The sharp rally in financials in the past few days has persuaded many analysts that the worst is over, that investors have a “historic” opportunity to scoop up financial stocks such as JP Morgan (JPM), Fannie Mae (FNM), and Freddie Mac (FRE). American Express’s (AXP) comments about the month of June should give them pause:
Over the past month or so we have seen clear signs that the U.S. economy is weakening. Unemployment rates, as we know, took the largest jump in over 20 years. Home prices declined at the fastest rate in decades and consumer confidence is at one of the all time low points.
Now Card member spending particularly among consumers slowed sharply during the latter part of the quarter. Current indicators, as we signaled a few weeks ago, deteriorated beyond our expectations and by almost any measure the U.S. economy and business environment are much weaker than the assumptions we first spoke to you about back in January and the conditions that existed until June.
This fallout was evident across all of our consumer segments even our longer-term super prime card members. (Transcript from Seeking Alpha)
Specifically, the company said it is now seeing problems among consumers with high FICO scores (650-750) and multiple mortgages, both of which had previously been fine: “affluent people in fact in some cases are cutting back on discretionary spending. So they are not in the same situation as other segments but the reality is we are seeing very affluent people who have had historically very, very strong spending history with us cutting back on non-discretionary items.”
This, combined with JP Morgan’s comments about exploding losses in the “prime” segment of the mortgage market, should put to rest the theory that we’re just dealing with an isolated segment of the consumer market. American consumers are getting hammered, and temporary boost from the rebate checks has run out. Meanwhile, Ben Bernanke and the Fed are getting increasingly explicit about the need to start raising interest rates.
More from AXP:
The severe decline in home prices and the marked rise in oil prices have had a fundamental impact on consumer budgets and behaviour not just as it relates to mortgages and home related spending but also across the full spectrum of the consumer economy…
We saw the first signs of weakness in our credit indicators at the end of last year and communicated this to you in January when we reported our fourth quarter results…. In the first quarter U.S. lending write off rates rose further and at that time we indicated the second quarter loan loss rate would be higher than the first quarter which has proven to be the case. …we saw credit deteriorate in June beyond our expectations as the write off rates rose and roll rates within the portfolio deteriorated versus prior months.
In other words, more and more consumers who are falling behind on their payments are remaining delinquent. This causes us to assume that a greater percentage of past due loans will not be repaid. In light of the magnitude of the negative economic trends and our experience now we believe the economic weakness in the U.S. will likely worsen throughout the remainder of the year and negatively impact credit and business strategies.