Farrell: The Haze Lifts A Bit

It might just be my inability to see clearly, but the past two days have provided me some clarity on where the stress test is going.

The Wall Street Journal listed a bunch of criteriathe Feds will use in testing the banks. They will assume that unemployment goes to 10.3% by year-end 2010 and that for two years the loss on first-lien mortgages will be 8.5%, 11% loss on home equity lines of credit, 8% on commercial and industrial loans, 12% on commercial real estate loans, and 20% on credit card portfolios. Then, according to a CNBC report on Wednesday, the banks will have to be able to absorb the above and surface with a 3% tangible capital ratio. The 3% ratio appears to be what the expectations were to begin with, but the actual level the government might target is yet to be discovered.

To put some perspective on what 3% means: JP Morgan'stangible capital is about 4.2%, Bank of America said theirs was 3.1%, and Wells Fargo, which reported earnings on Wednesday, is at 3.28%. While a couple look close to the edge, make sure you read my partner Carole Berger's report issued today. She crunches the numbers and produces what the ratios will be, both including and excluding the next two years of earnings. If the banks can count potential earnings, Geithner's statement the other day that the system has enough capital is validated. Her report is a must-read.

While all this noise is driving us (or at least me) crazy, a nice little report came out Wednesday morning. The Federal Housing and Finance Agency, known forever more as FHFA (clever), said its home price index rose 0.7% in February after a gain of 1% in the month before. The January number equaled the largest monthly gain since the FHFA began tracking this stuff in 1991. The two-month gain hints at some price stability in the housing market. This index is down 6.5% year-over-year, and that is in stark contrast to the more widely quoted Case-Shiller Index, which is down 18.9% for the same period. The difference is FHFA surveys only Fannie- and Freddie-backed mortgages while Case-Shiller captures jumbo and Alt-A as well. FHFA is the whole country and Case-Shiller is 20 cities. The truth is probably in between the two and FHFA is too optimistic a reading and Case too pessimistic. Some measures of housing affordability have improved markedly, and the two-month improvement in the FHFA reading offers hope that the housing market is nearing a bottom.

Goldman Sachs upgraded Ford to a buy Wednesday. I have to point out Mike Ward of Soleil/Ward Transportation Research has been on Ford for a while, but Goldman feels that, with a "cash-for-clunkers" program this year, new car sales will reach 11 million. I believe most estimates are for around 10 million for 2009 and a gradual improvement towards 13 million by 2011. If that were to be, the average mileage on existing cars would soon approach 100,000 miles, and either there would be a stronger surge of new car sales or auto parts companies would see some healthy demand. Mike has a report on Genuine Parts out (symbol GPC-issued April 20) and with a solid 4.6% yield, Buy-rated GPC is worth a look.

The market managed to finish a conflicting news day on Wednesday with modest losses. Financials led the way down, falling over 3.5%. My best guess is still a bottoming process continuation with the next "low" a higher low than we saw in November which was in the 750 area for the S&P.