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After a six week stock
market rally investors
received more news that the
most severe economic decline
since the Great Depression
may be leveling out or more
aptly put by Federal Reserve
Chairman Ben Bernanke,
"tentative signs that the
sharp decline in economic
activity may be slowing."
Nobody but the most
extremely optimistic
economist called for an
economic recovery by the end
of the first quarter of
2009, although a number did
target the end of the Second
Quarter, although many of
those predictions tended to
drift into late 2009 and
beyond.
Bernanke cutely said a few
weeks ago that he saw "
green shoots" growing in the
market. One area that he saw
improvement was banking and
after very positive and
surprising record quarterly
profits announcement by
Wells Fargo last week, the
good news continued to take
root. Goldman started the
week reporting $1.81 billion
in first quarter net
profits, up 20% from a year
ago, but more importantly a
sharp reversal from a $2.1
billion loss from the fourth
quarter of 2008.
Despite the good news,
Goldman's principal
investments generated a net
loss of $1.41 billion for
the quarter, evidence of the
continuing decline in real
estate assets. Goldman
indicated that it is
planning to raise $5 billion
to pay back its $10 billion
in government TARP funds.
J.P. Morgan Chase & Co.
followed saying first
quarter profit fell 10% as
reserves for consumer loan
losses continued to "grow
alarmingly" per Marketwatch,
but the largest bank by
assets still reported
results that topped analyst
estimates. The bank earned
$2.1 billion compared with
$2.4 billion for the same
quarter a year earlier, with
markdowns of $711 million on
leveraged lending funded and
unfunded commitments, as
well as $214 million of net
markdowns on
mortgage-related exposures.
Regarding its $25 billion in
borrowed TARP funds from the
U.S. Treasury, Chief
Executive Jamie Dimon boldly
told reporters, "We could
pay it back tomorrow -- we
have the money." Despite
reporting a 35% decline in
profits from continuing
operations to $2.83 billion
for the first quarter 2009
from a year earlier, General
Electric Co.'s profit fell
less than analysts
estimates. The company cited
losses from real estate
losses and rising
consumer-credit defaults.
Of course, all of the
banking news was good, last
week American Sterling Bank
of Sugar Creek, Missouri
became the 24th bank failure
this year. We will also know
a lot more about the health
of the banking sector as
Bank of America reports on
Monday.
Turning to the closely
related residential market,
housing starts plunged to
the second-lowest level on
record in March (due
primarily to a pull back in
multi-family construction)
and long-term jobless claims
hit a record (demonstrating
the difficulties in the job
search market) builders and
consumers turned slightly
optimistic. Building on some
positive housing news last
week, Reuters reported that
the U.S. homebuilder
sentiment rose in April to
its highest level since last
October according to the
National Association of Home
Builders; and the University
of Michigan's preliminary
index of consumer sentiment
rose for the second month in
a row to the highest level
since September, having
reached a three-decade low
in November.
It does seem strange to see
such positive news on
banking and residential real
estate. However, considering
the fact that this recession
started as a financial
crisis led by the banks and
a collapse in residential
mortgages and housing values
combined with the amount of
stimulus targeted at both
industries, it should not be
surprising that banking and
housing would lead us out of
this economic downturn.
Housing will be key to
returning the U.S. economy
to health. However, a survey
by the American Institute of
Certified Public Accountants
indicates that 79% of
Americans have no intention
of buying or selling a home
anytime soon. This despite
the fact that price declines
and low mortgage rates have
resulted in the cost of
homeownership to fall 43%
from the peak of the housing
cycle, putting housing
affordability to the best
level in 38 years according
to John Burns Real Estate
Consulting. "The darkest
phase of the recession is
behind us, according to
consumers," said Jonathan
Basile, an economist at
Credit Suisse Holdings Inc.
He was also quick to point
out that the current level
of consumer sentiment is
"very consistent with a
sluggish consumer profile"
and that a full economic
recovery is "not under foot
right now." |
