Markets were not much changed on Tuesday with the S&P 500 up 0.1% and Toronto up 0.2%.
AutoCanada was up 2.0% after announcing an acquisition of a very large GM dealership in Windsor Ontario. They will use their line of credit to pay for it. My take on this is that it shows that the company is confident about cash flows. It’s a good sign.
Toll Brothers was up 2.7%. U.S. home starts for March were reported and were down less than 1%. Commentary indicated that there are fewer existing homes for sale becasue owners are less willing to sell and upgrade when the would face higher interest rates on their next home. Sop they stay with their existing home typically at a lower interest rates. The commentary suggested that this is good news for new home builders since buyers are less able to find existing homes to buy.
About those higher interest rates:
Bank of America reported stronger earnings today.
I’ve been watching the increase in interest income and interest expense of the banks and I find the numbers to be rather breath-taking.
Bank of America’s interest income was up $15.8 billion versus Q1 of 2022 or 121%. Some portion of that was likely paid by other banks. But most of it was likely paid by businesses and individuals. And it seems to me that that this is a MASSIVE increase in interest payments and I wonder how many businesses and individuals are simply not going to be able to continue to pay. What this also means is that Bank of America’s loans and other interest-earning assets have “re-priced” rapidly with the higher interest rates. Unlike (the dummies) at Silicon Valley bank this bank was not locked into low interest investments to any important extent. In the U.S. mortgages are mostly fixed for 30 years but banks sell those mortgages in securitizations partly because they don’t have 30 year deposits to match those loans. The dummies (and really I’m being kind with that word) at Silicon Valley Bank went out and BOUGHT low-rate 30 year securitized mortgages!
Meanwhile, Bank of America’s interest expense was up by $12.9 billion or 975% (not a typo)!! Basically, a year ago Bank of America was paying almost nothing on deposits and now they are paying quite a lot. Some of this may have been paid to other banks. But a great deal was no-doubt paid to businesses and individuals.
So I think we have some businesses and individuals suddenly collecting a lot of interest (albeit less than the rate of inflation) and another group of people and businesses suddenly paying a LOT of interest. And that group too faces inflation and I am NOT in the camp that believes that inflation makes it easier to pay off debt, not in the short term at least. Obviously there is some overlap where some are both paying more interest and receiving more interest but in general there must be a huge group that is finding these higher interest payments very difficult. And perhaps that will lead to to the next shoe to drop on the markets this year.
Bank analysts and observers tend to focus on the NET interest income of banks. For bank of America as higher income is partly offset by much higher interest expense, the net interest income was “only” up $2.9 billion or 25%. That’s a big increase but I think the analysts seem to be missing the more massive increase in interest income and therefor interest being paid by businesses and individuals.
P.S. I just noticed the two Brookfield Office Property rate reset shares were down today. They look cheap but are in a troubled segment and it’s hard to say how this will turn out. More will be known when they release Q1 results around May 10 or so.