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US Banks Safer But Still "Too Big To Fail"





Looking at the stock market, the story of corporate<br /> American is strikingly different. Balance sheets are flush with cash,<br /> debt is being serviced relatively easily and corporate profits as a<br /> percent of GDP are amongst the highest on record. As the chart shows,<br /> if real corporate earnings are growing over the last two years of a<br /> president’s first term, re-election has been a good bet. In blue are<br /> the presidents who served more than one term in office and the red bars<br /> show one term presidents.







Navigating a Sea of Opportunity


The
following Pacifica Partners article was also published in the Financial Post

One
of the strongest reminders of the depths of the financial crisis has
been the number of US bank failures.  As the chart shows, in
2009 over 140 banks failed and by 2010 the number had risen to 157. For
the current year, the Federal Deposit Insurance Corporation (FDIC) is
expecting that about 50 to 60 US banks are expected to fail. 

Crossborder investment specialistsAs the economy in the
US emerges to a path of stability, job creation and rising consumer and
business borrowing has helped the banking industry begin to become
profitable again. In the first quarter of 2012, the industry earned
about $35 billion, which is up from $29 billion earned in the same
period of 2011. This was the best level of industry earnings since 2007.

How
did these bank profits come about? As interest rates have fallen to
record lows, banks have had to pay nearly zero interest rates for bank
deposits made by their customers.  However, banks have still
had the ability to loan out these low-cost deposits at higher longer
term rates which resulted in expanding profits.  Another plank
in their profitability has been from the reduction in having to write
off loans. In other words, default rates have dropped and any money
banks set aside to cover loan losses that did not emerge are added back
to profits.  US banks have come a long way from the financial
crisis when the net interest margin (the profit from lending out
deposits at higher rates) for all US banks had fallen to the lowest
level since the early 1980s.

One
of the great ironies of the new banking landscape in the US is that the
big banks have gotten bigger. During and after the crisis, regulators
worried about banks that had gotten “too big to fail”. The five largest
financial institutions hold about $8.5 trillion dollars in assets which
is equivalent to about 55% of US GDP (the US economy).  Just
prior to the financial crisis, their assets were actually a smaller
proportion equivalent to approximately 40% of the US economy. 

US Bank Failures Too Big To Fail

Click Here to view a larger version of
this diagram
The
US mortgage market provides further evidence of how skewed things have
become. Currently, Wells Fargo controls about one-third of all US home
lending.  This has regulators concerned but they are faced
with a double edged sword as they do not want to do anything to upset
the budding recovery in the US real estate sector.

For
US policy makers, stabilizing the banking sector was a significant
priority. That mission seems to have been accomplished. The next
challenge will be regulatory reform and trying to figure out a “Plan B”
for the dangers of financial institutions that are even more “too big
to fail”.

Pacifica
Partners – Capital Management

Navigating
a Sea of Opportunity

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Obama Forecasted to win 2012 election

Corporate
Earnings Forecasting Obama Victory

The
current U.S. presidential election has seen both candidates locked in a
fairly tight battle with polls showing neither able to garner much more
than 45% support on a week to week basis. However, in upcoming polls,
it is likely that the Obama campaign will receive a boost from its
recent convention – as it is customary for a party to get a shot in the
arm in the polls of about 5-9%. 


Click
here
for full story.  


Wealth Management Crossborder


Transferring
Your IRA/401K to Canada

Often
expatriate employees accrue retirement and/or pension benefits while
working for an employer. If you decide to move back home (Canada in
this case), what should you do with the 401k or IRA account?


Click
here

for full story.  


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Canadian Real-Estate Chart Book


This
report is our latest update of trends and valuations of the Canadian
real estate market.  The 34 charts and two tables included
below comprise an exhaustive look at the valuation drivers of Canadian
real estate. 

Click
here
for full story.  



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