SSB Comments re:Specialy Finance Sector:
at the end of 4Q01, key economic data points seem to be pointing to
a brighter outlook. Weekly jobless claims seem to have peaked around the
500K level seen shortly after the 9/11 attacks. At 5.8% in December, the
unemployment rate remains significantly below the 6.5% -7.0% peak level we
have been anticipating (although it will likely continue to climb for the
bulk of the year). Also, consumer confidence, a key leading indicator for
consumer spending, switched directions to the positive for the first time in
December since June. By the end of the fourth quarter, specialty finance
stocks had cut their losses for the year to roughly half, ending down just
17% (cutting the difference relative to the S&P 500 by 200 bps), a
significant improvement from that at the beginning of the quarter.
We continue to expect credit losses for the industry to peak around the 3Q02
time-frame, more or less coinciding with the peak in unemployment, as
happened in the last recession. Since inflection points in jobless claim
filings lead those in unemployment, we are watching for (and may have seen) a
peak in new claims as a leading indicator. At the individual company level,
we are watching for a peak in delinquencies as a leading indicator for peak
charge-offs, and believe we could see that peak around the first quarter of
2002 for many of our companies.
In addition, we note that credit card stocks have historically underperformed
the market during past interest rate easing cycles, but have outperformed the
market meaningfully after the last cut in past easing cycles. While reported
earnings are often protected by a lower cost of funds in an easing cycle (as
has been seen this cycle), P/E multiples often contract, reflecting investor
trepidation about the credit outlook. Once the Fed has stopped cutting rates
and the economic coast looks clear, the group has historically seen multiple
expansion. |
