The IMF said nice things about the American economy, but judging from the 2% slump on Wall Street overnight, no one was listening. Shares and commodities suffered their biggest sell off in up to two months.
Markets around the world, especially in Europe fell sharply, with falls there over 3% and more; oil and copper retreated and the US dollar rose. Sharemarkets have been looking tired in recent days, having run up 40% (in the US), 50% (in emerging markets) and 30% in Australia. Investors are starting to want their profits.
The IMF said it now expects that the US economy will have growth in 2010 of 0.7%, a bit stronger than its earlier prediction, while the slump this year will be less intense at 2.5% (2.8% at the time of the IMF’s forecast in April).
The IMF had praise for the policy response of the Federal Reserve and President Obama’s administration, and said US can expect a “gradual” recovery next year. But it did warn most of the risks remained on the downside, with rising unemployment and a weak banking system still major concerns.
And we had some reminders of those negatives overnight: a monthly Federal Reserve survey of factory activity in the New York area revealed a much larger fall than had been forecast. The recent upturn in this survey had been a minor green shoot grabbed by US analysts.
Figures released during the day also showed credit card delinquencies eased in May with tax rebates being used to bring accounts up to dare, but that was the good news; the bad was a surge in card defaults to their highest level ever.
Standing out in the reports was a sharp worsening in the losses at Bank of America and American Express.
Bank of America Corp said in SEC filings that its default rate jumped to a nasty 12.50% of all outstandings in May from 10.47% April. It is especially exposed in California and in the South Eastern states of the US. American Express Co, which accounts for nearly 25% of credit and charge card sales volume in the United States, said its default rate rose to 10.4% from 9.90% in April.
Other card issuers had similar reports: Capital One said its credit card default rate rose to 9.41% from 8.56%, while Discover said its charge-off rate increased to 8.91% from 8.26% and JPMorgan Chase said its default rate rose to 8.36% in May from 8.07%.
As bad as these figures were, two major bankruptcies in the past three days showed the fragility of large parts of the US, especially anything to do with cars, travel and transport. It’s just not the likes of General Motors, Chrysler, their dealers and suppliers that are in trouble.
The Six Flags theme parks company went bust at the weekend owing over $US2.3 billion. It will be recapitalised in Chapter 11 and secured lenders will get 92% of the company and the much larger hotel chain Extended Stay Inc went into bankruptcy with debts of more than $US7 billion.
It’s one of the biggest amusement park chains in the world.
Six Flags owns 20 theme and amusement parks and it claimed to have $US3 billion in assets and $US 2.4 billion in debts. But a prolonged and futile debt for equity swap with lenders collapsed last week and it filed for Chapter 11 protection. It was taken over in 2005 by the owner of the Washington Redskins football team in the US and has been unable to improve its business as petrol prices, the credit crash and then the recession saw visitor numbers fade away.
Likewise for the Extended Stay chain with over 60,000 hotel and motel rooms in the US and Canada. It is owned by a private equity group, having been bought from the Blackstone private equity group in June of last year, despite the gathering crunch and recession. That deal was valued at $US8 billion, another poorly-timed high-priced deal that ignored the end of easy and cheap credit.
Its move to Chapter 11 wasn’t pre-arranged; it doesn’t plan to sell any assets and still has positive cash flow. But due to the recession and lower car driving and tourism, it doesn’t have customers coming through the front door and needs to cut a heavy $US7.6 billion debt burden to right size the business.
It has assets of $US7.1 billion and in terms of assets is one of the biggest failures so far, up there with the likes of the Tribune Co of Chicago which had $US13 billion of debt.
Bank of America and Merrill Lynch and Wells Fargo (through Wachovia) are reported to be the major lenders to Extended Stay, another reason why investors will be worried about the amount of reserves the big US banks have to handle the growing default rate among corporates. Housing defaults have grabbed all the attention, now its credit card debts, soon it will be companies, large and small grabbing attention.
The IMF was right: the risks remain on the downside in the US economy.
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