By By Eric Siegel
It is 2011, and the recession is over. We have seen six consecutive quarters of GDP growth, the S&P 500 has returned over 18 percent since a year ago, and this month's Consumer Confidence Index is up from December.
January's unemployment rate, published by the Bureau of Labor Statistics, showed that the job market is improving, despite a still meager job outlook for adult women, teenagers, blacks and Hispanics.
Still, we are in the early half of a second round of quantitative easing, which the Federal Open Market Committee does not plan on ending early, despite such quantifiable economic improvements. This just goes to show, economic recovery is not about equity markets, but is about liquid credit markets.
And as mouth watering as an 18 percent annual market return might be, market portfolios are still down from the peak in 2007, with the rebound only recapturing 83 percent of losses. We're still in the trenches.
Looking back on the past few years, it is difficult to orient ourselves in the grander scheme of economic cycles. From AIG and Lehman, to Madoff, to European sovereign debt, there seems to be an element of ease that has returned to the market as we put old headlines behind us. Unlike 2009, 2010 was not just about bouncing back from an over pessimistic bear market.
In 2010 we saw real corporate retrenchment, stabilization and a renewed willingness to invest. Yet, so much depends on the state of the financial sector, manufacturing in America, mollifying credit markets, and fiscal and monetary policy.
While bank failures peaked in 2010 and have since settled, banks still have a treacherous road before them. According to Standard & Poor's Leveraged Commentary and Data, large corporate bankruptcies are coming to an end, meaning that bank assets are looking more reliable and less prone to write-downs.
Smaller businesses, however, are being left in the dust. The low interest rate environment has pushed investors into high-yield bonds and leveraged loans, and an increasingly robust secondary market is fueling the gold rush.
Secondary markets substantially lower the liquidity risk associated with holding such assets, while middle market and small business lending with similar credit profiles (and without secondary market backing) are getting far less attention.
Going forward, the banking system may suffer from a two-pronged assault.
On one side, many analysts are afraid of a bubble in the high-yield and leveraged loan market. Once QE2 ends in July and liquidity dries up, the less-than investment grade support may fall off.
On the other side, larger banks are swallowing up small community banks. Many small businesses and middle market companies rely heavily on their relationship with community lenders, and more households than not rely on small and medium sized businesses for employment.
Some are less worried about the threat of a debt bubble. Partially because a large portion of the below BBB rated (Standard & Poor's) or Baa3 rated (Moody's) debt will extend the term of a number of loans coming due between 2012 and 2014, according to Bloomberg LP.
Refinancing now will be less demanding on what may be a fragile debt market in one to three years from now. In addition, many analysts are banking on diminishing yields on junk bonds to start easing out LBO and M&A activity. This in turn will consolidate weak companies, and stabilize asset values throughout the market in 2011.
The future of small businesses in America seems to be of ubiquitous concern. In a recent "Overcoming Obstacles in Small Business Lending" panel discussion at the L. William Seidman Center in Arlington, VA, Federal Reserve Chairman Ben Bernanke spoke about the real obstacle facing small business borrowers. Bernanke acknowledged that the number one concern facing small businesses is weak sales.
According to Bernanke, GDP will do the majority of the legwork in making small businesses more credit worthy. More consumer-spending will lead to higher cash flow to small businesses.
"More cash flow and also higher collateral values makes business more creditworthy, gives them more credit demand, allows them to expand, allows them to hire. And that's a virtuous circle," said Bernanke.
But the topic of collateral's role in small business quickly turned the conversation toward the American housing market. In the same panel discussion, FDIC Chairman Sheila Bair said, "one in four small businesses have financed themselves either through home equity lines or using their home equity as collateral, and those valuations have come down so much."
In the S&P Case-Shiller 20 Indices news release this past Wednesday, David Blitzer, Chairman of the Index Committee at Standard & Poor's, claimed that housing prices could hit a new low before spring. The two months lagging the leading index showed that home prices in a composite of 20 metropolitan statistical areas had dropped for November. If the trend continues, we will have, by definition, a double dip housing recession.
The primary mortgage market is asleep. Rates in 2010 have remained relatively stable, exhausting refinance activity for anyone with equity left in their home. According to the Mortgage Bankers Association's weekly survey, there had been a decline in mortgage applications between Thanksgiving and Christmas in 2010.
Since then, mortgage applications have been on the rise, with the majority of applications pursuing refinancing, rather than purchasing. The National Association of Realtor's press release blames the drop in median home prices on the increase of distressed home sales. According to NAR's chief economist Larry Yun, distressed sales discount homes 10 percent to 15 percent from their normal value.
The conversation comes full circle. A spike in mortgage rates will drive home prices further, deteriorating collateral for consumers and small businesses, hence the importance of QE2. Signs point to a retrenching and stabilization of housing prices in the stronger markets throughout Q1.
Job growth for 2011 will be the last piece of the puzzle to fall into place. Hope falls with the corporations to take over the spending that the Federal government is more and more concerned about stopping.
Overall, 2011's economy is one to look forward to. The American consumer has deleveraged, and perhaps turned over a new leaf. With the focus shifting from the "Too Big to Fail" to the smaller, independent enterprise, there will be a greater emphasis on the type of business that creates jobs and stimulates growth. 2011's first quarter has been set in motion with strong earnings releases in January.
Much will come down to the second quarter, when home prices will need to be stronger, private investment will need to be more aggressive, and the American consumer will need enough breathing room to comfortably re-leverage and consume.
