It’s been recently deemed possible that over 100 more banks could potentially fall victim to the current state of the economy. Thus adding to the pressure on the Federal Deposit Insurance Corp’s

The FDIC may have no other choice but to reach across the pond and elsewhere for assistance in efforts to keep the banking system afloat.

There have been numerous bank closings since 2007, most of which have taken place in the past months of this year. Concerns such as home value depreciation and loss of jobs have all had a collective part in the fall of such institutions as banks.

In 2013 and the years that follow, it is predicted that the demise of banks are going to cost around $70 billion dollars for the insurance deposit fund.

On Wednesday July 29, 2009, 1:43 pm EDT

The bulk of the much-anticipated second-quarter earnings season has passed with Wall Street standing on substantially stronger ground.

So now what?

With stocks up 11 percent since Alcoa (NYSE:AA – News) kicked off earnings three weeks ago, investors now will be turning their gaze elsewhere to see whether the rally is for real, or if it was just a momentum-driven push that soon will fade.

“When you’re in a scenario in the markets when you don’t have that many macroeconomic data points and you’re beginning to slow down in earnings season, the market tends to obsess about different issues,” says Quincy Krosby, general market strategist at Prudential Financial. “Investors will very often just pull back until they can absorb more guidance, particularly when a market is in an overbought scenario.”

The market’s movements, then, will depend largely on five factors that loom ahead:

1. The Economy

Economic data points-such as unemployment, housing starts, gross domestic product and other statistics-have taken a back seat in investors’ minds as companies have reported quarterly earnings.

That’s likely to change as Wall Street looks for concrete signs that a recovery is at hand.

“We always say that markets climb a wall of worry, and with that said on every front there’s something to be worried about,” Krosby says. “The tug-of-war has existed from the very beginning that the recovery was going to be muted against those who say you’re going to be surprised that this is going to be a stronger recovery.”

GDP numbers due out at the end of this week will help provide a signpost of whether the economy will go positive by year’s end.

At the same time, unemployment, considered by many to the biggest fly in the ointment of recovery, may be discounted as a sign of recovery. Talk of a “jobless recovery” has only accelerated in recent weeks.

“The only thing that you’re hearing the bears scream about is that without jobs there can’t be a real recovery,” says Jordan Kimmel, market strategist at National Securities in New York. “Each recovery for the last several decades, the jobs have been more and more of a lagging indicator.”

Yet stocks fell Tuesday, precisely on worries that the economy was still sluggish and consumers were not regaining confidence.

2. The Energy Trade

Since the rally began off the March lows, movements in stocks and oil have been closely correlated.

One of the main reasons is that investors have been watching for signs of consumer demand growth. Current demand for oil is relatively anemic, but investors are looking at other signs to gauge the prospects for demand returning in the future.

“In the past few years, there was a $20 to $25 per barrel ‘risk premium’ added to oil prices. That premium has been replaced by a ‘hope premium’ as markets believe an improving economy will spur significant demand increase,” Marcia Donadio, an analyst at Ernst & Young, said in a study released Monday. “Major players in the energy industry are preparing for the upturn.”

Ernst & Young said hopes for a recovery are playing out across the energy spectrum, not just in gas and oil prices.

“While recovery will be slow and gradual, there is a great deal more optimism in the markets going into the third quarter, and that is reflected in oil and gas industry activity,” Donadio said.

3. More Earnings: Energy, Regional Banks

While many of the big financial companies and major Dow components have already reported earnings, there still are a handful out there.

Energy companies will be looked at particularly for their outlooks, while regional banks will be watched closely for deterioration in their commercial lending portfolios. Most report results this week or next.

In a broad review of third-quarter banking earnings, Keefe, Bruyette and Woods found “weak profitability” for small-cap banks to be among the biggest trends, and said commercial credit quality was slipping at an appreciable pace.

