimes charts can be misleading at face value.A few months of consistent upturn in retail sales and other variables are needed before we can come to a conclusion on the direction of the economy.

The top bank choices were:

BancorpSouth (BXS)
City Holding (CHCO)
Danvers Bancorp (DNBK)
First Horizon (FHN)
People’s United Financial (PBCT)
TCF Financial (TCB)

Stifel Nicolaus said: “Though not unscathed by the credit cycle, these institutions maintain adequate capital levels, in our view, and, in many cases, will capitalize on weakened competitors.”

The Year-To-Date (YTD) performance and dividend yield of these stocks are as follows:

BancorpSouth (BXS)
YTD Change= -9.0%
Dividend Yield = 4.23%

City Holding (CHCO)
YTD Change= -12.4%
Dividend Yield = 4.75%

Danvers Bancorp (DNBK)
YTD Change= -1.5%
Dividend Yield = 0.61%

First Horizon (FHN)
YTD Change= 19.7%
Dividend Yield = N/A

People’s United Financial (PBCT)
YTD Change= -10.2%
Dividend Yield = 4.01%

TCF Financial (TCB)
YTD Change= 5.0%
Dividend Yield = 1.50%

The best performer in the list is Memphis, Tennessee-based First Horizon. The Wall Street Journal recently had a rave review of FHN saying that the bank had cleaned up its mortgage business and is a survivor of the credit crunch. Danvers Bancorp is a Massachusetts-based small S&L. We will review these picks again at the end of the year.

Congratulating the bank Euromoney said:

“After a period in which banks suffered for putting too many eggs into too few baskets, one of the things that stands out at HSBC is the diversity of its business. It is a truly global bank.HSBC has adopted a clear policy of focusing expansion on emerging markets, and to place the bank in a position to focus on the international connectivity of those markets with the developed world. It is scoring a number of successes. The bank achieved almost full subscription to the rights issue. No other bank could have raised so much money in this way at that time. The market had made a judgment on HSBC.”

The CEO of HSBC, Michael Geoghegan commented “Conservativism, strong capital management and responsible practice have certainly been the core of HSBC since we were founded in 1865. In practice, this character is personified every day by our 300,000 plus staff around the world and it’s on their behalf that I am delighted to accept the global bank of the year award for HSBC.”

Currently HBC has a 3.95% dividend yield and a market cap of $98.4B. The stock has nearly doubled from its March lows of nearly $23. HSBC made a disastrous deal back in 2002 when it acquired consumer finance company Household International. As a result of losses with the purchase, HSBC had to  take a $10.6 billion goodwill impairment charge. After that deal, the bank made many strategic changes and positioned itself to be a strong survivor once the credit crisis hit the markets worldwide. HSBC never took British government bailout funds and successfully raised money with a rights issue. The bank that calls itself “The World’s Local Bank” has a strong presence in many countries especially in Asia since it was originally founded in Hong Kong.

Euronomey named Standard Chartered of the U.K. as the best emerging market bank. Called simply as Stanchart, it does trade in the U.S. markets.

The list of other global award winners for “Awards for excellence 2009″  are:

Best commodities house     - Morgan Stanley (MS)
Best corporate restructuring house     - Lazard
Best DCM house  -    HSBC (HBC)
Best ECM house    -  Goldman Sachs(GS)
Best emerging market debt house     - Citi (C)
Best emerging market equity house  -   J.P.Morgan (JPM)
Best emerging market investment bank -  J.P.Morgan (JPM)
Best emerging market M&A house    - Credit Suisse(CS)
Best equity derivatives house  -   Societe Generale Corporate & Investment Banking (SCGLY)
Best foreign exchange house     - Barclays Capital (BCS)
Best hedge fund    -  Paulson & Co
Best infrastructure and project finance house -    BNP Paribas (BNPQY)
Best investment bank     - Credit Suisse (CS)
Best investor services house    -  Bank of New York Mellon (BNY)
Best M&A house  -   J.P.Morgan (JPM)
Best private equity firm    -  Blackstone
Best risk management house-     Deutsche Bank (DB)
Best securities restructuring house    -  Goldman Sachs (GS)
Best short-term debt house   -  Goldman Sachs (GS)
Best sovereign advisory    -  Rothschild
Best structured products house -    RBS (RBS)
Best transaction banking house  -   HSBC (HBC)
Best wealth management house    - Credit Suisse (CS)

Source: Euromoney

Unemployment Rate in Canada for June,2009

via The Star

It is interesting to note that the current US unemployment rate equals or exceeds the rate in some European countries. And now it is higher than the rate in Canada. Hard-hit sectors in Canada include construction, manufacturing and tourism. Due to the recession in the US lesser number of Americans are visiting Canada.

