Who Will Lead The Charge When The Market Recovers
As hard as it may be to imagine, the stock market will move back up someday. It always has.
When a market recovers, there are always one or two sectors which are perceived as values. The buying begins with those and then spreads.
According to The Wall Street Journal, “If the stock market makes a lasting recovery in 2009, the financial sector — its worst performer in 2008 — may lead the way.”
Banks may have access to less expensive capital and they may have access to nearly unlimited borrowing from the Fed. But, they are also about to be hit by a number of new challenges that are likely to drive their earnings into a deepening hole.
The first among these is the disaster with consumer credit. By some measures, default rates on credit cards and auto loans track unemployment. The jobless rate could easily move from 7% to 10% next year, driving billions of dollars in losses.
The next pothole banks will hit is commercial real estate lending. The value of this kind of property is moving in the same direction homes have. As occupancy rates drop and rent income falls along with that, highly leveraged properties will move into the default column.
Loans attached to leverage buyouts are also likely to encounter their worst year in decades. Some analysts expect 10% of corporations to default on loans. Many of the private equity deals done in 2006 and early 2007 will be up against large interest and principle payments just as the recession undermines their sales.
The subprime mortgage mess is not the end of the home loan crisis. Hundreds of thousands of Americans took out pay-option adjustable-rate mortgages. These instruments allow homeowners to pay what they want to each with any “underpayment” going into the principal. Then the interest rates reset higher. The marriage of the two will destroy the ability of many people who took the loans to repay them
Other than that, bank stocks should do well.
Douglas A. McIntyre