Registered Investment Adviser Caleb Lawrence
Relief that hurricane Irma didn’t turn out to be the devastating catastrophe many feared inspired the major averages to large gains to begin the week. Consumer credit came out late Friday. The 18.5-billion-dollar gain beat expectations on a huge jump in non-revolving credit, essentially student and auto loans. Other details from the report include significant revisions to the series covering November 2015 through December 2016 reducing outstanding credit card debt by 27 billion, while student and auto loans outstanding were reduced by 75 billion. Well one man’s debt is another man’s asset so the 102 billion in reduced debt means 102 billion in reduced assets at financial companies. Also of note the new record high in consumer debt recently achieved was revised away as well along with 262 billion in consumer savings.
Moving to earnings and the recent Generally Accepted Accounting Principles or GAAP recovery isn’t as robust as it appears because GAAP earnings feature most if not all the unpleasant surprises taken out and other items. As an example, Standard and Poors 500 GAAP earnings have advanced 61 billion through the first two quarters of this year. Economic earnings on the other hand have fallen 28 billion over the same period. Looking at the details shows that companies are growing their balance sheets faster than their profits. Given that companies debt levels are painfully high following three years of substantial expansion this is hardly a positive trend.