“The Goldman Sachses (NYSE:GS – News) of the world did just fine, and investors have flocked to those situations,” David Twibell, president of wealth management at Colorado Capital Bank in Denver, said in a recent interview. “By and large the real banking world out there, the regional banking world, is not doing well.”

In energy, ConocoPhillips (NYSE:COP – News) reports Wednesday, while earnings for ExxonMobil (NYSE:XOM – News) are due Thursday, and Chevron (NYSE:CVX – News) comes out Friday.

4. Progress in Healthcare

Investors remain concerned over the drastic revamping of the healthcare industry, as proposed by President Obama and making its way through Congress now.

Fitch ratings last week said it was downgrading more insurers that it covers, based primarily on concerns it has over how the companies will fare in competing with the government for the healthcare dollar.

But some analysts believe that the final bill to come out of Congress will be far less radical than the original plan, and will present opportunities across the healthcare spectrum.

“For investors in healthcare stocks, the longer Washington’s logjam continues, the less threatening the final version of legislation is likely to be,” John L. Sullivan, an analyst with Leerink Swan, said in a research note.

He added that “a discounted valuation offers healthcare investors an opportunity” and said the pickings will be especially ripe in biotech and managed care.

5. Buying Opportunity?

A general sentiment that the strong earnings run is leading to a natural pullback has some market pros sensing an opportunity.

“When it comes to the psychology part everybody is so afraid of seeing a ghost right now,” National Securities’ Kimmel says. “They’re seeing things that don’t exist.”

In such a climate, Kimmel says smart investors will be selective. He recommends bulking up on small caps and international companies, which he says are traditional market leaders out of a bear cycle.

Technology as well remains popular among those who think the market could recoil against a pullback sentiment.

Richard Sparks, senior analyst at Schaeffer’s Investment Reserach in Cincinnati, recommends mid-cap technology companies such as Juniper (NasdaqGS:JNPR – News) and Synaptics (NasdaqGS:SYNA – News), and counsels against buying into the talk of a natural selloff.

“I’d hesitate to be part of that big crowd that is always going to be worried about a pullback or think we definitely have to correct here,” Sparks says. “I don’t think it’s time to lighten up. Ride the trend as far as it goes.”

Anita Raghavan, 06.29.09, 02:00 PM EDT

LONDON — RBS Group Chief Executive Stephen Hester’s 9.6 million pound ($15.8 million) pay package came under fire yesterday, animating a conference at the London Business School.

An American entrepreneur living in London challenged John Kingman, the chief executive of UK Financial Investments Ltd., on Hester’s pay.

“The government owns this bank and sets a compensation package of 9.6 million pounds,” said the entrepreneur who was sitting in the audience. “I don’t think it’s appropriate.”

When the moderator of the panel challenged the questioner, asking him how would he feel if someone tried to begrudge him that kind of money if he earned it as an entrepreneur, the questioner, to resounding applause, responded: “The government doesn’t own my business.” He said Hester’s package sent “completely the wrong message to entrepreneurs.”

The entrepreneur’s comments–and the response he received from the audience–highlighted the anger that the bailout of the banking sector has sparked in the United Kingdom.

Kingman, who heads UK Financial Investments, a company that was set up to manage the government’s investments in the banking sector, said that if Hester does as well as published reports about his pay say he does, “I will be extremely happy because the taxpayer will make a huge profit on their investment.”

By KELLY HOLMAN, Investment Dealers’ Digest

June 29, 2009

If private-equity executives were sailors, right about now they might be rounding Cape Horn, an area at South America’s tip where treacherous waters have sunk more than a few vessels.

A significant amount of leveraged buyout firms, or 23%, are expected to go out of business in coming years, according to the latest survey of 120 global institutional investors conducted by London and New York-based secondary private-equity firm Coller Capital. The poll confirms and bolsters past theories, following up on a study from Boston Consulting Group from this past December that predicted between 20% and 40% of the 100 largest PE firms could disappear in the coming years.

