Market Talk

What happened to our customers?

The nation’s banks are certainly in a better place than they were a year ago. Varied and myriad government backstops have erased the threat of imminent collapse and given them breathing space to recapitalize themselves. There was even a nifty little stock-market rally to help things out. But one little nagging problem remains: the demand side of the supply-demand equation is still lacking.

From today’s Upshot column:

Amid signs of increased second-quarter demand among companies including airlines, trucking and heavy machinery, there’s at least one place where demand is a no-show so far—banks.

The reasons are manifold. Some corporations remain reluctant to invest heavily in new business because they’re uncertain the spring uptick will continue. Others are sitting on a veritable mountain of money as profits have soared. Meanwhile, consumers remain fixated on paying down debt, rather than adding more.

Wells Fargo & Co.’s total consumer loans were down about 2.6%, or almost $12 billion from the year-ago quarter. Commercial loans were down 14%, or $48 billion. Finance chief Howard Atkins said the bank “began to see signs” of increased loan demand in the second quarter from businesses and “to a lesser extent” consumers. Chief Executive John Stumpf said business clients’ use of credit lines was “relatively unchanged” from the first quarter and still at “historic lows.”

Other large banks are seeing the same. “As we look on the loan demand side, it continues to remain weak as the consumers continue to delever,” Bank of America Corp. Chief Executive Brian Moynihan said on a conference call last week. “There’s no loan demand, because there’s no demand for the [client's] products,” Mr. Moynihan said, referring to a dearth of commercial lending.

Hey, wha’ happened?

US stock futures modestly lower premarket following yesterday’s big SEC settlement with Goldman Sachs, Google 2Q results, as well as results from GE and BofA this morning.

Stock markets currently higher in Europe, mixed in Asia overnight. Looks as if investors in Japan are more worried about the US economy than US investors — the Nikkei slumped nearly 3% to its lowest level in more than a month as the yen soared vs the dollar on fears over US growth prospects.

GS up 4.5% premarket; GOOG down 4% as results missed expectations. GE off 1.1% as revenue declined overall, falling in three of five business segments. But there was improvement at GE Capital.

June CPI due at 8:30am; Reuters/Univ of Michigan consumer sentiment out at 9:55am. S&P futures off 0.90; 10-yr slightly lower, yield at 2.98%.

- China better have right intentions regarding its pledge for a stronger yuan. “The probability of a disastrous trade war will skyrocket if Congress believes they have been the victim of a classic bait and switch,” Tim Duy writes.

- “Adjustment in China and America will be slow, but that’s not unexpected or entirely a bad thing,” Ryan Avent notes at The Economist’s Free Exchange blog. “And the best news of all is that America and China have managed to arrive at this point without a major diplomatic fall-out.”

- Obama administration’s housing market stabilization efforts are yielding mixed results. Calculated Risk has the details.

- Digital music is a tough business to profit from, but MediaMemo blogger Peter Kafka says it still makes perfect sense for Google (GOOG) to jump in. A music store would enhance Android as well as give GOOG an “owned and operated destination” for music traffic. “My suggestion: Start simple. Copy iTunes’ pay-per-song model.”

- The fact that the “normally bank-friendly” Fed is pressing big banks to move faster in curbing risky pay practices is a step in the right direction, Yves Smith writes at naked capitalism. “Given [the Fed's] track record, I would not be terribly optimistic, but then again, I am surprised it has gone even this far. It would be great if it surprised me again.”

- May existing home sales dropped 2.2% to a 5.66M annual rate, well below the 5% rise to a 6.06M rate that economists were expecting. “We see more evidence that the next leg down in housing has begun,” Barry Ritholtz writes at The Big Picture.

- Investor sentiment can be a funny thing. “You couldn’t find a bull two weeks and eight percent ago but voila, as soon as the 200-day was captured and S&P 1115 traded underfoot, the equity enthusiasm was palpable, as evidenced by the recent collapse in volatility,” Todd Harrison says at Minyanville. “That’s the fatal flaw of technical analysis, right? Financial assets are ‘better’ higher and ‘worse’ lower, which is why I use them as a risk context rather than a catalyst.”

- Business Insider blogger Henry Blodget goes a bit sensationalistic in a recent post entitled “The Odds Are Increasing That Microsoft’s Business Will Collapse.” But in reality, Microsoft (MSFT) faces a “simple and less flashy situation,” BoomTown blogger Kara Swisher says.

