How Aussie Banks are Worse Than Storm Financial

Well the market is taking another pounding this morning.

Before we know it we’ll be down 10% from the recent peak.

Of course it’s not the first time the market has fallen by 10% in recent months. You only have to go back to June/July this year for the last time.

The ‘buy and holders’ will tell you this is just a shake-out the market had to have. Just like the shake-out this time last year that resulted in a 50% drop.

The fact that these so-called financial professionals keep getting away with the buy and hold brainwashing is amazing. As I’ve written this year, even when the market has been rising, this is a super high risk market.

Trouble is, you can’t afford not to be in it as inflation gnaws away at your cash savings. And furthermore, once you’re in it, you’ve got to be active.

That means setting trailing stop orders or just getting out of stocks if you’re nervous about them.

In fact, just this week I sent an email to subscribers of Australian Small Cap Investigator telling them to sell out of three stocks. Two of them I count as consumer cyclical, and one of them a small energy play.

When you’ve got profits of 338%, 150% and 133% on the table, you’d be mad not to lock some of those gains in.

But that’s not to say we’ll take all the profits off the table. And it’s also not to say that we’ll stop buying either. Most of the positions in Australian Small Cap Investigator are super high risk or big picture stocks – the sort of stocks that could double or triple tomorrow on the back of a good news story.

However, that doesn’t mean that I haven’t encouraged subscribers to set their own trailing stop orders on some of these stocks. As I say, there’s no need to give away big returns when you don’t have to.

But there is another side to it. While you should be looking to lock in gains, small cap investors should also look to take risks.

In the last few weeks, the bears have regained some control as the reality of the phony recovery has dawned on the masses. And it’s happened even quicker than we thought it would.

We thought these money printing clowns could keep their dodgy arguments going for a while longer and sucker everyone in. Well, we go that wrong. But I suppose that makes sense, if we could see through them, surely others could as well.

It seems to us as though they need to take some lessons from the property spruikers. They are the masters of keeping a bubble afloat.

But speaking of bubbles, we’ll follow on from where we left off yesterday…

“The Group’s priorities remain: to keep the bank safe with conservative management of capital and funding…”

Those words are taken straight from the National Australia Bank (NAB) press release as spoken by CEO Cameron Clyne.

We like the use of the word ‘conservative.’

Particularly when the press release also states, “Tier 1 capital ratio was 8.96%…”

In simple terms, that means for every $1 of customer money on deposit the NAB has liquid capital to pay each customer 8.96 cents.

8.96 cents on the dollar.

That’s ‘conservative’ is it?

It brings us nicely back to our parting shot in yesterday’s Money Morning where we wrote:

“Because when you think about it, there’s very little difference between what Storm Financial was doing for its clients and what the banks do to their clients – the savers.”

It’s a closer comparison than you may think.

What did Storm Financial do? They told investors to borrow money against their house to invest in shares. The investor got a triple whammy. They released ‘dead’ equity from their home, they bought shares in a rising market, and they could also claim a tax deduction on the interest.

A result like that would have the lass from the H&R Block ads doing cartwheels.

High fives all round, and then off to the bar to drink piña coladas from a coconut shell.

So we’re wondering how that’s any different to how a bank works.

The bank borrows money from a saver and then gives 91.04 cents on the dollar to someone else to buy a house.

But this is where the banks are ten times worse than Storm Financial. Because the banks allow you to believe your money is sitting there in your account waiting for you to withdraw it.

But it isn’t is it. Or rather it is, but it also isn’t. I mean, if you’ve got a couple of grand in the bank and you turn up tomorrow and ask for it back then chances are they’ll give it to you.

They’ll give you the full whack even though they’ve only really supposed to have 8.96 cents per dollar.

But if more than 9% of a banks’ customers wanted all their money on any given day, then they’d be in big trouble. That’s what’s commonly known as a ‘bank run.’

