One of the odd things about the recession fears since December is that spreads on junk bonds have not risen. Usually, junk bonds sell-off when there are recession fears, as they are the riskiest credits and likely to suffer the worst downturns. However, the opposite has happened in junk, with spreads to investment grade very tight. In fact, investors are picking up so little extra yield in junk bonds, that in many cases they are not even worth the risk. Spreads are tied for their narrowest since the Financial Crisis at just 60 basis points.
FINSUM: The last time spreads got this tight was last October, right before the market tanked. Warning sign.
Something very worrying happened yesterday if you are an investor in bank stocks. Bank of America released what were widely considered to be stellar earnings, yet the stock fell. We don’t just mean stellar in the “oh, they beat estimates” sense, but that the company looks healthy even as some other banks (e.g. Goldman Sachs) look weak. However, the stock fell because the bank indicated that its cost pressures were rising, and coupled with the fact that yields are now lower, means the bank will have higher expenses and lower interest income, putting a squeeze on margins.
FINSUM: This does not seem to be unique to B of A, as the whole industry has the same interest margin and cost pressures.
In what seems slightly odd timing, Goldman Sachs is going on the record about the 2020 election. The bank is saying Donald Trump is likely to win re-election. Goldman says his lead is “narrow” but that his chances are improved by the crowded Democratic field and the success of the economy. What is so interesting about the call is that in runs in contrast to most polls, which Goldman points out, saying “While we believe the majority of market participants expect President Trump to win a second term, we note that prediction markets point in the opposite direction and imply that the Democratic candidate has a 56% probability of winning and the Republican candidate has a 44% chance”.
FINSUM: We have to agree with Goldman. Trump’s base seems to have grown in strength since his initial election, and the politics of the left seem more likely to fragment their base (including into third party candidates) that unite them behind a single leader.
The market has been fretting about real estate for over a year now. Numbers in the sector have been in a funk and there is a definite weakening occurring. However, that may prove short-lived as a new factor may slowly push that market back into a sustainable boom cycle. That factor is the grow of $15 per hour minimum wages across the US. Such wages are likely to significantly increase the earning power of millions of Americans, allowing many couples to afford to buy a home. For instance, a couple with one worker at Target and another at Bank of America could afford to buy up to a $300,000 home at the new wage levels.
FINSUM: If the new higher wage rate takes hold, it is likely to unlock a major source of untapped demand for housing.
Goldman Sachs investors took it on the chin this week. Earnings numbers just released look pretty grim, especially as compared to some other banks, like JP Morgan, which had good showings. The bank got hit by a triple whammy of lower trading revenues, weaker private equity profits, and lower fees from investment banking, all of which conspired to bring earnings down by 20% in the first quarter. David Solomon, CEO, is promising the company is undertaking a “front to back” performance review of Goldman’s businesses.
FINSUM: This looks particularly poor because JP Morgan was able to achieve the highest ever quarterly profit of a US bank during the same period.