The  recently released Annual Report 2008 by the Registrar of Banks provides a detailed analysis on the status of South African banks. Some of the takeaways from this report are:

•  In 2008 South African banks remained stable and were well capitalized
• The capital-adequacy ratio of the sector rose to 13.0% at the end of the year from 11.8% in January,2008
• The Tier 1 capital ratio  stood at 10.2% at the end of 2008
• Banking sector assets grew by 24.5% last year
• Despite the  turmoil in the international financial markets, banks remained profitable with return on equity at 28.7%
• Liquid assets held by banks exceeded well above the regulatory requirements
• Impaired assets as a percentage of total assets grew to 3.8% by the end of December,2008
• South Africa implemented the Basel II requirements successfully in 2008
• On Basel II implementation, the IMF  commented “Overall, the Basel II implementation process in South Africa has been of high quality, backed by professional and competent supervisory staff and  strong buy-in from the industry, and reflects a high degree of compliance with the criteria in the methodology.”
• Securitization in South Africa was less complicated than in the USA and European countries
• Assets held by South African banks tend to have high level of transparency
• South Africa’s sophisticated financial system is fundamentally sound and banks did not take unwarranted risks
• Foreign shareholders hold 46% of all bank stocks at the end of December, 2008
• The financial leverage ratio of banks  stood at 17.% compared with ratios of 30% or even 60% in developed countries

Source:  South African Reserve Bank

For US investors, none of the South African banks are listed in the organized exchanges.But some of them trade on the OTC markets. NedBank (OTC:  NDBKY) had a profit margin of about 25% last year and it currently pays a dividend of 5.38%. The stock has more than doubled from its March lows in the $12 range.Absa Group Ltd. (OTC: AGRPY) offers 1 4.76% yield. Both Absa and NedBank are sponsored ADRs with Bank of New York Mellon as the depository.

Two unsponsored  ADRs for Investec and Standard Bank are also available. Investec (OTC: ITCFY) seems to be rarely traded. Standard Bank (OTC: SBGOY) is the largest bank by assets and earnings in South Africa with operations in 17 other African countries and 16 other countries outside of Africa. SBGOY is also rarely traded. As of December,2008 Industrial and Commercial Bank of China(ICBC) holds 20% of the equity. Standard concentrates on expanding in emerging markets of the world.

Another way to invest in South African banks is via the iShares MSCI South Africa ETF (EZA) which holds South African banks in the portfolio. Standard bank is  one of the top 10 holdings with 6.5% weightage. Absa, Nedbank, Investec are also represented in the fund.Overall as of the end of May, 22% of the fund’s assets are invested in the financial sector.

Unlike the U.S. housing market crash, home foreclosures have not yet become a serious problem in Canada. Other than losses sustained due to their sub-prime exposure in the U.S., the five major Canadian banks - Bank of Montreal (BMO), Bank of Novo Scotia (BNS), Toronto-Dominion Bank  (TD), Canadian Imperial Bank of Commerce  (CM) and Royal Bank of Canada (RY) are staying strong and their earnings have not take a huge hit due to mortgage defaults. This is not the case with American banks such as Bank of America (BAC), Citibank (C), US Bank (USB), Wells Fargo (WFC) and many others who have been forced to seek government aid to prevent complete meltdown.

This brings us to the following questions: What are the primary causes of the housing market collapse  in the U.S?. Why is the housing mortgage market so strong in Canada? What are the real differences between the Canadian and American mortgage systems? Why didn’t Canadian banks suffer huge losses due to mortgage loan losses?

Some of the answers to the above questions can be found in the following table which lists the differences between the housing markets in Canada and US.

Source: Canadian Residential Mortgage Markets: Boring But Effective?, By  John Kiff, June 2009, IMF Working Paper

In summary, in Canada lending standards are much more strict and banks are not as innovative and aggressive as their peers south of the border but perform their main function as deposit takers and housing loan providers. American banks on the other hand have deviated from their primary functions over the years  in order to generate higher above-average returns year after year. Relaxation of regulations by the government and creating favorable environment promoting home ownership by all added fuel to the fire.

