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US stock market daily report (March 15, 2013, Friday)

Contributed by Millennium Traders

Stress tests results from the Federal Reserve regarding whether 18 of the largest financial institutions can withstand a deep recession, were released late Thursday. The Fed and the banks, for the stress tests, considered a hypothetical nine-quarter scenario with a hypothetical unemployment rate of 12%. Additionally, banks were required to evaluate how their capital buffers would withstand a GDP decline of nearly 5% as well as a situation where equity prices would fall by more than 50% over the course of the test recession. Stress test results projected losses, revenue and net income for the banks, as well as a wide variety of loan losses including mortgages and commercial real estate. Results differ from initial stress test results released last week because they are forward looking, taking into account each institution’s dividend and stock buyback plans over the next 12 months. Stress test results from last week focused on an average of each bank’s last four quarters of dividends. Generally, banks must be able to project losses and revenues for particular categories of assets in the stressful scenario, as well as how their capital would be impacted at each stage of the stress period. The Fed said that if there is a problem with a particular firm’s loss estimate, for example, the problem should be addressed sooner rather than waiting to see whether they get it right in next year’s stress tests.

Ally Financial, government-owned, failed final Fed stress test on Thursday with 1.52% in capital set aside under a measure called Tier 1 common capital ratio.

American Express (AXP) proposed adjusted capital plan came in at 6.4% and was approved after a resubmission. The banks capital distribution plans were rejected by the Fed last week with a 4.97% stress ratio for its tier 1 common ratio, below the 5% regulatory minimum.

BB&T (BBT) dividend and stock buyback plan was rejected by the Fed as the bank needs “certain adjustments” related to “unfunded lending commitments” which are required to conform with regulatory guidance.

Goldman Sachs & Co. J.P. Morgan Chase & Co. (JPM) received passing grades from the Fed however, are required to resubmit share distribution plans to the central bank by the end of Q3 as the Fed cited “weaknesses” in their capital plans.

Other financial institutions that passed the stress test, totaling 14 include: Bank of America Corp. (BAC), Citigroup Inc. (C), Fifth Third Bancorp (FITB), Regions (RF) and SunTrust Banks (STI) and are permitted to distribute their capital and must resubmit plans next year for 2014 stress tests.

Senator Carl Levin (D-MI), chairman of Senate Permanent Subcommittee on Investigations, on Friday said he is focused on J.P. Morgan’s (JPM) failure to investigate repeated breaches of its own risk limits, mainly the London Whale trade losses and internal oversight. Thursday evening, a report was released accusing Morgan of misleading regulators as well as, hiding information about the extent of its losses on the trades, a loss resulting in the write-off of nearly $6 billion so far - as a result of runaway derivatives trading. Ina Drew, former head of J.P. Morgan’s Chief Investment Office, testified before the committee and, took the fall , describing her departure from Morgan in May 2012 as devastating, saying “This was my life’s work.” Levin said federal regulators should track and investigate trading activities that cause large breaches of internal bank risk limits. During the first three months of 2012 Morgan breached key risk limits 170 times.

When a securities firm promises to deliver a Treasury security to a buyer but is subsequently unable to obtain it in the market - that is a 'fail'. On Friday, U.S. Treasury Department announced that it wants to examine trading that occurred earlier this week in the 10-year note auctioned in February. As a result, any market participant holding over $2 billion of the 10-year note as of the close of business on March 11 must report its holdings to the government. Earlier this week, Treasury officials said that market 'fails" reached elevated levels and not only in the 10-year note. Any irregularities found by Treasury will be discussed with the firm's primary regulator.

The New York Federal Reserve Bank said Friday that the Empire State manufacturing index in March slipped to 9.2 in March from 10.0 in February, remaining in positive territory for the second month after six straight negative readings. Key new orders sub-index fell to 8.2 and shipment slipped to 7.8 in March.

The Federal Reserve said Friday that industrial production rebounded in February, rising 0.7% on the back of stronger manufacturing and utility production. Output at factories increased 0.8% and utility production rose 1.6% due to the return of more normal winter temperatures. Capacity utilization rose to 79.6%, the highest level since March 2008.

March consumer-sentiment gauge dropped to a preliminary reading of 71.8, for the lowest level since December 2011, as reported by University of Michigan-Thomson Reuters on Friday. Consumers face uncertainty from effects of federal spending cuts.