Spark Global Limited Reports:
Macroeconomic indicators can give you a comprehensive picture of the health of the economy, but why is it important and how do you use them?
Here’s a look at some specific macroeconomic indicators for different industries that help gauge the market’s strengths and weaknesses.
The Texas ratio is a quick and dirty accounting ratio used to identify “zombie banks”.
The measure was developed by Gerard Cassidy of RBC Capital Markets in an analysis of Texas banks.
The ratio compares a bank’s non-performing assets (loans 90 days past due) and real estate holdings with the bank’s tangible common equity (meaning no goodwill or other intangible assets) and loan loss reserves (the amount the bank assumes it will lose on loans).
This ratio is a good indicator of the performance of a bank’s loan portfolio. The conventional wisdom is that anything over 100 per cent is bad news, indicating a high likelihood of solvency.
Simon Constable and Robert E. Wright of the Wall Street Journal call this the Texas “zombie bank” ratio, because banks with high Texas bank ratios are “undead banks.” They are not solvent enough to make new loans and not solvent enough to die or be taken over.
Where is the Texas rate data
For whatever reason, this metric never really caught on, which is odd because the financial world generally likes these quick and dirty accounting ratios, such as the current one.
As a result, you’re unlikely to find statistics on the Texas ratio on a major financial data aggregator like Yahoo Finance. There are websites, such as BankRegData, that publish vast amounts of bank financial data.
Unlike most other financial sites that offer metrics, BankRegData also provides historical data that allows you to see where things are trending.
You might be surprised to find that the Texas ratios of all the banks they track have barely risen since the global lockdown began in March 2020:
How do I use the Texas ratio
The Texas ratio is best used as a screening indicator for banks likely to fail in the future. Just like the current ratio. As such, it paints a very crude picture.
But as part of a larger strategy, it is a shortcut to a shortlist of bad banks to analyse.
Revenue per available room
The travel industry uses revenue per available room to measure the performance of hotels and other short-term rental services. The metric is simply calculated by dividing monthly (or period) gross rental income by the number of rooms occupied.
Thomas Claugus wrote to Jack Swagger in Hedge Fund Market Wizards magazine Schwager, explained why his fund was heavily long U.S. stocks in 2011 amid a seemingly bleak economic backdrop.
Revenue per revpAR was one of the leading indicators he used, forming a highly contrarian view at the time:
“Net exposure is mainly determined by mean reversion models, but I don’t think the economy is as bad as the media makes it out to be. We track some basic indicators to understand the real economy. Rail traffic, for example, is up 2% this year and truck traffic is up 4%. These figures do not indicate a contraction. Airline load factors are also good. Revenue per available room rose 7%. These basic indicators tell you the economy isn’t that bad. While we still need to address some of the excesses of the housing bubble, I don’t think construction and housing starts are going to fall significantly from here because they are already so low that there is almost no way out but up.”