Another low-volume day -- looks like maybe only 800 million shares of total volume by day's end!
American Express's Master Trust net write-offs dropped from 5.7% to 5.5% (month over month).
The trend for an improvement in credit quality appears intact for now.
Credit charge-off rates declined for BAC, COF and others (released today).
The principal case for the bank stocks remains an improvement in credit quality and that the shares are trading at a reasonable P/E multiple relative to earnings power.
And that trend in credit quality appears intact for now.
A GDP under +2% doesn't always mean a recession.
Before anyone panics regarding Ed Hyman's ISI comments that a GDP print of less than +2% typically presages a recession, it should be noted that GDP was below +2% in 1975, 1983 and 2001.
And none of those years had a recession.
I have observed that the banks are starting to show me something after several months of underperformance.
This could portend broader market strength over the short term.
Due to signs of broadening economic weakness, ISI has lowered its second-half GDP forecast from +2.5% to +2.0%. (Almost every time GDP has slowed to below 2%, "a recession has been signaled.")
Meanwhile, ISI's company surveys have improved in the past several weeks.
The market's upside and the economy's downside are currently mired in a vortex of liquidity, tax and regulatory traps.
Fed policy has likely done as much as it can and as much as it should:
* Zero-interest-rate policy stopped the Great Decession and the economic free-fall, but it has failed to create jobs.
* Quantitative easing has also helped to halt the financial crisis, but it did little to encourage small-business hiring and expansion.
* TARP stopped the carnage in the banking system, but it did little to encourage lending.
I add that there are unintended consequences of monetary policy. Low interest rates hurt the savers' class, especially the elderly. Meanwhile, well-positioned large corporations such as IBM, which borrowed short-term money at 1%, and MCD, which borrowed 10-year money at 3.5%, are aided by easy money.
The market's upside and the economy's downside are constrained and currently mired in a vortex of liquidity, tax and regulatory traps. These factors are undermining confidence and hurting valuations and probably won't change until the administration adopts a new playbook. The Fed can print money, but it can't print jobs. We need some combination of a transformative and focused jobs program, a cut in taxes and a simplification of the financial and health care regulatory initiatives. In essence, the current administration's policy has the effect of tightening economic and business conditions. In some ways policy is even more of a constraint to growth than a hike in interest rates would be.
By contrast, the downside is supported/protected by reasonable valuations and by the financial and operating strength of our largest corporations (especially of a S&P kind), which are generating record free cash flow, have cut costs to the bone and have taken advantage of a hospitable, friendly and cheap debt market. Hedge funds have de-risked, and retail investors have abandoned domestic equity funds, so who is left to sell? Meanwhile, inflation is quiescent, and short-term interest rates are very low and are likely to remain so for some time to come.
With corporations in such strong shape but with the consumer sector still deleveraging (and exposed to the continued risk of lower home and equity prices), a lumpy and inconsistent economic recovery that feels bad (because of structurally high unemployment) seems in order. At times, it will seem like we are reentering a recession; other times, it will seem as though economic growth is accelerating. These conditions will provide a setting that is hard for investors to navigate, particularly when algorithm-based high-frequency-trading strategies disrupt markets (at times), as their trading activity fills a light-volume void.
There are plenty of crosscurrents, but my baseline expectation remains for a range-bound market. Despite this tug of war, a reversal to better fiscal policy can resolve the range-bound market to the upside.
Even though I think we're range-bound, I like C, BAC, PRU and LNC in the financials; I especially like AAPL - it is very, very inexpensive below 250.....
long LNC; AAPL