NEW YORK (TheStreet) -- Capital One Financial (COF) and two major trust banks were the leaders among large-cap bank stocks on Thursday, as improved economic numbers and a recent change in Federal Reserve stimulus policy continued to push long-term interest rates higher.
Shares of Capital One rose 0.7% to close at $75.88, while Northern Trust (NTRS) of Chicago was up 0.7% to $61.71 and State Street (STT) of Boston rose 0.7% to $72.73.
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Economists polled by Reuters on average had estimated last week's jobless claims number to come in at 335,000.
Despite being seasonally adjusted, unemployment numbers are typically volatile during the holiday season.
"The next 'clean' claims report won't be for weeks. But the underlying trend suggests job destruction continues to decline. This is a welcome step in the right direction and further reinforces the Fed's assessment of a stronger labor market," Sterne Agee chief economist Lindsey Piegza wrote in a note to clients Thursday.
Piegza was referring to the determination by the Federal Open Market Committee last week that U.S. economic indicators had improved sufficiently for the Federal Reserve's "QE3" purchases of long-term bonds to be lowered from a monthly pace of $85 billion to $75 billion. Long-term interest rates had already risen considerably as investors anticipated the Fed's eventual "tapering" of its balance sheet expansion, but rates have risen considerably over the past week.
The market yield for 10-year U.S. Treasury bonds rose by two basis points on Thursday to 3.00%. The 10-year yield has risen 11 basis points since Dec. 18, the day before the FOMC announced its Fed tapering decision. The 10-year yield was as low as 1.70% at the end of April.
Piegza was also impressed with the Census Bureau's report on Tuesday, when the agency said durable-goods orders for November rose 3.5% from the October, when they dipped 0.7% in part because of a two-week partial shutdown of the federal government. That second number was revised upward from the previous estimate of a 2.0% decline during October.
"Most impressive, however, was the outsized rise in business investment," Piegza wrote. "Capital goods, ex defense, ex aircraft orders rose 4.5% in November after falling 0.7% the month prior. November's rise is the strongest monthly increase since January."
According to Piegza, "businesses have been sidelined for quite some time, hesitant to invest in equipment, structures and certainly employees. However, as certainty appears to have returned to Washington in terms of spending and tax policy, at least through 2015, businesses (and consumers) are beginning to loosen their purse strings, particularly amid improving global demand."
The KBW Bank Index (I:BKX) was up slightly to 69.13, with winners and loses roughly split.
While federal regulators finalized their regulations to implement the Volcker Rule on Dec. 10, the Volcker Rule saga appears far from being over.
The Volcker Rule bans "proprietary trading" by banks and was included in the Dodd-Frank banking reform legislation signed into law by President Obama in July 2010. Under the final set of regulations to implement Volcker, banks are banned from holding investments in "covered funds," which include collateralized debt obligations (CDOs) backed by trust preferred securities.
The American Bankers Association and several community banks filed suit on Tuesday seeking the suspension of the the "covered funds" portion of the rules, claiming over 275 banks would see "an estimated $600 million in capital... vanish overnight."
Zions Bancorporation (ZION) of Salt Lake City on Dec. 16 said it had determined that "substantially all" of its investments in CDOs backed by trust preferred securities would be disallowed under Volcker. The company said it would record a fourth-quarter other-than-temporary impairment charge of $629 million on the transfer of disallowed held-to-maturity securities to held-for-sale. The bank also said it had until July 21, 2015 to sell the trust preferred CDOs, "unless, upon application, the Federal Reserve grants extensions to July 21, 2017."
Federal bank regulators on Dec 19 released a FAQ Regarding Collateralized Debt Obligations Backed by Trust Preferred Securities under the Final Volcker Rule. In the FAQ, the regulators said banks could evaluate their CDOs backed by trust preferred securities to determine if they "could be restructured during the conformance period" to take advantage of "another exclusion or exemption under the Investment Company Act."
While restructuring their CDOs could eventually allow affected banks to avoid selling the banned investments, the bank regulators neglected to consider publicly traded banks' needs to follow generally accepted accounting principals when reporting their Dec. 31 financial condition. With Volcker unresolved, the publicly traded banks holding the CDOs in question are required by the Securities and Exchange Commission -- which requires GAAP reporting -- to move the CDOs to "held-for-sale," even if there's only a chance the securities may have to be sold. This will result in significant losses -- unanticipated by the banks and apparently unanticipated by tone-deaf bank regulators -- for many of the affected banks.
An ironic result of the Volcker Rule -- meant to curb perceived "excesses" of the largest U.S. banks -- could be the slipping of several community banks to "undercapitalized" status per regulations.
The federal regulators have until Monday to respond to the ABA's court complaint. A reasonable outcome would be for at least a short suspension of Volcker's rules on "covered funds," to enable the banks to avoid an artificial year-end deadline that the regulators created on Dec. 10.
The following chart shows this year's stock performance for Capital One, Northern Trust and State Street against the KBW Bank Index and the S&P 500:
data by YCharts