• TSX -4.88 amid mixed earnings news and reassurance from the head of the U.S. central bank that key interest rates will stay low to stimulate the economy.
• DOW +91.75 In his first day testifying to the House, Bernanke told the House Financial Services Committee that while the economic recovery is moving along, the jobs market remains weak. Against this backdrop, the Fed is unlikely to lift the fed funds rate, the key overnight bank lending rate, anytime soon.
• Dollar +.24c to 94.88cUS
• Oil +$1.14 to $80.00US per barrel.
• Gold -$6.10 to $1,096.50 USD per ounce
Big banks' credit provisions may offer clues on economy
Earnings season starts Thursday
John Greenwood, Financial Post
A year after the worst financial meltdown in more than 60 years and in the wake of an equally historic recovery, analysts are closely watching the pile of cash set aside by the big banks to cover future bad loans known as provisions for credit losses.
The reason is simple: If the provisions get smaller, it's a sign that the economy is truly on the mend just as most economists predicted. If on the other hand the money pile gets bigger, that would suggest the banks are preparing for a less positive future.
We get our first peek of the year at what the industry is expecting when Canadian Imperial Bank of Commerce reports its first-quarter results this morning, kicking off earnings season for the big banks.
Analysts generally believe that the worst is over or soon will be with provisioning declining in 2010 against the backdrop of a strengthening economy.
Jim Bantis, an analyst at Credit Suisse, scaled back his forecast for 2010 credit loss provisions at the Big Six from $12-billion to $10.6-billion because of recent stability in credit card losses and the absence of large corporate loan losses.
John Aiken, an analyst at Barclays Capital, is similarly optimistic. "All signs point to improving credit quality and lower provisions," he said in a research note.
Brad Smith, an analyst at CI Capital Markets, takes a more bearish view, pointing to continued deterioration in credit conditions in the United States in the last three months of 2009. "With limited improvement evident in recent domestic employment and bankruptcy data, scope for adoption of a more optimistic view of domestic credit in our view remains limited," Mr. Smith said in a note.
Another reason for the concern around loss provisions is the sheer scale of the underlying borrowing. While Canadian banks have become global models for conservative risk management practices, the behavior of some of their customers has become a major cause for concern for some industry insiders.
Household borrowing compared with income has risen to 145%, from around 95% two decades ago and could exceed U.S. levels in the next three years, according to Moody's Canada. The concern is that if the economy suddenly deteriorates or if interest rates take a jump, many of those borrowers could find themselves unable to make the payments on their loans.
Peter Routledge, a senior vice-president at the rating agency, questions whether the banks are properly considering such a scenario. The conventional wisdom is that Canadians will try to meet their mortgage payments even if the house price falls below the value of the loan, and that idea is baked into many bank forecasts.
The trouble is that consumer behaviour is often very difficult to predict and historical performance is not always the best guide, Mr. Routledge said.
Read more: http://www.financialpost.com/news-sectors/financials/story.html?id=2608752#ixzz0gY3Cirnl
Bernanke's bittersweet rate pledge
Janet Whitman, Financial Post
NEW YORK -- Stock-market investors may have cheered Ben Bernanke's plan to keep benchmark interest rates at next to zero for at least the next several months but his pledge is also a signal the U.S. economy remains in rough shape.
Just how precarious the country's nascent economic recovery is was highlighted by a slew of data released this week: U.S. banks posted their sharpest drop in lending last year since 1942, sales of new homes plunged to their lowest level on record last month, already gloomy consumer confidence took a surprise dive this month, and hundreds of community banks could be forced to close their doors because of their exposure to souring commercial loans.
U.S. unemployment, meanwhile, is expected to remain stuck for the rest of this year at around a 26-year high of 10%.
Speaking before U.S. lawmakers at a hearing in Washington, D.C., Wednesday, Mr. Bernanke, the chairman of the U.S. Federal Reserve, said the economy still needs to be shored up by record-low interest rates.
"Notwithstanding the positive signs, the job market remains quite weak," he said as he delivered his semi-annual report to U.S. Congress. "Of particular concern, because of its long-term implications for workers' skills and wages, is the increasing incidence of long-term unemployment; indeed, more than 40% of the unemployed have been out of work six months or more, nearly double the share of a year ago."
Stocks surged on the news, relieved that borrowing to fuel leverage and company borrowing and investment would remain cheap for some time to come while rock bottom rates makes equities a more attractive bet than bonds.
The Dow Jones Industrial Average gained 91.75 points to 10,374.16, ending two days of losses. Toronto's main stock index ended virtually unchanged at 11,521.83.
Although perhaps a boon for stocks for now, the gloomy backdrop raises the question whether the U.S. economy can stand on its own two feet or faces the threat of a "double dip" recession as the hundreds of billions of dollars in government stimulus wears off.
"There's enough stimulus in the pipeline to keep the economy bumbling along for a while, but we haven't solved any of our main problems," said Joshua Shapiro, chief U.S. economist with MFR Inc. "There's still way too much leverage in this economy and how do you get out of that without further massive pain?"
Mr. Shapiro doesn't expect the economy, which emerged from its recession about seven months ago, to slip into a recession again this year or next. But he expects overall economic growth to slow in 2011 compared to this year. Beyond that, he said, the outlook is murky.
John Ryding, chief economist with RDQ Economics, said he's not anticipating another recession, but added that growth is likely to be so sluggish and employment so high that it might feel like a recession to many Americans.
"Jobs probably will start to be created in March and beyond, but the rate won't be fast enough to make significant inroads on the unemployment rate," Mr. Ryding said.
"It's going to feel like a recession in the labour market."
Tackling America's massive deficit will also be a major factor as the economy recovers.
"It would be helpful for the current situation if the Congress and the administration ... could provide a plan which shows how the deficit will fall to 2.5%-3% level, at least, over the next 10 years," Mr. Bernanke told lawmakers Wednesday. "I don't know exactly which programs, what taxes, what changes you would make. That's certainly up to Congress. But a concerted effort to do that would be, I think even a strong effort, would probably be good for confidence."
Some economists worry that lawmakers won't be able to find a solution to the debt problem.
"I think it's going to be very difficult for politicians to come to grips with this," said Mr. Shapiro of MFR. "The political cycle is two years or less. The temptation is to deny reality and go for temporary fixes."
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2608710#ixzz0gY4oXX1v
Thursday, February 25, 2010
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