Source: http://www.theticker.org
It is 2011, and the recession is over. We have seen six consecutive quarters of GDP growth, the S&P 500 has returned over 18 percent since a year ago, and this month's Consumer Confidence Index is up from December.
January's unemployment rate, published by the Bureau of Labor Statistics, showed that the job market is improving, despite a still meager job outlook for adult women, teenagers, blacks and Hispanics.
Still, we are in the early half of a second round of quantitative easing, which the Federal Open Market Committee does not plan on ending early, despite such quantifiable economic improvements. This just goes to show, economic recovery is not about equity markets, but is about liquid credit markets.
And as mouth watering as an 18 percent annual market return might be, market portfolios are still down from the peak in 2007, with the rebound only recapturing 83 percent of losses. We're still in the trenches.
Looking back on the past few years, it is difficult to orient ourselves in the grander scheme of economic cycles. From AIG and Lehman, to Madoff, to European sovereign debt, there seems to be an element of ease that has returned to the market as we put old headlines behind us. Unlike 2009, 2010 was not just about bouncing back from an over pessimistic bear market.
In 2010 we saw real corporate retrenchment, stabilization and a renewed willingness to invest. Yet, so much depends on the state of the financial sector, manufacturing in America, mollifying credit markets, and fiscal and monetary policy.
While bank failures peaked in 2010 and have since settled, banks still have a treacherous road before them. According to Standard & Poor's Leveraged Commentary and Data, large corporate bankruptcies are coming to an end, meaning that bank assets are looking more reliable and less prone to write-downs.
Smaller businesses, however, are being left in the dust. The low interest rate environment has pushed investors into high-yield bonds and leveraged loans, and an increasingly robust secondary market is fueling the gold rush.
Secondary markets substantially lower the liquidity risk associated with holding such assets, while middle market and small business lending with similar credit profiles (and without secondary market backing) are getting far less attention.
Going forward, the banking system may suffer from a two-pronged assault.
On one side, many analysts are afraid of a bubble in the high-yield and leveraged loan market. Once QE2 ends in July and liquidity dries up, the less-than investment grade support may fall off.
On the other side, larger banks are swallowing up small community banks. Many small businesses and middle market companies rely heavily on their relationship with community lenders, and more households than not rely on small and medium sized businesses for employment.
Some are less worried about the threat of a debt bubble. Partially because a large portion of the below BBB rated (Standard & Poor's) or Baa3 rated (Moody's) debt will extend the term of a number of loans coming due between 2012 and 2014, according to Bloomberg LP.
Refinancing now will be less demanding on what may be a fragile debt market in one to three years from now. In addition, many analysts are banking on diminishing yields on junk bonds to start easing out LBO and M&A activity. This in turn will consolidate weak companies, and stabilize asset values throughout the market in 2011.
The future of small businesses in America seems to be of ubiquitous concern. In a recent "Overcoming Obstacles in Small Business Lending" panel discussion at the L. William Seidman Center in Arlington, VA, Federal Reserve Chairman Ben Bernanke spoke about the real obstacle facing small business borrowers. Bernanke acknowledged that the number one concern facing small businesses is weak sales.
According to Bernanke, GDP will do the majority of the legwork in making small businesses more credit worthy. More consumer-spending will lead to higher cash flow to small businesses.
"More cash flow and also higher collateral values makes business more creditworthy, gives them more credit demand, allows them to expand, allows them to hire. And that's a virtuous circle," said Bernanke.
But the topic of collateral's role in small business quickly turned the conversation toward the American housing market. In the same panel discussion, FDIC Chairman Sheila Bair said, "one in four small businesses have financed themselves either through home equity lines or using their home equity as collateral, and those valuations have come down so much."
In the S&P Case-Shiller 20 Indices news release this past Wednesday, David Blitzer, Chairman of the Index Committee at Standard & Poor's, claimed that housing prices could hit a new low before spring. The two months lagging the leading index showed that home prices in a composite of 20 metropolitan statistical areas had dropped for November. If the trend continues, we will have, by definition, a double dip housing recession.
The primary mortgage market is asleep. Rates in 2010 have remained relatively stable, exhausting refinance activity for anyone with equity left in their home. According to the Mortgage Bankers Association's weekly survey, there had been a decline in mortgage applications between Thanksgiving and Christmas in 2010.
Since then, mortgage applications have been on the rise, with the majority of applications pursuing refinancing, rather than purchasing. The National Association of Realtor's press release blames the drop in median home prices on the increase of distressed home sales. According to NAR's chief economist Larry Yun, distressed sales discount homes 10 percent to 15 percent from their normal value.
The conversation comes full circle. A spike in mortgage rates will drive home prices further, deteriorating collateral for consumers and small businesses, hence the importance of QE2. Signs point to a retrenching and stabilization of housing prices in the stronger markets throughout Q1.
Job growth for 2011 will be the last piece of the puzzle to fall into place. Hope falls with the corporations to take over the spending that the Federal government is more and more concerned about stopping.
Overall, 2011's economy is one to look forward to. The American consumer has deleveraged, and perhaps turned over a new leaf. With the focus shifting from the "Too Big to Fail" to the smaller, independent enterprise, there will be a greater emphasis on the type of business that creates jobs and stimulates growth. 2011's first quarter has been set in motion with strong earnings releases in January.
Much will come down to the second quarter, when home prices will need to be stronger, private investment will need to be more aggressive, and the American consumer will need enough breathing room to comfortably re-leverage and consume.
Source: http://www.theticker.org
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