Trader Talk

Cleaning Up Balance Sheets: Banks, Households, Governments

S&P futures are down again...this would be the seventh straight decline...the worst streak since October 2008. Traders are citing continuing macro stresses:

1. June personal spending turned negative, down 0.2 percent, not inflation adjusted.

2. The Swiss franc is screaming higher; the Swiss stock market is down 3 percent and now at a two-year low.

3. New highs for gold.

4. Guidance becoming more conservative. The S&P 500 industrials sector hit an eight-month low Monday, as concerns of slower economic growth have plagued the big companies in recent weeks. More signs of a potential slowdown are evident in Parker Hannifin‘s disappointing report. The diversified manufacturer’s fourth-quarter earnings missed estimates by a penny. More disconcerting is its very conservative guidance for the current year it just began ($6.70 to $7.50 vs. $7.51 consensus). ?

Cleaning up the balance sheets...of banks, households, and the federal government. All this talk about cuts is painful, but necessary. Everyone is doing it, and ultimately it will be a good thing.

First banks have had to clean up their balance sheets, now American households are trying to clean up their balance sheets by saving more. Today's personal spending data indicate that the savings rate is up to 5.4 percent...well above the historic average of about 4 percent. The federal government has also just begun to address the need to clean up its balance sheet.

The concern, of course, is that with consumer spending two-thirds of gross domestic product, a pullback in spending will make it impossible to get significant GDP growth.

It's hard to get fiscal discipline and robust economic growth in one package.


1. Even central banks acknowledge they are unsure. Australia left interest rates unchanged overnight. The Australian Reserve Bank made this statement: "On balance, the board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks."

2. The high-end retailers continue to do well...Coach is down 1 percent and not far from a new high after beating fourth-quarter estimates (68 cents vs. 65 cents consensus). The luxury accessories maker continued to see strong sales with North America comps rising 10 percent and China sales rising at a double-digit rate. Looking ahead, it expects to grow sales and earnings in the current year "at a double-digit pace."

...but not so at the lower end. Wal-Mart was downgraded to hold at Jeffries: "Recent market share data suggests continued challenges at Wal-Mart in Q2, which combined with our own checks, lead us to think there is downside risk to sales in Q2 and potentially over the balance of the year...Inflation in food and fuel could pressure sales mix and margins further." ?

3. Archer-Daniels Midland falls 4 percent as profits were hurt by higher corn costs and tax expenses. Even though volumes increased 15 percent, the corn processor missed earnings estimates by penny as earnings were squeezed by a 78 percent surge in corn prices over the past year.

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