Market Commentary

When will banks begin to lend?
November 25, 2009

When will banks begin to lend?  As noted a gazillion times excess bank reserves are now over $1 trillion versus the historical $1-$2 billion as per the Federal Reserve.  If banks additional provisions to loan reserves did peak in the third quarter and if loan portfolios are stabilizing, I think bank lending could resume sometime in the early part of the year. 

If lending does again begin to occur, coupled with the record amount of corporate bond issuance that has occurred since March, I believe the odds are around 25% that the economy can accelerate at a pace greater than expected perhaps creating some inflationary pressures. 

As all know inventories are extremely lean with most organizations operating under the “just in time” inventory management system.  If demand quickly accelerates with minimal inventories, potential shortages could occur hence creating pricing pressures as companies pay up for components to ensure timely delivery of goods. 

Radical thought?  Probably but the only consistency of this crisis is the velocity of change and the unexpected occurring.  Most, including me misjudged the severity of this crisis.  Corporations shed workers and inventories at a record pace to ensure survivability.  As little as three months ago consensus expected tepid third and fourth quarter growth.

Speaking of growth, the third quarter growth rate was revised to 2.8% from 3.5%.  The headline rate was in line with consensus but the composition was a little weaker than expected. Specifically inventory accumulation and real final sales were revised downward.  However it did little to change my view the economy is expanding a pace greater than expected.

Yesterday the Federal Reserve also released the Minutes of the November 3-4 FOMC meeting.  The Minutes stated that record low interest rates might fuel “excessive” speculation and possibly “unanchor” inflationary expectations.  While the Central Bank stated the odds “remain relatively low” they would remain alert to these risks.  The Minutes also indicated the Central Bank expects unemployment to range between 9.3% and 9.7% in next year’s fourth quarter down from June’s projection of 9.5% to 9.8%.

Commenting briefly about the markets, both stocks and bonds were skittish on the news attempting to discern the direction of the economy and interest rates.

Today is another big data day as personal spending/income, durable goods, initial jobless claims and new home sales are all released. All data points can influence trading.

Last night the foreign markets were up. London was up 1.03%, Paris up 0.75% and Frankfurt up 0.84%.  Japan was up 0.43% and Hang Sang up 0.84%

The Dow should open moderately higher on initial jobless claims that were lower than expected and personal spending/income data that exceeded economists’ expectations.  The 10-year is off 2/32 to yield 3.31%.

Tomorrow is Thanksgiving.  Please take the time to acknowledge and be thankful for all our blessings and gifts that are bestowed upon us.   Yes there are times trades do not go our way or a series of statistics ruins an economic thesis, however these short comings are really meaningless in the grand scheme of life.  We live in a great company, free to elect and write anything we chose about our leaders or issues facing society.  We have the right to pursue the religion of our choice.   The basic necessities of life such as food, shelter, health care are abundant.    I believe many take these gifts for granted.   Please take time to reflect and review our lives in the proper perspective and be thankful that by only by the luck of birth we live in this great country.