FDIC Quarterly Banking Profile Takes a Back Seat to Bernanke

NEW YORK (TheStreet) -- The FDIC reported its quarterly banking profile Tuesday morning, but I did not see any coverage on financial TV for what I believe is the status of the balance sheet for the U.S. economy.

According to the report, FDIC-insured financial institutions earned $34.7 billion in net income in the fourth quarter down from $37.6 billion in the third quarter. Earnings continue to be buoyed by the reduction of loan loss provisions and rising noninterest income, not by a significant increase in interest income from new loan issuance as tight credit standards continue.

Year over year net income was up 36.9%, but net interest income, the life-blood of the banking system, registered a $2.7 billion (2.5%) decline. This is a sign that the "Great Credit Crunch" continues.

I will drill down into the FDIC data in subsequent posts focusing on the impact to the housing market, money center and regional and community banks. I will say that community banks remain reluctant to lend to developers and home builders as legacy C&D loans remain elevated at $203.9 billion at the end of 2012.

On Tuesday, the stock market regained some of Monday's lost ground, as Fed Chief Ben Bernanke re-iterated his pledge to continue QE3 and QE4 until the unemployment rate declined to 6.5%. Bernanke concluded that Fed policy was helping the housing market recovery and Tuesday's housing data supported his opinion.

Tuesday began with the January readings for the S&P Case-Shiller home price indices. The 20-City Composite, the one I focus on, showed that home prices rose by 6.8% in 2012. The index shows that home prices are still down 30% from their June/July 2006 bubble peak, despite an 8% to 9% gain since the March 2012 low. If you bought your home at the beginning of the new millennium your home has appreciated by 46.0%.

At 10 a.m. as Bernanke began his Congressional testimony and subsequent Q&A we learned that new home sales surged 15.6% in January to an annual rate of 437,000, but this is old news given the slippage in home builder confidence in February.

Despite this anomaly the National Association of Home Builders indicates that a double-digit pace of new home sales will be difficult to sustain given the challenges faced by the industry; credit availability, difficult appraisals, dwindling supply of prime lots, spot shortages of skilled labor and rising materials costs. The supply of new homes remain near historical lows at 150,000.

Also at 10 a.m. we learned that the Conference Board's reading on Consumer Confidence rose to 69.6 in February versus a downward revised reading of 58.4 in January. While this reading was above expectations, keep in mind that this index is tracking well below the neutral 90 to 100 range, as shown by the chart below, courtesy of Dshort Advisor Perspectives.

At 3 p.m. Tuesday the NAHB issued a press release citing the concerns I have been talking about over the past several weeks. The headline was "Tight Credit, Flawed Appraisals and Erratic Supply Chain Hurt Jobs, Housing."

Perhaps Rick Judson, the new NAHB chairman and homebuilder from Charlotte, N.C., read the FDIC Quarter Banking Profile and concluded that homebuilders cannot keep up with pent-up demand for new homes given the continued tight credit conditions for NAHB members.

According to Judson, builders are "expressing increasing frustration that they can't get access to construction loans to develop lots in markets where demand is on the upswing." This keeps construction workers sidelined and is frustrating potential home buyers and is slowing the housing recovery.

With the spring building season just around the corner, the NAHB is concerned that with inventories of new homes near record lows they will not be able to build in anticipation of demand because community banks are reluctant to lend.

Builders are also pointing out that creditworthy home buyers are having difficulty obtaining mortgages, which is resulting in cancelled home sales.

If you are bullish on the home builder stocks this press release is an important read.

The question of the day is how to trade this market given the cross-currents over the past several days? The daily chart of the S&P 500 is negative with the index between its 50-day simple moving average at 1478.09 and its 21-day SMA at 1510.06. The 200-day SMA lags at 1409.87. In my opinion the S&P 500 peaked at 1530.94 on Feb. 19, so my suggested strategy is to sell strength.

Chart Courtesy of Thomson/Reuters

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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