Are we there yet?

Many of us are afraid to open our statements of account from our mutual funds and stock brokers. That’s because we all have a general idea of the carnage within. We all have the same basic question: has the market hit bottom? Are we there yet?

In the US, the Wall Street Journal reports economists are struggling to gauge the depth of the US downturn and whether we have hit bottom already. Last Wednesday, the New York Times raised the possibility of a new financial bubble bursting fresh havoc on the market and on the consumers… credit cards.

“After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers. The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.”

I saw that coming a few weeks ago when one of my daughters told me her credit card got declined in a store a few days after she paid up her current balance. Luckily for her, she had her extension card of my BPI Mastercard and that solved her problem for the moment. She found out later that without even informing her first, her credit card company reduced her credit limit for no reason that’s apparent to her. It is so unfair.

Well, the NYT article provides the reason why that’s happening… the banks are starting to feel the pain of rising losses in their credit card business and are tightening up. According to the San Diego Union Tribune, “credit-card limits are being reduced. About 62 percent of all credit companies are planning to trim limits, according to a survey of company executives back in July, before the current meltdown. Everybody who is not considered to have excellent credit is at risk for having their limits cut.”

That’s because, NYT reports “lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say.”

However, Investors Business Daily points out credit card losses probably won’t hit the financial system as hard as the home-loan foreclosure crisis. They only have $970 billion in outstanding credit card debt… much smaller than the $14 trillion tied up in mortgage loans.

That’s one side of the coin. Consumers are no longer waiting for a spending limit cut and are themselves curbing their legendary propensity to shop and spend till they drop. Consumers nervous about their jobs or about the potential of a recession are cutting back out of fear. Bank executives told the NYT that consumers are starting to curb their spending.

Consumer pullback was confirmed the other day with the release of the Conference Board index. Consumer confidence fell from a reading of 61.4 in September to 38 this month — the lowest level since the index was established more than 40 years ago and well below economists’ expectations that it would drop to 52. Consumers are indeed, cutting on their spending in a big way and if this persists into the critical holiday season, the Financial Times reports, the economy could be driven into a deep and long-lasting recession.

According to CNN Money, an alliance of financial industry interests and consumer advocates on Wednesday asked federal regulators to allow lenders to reduce by as much as 40 percent the amount of credit card debt owed by deeply indebted consumers in a special program. The request came in a letter to US Comptroller of the Currency John Dugan, who was asked to approve a pilot project allowing major credit card companies to sharply reduce the amounts owed by heavily indebted consumers who don’t qualify for the repayment plans that are currently available.

Back here in Ate Glue’s realm, the BSP just reported local banks’ credit card receivables grew by 6.2 percent to P122.6 billion in June compared to the figure in end-March. Nonperforming credit card receivables went up to 11.6 percent of the total from 10.2 percent in the previous quarter. Bad credit card loans rose 20.5 percent quarter-on-quarter to P14.2 billion and outpaced the growth in total receivables.

While the data is still far from being terribly alarming, it does indicate a worrisome trend. The test here, as in the US, will be the level of holiday shopping. Are consumers going to close their eyes to economic realities and spend all their bonuses for a jolly good time this Christmas? Or are they going to use their heads and observe a more austere holiday season? Then again, a large number of Pinoy consumers deal not with credit cards but with cold cash… from OFW remittances. Juan dela Cruz could be a lot better off than Joe the Plumber this holiday season.

Stuck market

The best analysis of what happened last Monday at the PSE was made by my friend, John Mangun in his Business Mirror column. Here are excerpts.

“The overall drop in prices is the result of years of encouraging foreign investment on the Philippine Stock Exchange (PSE), and that is our market’s biggest problem. When you put an 800-pound gorilla in the sala, expect lots of damage when he suddenly goes crazy. Two of the most widely foreign-held issues, Philippines Long Distance Telephone Co. (PLDT) and Ayala Corp. (AC), took the market down. Three billion pesos in foreign money came out of PLDT, Ayala Land and AC this month. Megaworld lost P700 million in foreign investment, as well, as SM investments (P500 million) and EDC Corp. (P400 million). It is not the Filipinos that are panicking.

“The foreign funds are selling because 1) they are losing net value, also due to the decline of the peso; and 2) their own customers are liquidating furiously and they need cash.

“The basic problem is that foreigners and foreign money control our market… The main factor that keeps locals away from the market is that there is no way to profit except through speculative trading. Because local companies’ profit sharing or dividends are so low, the only way an investor can make money is through speculative price appreciation. That is not good. Dividends are ultimately the only sound foundation for a stock market. We do not have that foundation. Our market is still sitting on a groundwork of sand.”

 Ideological Americans

I got this e-mail from Bobby Tordesillas in reaction to last Wednesday’s column.

May I add the ff to your column.

The tax plan of Obama will not only decrease the income disparity but may provide the necessary stimulus to the economy.

Since Obama defines middle income class as those earning below $250,000, then according to demographics, that represents more than 95% of the U.S. earning population.

Transferring the wealth to the middle income class will increase consumption, since they have a higher marginal propensity to consume than the upper 5%. The increased consumption will result in an increase in aggregate demand in the economy through the multiplier effect.

 And with this follows the logical chain effect in the economy. Increased demand - increased production - increased investments - increased wages and so on.

 I also feel a big part of the economic recovery (U.S. and worldwide) will have to be psychological and will depend on the restoration of the consuming public’s and investor’s faith and confidence.

 Obama’s victory is more likely to bring about this restoration faster especially since surveys show the rest of the world overwhelmingly in favor of Obama.

 And with the possibility of a Democrat controlled Congress, the passage of the necessary economic bills will also bring about a faster economic recovery.

 God bless!

Lehman sisters

Dr. Ricky Soler texted this joke to me the other day.

Do you know where we can find the Lehman sisters? We’ve gotta do to them what the brothers did to us!

Boo Chanco’s e-mail address is [email protected]