A Look at the Coming Week - May 11, 2009
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We are all breathing a sigh of relief now that the bank stress tests are over. Almost half to the banks that were tested will need to raise a combined $75 billion. What was lost in the fine print is if the banks are subjected to the "worst case" scenario.
When the tests were done, they used several scenarios. The "worst case" test scenario assumed things that are actually a foregone conclusion. For example, the worst case is unemployment at 10% over the next year. On Friday, we learned that unemployment hit 8.9% which is not too very far off.
The conclusion we have formed is the banks are still not out of the woods. It is comforting to hear that the sky is not falling like it did last fall but caution is the order of the day. There are still two major problems lurking. The first is commercial real estate and the second is credit card defaults.
As taxpayers we have showered manna from heaven on these free-wheeling, free-spending banks. The problem is they are not, in turn, opening their wallets to give loans to everyday American families. As people cut back on spending due to job losses, job cutbacks or fear, the shopping malls will suffer. This in turn is putting pressure on the mall owners. The second largest mall owner, General Growth just recently filed for reorganization (bankruptcy) and more will no doubt follow suit. Furthermore, the country is littered with empty buildings due to overbuilding
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Banks are now hoarding money to meet future credit card defaults. Historically there has been a correlation between the unemployment rate and credit card defaults. As unemployment continues to rise toward the 10% level, so too are credit card defaults. The result of the heady years of the past are coming to haunt many folks who spent more than they made and now they are being cut off from going back to the punchbowl. When credit stops, it stops!
After a nice stock market rally, many are wondering when things will end. This is hard to say. What we do know is a rally like this has never happened in a bad market without going back down to test the lows. This is done so investors can have confidence that things really are getting better and that it is safe to buy in once more. This current rally is a very distinct aberration that has not been seen before in this type of market.
The next few weeks should give us more clues. In the meantime, we are recommending a position of safety.
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Working for your wealth and peace of mind,
The Vance Capital Management Team |
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