Oct

28

While natural gas has been the butt of jokes after 50 out of 50 winners…The one loser on my screen was the bank index bkx & BAC. It may be too early to call a trend, but I have noticed that 6 days so far in Oct the bank index has been down while the S&P has been up. Most of these have been since Oct 13th when the markets started hammering the banks over servicing mbs and foreclosures.

Looking at each quarter, the S&P was highly correlated with the bank index from 2003 late 2008. In hindsight it seems so clear that the banks index switching from low or average beta to a high beta correlation to the S&P index was a sign of the impending explosion before Lehman hit the beta for the 3rd quarter 2008 was 2.70 according to my regression. This is after a fairly stable Beta hovering around 1.0 .

Looking back during the 90s when tech not banks were driving the market, the beta of the bank index on any given quarter would bounce around and the correlation would also, but in general was much lower (the bank index data I had only went back to March 1993).

Of course with banks were issuing those IPO's back in the 90s where as by aughts they were switching to securitization and financial engineering to manfacture their edge.

But do banks still matter? With the government effectively backstopping their balance sheet, do they really have a reason to exist? (aside from the political gains do they havea wealth creation reason?) If not, does "too big to fail" still apply if they do not fit the political agenda?

What are the new numerical disconnect saying?

S&P r        BKX r        correl      Beta        Alpha  quarter          Year
0.0381     -0.0150     0.58344     1.16939     -0.0035    oct     2010
0.1018     0.00173     0.93421     1.64995     -0.0026     3     2010
-0.126     -0.1199     0.92693     1.42600      0.001      2     2010
0.0475     0.19681     0.69486     1.18386      0.0023     1     2010
0.0534     -0.0999     0.84697     1.64582     -0.0029     4     2009
0.1396     0.25845     0.78197     1.62397      0.0005     3     2009
0.1416     0.25874     0.84468     2.78847     -0.0022     2     2009
-0.124     -0.4542     0.84269     2.43938     -0.0025     1     2009
-0.255     -0.4237     0.81996     1.23216     -0.0017     4     2008
-0.092     0.15255     0.91565     2.57134      0.0061     3     2008
-0.032     -0.3060     0.75759     1.54808     -0.004      2     2008
-0.104     -0.1154     0.85674     1.68488      0.001      1     2008
-0.038     -0.1793     0.86751     1.50680     -0.0019     4     2007
0.0154     -0.0629     0.85999     1.23968     -0.0013     3     2007
0.0564     -0.0085     0.83763     1.00614      -0.001     2     2007
0.0018     -0.0316     0.91944     1.09838     -0.0006     1     2007
0.0576     0.03269     0.75834     0.83588     -0.0002     4     2006
0.0482     0.04607     0.83727     0.98334      0          3     2006
-0.021     0.01923     0.77312     0.89102      0.0006     2     2006
0.0407     0.02143     0.79510     0.95712     -0.0003     1     2006
0.0166     0.07061     0.78553     0.91498      0.0009     4     2005
0.0229     -0.0276     0.84186     0.99538     -0.0008     3     2005
0.0161     0.02979     0.84171     0.89760      0.0002     2     2005
-0.026     -0.0753     0.85131     0.98382     -0.0008     1     2005
0.0837     0.06477     0.90318     1.02108     -0.0003     4     2004
-0.023     0.00936     0.85927     0.85178      0.0005     3     2004
0.0162     -0.0401     0.82188     1.02596     -0.0009     2     2004
0.0114     0.03282     0.91278     0.92618      0.0004     1     2004
0.0974     0.09482     0.87883     0.89619      0.0001     4     2003
0.0323     0.03224     0.88914     1.07428      0          3     2003
0.1388     0.19254     0.93348     1.10238      0.0006     2     2003
-0.036     -0.0558     0.96863     1.01468     -0.0003     1     2003
0.0761     0.07047     0.92250     1.30637     -0.0005     4     2002
-0.193     -0.1740     0.93277     1.12174      0.0007     3     2002
-0.146     -0.0743     0.87331     1.00450      0.0011     2     2002
-0.001     0.03820     0.89408     1.26995      0.0008     1     2002
0.0979     0.08147     0.78028     1.05444     -0.0004     4     2001
-0.163     -0.1527     0.89156     0.97725      0.0001     3     2001
0.0723     0.13445     0.80468     0.89475      0.0011     2     2001
-0.136     -0.1037     0.79788     1.19917      0.001      1     2001
-0.103     0.03487     0.71966     1.05525      0.0023     4     2000
-0.002     0.12468     0.54630     1.03989      0.0022     3     2000
-0.032     -0.0248     0.58095     0.88924     -0.0001     2     2000
0.0285     0.01104     0.70553     1.24602     -0.0001     1     2000
0.1301     0.04747     0.73276     1.53207     -0.0025     4     1999
-0.027     -0.1303     0.74732     1.10596     -0.0018     3     1999
0.0197     -0.0155     0.77527     1.11365     -0.0003     2     1999
0.0506     0.05411     0.81441     1.17468     -0.0001     1     1999
0.1621     0.16835     0.82698     1.52850     -0.0013     4     1998
-0.077     -0.2254     0.90935     1.33349     -0.0019     3     1998
0.0255     0.00949     0.71068     1.12551     -0.0003     2     1998
0.1616     0.15019     0.81421     1.14996     -0.0006     1     1998
-0.001     0.03142     0.91399     1.11496      0.0005     4     1997
0.0535     0.08639     0.88248     1.10622      0.0004     3     1997
0.1174     0.08028     0.81751     1.23158     -0.001      2     1997
0.0435     0.07625     0.83011     1.37483      0.0003     1     1997
0.0984     0.15136     0.77470     1.36041      0.0003     4     1996
0.0318     0.10855     0.86728     1.10377      0.0011     3     1996
0.0173     -0.0125     0.83779     1.40889     -0.0006     2     1996
0.0613     0.09627     0.78498     1.11939      0.0005     1     1996
0.0553     0.04865     0.62770     1.22768     -0.0003     4     1995
0.0645     0.12961     0.49631     0.92225      0.0011     3     1995
0.0794     0.14789     0.67762     1.12278      0.0009     2     1995
0.0911     0.10919     0.76762     1.71786     -0.0008     1     1995
-0.006     -0.0715     0.72703     1.11738     -0.001      4     1994
0.0406     -0.0271     0.80706     1.00491     -0.0011     3     1994
-0.002     0.07169     0.75132     1.07790      0.0012     2     1994
-0.043     -0.0368     0.77869     1.18102      0.0002     1     1994
0.0089     -0.0698     0.47082     1.12801     -0.0013     4     1993
0.0269     0.05376     0.48552     0.84299      0.0005     3     1993

