Today begins earnings season on Wall Street. Alcoa is up first, as befits a company with the stock symbol AA. But the sector that people will be watching most closely is banking. And no-one's expecting good news.
Charles Peabody is a founding partner at the research firm Portales Partners. He says that the banking industry can be split into two this earnings season.
On one side are the banks that provide the basic service of taking deposits at one interest rate and lending that money out at a higher rate will do well. Credit costs have come down and banks are actually doing more lending - on the corporate side, at least. Plus, counter-intuitively, mortgage lending is doing very well right now, with a spike in refinancing and increased profitability. This is all good news for banks such as Wells Fargo which tilt heavily toward this sort of traditional retail banking.
Peabody says this could be good news for the economy, too. More lending means more business activity and investment, and more business activity and investment creates jobs.
On the other side of the banking divide are the banks that still have large investment-banking businesses. That's asset management, trading and anything involved in the capital markets. Peabody says these kinds of banks had a disastrous quarter, as trading revenue plummeted across the board. This includes Bank of America, Citigroup, JP Morgan, and, of course, Goldman Sachs, which recently acknowledged its profits will come in low and likely lead to layoffs.
This is particularly bad news for the state of New York, which today predicted a loss of 10,000 securities industry jobs before the end of next year. New York gets 14 percent of its tax revenue from the securities industry.
One big unknown for the banks is the cost of litigation from their mortgage-related activities, such as the misrepresentation of the quality of certain mortgages sold to investors, irregularities in foreclosure proceedings, and alleged violations of underwriting laws. Peabody says nobody yet knows how much money banks will have to hand out to litigious states, localities and investors, and no-one wants to touch any affected bank without knowing how large its impairment is likely to be. Peabody says we may know more about the true health of banks in a month or so: a number of related cases will be decided in November.
Also on the show today, big-time investors are falling over themselves to get a piece of the low-end discount and dollar stores market. Today, a pair of investors said they would buy the 99 Cents Only chain for about $1.6 billion. This is good news that investors are buying assets, but it's a sign that Americans are badly strapped for cash. That balances out the ups and downs of the Marketplace Daily Pulse today, and keeps our heart rate neutral.