In fact it would need a lot less than that considering Tier 1 capital isn’t just made up of cash. It includes a range of other ‘investments’ too. So chances are a bank run could be caused by less than 2% or 3% of savers wanting their cash back.

But the funny thing is, the banks actually admit they don’t have your money. Except they give it an important sounding name so you think it’s got nothing to do with your savings.

They call it Tier 1 capital.

Yep, the ‘conservative’ practices by the banks are just as conservative as Storm Financial.

The banks are leveraging up your savings by more than 11 to 1 so that some mug can blow it all on an over-priced house.

Call us dumb if you like, but we just can’t see much of a difference. Both involve a house, and both involve massive leverage.

In fact the only difference we can see is that at least Storm had the decency to get the punters to leverage up their own assets, rather than someone else’s.

But if you think 8.96 cents on the dollar is a bit thin, the NAB says it won’t stay that ‘strong’ for long:

“When conditions become more predictable the Group will consider allowing the Tier 1 Capital Ratio to trend down.”

Are you getting the hang of this now? In mainstream press speak that would be presented as a sign of banking strength. The bank is so strong it doesn’t need to keep a high ratio.

We’re yet to figure out how something becomes stronger by making it weaker. But we’ll work on it.

What the bank is really saying is that forget about the current 11:1 leverage, they’ve got their sights on something closer to 12:1. Before you know it the banks will only have 7 or 8 cents on the dollar of your cash – or much less.

But this result from the NAB is good enough for our favourite banking cheerleader, Michael Pascoe at The Age:

“Never mind the bad debts, CDOs, being caught trying to rort the New Zealand tax system, the dithering British presence and the timing of its US bank purchase, National Australia Bank is sitting very pretty indeed.”

We almost feel embarrassed for the bloke. At the end of a blah, blah article the bank loving mainstream journo wraps up with:

“Oh, the banking analysts will continue to roll their recommendations from one to another in the club – and then swing back again in next year. And the share prices will rise some days and fall on others, but the underlying story keeps all the Big Four as portfolio bedrock.”

The only underlying story we can see is blatant fraud.

But anyway, we read through the NAB report several times yesterday and we can’t figure out how anyone could call banks the ‘bedrock’ of a portfolio.

And as for the NABs prediction of 6.7% unemployment and an improving economy. Well, thanks, but we’ll take that with an entire block of salt. Considering it was one of their own economists, Allan Oster who confidently predicted that interest rates would fall below 3% and inflation wasn’t an issue.

If you believe the banks about their conservative practices, then you do so at your peril.

If Storm Financial and Opes Prime have gotten themselves in hot water for leveraging their clients too much and other ‘alleged’ wrong-doings, then we can only conclude that the banks should be in the dock alongside them.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 closed down again yesterday, for the third day in a row, to 4,685.10, a 1.44% drop. Australian shares dropped again today, as the US had an ordinary session overnight.

The Dow Jones Industrial Average was down last night, closing at 9,762.14, a 119 point decrease. News of a weaker housing market gave another reason for investors to be cautious.

In Europe, the FTSE was smashed over night, down by 2.32%, falling to 5,080.42 at the close. A negative start to the US market and a decline in UK bank shares drove the FTSE lower.

The Nikkei fell again for the second day in a row. Closing to 10,075.05, down by 1.35%, its lowest point in two weeks. Follow that story here.

A strengthening US dollar caused the price of gold to diminish again over night.

In Australian dollars, Gold is trading at $1,143.82, while in US Dollars it is trading at $1,027.72. And the price of silver in Aussie dollars is $18.02 and in US Dollars it is $16.19.

The Aussie dollar against the US dollar, is currently trading at USD $0.8983. The Aussie dollar dropped overnight against the Japanese Yen, trading at JPY 81.49

Crude oil, dropped overnight, closing at USD$77.46

For the biggest movers on the market yesterday click here…

Tagged as: australian small cap investigator, bubble, financial professionals, H&R Block, Michael Pascoe, nab, National Australia Bank, New Zealand, property spruikers, Storm Financial, tax system