Financial markets remain choppy and distressed as markets apparently view Treasury Secretary Geithner’s rollout of the “Financial Stability Plan” as a disappointment. I certainly was underwhelmed by the plan and its lack of details.
As it stands, the plan outlines six big steps. The first is to “stress test” major banks, increase disclosure, and if needed inject more capital and encourage private investment. For me, despite my view that of some big banks deserve a lot of the blame for the mess we’re in, this idea falls in the “if I wasn’t laughing so hard, I would cry” category. These banks are already totally stressed out and struggling to stay afloat. Another round of major regulatory reviews and disclosure requirements may not be the best use of anybody’s time or money in the midst of this financial crisis.
Step 2 is to create a “Public-Private Investment Fund” to allow banks to sell troubled assets to others in the private sector. In my opinion, the misstep here is that the new plan wants the assets sold at market prices. Heck, the banks can do that already, but they think the bids are too low.
Step 3 is to have the Federal Reserve (the Fed) to fire up the Term Asset-Backed Securities Loan Facility (TALF), start buying consumer and business securitized loans, and then expand the program to commercial mortgage-backed securities and consider purchasing other assets as well. The plan calls for up to one trillion dollars in Fed lending. My concern here is that the size and flow of credit could become politicized. In any case, the Fed has been slow to get this program rolling.
Step 4 is a “Transparency and Accountability Agenda” which goes after banks requiring assistance; limiting dividends, compensation, lobbying and other restrictions. Some of the restrictions make sense; others, despite my anger over some of these institutions’ behavior, seem draconian.
Step 5 is to spend money helping folks avoid foreclosure and support housing. My heart is okay with this, but my head says it is not likely to be very successful. It is hard to help out homeowners that are in way over their heads. Sometimes it is just best to move on and live in something you can afford. I guess it is worth a try, but I also wish I wasn’t paying for it.
Finally there is a “small business and community lending initiative” that allows the Small Business Administration (SBA) to make more loans and increase their guarantees on loans. This program seems okay, but I worry about defaults.
As I said earlier, there are no details yet, and given the decidedly tepid response from the stock and bond markets, I suspect there may be some significant changes in the plan over coming weeks. We will just have to wait and see. I hope they go back and reconsider the model used to lift a lot of risk out of Citigroup and Bank of America late last year. That model was simple and uncomplicated. Although it seems to me that the government charged too high a price to guarantee the troubled assets, given those banks’ languishing stock prices, it would be pretty easy to change the two-page term sheet used in those transactions to fine-tune the outcomes.
A lot of big numbers are being thrown around in all these discussions, and it is easy to lose perspective. Bear in mind that while total U.S. debt outstanding was about $52 trillion at the end of Q3 2008, total financial assets, after substantial write-downs and losses, were about $146 trillion. And remember that there are still a lot of companies in good financial shape. As always, please call me with questions or concerns.
LPL Financial
100 North Point Center East
Suite 530
Alpharetta, GA 30022
(770) 995-7101
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Compliance tracking #514979.
Posted by Christopher S. Laws, CFP
Posted by Christopher S. Laws, CFP
Posted by Christopher S. Laws, CFP
Is the Market Turning Around?
April 29, 2009Here we are with the blessings of spring upon us. In these recent weeks the financial markets have started to rebound from the lows hit this winter. Yet, broad equity price indices remain well below the 2007 peak levels and from a long-term perspective are about 40% to 45% below the peaks hit in 2000 and 2007. So, we have a long road to a full recovery however there are some signs that the market’s recovery is progressing.
The first quarter company earnings reporting season is closing and it looks like things are turning around, after generally bad earnings reports for Q408. The earnings turn looks to be partly due to a reduction in bank loan write-offs, but also due to company cost cutting and, despite dire predictions of deflation, some ability to avoid a collapse in the prices of goods and services sold. Excluding energy, the Consumer Price Index (CPI) is up 2.2% over the last year including modest gains over all three months of this year.
Of course cost cutting has its dark side. The worker layoffs have pushed the unemployment rate to 8.5%. Inventory cuts and a drop in spending on plant and equipment by companies accounted for nearly half of the 6.3% decline in fourth quarter GDP. And various monthly data for the first quarter indicate further weakness. However, private sector actions in recessions, while painful, can be the most powerful factor driving recoveries.
On the brighter side, some measures of home prices are showing a rebound in February and March and the sharp drop in home sales appears to be leveling off. With home price declines, lower mortgage interest rates and, amazingly enough, still rising real personal income (due to lower energy prices), the housing affordability index is, by a large margin, at an all-time record high. Speaking of energy prices, we are getting much needed sustained relief for households, with crude oil down about 65% from that terrible peak in July 2008 and natural gas down about 70%. And consumer confidence rebounded strongly in April.
Though we are seeing some improvement, we are by no means out of the woods. Uncertainty is still a factor that can impact market participation, and we still don’t know if the Obama administration policy actions, the Federal Reserve and other agencies’ plans will work well. I do think there will be some failures, but we are already seeing some positive results. Many, but not all, of the big banks appear to be recovering and while big bank lending is down recently, smaller banks that stuck to their knitting have been expanding lending. Interest rates on municipal, mortgage, corporate, commercial and other debt, previously viewed as “way too risky to invest in” have come down signaling renewed investor interest, allowing towns, states, home buyers, companies, and other borrowers expanded access to credit markets. It’s not business as usual, but to me it looks a whole lot better than the “frozen credit markets” we saw earlier.
There is an expression “accelerating to the bottom” that means things are getting worse at a faster pace. That would be bad. However, looking across the financial and economic landscape I do not see that acceleration at present. I see a moderate, but still jittery financial recovery, and an economy that is finding a bottom and struggling with a turnaround. People talk about V or U or maybe L-shaped recoveries (though talk about a return to the Great Depression or replicating Japan’s experience is heard much less now). The information on the markets and the economy looks to me to signal more of a U with the bottom probably behind us in financial markets and the economy headed for a flat summer with recovery starting in the autumn. I am hoping for a better holiday season than last year’s, economically speaking. As always, please call me with any questions or concerns.
LPL Financial 100 North Point Center East Suite 530 Alpharetta, GA 30022 (770) 995-7101The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Compliance tracking #536518