There ought to be a big sign erected in every dealing room, stockbrokers office and trading floor around the world: it’s all about the banks (especially US) and the American housing sector, ‘stupid’.
And something similar should be etched on the forebrain of every investor: until there’s complete certainty about the health of the US housing sector, and until there’s complete confidence about the health of US banks (and other financial groups as well), there’s not going to be a sustained economic recovery, or a concerted rebound in share prices, anywhere.
Trading on Wall Street Monday confirmed that very point, and yesterday Asia when optimistic comments from Standard Chartered about its current trading positions, got the rebound back on the rails.
But there was Wall Street on Monday, chuffing along on day five of its bounce, ignoring the realties of the sick US economy and along came a reminder from the black hole that is the swamp that is the American financial sector.
A surprise rise in US housing starts in February, and housing permits, added to the impression for markets that things were on the turn. They finished higher in the uS as the rebound resumed.
Watch now for the head of steam to build, watch also for possible shoals, like the quarterly reports from US and other banks.
The fragility of the economy and the system overall remains tentative.
American Express reminded us of that when it warned that many of its customers were having trouble repaying their debts.
That’s something that shouldn’t be too much of a surprise with unemployment at a 26 year high and climbing, house prices down 18.6% in the past year, and still falling, and foreclosures up 30% in the past 23 months.
What’s amazing is that all these facts are ‘knowns’: it’s not the first time Amex has reported slow payments. It’s no wonder US house prices are falling and foreclosures are rising, share prices are down and jobs are being lost (over 2 million in the past five months).
So it’s no wonder debts are being deferred, pushed to one side or defaulted on. The big US credit card group, Capital One is another to have told the market just that.
And yet Wall Street has been ignoring this: the market was up 2% on the Dow on Monday, at one stage, making around 13% since last Tuesday.
And, in pushing it higher in early trading, ignored the bigger than expected slump in US industrial production last month and associated bad news from the heartland of the country’s manufacturing sector.
Financial stocks were up 8% and after Amex issued its statement, everything fell as investors went into a lather about the health of the banks again.
They also ignored the news that American insurers lost $US32 billion in capital last year, according to a report from Moody’s.
That could mean some big insurers might have to stop writing some forms of business, and might have to sell billions of dollars of shares, bonds and other investments to generate enough money to repay investors and policyholders. That is not bullish news.
Fed chairman, Ben Bernanke had cheered markets by revealing that he thought the US had dodged a depression (which was quite a dramatic statement for a central banker to make) and he told 60 Minutes in the US that there were "green shoots" starting to appear in various parts of the economy.
And with UK bank, Barclays
joining the likes of Citigroup, Bank of America and JPMorgan in seeing its own ‘green shoots’ in its profit and loss account, investors should have realised that the rebound is very fragile, being based on the supposed "good news" of banks doing well when they are borrowing for virtually nothing and lending with margins of 5%-8% in many cases.
The cheapness of money at the moment ought to make every investor wary of claims of banks doing well, especially big American banks like Well Fargo, which has started a campaign against the help given by the US government to the sector.
Barclays other bit of news was that it was looking to raise more capital by selling assets: that was ignored by UK and US investors looking only for good news and yet it tells us that the UK giant is not out of the woods by any stretch of an accountant’s imagination. In fact it wants to strike a deal with the UK government to dump toxic assets on the government via the current ‘insurance’ scheme while refusing government capital.
Having created many of its own problems, it now wants dump the nasties on UK taxpayers.
If anyone had been thinking, instead of peering at their screens, they would have realised that the current upturn has been driven by reports ‘of ‘good news’ in some major banks that have been previous basket cases, so if another struggling financial group came along with some ‘bad’ news, the odds were the market would take a lurch. (Source,CNN)
And that’s what Amex (who bought a bank late last year to get its hands on some government bailout money) did with its update. American Express said its credit card default rates rose to 8.7% from 8.3% in January and the percentage of loans at least 30 days past due rose to 5.3% from 5.1%.
That jolt made investors more aware of bad news: so when Alcoa said it was cutting dividend by 82%, capital spending and raising up to $US1.1 billion in new capital, traders took notice.
Even though Alcoa reported after the bell its shares fell 10%, meaning trading tomorrow will start off on the wrong foot with the Dow member stock down sharpl
