Good Debt or Bad Debt?

For a world already awash with debt, it was wonderful [sarcasm alert] to see Tuesday’s results from Visa Inc. [NYSE:V]. As Bloomberg reported:

Visa Inc., the world’s largest payments network, posted fiscal-fourth quarter profit that beat analysts’ estimates as card spending by consumers increased.

The report continues:

Global credit- and debit-card spending, including Visa Europe and adjusted for currency fluctuations, rose 47 percent from a year earlier to $1.86 trillion, the company said. Cross-border volume, a measure of customer spending abroad, gained 149 percent from a year earlier.

The bearish argument is that this is another worrying sign of increased indebtedness — that folks may not be able to meet their obligations with cash, and so have to resort to credit.

Another bearish argument is that even if the increased credit card use isn’t as a result of indebtedness, but rather choice, it highlights potential risks as individuals increase spending, even though, worldwide, economic problems persist.

The bullish argument is that it’s only natural that Visa would see increased revenue and profits. The more people move away from cash and towards debit and credit cards, the more fees Visa gets to charge.

The increase in cross-border transactions also indicates an increase in online retail sales. The easiest way to pay online is with a credit card.

Furthermore, bulls would take the bearish argument about consumers spending more, and say that it shows an increase in consumer confidence. That, they will say, is a positive, not a negative sign.

So, who’s right? (Assuming that bulls and bears really are making those arguments, and that your editor hasn’t just made this up!)

In the interests of keeping this e-letter going, we’ll assume we haven’t made it up. The truth is that, so far this US earnings season, it’s a veritable mixed bag of results.

As Bloomberg notes:

Proctor & Gamble Co. added 3.5 percent after the world’s largest consumer-products company’s earnings beat forecasts. Caterpillar Inc. slipped 1.3 percent after reporting lower-than-expected revenue. Merck & Co. was little changed and Visa Inc. fell 0.8 percent even as their profits exceeded estimates. Under Armour Inc. plunged 16 percent as its outlook renewed concerns that growth is slowing.

You can add to that Apple Inc’s [NASDAQ:AAPL] earnings result after the US markets closed.

Apple’s fourth-quarter revenue and profits were both lower compared to the fourth-quarter of 2015. Revenue was US$46.9 billion, compared to US$51.5 billion last year. Profit was US$9 billion, compared to US$11.1 billion last year.

And for the full year, revenue fell to US$215.6 billion, from US$233.7 billion. And profit fell to US$45.9 billion, from US$53.4 billion.

That’s the first annual revenue decline for Apple since 2001, and the first annual profit decline since 2013.

The implosion of Samsung Electronics Co Ltd’s [KRX:005930] Galaxy Note 7 product didn’t appear to help much. Apple’s stock price fell nearly 3% in after-hours trading.

So whether we’re right or wrong on this, we’ll continue to sound a note of caution on the progress of US company earnings. The best light the market can seem to shed on this earnings season is that profit growth will be flat, ending five consecutive quarters of falls.

Perhaps that is something to cheer about. But regardless, we’ll still point out that, whatever these earnings show, most analysts have still factored in a near 20% increase in earnings over the next year.

At some point the market has to realise that just isn’t going to happen.

Goldman’s big call

Of more direct importance to Aussie investors are the expected earnings of the big banks.

Again, from Bloomberg:

It’s going to be a “tough” earnings season for Australia’s biggest banks, according to Goldman Sachs Group Inc.

Full-year results due from three of the lenders – starting with National Australian Bank Ltd. on Thursday – are poised to show that a record-breaking run of profits is coming to an end amid higher funding costs, lower interest margins and rising bad-debt figures.

In anticipation of the upcoming bank results, the banks’ stock prices have begun to react.

Yesterday, the Big Four banks’ shares are performing thus:

  • National Australia Bank Ltd [ASX:NAB], down 1.6%
  • Australia & New Zealand Banking Group Ltd [ASX:ANZ], down 1.4%
  • Westpac Banking Group Ltd [ASX:WBC], down 1.5%
  • Commonwealth Bank of Australia [ASX:CBA], down 1.8%

Not good.

In truth, it’s wasn’t a happy day for the Aussie market in general. BHP Billiton Ltd [ASX:BHP] was down 1.6%.

But the real action is among the banking stocks. Bank of Queensland Ltd [ASX:BOQ] was down 2.6%. Bendigo & Adelaide Bank Ltd [ASX:BEN] was down 1.8%.

But the outlook for bank earnings isn’t the only reason Aussie stocks are tumbling. There’s another reason. You got it. It’s to do with those meddling central banks.

As Bloomberg reports:

Australia’s headline inflation accelerated last quarter, sending the currency up half a U.S. cent and prompting money markets to pare bets on an interest-rate cut.

On Tuesday, the chance of the Reserve Bank of Australia (RBA) cutting rates next week to 1.25% was 16.6%. It wasn’t a big probability, but some thought it could happen.

Yesterday, following the inflation news, the chances of a rate cut were just 4.1%.

You know the drill with this stuff. Higher inflation means it’s less likely the RBA will cut interest rates, which means less cheap money to boost stock prices.

It’s New Market Economics 101.

If you haven’t already gotten used to it, what’s wrong with you? This stuff has played out for over eight years. And it’s not likely to change anytime soon.


Kris Sayce,
Publisher, Money Morning

Editor’s Note: This is an extract from an article originally published in Port Phillip Insider.


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