Coller’s survey found that 28% of the world’s venture capital firms and their leveraged buyout peers won’t be able to raise new funds over the next seven years. As a result, these groups will be forced to stop investing since there won’t be capital available to finance new deals.

Even private-equity veterans like Boston Ventures managing director Vikrant Raina, a former Goldman Sachs banker, thinks an industry shakeout is inevitable, but ultimately good for the buyout business. “The industry got too big and raised too much money, but it’s going to be smaller,” he says. “The shrinkage is going to be good for the overall financial markets.”

Buyout firms, though, aren’t likely to fail in droves over the next year or two. The reason is they are required to wind down, or realize liquidity on their portfolio of investments before going out of business, which can take several years.

If data from Coller’s survey offer any indication, fundraising isn’t likely to be easy. Buyout partnerships declined 22% on average last year compared with venture capital partnerships, which fell 11%.

“The funds that have generated strong realized returns have a better chance of getting re-upped than those with lower returns or unrealized returns,” says Brian Boyle, a senior managing director at McGladrey Capital Markets, a Costa Mesa, Calif., investment bank.

Institutional fund managers have reported declining fund returns. For example, Coller’s survey noted that 37% of respondents reported average private-equity returns of just 16%.

A substantial majority of institutional investors, 84%, declined to provide their existing fund managers with capital for new funds over the past year and 20% plan to reduce allocations to private equity in the next 12 months. North American-based investors comprised the highest percentage of refusals at 92%, while 82% of European institutions and 70% of Asia-Pacific investors made up the remainder.

The moves are an effort by limited partners, as investors in private-equity funds are also called, to rebalance their asset allocations.

Some have gone further. Harvard Management Co., for example, sold off some of its interests in funds to select buyers known as secondary market private-equity firms.

Large buyout funds, those with capital of $7 billion and larger, experienced a 35% decline in their valuations, while middle-market funds valued up to $500 million only declined by 8%.

Additionally, some investors are seeking to reduce their investments in private equity because of a lack of return on their investments. Some 74% of respondents are expecting distributions — capital culled mainly from initial public offerings of private-equity-owned companies or corporate sales — to deteriorate over the coming year. A mere 25% think conditions for exits via IPOs or M&A transactions will improve.

In the meantime, limited partners may also prevent their buyout fund partners from executing transactions. In North America, for instance, investors forecast an average 13% default rate on capital calls over the next two years. By comparison, only 8% of European investors are expected to default and Asia-Pacific limited partners are projected to have a 7% default rate.

Capital calls are the funding that private equity firms request from their investors to finance deals.

Raina says when it comes to raising capital the multinational private-equity firms like the Blackstone Group or the Carlyle Group are better positioned to secure new commitments given their capital base and breadth of operations.

The story, meanwhile, could well be different for the class of middle market firms that have reputations as generalist investors, or those that invest opportunistically across a broad range of industries.

“The industry-focused and style-focused funds have developed better-quality deal flow than their ‘generalist’ counterparts because there are so many of these types of funds out there,” says McGladrey’s Boyle. “I believe that limited partners will want more focus on the high-return sectors or different investment styles.”

Financial sponsors that are seeking to raise new funds have found a much different environment than the period from 2005 to 2007 when limited partners couldn’t seem to put enough capital into funds. Now, fundraising is a more arduous process and one that is only expected to get tougher, say veterans like Coller Capital partner Frank Morgan.

“My understanding is that there are a number of funds in the market now trying to raise new money, but it’s very slow going,” he says. “As one investor said to me, ‘I need another large buyout fund like a hole in the head.’”

Additionally, 52% of polled respondents think that a constraint in resources will limit their chances to monitor their private-equity investments over the next two years. However, 23% plan to increase their private-equity teams.