Gary Rogan writes:

The upcoming change in the political reality and some dangers to the biggest protectors of TBTF, the servicing/foreclosure controversy coupled with the possibility of a Countrywide mortgage putback made the group a lot more risky. Who is to say whether another balance sheet shock will be met by bailing out the bondholders again? TBTF may become redefined as just full protection of deposits vs. every stakeholder. There will certainly be less appetite for the latter after Nov. 2. Plus if on Nov. 3 QE2 is really modest and limited to Treasuries as opposed to the recent speculations of everything under the sun due the "shortage" of new issue treasuries, coupled with possible Fanny/Freddy uncertainty again due to the change in the political reality the naked truth staring in the face of MBS and plain old mortgage holders, and even CRE doesn't look too good. 

Phil McDonnell comments:

Thanks to Russ for a counting tour de force. I have a few questions which I shall pose as assumptions.

I assume:

1. S&P r is the daily serial correlation of S&P changes at lag 1.

2. BKX r is the daily serial correlation of daily serial BKX changes at lag 1

3. correl is the daily coincident correlation between S&P and BKX

4. Beta is the beta of a regression of BKX changes on S&P changes on a daily basis5. Alpha is the alpha for the same regression

Correct me where I am wrong.

Russ Sears writes:

S&P r is S&P return for the quarter on lognormal basis. likewise for BKX
 


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