As the recession continues to slow consumer demand, governments across the world are stepping up their of goods and services. This is true in India as well as the chart shows below. The government consumption expenditures as a percentage of GDP is rising faster as the private final consumption expenditure is going down.

For more details on the Indian economy click Indian Economic Outlook 2008-09 and 2009-10

The Eurostat also released the unemployment report for the EU but for the month  of May. The unemployment rate in the Euro area stood at 9.5% seasonally-adjusted in May .In the expanded EU 27 states, the unemployment rate was 8.9% in May.An estimated 21.462 million in the EU27, of which 15.013 million were in the Euro area, were unemployed last month.

The lowest unemployment rates were in:
The Netherlands - 3.2%
Austria - 4.3%

The highest unemployment rates were in:
Spain - 18.7%
Latvia - 16.3%
Estonia - 15.6%

While the EU unemployment rate was 9.5% in May, the rate in the USA and Japan were 9.4% and 5.2% for the same month respectively.

Source: Eurostat

Source: Broad Money Demand and Asset Substitution in China, Ge Wu, IMF Working Paper

Some of the key points from this study comparing the U.S. health care system with other countries are listed below:

• In 2007, the total spending for health care accounted for 16% of the country’s GDP, the highest share among the OECD and almost double the OECD average
• On a per capita basis also the U.S. spent the highest with a total of $7,290 which is two-and-half times the OECD average
• The public share of health care expenditure in the USA (45%) is less than any other OECD country
• Despite spending the most, the U.S. provides health care coverage for only the elderly, disabled and some of the poor people
• In comparison, the same amount is enough to provide universal health care insurance by the government for all citizens in other OECD countries
• 35% of total health care expenditures is done by private health insurance which is the highest In OCED
• Despite the high medical expenditure,there are fewer doctors per capita in the U.S. than most other OECD countries
• Life expectancy in the U.S. is lower when compared with Japan,Switzerland, Canada and Australia
• Infant morality rates  in the U.S. is higher than most OECD countries. In 2006, it was 6.7 per live births relative to OECD average of 4.7
• The proportion of daily smokers has fallen the most (> 50%) between 1980 and 2007 in the U.S. due to public awareness and high taxation
• Obesity rate among adults is the highest in the U.S. in the OECD countries at 34.3% in 2006. Higher obesity rates leads to higher health care spending in the future

Charts:
Click to Enlarge

The above data lead me to do some research on the health care system. In 2007, we spent an astonishing $2.2 Trillion on health care expenses. The government social programs Medicare and Medicaid spending grew by 7.2% and 6.4% in 2007. On a long-term basis I observed that the price food has fallen continuously over the years but the cost of health care has gone up in the opposite direction.

One benefit of spending so much on health care is that it provides stable and well-paid employment opportunities for many people in that sector. In fact, it is one of the safest sector to be employed in now.

One reason for the fewer number of doctors per capita in the U.S. is  the total number of medical schools in the U.S.  is low.There are only 131 accredited M.D.-granting medical schools in the country. The total number of graduates coming out of these schools per year seem to be low as well. For example, last year just 16,167  students graduated to be physicians.

In his speech to the American Medical Association last month, even our President Obama highlighted the problems in the health care system. Some of the points mentioned by him match with the OECD’s findings as noted above. President Obama said:

“Today, we are spending over $2 trillion a year on health care — almost 50 percent more per person than the next most costly nation. And yet, as I think many of you are aware, for all of this spending, more of our citizens are uninsured, the quality of our care is often lower, and we aren’t any healthier. In fact, citizens in some countries that spend substantially less than we do are actually living longer than we do.

Make no mistake: The cost of our health care is a threat to our economy. It’s an escalating burden on our families and businesses. It’s a ticking time bomb for the federal budget. And it is unsustainable for the United States of America. ”

The current administration is planning to dramatically change the health care system in this country. The official site of the U.S. government healthreform.gov states:

“The President’s 2010 Budget lays the groundwork for reform of the American health care system, most notably by setting aside a deficit-neutral reserve fund of $635 billion over 10 years to help finance reform of our health care system to bring down costs, expand coverage, and improve quality.”

