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| 2010-03-08 09:33 |
GOOD NEWS BEYOND GREEN SHOOTS (FINAL EDITION)
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Well, one has to wonder if there will be that morning-after feeling this week after the much anticipated jobs report
has come and gone. I like when the market is left to its own devices as it gives us a greater glimpse into the soul of the investor. That being
said, there is going to come a point soon when it feels like the train is pulling out of the station. In fact, I think that we are just about there,
but we'll know more when the market rallies higher on days there isn't serious news or developments. Last Friday it wasn't discussed in the business
media much, and maybe it's a stretch, but there was scuttlebutt that could be good for the economy and public confidence.
Word is spreading
that the Obama Administration is warming up to military trials for 9-11 attackers. If this is true it would be a complete 180 degree turnaround in
policy on something that seemed etched in stone. It would be cheered by many Americans, particularly those in the so-called investor class. I
realize at times I connect dots in a way that would strain the imagination even of a master cubist painter but these are the kinds of things that
matter to large swaths of people. These are the things that impact
the lives of regular folk much more than the mumbo jumbo you often hear on
television. I won't hold out hope for trials at Guantanamo but would cheer taking this mess out of civilian courts.
Speaking of cheer, there
was inspiring news on Friday and it wasn't the jobs report. Consumer credit in January increased $4.96 billion or 2.4% year over year to $2.46
trillion. The report was somewhat mixed with non-revolving credit up $6.62 billion or 5.0% while revolving credit decreased $1.67 billion. The former
represents things like student and auto loans while the latter credit cards. I realize that it's smart for households to continue to repair their own
balance sheets but I always know credit is the lifeblood of the economic engine. In fact, I think that the spike in savings that kicked in last year
has peaked, so I wonder how much people are dipping into their savings to make ends meet. Without a doubt the back to back increase in non-revolving
consumer credit is a positive sign.
I think that this is going to be a big year for the auto industry (relatively speaking) despite the recalls
and other uncertainties. I think that this is going to be a great year in the for-profit education industry. I think that this is going to be a better
year for furniture sales and home appliances. People with jobs will probably spend some of the money under their mattresses as the year goes on and
job growth begins. On that note, any job growth under 150,000 a month would still only be a moral victory. I must admit concern that job growth hasn't
begun yet.
In the end, jobs come from end-demand and that comes from spending. This is the conundrum.
As for revolving credit, it's the
16th straight month of declines. Part of that is fiscal responsibility among consumers and is echoed by the surge in use of debit cards and cash. But,
part of this is also the result of banks retrenching. I don't know about you but I get fewer and fewer of those pre-approved credit card offers in the
mail. It's less clutter, but I kind of liked being wooed. I know that consumers need more education before getting credit cards because it's not
really fine print that gets folks in massive holes.
Another big issue for banks continues to be the looming collapse in the commercial real
estate market. On Friday, four more banks bit the dust in part to poor commercial real estate loans. The tally for the year is now 26. In the first
week of March last year there was only one bank failure and just five for the entire month. The red flag is the fact that the FDIC couldn't find
buyers for two of the four, and that is very expensive.
Case in point is Centennial Bank of Ogden, Utah which had just $215.2 million in
assets and $205.1 million in deposits. But, the FDIC could only get Zion First National to buy direct deposits so this failure cost a whopping $96.3
million.
Sun American Bank of Boca Raton, Florida with $535.7 million in assets and $443.5 million in deposits was bought by First Citizens,
but will still cost the FDIC $103.8 million.
Bank of Illinois with $211.7 million in assets and $198.5 million in deposits will reopen as
Heartland Bank & Trust but still cost the FDIC $53.7 million.
There were no takers for Waterfield Bank of Germantown, Maryland which had $155.6
million in assets and $156.4 million in deposits. The FDIC will run the bank until April 5, and it will cost $51.0 million.
This brings up the
role of the Federal Reserve which has been credited with sparking the market in commercial mortgage backed securities through the TALF program. The
fact is that TALF has been helpful in tightening spreads, but legacy CMBS still look vulnerable. The TALF program is over at the end of this month for
most loans, and for CMBS, at the end of June. I'm not sure what's going to happen but I wouldn't be surprised to see the program extended. The problem
is that 2,988 U.S. banks are concentrated in commercial real estate loans and according to some reports, half of $1.4 trillion in outstanding loans
that need refinancing between 2011 and 2014 are underwater.
In addition to concerns about the existence of a market for CMBS is the role
securitization has played in our economy. According to the Dallas Fed, the ABS market funded 66% of all residential U.S. mortgages and 26% of all
non-mortgage consumer credit loans.
I'm not sure where
this battle between Washington and the banks will finish but it has caused banks to hold onto more cash than they normally would, and like most of
these skirmishes, it is regular people and the economy taking the deadly shrapnel.
We'll see what happens to the consumer financial protection
agency which should be easy to implement in one form or another. But, on Friday Chris Dodd sounded about as dejected as he has been since announcing
he wouldn't seek reelection.
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Disclaimer: Securities Operations Forum is providing this research to assist investors in determining when to buy and when to sell. All investment decisions are yours and as a result you could make or lose money. Securities Operations Forum, its employees and/or its affiliates and family members may from time to time take positions in the open market or otherwise with respect to the securities discussed, but not have stock ownership equal to or greater than 1% of the outstanding stock of the covered company nor does any employee of Securities Operations Forum sit on the Board of Directors of any covered company. The statements made herein include information obtained from sources believed to be reliable, but no independent verification has been made and we do not guarantee its accuracy or completeness. The statements made herein contain general information and do not constitute an offer to buy or sell any security. |
