Tuesday the American Bankers Association issued a report which showed rising loan delinquencies on several installment loan categories for the first quarter. While that information shouldn’t be all that surprising given the climate of the first quarter, investors quickly hit the “sell” button sending the S&P 500 down roughly 2% for the day. The report painted a very disturbing picture and while the actual statistics only covered the first quarter, the commentary certainly applied to current market trends which is why the market responded so sharply.
According to the report, unemployment is the largest contributer to loan delinquencies which are defined as personal loans with payments more than 30 days past due. Particularly hard hit were home equity loans wich rose nearly a half percent to 3.52%. The deadly combination of falling home prices with weak employment means that many consumers are simply unable to keep up with these obligations. This is particularly disturbing since for most consumers, the house is one of the last obligations that consumers will allow to lapse. According to James Chessen, Chief Economist for the American Banker Association, “Even if home prices stop falling later this year, unemployment will keep home equity delinquencies high for some time.”
That’s exactly what is likely continuing to happen as the most recent unemployment numbers were even more dismal than economist had predicted. The rising unemployment will have ripple effects in many different sectors. While we have widely discussed the coming weakness in retail stocks, the rising delinquency rates could eventually provide a good short opportunity for financial stocks as well. One more quote from Chessen: ”Delinquencies won’t improve until companies start hiring again and we see a significant economic turnaround.” That turnaround is looking more questionable on a daily basis.
The increase in loan delinquencies along with other weak economic data is likely to continue to lend support to lawmakers calling for more stimulus spending. The international concerns raised a few weeks ago regarding too much stimulus spending (questions largely raised by Germany) may end up being swept under the rug. Unfortunately, none of this economic help is free and we will eventually have to pay for these measures through higher taxes, inflation, or continued weakness if the measures are not successful.
This week marks the official start to earnings season with Alcoa throwing the customary “first pitch.” Look for weakness both in reported numbers as well as in comments from management on the future outlook. This quarter it will be important to read between the lines as executives try to put on a brave face and give investors a reason to hang on. So take optimistic statements of a recovery with a grain of salt and concentrate on the fundamental data. In particular, stocks with high debt levels and significant payments coming due could be vulnerable for sharp drops.
We continue to look carefully at the precious metal and commodity sensitive stocks. While they have been weak due to the macro effects of unemployment and slow busniess and consumer spending, the long-term effects of printing money will eventually catch up and propel these stocks higher. So as most economically sensitive stocks trade lower on poor news, watch this area carefully for signs of strength. Once the trend begins, I expect a multi-month rally in “hard assets” which could yield 20%, 40% or even triple digit gains on many of the stocks in question. ZachStocks will likely be profiling many of these companies in coming weeks as we work our way through this volatile period.
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August 16th, 2010 at 9:39 am
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