- Looking for the important aspects to today’s existing home sales report? “The key is the inventory and months-of-supply, and if these two measures increase later this year as I expect, then there will be additional downward pressure on house prices,” Calculated Risk says.

- The IPO market never really made a comeback from the tech bubble a decade ago, and it’s telling that Facebook, Twitter and LinkedIn — some of the most successful tech companies right now — keep pushing off filing an IPO as long as possible, Eric Schoenfeld writes at TechCrunch.

- Several big name hedge-fund managers are placing bullish bets on Citi (C) and Bank of America (BAC). “Paulson, Soros, Falcone, Tepper, Ackman, Ainslie, Loeb — you name it, they own one or the other…or both,” Joshua Brown writes at The Reformed Broker. “And they own them in size.” But why the sudden interest?

- Goldman Sachs (GS) may be on the verge of resolving SEC’s fraud charge by agreeing to a settlement worth hundreds of millions of dollars, according to FT. But FusionIQ CEO Barry Ritholtz is still perplexed why GS chose to fight this charge in the first place. “Even if GS were to prevail in court, they have already lost. The reputational damage is already measured in billions of dollars, and will last years if not decades.”

- Furious decline in newspaper ad sales eased in 1Q, but struggling industry still isn’t showing signs of rebounding. “The less-awful sales in the first months of this year gave publishers the gift of a bit more time to fundamentally reposition their businesses,” Newsosaur blogger Alan Mutter says. “But there is nothing in the first-quarter numbers to suggest that the storm for newspapers has blown over.”

- S&P 500 has averaged a 0.12% gain on the Friday before Memorial Day since 1971, with positive returns coming 59% of the time, Bespoke Investment Group reports. But the performance hasn’t been so hot recently, with the index averaging a 0.28% decline throughout the last 10 years, firm notes. And the measure has dropped more than 1% on three instances in last decade.

- Warren Buffett’s testimony next week before FCIC is subpoena-driven, writes Fortune senior editor-at-large Carol Loomis, a pal of the Berkshire Hathaway (BRKA BRKB) chairman.

- FASB publishes proposal that would overhaul how companies value many assets and liabilities they hold. “Tremble US financial institutions, for FASB is about to fair value your assets,” FT’s Alphaville says.

- There are still calls for more (yes, more) government spending. “The long-term deficit needs attention, but right now it’s critical for government to spend,” says former labor secretary Robert Reich. “Otherwise we have no hope of getting free of the gravitational pull of this recession.”

- If enough tech giants go after a market, will it eventually catch on? Just a week after Google unveiled details of Google TV, Engadget reports Apple (AAPL) will take another crack at its three-year-old Apple TV product. But as MarketWatch’s John Dvorak pointed out in a column last week, it may be a hard slog, even for the biggest of behemoths.

- “The Great Recession is over, and the Great Transition is here,” James Picerno writes. In theory, distinguishing between the two is a piece of cake. In practice, reading the tea leaves is going to get complicated at times.”

- The Apple faithful struggle figuring out the best way to carry around the iPad. Aw, poor fanboys, such a conundrum – what are they gonna do??

- Good ol’ Thomas Brown is at it again. Yes, the same Thomas Brown who called the bottom in bank stocks in July 2008. Now he’s saying Nouriel Roubini and Meredith Whitney are too bearish on the banking sector.

- GDP’s 1Q revised down to 3.0% represents only a “minor disappointment” amid current economic recovery, Ryan Avent writes at The Economist’s Free Exchange blog. “America’s recovery remains young and fragile. Still, many developed nations would be happy to have a nine-month performance like the one the American economy has managed since returning to growth.”

- BofA and Citi incorrectly hid from investors billions of dollars of their debt, similar to what Lehman did to obscure its level of risk, WSJ reports, citing company documents.

-WSJ’s Matt Phillips wonders if Libor fears are overdone.

- FT’s Alphaville relays a century-long look at the US equity market, via Deutsche Bank. Blog wonders whether we’re currently mired in a cyclical bull market within a longer, structural bear market?”

- “I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences,” David Einhorn says in his NYT op-ed.

- Banks aren’t short of cash to spend on lobbying Washington to make sure serious financial reform never gets passed. But considering what’s at stake, the best hope for stronger reform is to make the upcoming House-Senate conference in June more transparent, writes Simon Johnson, former IMF chief economist.

- Palm’s mobile design guru, Matias Duarte — who led webOS development — is leaving the company and is headed to Google (GOOG), Digital Daily blogger John Paczkowski reports, noting Duarte’s departure is a “significant loss” for Palm and H-P.

