Time For Banks To Make Loans Again

There’s big news in banking as Congress finally begins to whittle away at the Dodd-Frank monster that was designed not to be altered or figured out like the infamous Kryptos sculpture at CIA Headquarters, which has confounded deciphering experts since 1990. 

Dodd-Frank was ostensibly designed to prevent banks from creating another financial crisis like the 2008 Great Recession. In fact, many in Congress had been champing at the bit for years to find ways to curb banking profits and influence. The problem is when big banks get hit, small borrowers get hurt as well.

In this case, it was also regional banks, too.

Treating banks with $50 billion or less in assets the same as those mega-money center banks, who were the real culprits of deception and excessive risk-taking, was always unfair and unwise. That’s why The Economic Growth, Regulatory Relief, and Consumer Protection Act bill sailed through the Senate 67 to 31 with the backing of 16 Democrats and one independent (Sen. Angus King of Maine) and passed in the House yesterday.

To avoid costly regulatory burdens, many banks put the brakes on growth (loans) as their total assets approached the $50 billion level. The bill also gives some regulatory relief to smaller community banks.

Banks on the Move

U.S. banks did extraordinarily well during the first quarter of 2018, in part to lower taxes - even without the data, it is impressive.

Net Income

• $56.0 billion: +27%
• $49.4 billion: +12.6% without tax benefits

Note: less than 4% of banks didn’t report a profit during the quarter, the lowest amount since 1996.

Spreading the Wealth

So, the banks have a ton of cash, and more are being freed from the clutches of Dodd-Frank. The question now is how much of that cash will find its way to Main Street.

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Loan Balance

• +4.9% total $9.75 trillion
• +4.7% commercial & industrial
• +4.4% residential
• +8.5% credit card

Note: loan balance grew faster than the Gross Domestic Product (GDP) and higher than 4Q17; +4.5%.

 Loan Loss Provision

6.2% from 6.6% a year earlier

Community banks

Net Income:

• $6.0 billion: +17.7%
• $5.6 billion: +9.2% without tax benefit

Margin Debt

While many fret over the hurdles imposed by Dodd-Frank, even for the most creditworthy loan applicants, some are worried investors have been able to borrow too much. There is no doubt the high level of margin debt is disconcerting; this isn’t going to cause a sell-off, only potentially exacerbate a sell-off.

Market Observation

What’s really interesting about the record amount of margin debt is how much is built into shares that would have to come down significantly to trigger widespread margin calls. 

Yesterday, market breadth underscored this point. Advancing to declining issues and up to down volume were very negative, new highs for both the NYSE and the NASDAQ swamped new lows.

This is a reminder that 52-week high breakouts have been great to chase, and winners have a built-in demand that would counter widespread selling pressure.

NYSE

• Advancing: 1,186
• Declining: 1,769
• Up Volume: 1.25 billion
• Down Volume: 2.04 billion
• New 52-week highs: 134
• New 52-week lows: 41

NASDAQ

• Advancing: 1,228
• Declining: 1,630
• Up Volume: 965.7 million
• Down Volume: 884.2 million
• New 52-week highs: 168
• New 52-week lows: 43

Earnings Gauntlet

 Companies in a variety of industries also navigated tough conference calls triggering massive selling on Tuesday. The result was gigantic selloffs in Toll Brothers (TOL), Kohl’s (KSS), AutoZone (AZO) and others. It’s clear that investors are not ready to bolt from the market entirely, but they are ready to cut and run from any company that looks like it would have near-term struggles. 

After the bell, Red Robin (RRGB) is being skewered on a big earnings miss.

Today’s Session

The earnings parade continues with mix results and reactions.  The most curious is Lowes (LOW), which posted an abysmal miss on the top and bottom lines, the stock was initially hammered.  Then management came out and said this was all about the weather and promised things have already turned around big time and will continue to for the remainder of the year.

The stock is surging now.

Not every retailer got the benefit of the doubt this week, although all pointed to aberrant weather as a major issue.  Consequentially there are several names that are extremely oversold.  Target is under pressure this morning and while it’s off the preopen low point the street needs more convincing.

Weak Dollar or Strong Dollar

On yesterday’s note we mention the impact of dollar visa vie other global currencies.  This morning a lesson on how currency fluctuation impacts earnings.

Tiffany is set to be the biggest winner in the entire market this morning (all subscribers should be long the stock) as the company saw its sale increase by 15% in part to the fact the US dollar was cheaper against other key currencies in the first three months of 2018 than the first three months of 2017.

The sales table underscores the dollar was slightly weaker against the Canadian Dollar and Euro (see America’s and Europe difference) and substantially weaker than the Yuan and Yen (see Asia-Pacific and Japan). 

This is why big multi-national names prefer a weaker US dollar because of the positive impact on sales and profits.  On the other hand, it lowers the purchasing power of American consumers.

The session will get off to a rough start after President Trump threw doubts on China and North Korea.

While I’ve come to accept such comments as part of the Trump negotiating process I think he is torn about outcomes that might favor or seem to favor the Establishment more than Main Street.  I can only hope this internal struggle doesn’t stop the process because it’s clear we are on the cusp of historic achievements that others couldn’t achieve.