The strength of the current stockmarket rebound and the prognostications of the “green shoots” analysts will be tested from tonight when the ‘stress tests’ of America’s 19 biggest banks will be revealed by the US Treasury.
The Treasury is supposed to release some of the information on May 4. But tonight regulators begin discussing their findings with the banks and will also outline publicly the process they followed in an attempt to show how rigorous the testing was.
Once into this sort of arena, information will leak — already there’s claims by some alarmist analysts that the tests will show US banks need $US1 trillion more in new capital; others claim the results won’t be all that surprising.
But results overnight from a slew of smaller regional banks show a continuing tide of red ink. The profits from the likes of Goldman Sachs, Well Fargo and JPMorgan have grabbed the headlines (although Morgan Stanley’s loss was a bigger than expected slump). But in regional America, where the 25 banks that have failed so far this year are located, the tide of red ink continues as property, personal and business lending is hit by the recession.
And that’s the big story now in the US — the credit crunch has jumped the shark and it’s now in a clean-up phase. The real story continues to be the deepening financial and personal impact on the US economy and US society from the worst recession since the Depression (some commentators are now terming it “The Great Recession”).
This week’s earnings results made that perfectly clear with a slew of poor corporate reports from most sectors of the economy showing damaged sales, earnings and cashflows; and news of another fall in sales of existing homes (but a small perk up in prices) and a further surge in unemployment numbers.
No matter what the likes of Ben Bernanke and others saw about their sightings of green shoots, the continuing rise in unemployment is rolling right over them — estimates are for the jobless rate to rise to 8.9% or perhaps 9% when the April figures are released a week tonight in Washington.
Those bank stress tests have an unemployment rate of 10.4% built into the model that tests the soundness of bank credit card, mortgage and other asset portfolios: it could be a good guess for the peak, according to some pessimistic commentators.
According to US Labor Department figures, March was another very bad month for the jobless, with 2,933 more mass layoffs, (Mass is defined as affecting 50 or more workers) than February. This brought the total number of people who lost their jobs in this manner to 299,388, the highest on a record that dates back to 1995.
Mass layoffs now total 31,414 since the start of the recession in December 2007, resulting in the loss of more than 3.2 million jobs.
It’s no wonder the number of continuing unemployment claims climbing to a new record of 6.14 million last week, and weekly initial jobless claims also rose again, to 640,000 (reversing the previous week’s drop that got some analysts gabbing about another ‘green shoot’.
Sales of existing homes fell in March, down 3% after that 4.9% (revised) rise in February that was also greeted as a possible ‘green shoot’. That was worse than expected but some analysts do say the size of the fall indicates that there’s a ‘bottoming process underway’.
But that was also a bit misleading, as the NAR explained:
Although prices rose from February to March, the national median existing-home price for all housing types was $175,200, down 12.4% from March 2008. The price increase from February to March was 4.2 percent, which is much higher than the typical 1.8% seasonal increase between those two months. Distressed properties, which accounted for just over half of all transactions in March, typically are selling for 20 percent less than traditional homes.
So the continuing rise in home foreclosures and then the sale of those lost homes, is still depressing prices.
But the damage can be seen from the string of first quarter reports: while some oil group like Conoco did better than expected, and a couple of retailers, such as regional food chain, Supavalu, (which lifted quarterly earnings 25% to just over $US200 million as customers bought more food and stayed at home). Online DVD rental group, Netflix saw its sales rise 21% and profit soar 68% as people stayed at home and rented more DVDs to go with their home cooked meals.
But it was the big national organisations that were hit hard.
McClatchy, America’s third biggest newspaper group reported a loss of $US37 million against a loss of less than a million. Revenue slid 25%, confirming that the media, especially newspapers, could have an unwanted starring role this quarter as the big loss making sector.
Burlington Northern Santa Fe Corp. reported late a 57% fall in first-quarter net income fell to $US293 million, from $US455 million (30% down excluding one off items). Revenue fell 20% and its rail rival, Union Pacific reported first-quarter net income fell 18% to $US362 million from $US443 million. Revenue was also down 20% in the quarter as fewer shipments of cars, steel timber, coal and a host of other products were made.
Their truck-based rival, United Parcel Service, one of the giants of global transportation, was hit hard by the slump, reporting a 56% fall in earnings to $US401 million in the first quarter of 2009 from $US906 million a year earlier. Revenues fell 13.7%.
Not even the instability in the markets (which sometimes means higher trading) could save CME Group, operator of the world’s largest futures exchange (Chicago, Nymex in New York), from a profit plunge of 30% in the March quarter. Average daily volumes at the company’s exchanges fell a third to 10.4 million in the quarter, down from 15.5 million a year ago.
Electric furnace steel maker Nucor Corp suffered a first-quarter loss of $US189.6 million, compared with a profit of $US409.8 million, a year-ago. Sales plunged 467% as the slump hit construction, home building and cars and whitegoods. Its capacity utilisation rate halved to just 47% and expects the loss this quarter to be even bigger than the first.
But Amazon was a bright spot. It reported higher quarterly net income, with revenue rising 18%, despite the slump at home and overseas. First-quarter net profit jumped 24% to $US177 million, from $US143 million a year earlier. Amazon said it expects second-quarter revenue to range between $US4.30 billion and $US4.75 billion on operating profit of $US110 million to $US190 million, a decline between 12% and 49% because the second quarter of 2008 was boosted by a one-off profit. Excluding that, earnings look like being higher.
No doubt some of the shoppers at Amazon used their Amex cards, but not enough as the card giant reported a sharp, 56% fall in quarterly earnings. Analysts said it was a good result because the company did better than their forecasts, but they were so far out to be unusable. They were expecting a profit of $US142 million, and higher revenues. Amex reported a figure of $US437 million. Revenues fell 18% and were lower than forecast.
The shares rose as a result, but investors skated over a fall in overall spending by card members and another boost to the company’s reserves to cope for future loan losses. Amex also reported a surge in write-offs, or loans beyond collecting. During the first three months of the year, write-offs soared to 8.5% from 6.7% in the previous quarter.
The company warned that it expected that number to climb another 2 to 2.5 percentage points during the second quarter in its US portfolio, before finally levelling off by the end of this year.
And, not even the giant Microsoft was exempt from the slump: its third quarter profit fell to $US2.98 billion; down from $US4.32 billion in the March quarter of 2008; on sales down 5.6% to $US13.6 billion. The company didn’t provide a forecast for the fourth quarter and it also abandoned its usual practice of providing the first prediction for the new fiscal year, which starts in July. Microsoft has given that forecast every April since 2000.
That’s as good a sign as any of the difficulty even the best run of companies are having in navigating through the current recession.
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