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April 12, 2011

VALUATION WATCH: Our models find that overvaluation is approaching
critical levels. Overvalued stocks now make up almost 62% of our universe
and 28 % of the universe is calculated to be overvalued by 20% or more. All
Sectors are calculated to be overvalued.

Not Out of the Woods Yet

Richard Suttmeier Warns of Continued Housing/Banking Trouble in Latest
ValuEngine FDIC Report
ValuEngine Chief Market Strategist Richard Suttmeier is an expert on the US
Banking System and uses the health of the system as a leading economic indicator.
He distills his thoughts on the banking system in our FDIC Report. The latest update of
the report is now available.

In his summary of the report he notes the following:

In its most recent statement, the Federal Reserve said that the economic
recovery is on firmer ground with an overall gradual improvement in the labor market.
While the Fed recognized that commodity prices are putting upward pressure on
inflation, they argued that this is temporary. They recognized the sharp run-up in
energy costs-- caused by supply concerns, but left their blinders on by asserting that
longer-term inflation expectations are stable-- with underlying inflation still subdued.

Why is it that the FOMC still believes that Americans do not need to eat or buy
gasoline?

The Fed will continue to expand their balance sheet via the $600 billion QE2--
which continues through June --and they will continue to buy US Treasuries to replace
maturing mortgage-backed securities. In addition, they are continuing to keep the
federal funds rate at zero to 0.25%.
 However, in my view the key to the Main Street economy is the housing market
as well as nonresidential construction. The housing market is normally 15% of the US
economy but it has been depressed since home values peaked in mid-June 2006.
Until we see improvement there, we will not be able to sustain the recovery.

Meanwhile, Community banks declare that they were not the cause of “The
Great Credit Crunch,” despite the fact that they participated by extending
commercial real estate (CRE) loans-- including construction and development (C&D)
loans-- with loan commitments well above the regulatory guidelines versus risk based
capital. We all know the saga of the regional banks, but even now those “troubled
assets” remain hidden on their balance sheets—and this problem extends to those still
considered “too big to fail.”

I recently published a research note on Forbes.com which featured critical

FDIC asset data from the 2001 through 2010 period. This data shows that several asset
classes have expanded at a faster pace relative to Current Dollar GDP. This indicates
that the banking system remains over-leveraged.

For more proof that banks remain in perilous condition, consider the fact that
25% of all FDIC-insured financial institutions reported a net loss in the 4th quarter.
Rather than being indicative of a strong recovery, reported improvements in quarterly
earnings are largely the result of lower loan-loss provisions.

We are NOT Out of the Woods Yet!

A critical portion of this report is the ValuEngine List of Problem Banks. Problem
banks are publicly traded FDIC insured financial institutions who are overexposed to
Construction & Development Loans and/or Nonfarm nonresidential real estate loans,
with “1-Engine”--Strong Sell, or “2-Engine”—Sell. The report also includes a listing of all
other engine-rated banks-- and those with “n/a” ratings but forecast figure data
points according to our models-- in violation of FDIC guidelines vis-a-vis loan
exposures.

As of April 8, 2011, there were 232 banks overexposed to C&D and/or CRE loans
in the ValuEngine database with full data coverage. There were two additional
overexposed banks with partial data coverage.Of the overexposed banks with full
data coverage, 55 were rated “1-Engine” Strong Sells, 65 were rated “2-Engine” Sells,
104 were rated “3-Engine” Holds, and six were rated a “4-Engine” Buy. There were no
Strong Buy-rated banks on the list This means that there are currently 120 banks rated
Sell or Strong Sell that are also overexposed to C&D and/or CRE loans. There are 291
additional institutions listed as a problem bank list that do not appear in the
ValuEngine database but are carrying C&D and/or CRE loans in excess of the FDIC
guidelines.

Our latest ValuEngine FDIC Report is now posted. The report contains loan exposure
and/or ValuEngine datapoints on valuation, forecast, and ratings for all of the
institutions on our List of Problem Banks.
Subscribers can download it HERE.
Others interested in the report may find out more on our website by clicking the image
below.

MARKET OVERVIEW
Summary of VE Stock Universe
Stocks Undervalued 38.46%
Stocks Overvalued 61.54%
Stocks Undervalued by 20% 15.92%
Stocks Overvalued by 20% 28.31%
SECTOR OVERVIEW
Sector Change MTD YTD Valuation Last 12- P/E
MReturn Ratio
Aerospace -0.34% -1.41% 14.25% 10.34% overvalued 19.71% 19.53
Auto-Tires-Trucks -1.57% -3.34% -5.72% 5.94% overvalued 30.36% 20.02
Basic Materials -2.14% 0.00% 0.98% 12.15% overvalued 45.72% 25.63
Business Services -0.40% -0.92% 4.74% 10.05% overvalued 12.68% 50.63
Computer and Technology -0.84% -0.91% 11.07% 7.85% overvalued 27.26% 45.18
Construction -0.62% -1.57% 0.90% 9.36% overvalued 6.22% 34.68
Consumer Discretionary -0.83% -0.30% 4.91% 5.44% overvalued 12.39% 32.8
Consumer Staples -0.14% 0.60% 0.15% 8.48% overvalued 13.37% 19.08
Finance -0.36% -0.85% 2.78% 7.29% overvalued 5.76% 25.89
Industrial Products -1.32% -2.26% 4.95% 10.31% overvalued 22.24% 30.27
Medical -0.80% -0.34% 12.01% 2.53% overvalued 12.68% 37.68
Multi-Sector Conglomerates 0.17% -0.21% 4.77% 16.32% overvalued 25.57% 30.21
Oils-Energy -1.79% -2.84% 10.18% 22.72% overvalued 37.09% 47.92
Retail-Wholesale -0.58% -0.05% 5.36% 7.72% overvalued 15.53% 28.83
Transportation -0.33% -2.33% -0.95% 13.69% overvalued 15.94% 21.7
Utilities -0.21% -0.37% 4.56% 11.92% overvalued 16.29% 21.51