Posted on Wednesday, December 8, 2010
America is a nation of optimists. Just two years after declaring this the worst financial crisis since the age of Busby Berkeley and speakeasies, it now appears that we are starting to ante up again by releasing our cash. Maybe spending is part of what makes us American--our founding fathers, who were products of the Enlightenment, taught us to reject the old-world notions of asceticism and praying for a better day in favor of enjoying the spoils of our labor and securing our rewards in this life. And now, here we are. Usually depressions are followed by extended periods of hoarding cash and sinking money into only safe investments, but recent events seem to suggest we're moving in another direction.
Take the banking industry, which declared aggregate profits in the third quarter totaling $14.5 billion, more than seven times greater than last year during the same period, according to the FDIC's Quarterly Banking Profile (QBP) for the third quarter of 2010. Part of the reason for these buoyant numbers is that banks released their rainy day provisions into earnings, causing FDIC chief Sheila Bair to warn bankers that they may be reducing their loan loss reserves too early. Provisions for loan losses dropped to their lowest level in three years--reserves against future slid to 63.9% of noncurrent loans from 65% in the second quarter--even as "troubled loans remain near historic high levels," Bair said. This is the first time that loan-loss reserves have fallen since late 2006. To be sure, most of Bair's comments are aimed primarily at mid-sized and smaller banks that have yet to show consistent credit quality improvement unlike the bigger banks. And, no doubt, we need liquidity in the economy and the banks need to provide it, but it behooves the industry to be careful to cover the bets at a time when the number of troubled banks is at 860, the most since 1993.
In the real estate industry, some of the largest companies, including Simon Property Group Inc., Kimco Realty Corp. and Nationwide Health Properties Inc., raised their quarterly dividends in November and more companies are expected to follow suit in the months ahead. The higher payouts reflect the higher rents and better occupancy levels, which are boosting the income pool for dividends. This a serious about face from the past 36 months, when REITs, along with other public companies, were slashing or suspending dividends to preserve cash. In 2010, 37 REITs have raised dividends; seven have cut them. To compare, 61 companies either cut or cancelled dividends in 2009.
REITs aren't alone in raising dividends. Many large-cap and cash-flushed companies are expected to do the same. A recent report by Markit, a financial information services firm, expects a 50% jump in dividend increases for S&P 500 companies in the fourth quarter from last year. Currently, there is an estimated $2.0 trillion in net cash sitting in non-financial corporate treasuries. The payout enthusiasm has affected even some of the holdouts: Cisco Systems announced plans to pay a stock dividend for the first time in its more than quarter of a century in business. Apple is sticking to its guns by sitting on its nearly $46 billion. One reason for paying dividends, outside of magnanimity, could be the tax rates. Under current federal individual income tax law, both capital gains and corporate dividends are taxed at a reduced 15% rate. However, those reduced rates are scheduled to expire at the end of 2010, raising the hit on dividends to increase to as much as 39.6%.
And finally, there's us, the consumer. Our national savings rate was 5.7 percent in October -- still strong when you consider that it was at 0% in 2004. An article in the Christian Science Monitor in 2004 summed it up this way: "Americans have stopped saving for a rainy day. Instead, they are living paycheck to paycheck, depending on credit cards to get them through emergencies, and hoping that the rising value of their homes will give them a retirement nest egg." However, that 5.7% looks meager when you consider that Europeans hover around a 14% savings rate in the Eurozone. The 5.7% also is a contrast with some of the other recessionary periods, for example the the early 1980s when American savings levels were in the 9% to 10% range. It's worth noting that this comes at a time when, the government reports, consumer spending rose 2.6% in the third quarter, the fastest pace since the fourth quarter of 2006. Clearly, we're feeling the same optimism as our corporate and financial counterparts. "One today is worth two tomorrows," Benjamin Franklin once said. What could be more American?
Silva Huffington Post