- Blogosphere has been abuzz about rumors that Microsoft (MSFT) CEO Steve Ballmer would appear on stage at Apple’s Worldwide Developer Conference. But Microsoft quickly squashes those rumors. “Steve Ballmer not speaking at Apple Dev Conf. Nor appearing on Dancing with the Stars. Not riding in the Belmont. Just FYI,” Microsoft says via Twitter.

- Obama says he’s “angry and frustrated” over the spill in the gulf.

- BofA, Citi, JPMorgan and Goldman Sachs all racked up perfect trading quarters in 1Q, but the Kid Dynamite blogger is less than impressed with the ensuing analysis. “See, the probability of winning when your cost of funds is near zero and you can invest at positive interest rates at assets which are already being supported by the Government is probably closer to 100% than 50%.”

- “It’s no wonder that Goldman Sachs–perhaps the largest market maker in the world–consecutively avoids trading losses quarter after quarter,” FT’s Alphaville blog says. “That’s because when you’re making markets with no obligation to do so, you are in complete control. You dictate the terms. It’s very hard to lose.”

- EU’s nearly $1T bailout package stabilized Europe’s stock and bond markets this week, but hasn’t done much for the sliding euro.

- The online advertising business is improving from its dismal
performance a year ago, but how much of an improvement is tough to quantify.

- Paul Volcker’s candidness is undermining Obama. “It’s one thing for people in the private sector to express negative views about the future on the Eurozone, quite another for someone of Volcker’s stature who is playing a policy role for the Administration to undermine an initiative deemed so important that the President has thrown its weight behind it,” Yves Smith says.

- The number of people considered long-term unemployed sits at its highest level on record even as the economy has experienced four-straight months of net payroll growth. “Think about what that means: The new jobs that have been created so far seem to be going disproportionately to people out of work for only a short period,” Catherine Rampell writes.

- NBC canceling Law and Order could mean 8,000 people will join the unemployed ranks.

- Bespoke compiles a list of companies whose stocks have performed well on their earnings release days, but then declined the most since then. Topping the list, First Solar (FSLR) which rose 18% after posting earnings April 28, but since has dropped 20%.

- Well, that experiment didn’t last long. Google plans to stop selling its Nexus One on the Web.

- The summer of LeBron officially starts now. Mayor Bloomberg says he’ll give LeBron a “big sales pitch” to come to NY, but President Obama hopes the King goes to Chicago. LeBron, you can guest post here at Market Talk anytime you’d like if you become a Knickerbocker.

A picture of an empty storefront taken in March, of 2009. It's still empty.

Something crystallized in my mind the other day, and while I’m not sure of its significance, it seems telling to me.

I’ve noticed lately that the vast majority, I think all really, of the store fronts that I’ve noticed going back a year ago that were empty…are still empty. These include spaces in New Jersey and Manhattan. I just haven’t seen any new businesses opening up in the past year, and I wonder how many new businesses really are opening up.

There’s a big space at the corner of 42nd and 6th Avenue in Manhattan that has been sitting empty since at least last June (John said he thinks some of the empty storefronts he’s seen on 5th Avenue have been filled recently.) And that’s about as prime a piece of retail space as exists in this world, it’s a huge (that might be part of the problem) space, looking out onto both 6th Avenue and 42nd Street, right across from Bryant Park. But nobody seems to want it.

And the storefronts around my New Jersey home that have closed over the past year have all remained empty. I can’t think of one that’s found a new tenant.

This ties in with comments Bank of America’s CEO Brian Moynihan made during their conference call for first-quarter earnings. On the commercial side, Moynihan said, loan balances are down “fairly dramatically, and that is due to customer demand. There’s no other explanation. That’s because customers are not feeling the need to draw on our lines because they don’t see economic demand.”

He added that while they’re still not sure, things seem better than a quarter ago, and if the economy stabilizes here, they expect to see their draw-down rate improve.

Paul Vigna and Madeleine Lim analyze the potential fallout from SEC charges against Goldman Sachs (GS). “This was a big shot from Washington to the height of Wall Street,” Paul says.

Also, they discuss the lack of revenue growth in Bank of America (BAC) and GE earnings. And, to no surprise, there’s still uncertainty surrounding Greece. Check it out, it’s Tomorrow’s News Today.

We’ve got a News Hub double-feature for you. You saw the AM report earlier. Here’s the PM report, taking a look at BofA’s latest mortgage-mod plan, Saudi Arabia’s mass arrests of suspected terrorists, and the latest skinny on the euro (courtesy of yours truly.)