Wednesday, April 15, 2009

Wednesday Evening Market Update: AmEx and Hoover

AmEx filed its 8-K with the SEC today.  Stabilization in 30-day past-due loans are said to have sparked a new rally in the financials, with Capital One, which led a sell-off in the morning with poor fundamental data, ending in the plus side.  

Econblog Review has in fact reviewed the AmEx 8-K and is unimpressed.  For one, total loans are plummeting, from $59.5 B on Jan. 31 to $56.5 on Mar 31.  That's a 5% drop in 1/6 of a year.  Put that in a calculator and annualize that.  Obviously AmEx is dropping its least creditworthy borrowers, so charge-offs will improve.

In addition to owned and managed loans discussed above, AmEx is involved with an off-balance sheet securitized "Lending Trust", data from which were also revealed today in the 8-K.  Not so hot:

Even as assets plummeted from $38.6 B on Jan. 25 to $36.0 B on Mar. 26, the annualized default rate soared from 8.3% to 9.7%.

As a stock, AmEx now trades at almost 3X tangible book value at at almost 40X current 2009 earning estimates and almost 20X current 2010 earning estimates.  The stock price has doubled in 6 weeks, bringing it all the way back to a level that, 2008 excepted, it had not traded at since 1997.

If AmEx were a stock in the second half of the 1990s showing exploding earnings and a major bull move that then halved with no real change in the fundamentals and still traded above its 200 and 150 day simple moving averages, you would have said this stock is a strong buy.  And until the year 2000, you would have been right.  The opposite likely applies now, even though unlike the 1990s, there are not many "inverse" cheerleaders telling the public to sell it short.

In a different vein, the following information was provided by Casey Research today, along with a chart demonstrating new lows in steel pricing in China:

Last year, while the economic crisis gathered steam Chinese steel prices plummeted and companies responded by running down inventories. Even with the infrastructure stimuli announced by the Chinese government, the recent surge in iron ore imports was a miscalculation by the Chinese steel industry. As you can see in the chart above, re-stocking has sent domestic steel prices back to the levels below the initial crash, and they’re still headed south, indicating that further contraction of the Chinese economy is baked in the cake.

This goes along with other commentary here that China has signs of being a Potemkin economy.

Back in the U. S. as well as involving its international operations, Burger King announced an unexpected drop-off in business in March.  McDonald's sold off in sympathy; MCD's earnings estimates have started to be cut.  MCD and WMT, last year's only 2 Dow Industrial winners, are both down sharply from their highs, are below their levels of 12 months ago, and have underperformed the Dow in 2009.  In other words, there is almost no real leadership.  The single strongest charts are of Ginnie Mae funds and deeper discounters than Wal-Mart.  The rest of the stuff is at best mostly churning.

On the one hand, this is a market for guessers.  On the other hand, what we know is that there is little real loan demand outside of refis, almost all of which demand is artificially created by the Feds; charge-offs are increasing; asset values of CDOs are not increasing; therefore the financial business is not getting better except for pure gifts in various ways by the Fed and the Feds to these companies.  Herbert Hoover's strategy of shoring up the banks did not work in the early 1930's following the bursting of a debt bubble.  Why should a similar but worse strategy work now?

Copyright (C) Long Lake LLC 2009

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