Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com.

ValuEngine is a fundamentally-based quant research firm in Princeton, NJ. ValuEngine

covers over 5,000 stocks every day.

A variety of newsletters and portfolios containing Suttmeier's detailed research, stock picks,
and commentary can be found HERE.

April 23, 2010 – Housing and Banking Reality Check

At the beginning of April I published a monthly update to the ValuEngine FDIC Quarterly Report.
My theme was that a “Double-Dip Housing Crisis Will Hurt Community and Regional Banks”. I
showed weekly graphs of Housing and Banking Indices that showed that despite my bearish
longer-term view, that there was momentum for near term gains for the Home Builders and
Community and Regional Banks. My longer term bearish views was based upon comparing the
FDIC Quarterly Banking Profiles for year ends 2001 through 2009, showing just how leveraged
the banking system was relative to GDP. Today I cover the Housing and Banking Indices.
In early April, the Housing Sector Index (HGX) was up 10.1% year to date, but down 61.5% since its
July 2005 high. With HGX at $113.13, I stated that the short term uptrend would continue given weekly
closes above my monthly pivot at $109.85. The upside is to the 200-week simple moving average at
$145.14. Today the HGX is up 23.6% year to date, but down 56.8% since July 2005. The 200-week
simple moving average has declined to $143.76 as MOJO remains strong.

Chart Courtesy of Thomson / Reuters

The daily chart for the Housing Sector Index (HGX) is extremely overbought creating a conundrum
that Housing Stocks are gaining as a bubble, while home demand remains subdued with home prices
most likely to decline once the tax credits end a week from today. When a parabolic is forming it’s
difficult to say how high that market can go, but when the run ends, it’s always painful. Keep in mind
that the NAHB Housing Market Index remains depressed with that index below 20 on a scale of zero to
100. If you are trading the home builders on the long side just beware of the risk in this MOJO game. At
the March 2009 lows they were trading below Market to Book Value versus 1.5 to 2.0 today. P/E ratios
were single digit and are now way too high. Home builders are having difficulty getting Construction &
Development Loans, and foreclosures and short sales of existing homes provide tough competition.
Existing Home sales rose to an annual rate of 5.35 million units in March with 44% first time home
buyers, 17% investors, 27% paid case, and 35% were depressed properties.

Courtesy of Thomson / Reuters

In early April the America’s Community Bankers’ Index (ABAQ) was up 12.2% year to date, but
down 47.3% from their December 2006 highs. At $166.17 I said that the short term uptrend continues
given weekly closes above my monthly pivot at $156.80. The upside is to my annual resistance at
$195.07 and to the 200-week simple moving average at $220.32. Today ABAQ is up 24% year to date
and 41.8% below the December 2006 highs. Today the 200-week simple moving average is down to
$218.62. There have been 142 buy rated financials and 216 sell rated financials. The buy names are
overvalued with elevated P/E ratios. Fifth Third Bank (FITB) and PNC Financial (PNC) have been two
of the BUY rated names. The problem is that 36% of all FDIC-insured financial institutions are
overexposed to C&D and CRE loans and today is Bank Failure Friday. Most are community banks!
 Chart Courtesy of Thomson / Reuters

The daily chart for the America’s Community Bankers’ Index (ABAQ) is extremely overbought
creating a short term smaller bank stock price bubble. These banks have not been increasing lending
and have been borrowing from Main Street offering fractional Money Market rates then buying the 5-
Year US Treasury. Even though bad loans declined in 2009, there is still a backlog; CRE loans are up
91.6% since 2001 to $1.1 trillion, C&D loans were down 23.6% in 2009, but still up 95% since 2001 at
$451.5 billion. Non-current loans were up 108.4% in 2008 and up another 55.1% in 2009 to $391.3
billion, or 526.4% higher than the end of 2001.

Courtesy of Thomson / Reuters

In early April the Regional Bankers Index (BKX) was up 22.8% year to date, but down 56.7% from
their February 2007 highs. With the BKX at $52.44, I stated then that the short term uptrend continues
given a weekly close above my monthly pivot at $53.31. The upside is to my annual resistance at
$73.12 and to the 200-week simple moving average at $76.30. My semiannual support is $40.76.
Today the BKX is up a mammoth 35.2% year to date, but down 52.4% since February 2007. We are
above the monthly pivot at $53.31 and the 200-week simple moving average has declined to $75.61.
The buy rated names among the bigger financials have been; American Express (AXP), JP Morgan
(JPM) and Wells Fargo (WFC). JP Morgan is trading at fair value. Wells Fargo is slightly overvalued.
American Express approached my monthly risky level at $47.95 in after hours trading on Thursday.

Chart Courtesy of Thomson / Reuters

The daily chart for the Regional Bankers Index (BKX) is showing a negative divergence after setting
a new high for the move on Wednesday. A concern may be the uncertainties with regard to financial
reform and potential exposures to Greece. Most of the earnings beats have been based upon
proprietary profits, which will be targeted in financial reform. Most of the bigger banks have been
involved with mortgage mitigation programs that may have slowed foreclosure procedures that could
pick up later in the year. Toxic assets remain off balance sheet and based upon FDIC auctions of sized
financial assets, the price could be around 22 cents on the dollar. Home Equity Loans are up 258.9%
since 2001 to $661 billion. Other Real Estate Owned is up 795.8% to $41.4 billion. Notional Amount of
Derivative Contracts are an issue for the bigger banks with that exposure up 370% since 2001 to a
staggering $213.6 trillion. Warren Buffet called Credit Default Swaps and Collateralized Debt
Obligations as financial weapons of mass destruction, and the SEC fraud allegations against Goldman
Sachs has this issue on the front burner.
 Courtesy of Thomson / Reuters

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

Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as
well as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as the
ValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sample
issues of my research.

“I Hold No Positions in the Stocks I Cover.”