I want to start off the day with an, “I just don’t get it.” How come Bank of America is getting hit today? The big bank swung to a nice profit ($2.1 billion) compared to a horrendous loss ($9.1 billion) the year before and it beat expectations on “the Street” for earnings per share (19 cents vs. 16 cents). True, its total revenue dropped, it showed reduced profit in its “investment” division (good news actually), total loans dropped, and its mortgage division lost money while issuing more mortgages (write-offs of bad loans), yet, despite all that, it still produced the following powerful statistic.
The bank set aside $1.8 billion in the quarter to cover bad loans, down 46 percent from a year earlier and a sign that the bank expects more customers to repay loans on time. It was the lowest figure since the first quarter of 2007.
As an investor, I like the above mucho. As a US economy watcher, I like the above mucho as well, and I like the embedded leading indicator in its report – it issued more mortgages.
Part of the transformation in the US economy is the ending of what I call the “reign of the big banks.” Prior to the collapse of 2008, the five big banks were allowed to trade with great risk, basically ignoring any responsibility to its customers, its clients, its shareholders, and, ultimately, to the US taxpayer. That is no longer the case. Although for the greatest protection, we need Glass-Steagall back, solid reforms have come and those are positively reshaping the big banks. The big banks are being forced to do what banks should do (loan money for revenue), and because of that, traders and investors can see more clearly what their actual financial status is.
The big banks have been forced to raise enough capital to deal with exceptionally dire scenarios of recession and loan write-offs. Five of America’s biggest banks wrote off almost $500 billion in the aftermath of the financial crisis and raised $318 billion in fresh capital. As a result, their equity ratios now exceed 10% –above both pre-crisis levels and those of euro-zone banks.
In the last year plus, the big banks have offered many trading opportunities, at least for me. With their increased stability, greater focus on lending money, and their horrendous liabilities diminishing, the big banks will continue to offer both trading and investment opportunities for some time to come.
US sales to traditional markets in the OECD (Organization for Economic Co-operation and Development), a rich-world club, have risen 20% since the end of 2007. But they have risen 51% to Latin America and 53% to China, which is now America’s third-largest market after Canada and Mexico.
The opportunity here is obvious, but don’t just look to the “up-front big boys.” Look at the product of the small companies selling to the emerging markets and then look to the supply lines and distribution networks, as more than likely, they will be big boys.
Traditionally, small companies find distribution, regulation, and language barriers overwhelming in foreign countries. But with a big prod from the federal Export-Import Bank, more are trying to sell goods there. According to the Census Bureau, 293,000 companies exported in 2010, up 19% from 2006. Small companies (with fewer than 500 employees) accounted for 34% of exports in 2010, up from 29% in 2006.
Trade in the day; Invest in your life …