It remains to be seen if the reforms proposed will lead to reduced costs and improved efficiency in the system.  A few other interesting stats from the site include:

• Employer-sponsored health insurance premiums have nearly doubled since 2000, a rate three times faster than wages.
• In 2008, the average premium for a family plan purchased through an employer was $12,680, nearly the annual earnings of a full-time minimum wage job.
• Americans pay more than ever for health insurance, but get less coverage.

Some of the other causes of issues  for the inefficient health care system are: malpractice suits, bureaucracy, monopoly pricing power of drug companies, lack of transparency of prices for various items such as medical procedures, surgeries, etc. preventing comparison shopping by patients, greedy doctors,  paperwork hell,  defensive treatments performed by doctors, inadequate medical facilities, growing number of retiring baby-boomers, increasing population, seeking medical care for unnecessary situations,etc. What are your thoughts on this issue?. Please feel free to share it in the comments section.

Click to Enlarge

Data Source: Census.gov

From a historical perspective, both imports from China and exports to China from have to rise in sync with each other. If the US exports continues to be flat-to-down and imports from China improves then the trade deficit will grow more and it will also imply that the Chinese are importing goods from other countries or sourcing goods from domestic producers. Given the current state of the US economy and the 9.5% official unemployment rate reached today, the US will import less from China.This may lead to further social unrest in China unless China is able to stimulate domestic consumption.

Not surprisingly Chinese banks dominates this list with a total of five and three among the top five ranks. ICBC of China ranks the most profitable in the world with a profit of $21.2B. Banco Santander (STD) of Spain came at third with a profit of $15.8B. Among the British banks , Barclays (BCS) and HSBC (HBC) are in this list because they are relatively in better shape than their peers like Llyods (LYG), Royal Bank of Scotland(RBS), etc. Royal Bank of Canada(RY) ranked number ten. Royal Bank is the most profitable of all large Canadian banks and is a long-term consistent performer. Banco Bradesco of Brazil (BBD) made it to this list at number two beating competitor Banco Itau Unibanco (ITUB).Among the big four Australian banks Westpac (WBK) and Commonwealth Bank Group are on this list.Bank of America Corp (BAC) and US Bank (USB) are the only two US banks in the rankings but came in at the bottom of the list mirroring the performance of the housing markets and the U.S. economy in general.

Household liabilities fell to 131.1 % of disposable income (after-tax income) in the last quarter from a peak of 141.0% in 2007.At the end of 2008, the number stood at 133.9%. In the first quarter consumers paid down debt and did not add new debt to their finances. From the above chart, we can see that liabilities grew form about 87% of after-tax income in 1990 to an all-time high in 2007 due to the availability of cheap credit and excessive borrowing. In this decade household debt-to-income ratio rose considerably faster than previous years.For the first time ever, households debt fell for two quarters in a row for 4Q, 2008 and 1Q,2009.

Since the U.S. economy is a consumer-based economy the fall in debt growth has a negative impact on a any recovery.

A historical chart of the household liabilities is shown below.

Source: BEA,  Flow of Funds of the United States, Federal Reserve

From the late 80s households continued to accumulate more liabilities up until last year. In Q1,2007  total household liabilities decreased by $255b compared to taking on about $2.8T debt in Q1,2008. Just like the borrowing binge went on for many years, the deleveraging process will continue for a few years.

From over 12,000 in 1990 the number of banks has fallen to 7100 last year.The share of assets held by the largest 10 banks grew by 1% and the assets of the top 100 banks grew by 1.5%. These two category of banks account for 54% and 82% of all total assets at the end of 2008.

Commercial Real  Estate mortgages have started to go bad following the path of residential mortgages. However CRE mortgages form a major portion of the small-to-medium sized banks as opposed to large banks.

Source: Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008, Federal Reserve Bulletin, June 2009

As the chart shows the share of CRE loans relative to all total loans is very high for small to medium-sized banks. When more CRE borrowers default in the coming months those small and medium banks that have high exposure to this type of loan will have more losses. The Federal Reserve defines the size of the bank as the total assets held at the start of each quarter. This past Friday the FDIC shutdown four banks. Banks that are located in the bubble states of CA,FL, NV and AZ with high CRE loans on their books may be adversely affected.