Banks Kick Off Earnings With Big Reserves As Economy Struggles!
“This is the way the world ends; not with a bang or a whimper, but with zombies breaking down the back door.” ― Amanda Hocking, Hollowland
If you are a normal red blooded kid, a trip to Disneyland gets you excited. On a few occasions as I was growing up, my family paid for the privilege of attending the mouse house in Anaheim, CA. As a kid, the best rides were always the roller coasters, and they were so popular you would have to wait hours in the hot sun for that one minute ‘thrill.’ The best one at the time was called the Matterhorn. As someone averse to waiting, I tried to avoid these kinds of situations, so second tier rides would get a higher priority. The best of those was the ride called Pirates of the Caribbean, which was fun and had plenty of excitement as well. In case you are not familiar with it, Johnny Depp later starred in the movie and made Disney plenty of money, along with himself. He has subsequently squandered 650 million of it with some unfortunate decisions. I digress, my fault, let’s get back on track. These rides can lead kids to search out more thrill seeking attractions, some of which might be Haunted Houses. Haunted houses typically include zombies, which are rejuvenated dead objects. With that endearing image in mind, the zombie term is meaningful, and some investors believe it has been relevant for quite some time. With all respect to the dead, let’s turn to the current investment environment, shall we.
Let’s recognize the economy has plenty of serious issues to contend with. Massive unemployment numbers, a services segment which should be considered on life support, if not half way in the grave, and a travel and leisure industry in pretty much the same situation. Both fiscal and monetary stimulus has helped over the last few months, but we all know it is scheduled to come to an end in a few days (more on that later). In the last week, the largest banks reported earnings which were all impacted by massive reserves set aside for future loan losses across the spectrum of categories (credit cards, consumer, commercial, real estate, autos). We are talking nearly thirty billion dollars, and future projections show possibly another fifty or sixty billion over the next two quarters. Not good. If we throw in an energy sector which is also on it’s back, we are looking at several major industries which are facing problems for quite some time. Throw in the issues of small businesses like bars, restaurants, gymnasiums, and others, and well, things are tough. In this context, the same cast of characters has led the stock market higher. You know their names, so let’s not go there. If we cast our gaze on the deep, dark corners of the investment world, yes, the joy that is tiny, very small, small or maybe medium size, many of these companies have been left for dead. I’m sorry, their stock prices reflect a zombie state. When the legendary investor Ben Graham was trying to get his firm to recover from the great depression, he wrote an article about how the vast majority of listed companies were priced so cheaply that they were worth more dead, meaning liquidated, than what they were priced for at the time. Today, we have the same situation. The quandary for investors is where to place your capital, if you want to do anything at all. Much depends on your specific situation and your risk appetite, or lack thereof. Many of these companies could be considered zombies for good reason. However, plenty have merit, and it could be the case they are wildly under priced. If one goes back in time to the depths of the 2008 crisis, if you were to research the stock prices of ten of your favorite companies to see where they traded at then versus where they are today, you will get an indication of what possibilities there may be. No, I am not giving out any candidates, but rest assured, they are out there. One thought, and it seems obvious, make sure they are breathing.
On the earnings front, the most interesting piece of the week was looking at the difference between the results posted by Chase, Wells, Citi, and Bank of America versus what Goldman Sachs and Morgan Stanley announced. All had huge underwriting gains, especially in debt and equity, but debt was clearly the star of the show. All of the debt issued by major corporations helped, along with the wide variety of issues bought by the Fed (munis, state, city, corporate) and other entities (foreign central banks?). With strong wealth management results, Goldman and Morgan Stanley clearly had the upper hand this quarter as lower commercial and retail exposure also helped. In other areas, Pepsi beat estimates, as did Johnson & Johnson and massive asset manager Blackrock. Next week, the flood of reports will continue, and a key focus will be more data regarding Covid 19 clinical trial results from a variety of pharmaceutical companies.
Let’s end with America’s version of a haunted house, that being the political discussions about further stimulus. We know the plan from one dracula, Speaker Pelosi, has 3 trillion worth of spending attached, with the untouchable being state and city government funding. A huge number of the public employee jobs like teachers, police, firemen, government workers are at risk of being scrapped in many states without Federal aid (California, NY, Illinois, NJ, etc). In the senate, the vampire known as Mitch McConnell will present something less spendy, with the untouchable being liability provision for the foreseeable future for businesses whose patrons include covid customers and workers. Payments for the unemployed where incentive to work will be strongly pushed but below what their former paycheck was. President Trump is pushing for a payroll tax holiday, and his supply side advisor, Larry Kudlow, is reportedly at odds with Treasury Secretary Mnuchin about how much stimulus must be offered. Senate Republicans are trying to keep the figure below a trillion. Let’s see, one vampire wants three, another wants one, it appears there is some number that might be in the middle which could work. Of course, that would assume that the parties were actually living and breathing, and we all know that is debatable. On that lovely note, stay safe and be well.
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Thank you for reading the blog this week, and if you have any questions about investing, please email me at firstname.lastname@example.org. Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.