US sharemarket — the news ain’t all bad. Despite mountains of press articles being devoted to a potential share slump, the US stock-market in general has held up remarkably well amid the current global financial turmoil. While certain sectors (specifically banking and automotive) have been decimated, the Dow is still 26% higher than it was five years ago. Not a great return, but hardly like the crash of 1929 which saw stocks drop 85% from their highs (the Dow is currently off around 18% of its peak). However, the relatively buoyant sharemarket contradicts the fact that US companies are not making much money. As Bill Bonner noted in the Daily Reckoning yesterday:
Taken altogether, guess how much money the Dow stocks are making? These are the companies that form the backbone of American commerce and industry. Guess again. Because if you put them all together, says Barron’s, you’d have a loss of more than $80 billion. The last time there was such a loss in the Dow was 75 years ago – in the Great Depression.
Meanwhile, US property prices are down 20% in a year, the banking system is on the verge of collapse and the Fed isn’t able to move rates up (which would tip the economy into recession) or down (spurring inflation). Have US equities bottomed? Wouldn’t bet on it. — Adam Scwhab
US banking sector — news ain’t all that good. While the US equity market in general had held up, the same certainly can’t be said for the banking sector. Despite another bank going belly-up over the weekend, many commentators remain optimistic that the worst is behind us. The excellent Seeking Alpha website took a different tact noting that:
[The bank which has led the recent resurgence] Wells Fargo, decided to extend its charge-off policy in the 2nd quarter from 120 days to 180 days, in an effort to give troubled borrowers more time to reach a loan workout. A skeptical person might think that they did not change this policy out of the goodness of their hearts.
Maybe, just maybe, they changed this policy to reduce their write-offs for the 2nd quarter, to beat analyst expectations.
There are many stories of people who are still living in houses, twelve months after making their last mortgage payment. Their banks have not started foreclosure proceedings.
Is this due to incompetence by the banks, or is this a way to avoid writing off the loss? The FASB has joined the cover-up gang by delaying the implementation of new rules that would have made banks stop hiding toxic waste off-balance sheet. The new rule would have made banks put these questionable assets on their balance sheet and would have required a bigger capital cushion.
What a surprise that bank regulators, the Treasury and Federal Reserve urged a delay in implementation. Manipulate the facts because the average American doesn’t understand or care. Sounds like Enron accounting standards to me.
As Seeking Alpha later noted, during the Savings and Loans crisis in the early 1990s, more than 1,500 banks failed. So far, only eight banks have fallen over during this crisis (out of more than 8,500). — Adam Schwab
Just when you thought it was safe to go back to the petrol station … There has been all but dancing in the street as the media and currency markets price in a drop in interest rates by the Reserve Bank at its 2 September meeting. However, before the McMansion owning, SUV driving battlers crack open another bottle of Hardy’s, it is possible that an interest rate drop may actually hurt the battlers’ hip pockets.
That is largely because Australia’s government licensed banking oligopoly aren’t required to pass on any rate drop to mortgage holders. As Ian Rogers noted in Crikey yesterday, the New Zealand, UK and even US experiences have shown that a drop in official rates will not necessarily lead to a drop in variable mortgage rates. A drop in the cash rate will however allow banks to increase their dwindling profit margins – we shouldn’t forget that paying Mike Smith and Gail Kelly almost five million dollars a year are the banks’ first priority.
Meanwhile, a drop in official interest rates will have adverse consequences in other areas. A lower official rate translates into a lower Australian dollar. That means stuff we import becomes more expensive. We import a fair bit of oil. A general rule is that a one cent drop in the Aussie dollar will translate into a one cent increase at the pump. So while oil prices are easing, a more permissive monetary policy could have the effect of increasing the petrol price, as it would take more Australian dollars to buy a barrel of US-denominated oil. Already the Australian dollar has slumped from 98 cents to around 90 cents with the market factoring in a 50 basis point cut in September. Mortgage holders should be careful what they wish for. — Adam Schwab
The AFR, where “lucky” means “not lucky”. Earlier this month, the world’s most expensive daily newspaper, the Australian Financial Review, lifted its cover price to $3.00. Despite the increase, it doesn’t appear that the journalistic quality has improved much. In the “Taking Stock” section of today’s AFR, Ayesha de Krester profiled the newly formed OZ Minerals (which came about following the recent merger between Oxiana and Zinifex). While noting that the OZ Minerals share price has slumped 16.3% since the merger (closing yesterday at $1.74), DeKrester then claimed that “OZ has a truly diversified mining portfolio to ward against a downturn in one particular area. Lucky, too, with zinc price hitting their lowest point since the end of 2005 on Tuesday.”
Not sure how “lucky” Oxiana shareholders are feeling at the moment. Given that they exchanged their copper/gold asset for a zinc asset and have lost around half of their value since the merger was announced. The only “lucky” people are Zinifex shareholders and Owen Hegerty, who will receive a (reduced but still hefty) payout as thanks for spearheading one of the worst merger deals of the past decade. — Adam Schwab