The biggest bank failure of the year, Bank United was told as early as April to find a buyer because of its serve financial condition. The bank was hit hard by falling home values in Florida on of the worst area for housing price delclines in the country. The FDIC will share in the losses in $10.7B in assets and will recieve warrent as well as share in the profits if the bank gooes public. The cost to the FDIC is a hefty $4.9B depleating their gund which totaled $53B at the end of Q1. The FDIC said they will have enough captial to deal with potential future bank failures. The FDIC said they will release guidlines for private equity in the future and it is the intention of the private equity group to aquire other troubled banks under the Bank United umbrella. John Kanas along with a group of high prifile investors will serve as chairman and officers of the new bank. Charttrader Investment Advisors Miami Florida. The name of the bank will not change and no member of the group will own more than 24.9%. All branches will remain open.

Don Dion

As the beat-up banking sector regains its footing, investors are using funds like FBR Small Cap Financial(FBRSX Quote) and iShares Dow Jones U.S. Regional Banks(IAT Quote) to get back in action.

Strong regional banks have rallied in 2009, after being dragged down by their peers in a meltdown rooted in the broader financial industry.

FBRSX has risen 11.83% for the three months ending June 19, while IAT has rallied 16.78%.

While the transparency and low-cost structure of ETFs continue to attract investors in droves, the mutual fund methodology may work better when it comes to banks.

Picking individual banking stocks for your portfolio is perhaps more dangerous now than ever. Diversified funds serve as a good method to give your portfolio some exposure to the recovering industry without making your investments vulnerable to a particular bank.

Both IAT and FBRSX track smaller banks that have generally held up better amid the economic downturn. Because of its methodology, however, IAT holds more “super regional” banks than David Ellison’s FBRSX, exposing investors to bigger banks generally avoided by its mutual fund peer.

For many investors it will come down to fees, and IAT’s 0.48% expense ratio is certainly lighter than Ellison’s 2.10%. But with the banking sector proving so uncertain, is the passive strategy a safe course?

IAT uses a capitalization-weighted index to track regional banks, a strategy that often results in a high concentration of assets in top holdings. U.S. Bancorp currently makes up more than 19% of IAT, a concentration that overexposes investors to the gyrations of one stock. IAT currently stakes nearly 64% of its portfolio on its top 10 holdings while Ellison’s top 10 make up just 17%.

The passive strategy employed by ETFs, however, can not be counted on to make last-minute judgment calls, especially when a sector is facing a major downturn. Last summer, Ellison began to grow increasingly troubled by news emerging from the financial sector and decided to bulk up cash holdings in funds like FBRSX to stem the impending doom.

“Everything kept getting worse and worse,” Ellison noted in a June 20 interview in The Wall Street Journal interview. He said “the stocks were being sucked into a negative vortex.”

Ellison’s decision-making saved his investors the drop experienced by IAT. For the one-year period ending June 19, IAT dropped 34.26% while FBRSX actually rose 1.81%.

Ellison believes that the time has come, however, to begin accumulating bank shares, if just gradually. Ellison’s cash position, which was trimmed to just 10% during the worst of the banking downturn, is back up to 60% as he looks for opportunities in uncomplicated banks that have cut dividends and focused on income. While investors have to pay a higher price for Ellison’s strategy, the cost is worth the comfort in an uncertain climate.

FBRSX’s Top 10 Holdings (as of March 31) include Brookline Bancorp(BRKL Quote), Independent Bank Corp.(INDB Quote), BOK Financial(BOKF Quote), Webster Financial(WBS Quote), Redwood Trust(RWT Quote), Hingham Institution for Savings(HIFS Quote), Bank Mutual(BKMU Quote), WSFS Financial(WSFS Quote), Comerica(CMA Quote), and Astoria Financial(AF Quote).

IAT’s Top 10 Holdings (as of June 18) include U.S. Bancorp(USB Quote), PNC Financial Services(PNC Quote), BB&T(BBT Quote), Northern Trust(NTRS Quote), SunTrust(STI Quote), Hudson City Bancorp(HCBK Quote), Regions Financial (RF Quote), Fifth Third Bancorp(FITB Quote), M&T Bank.(MTB Quote) and New York Community Bancorp(NYB Quote).