Thursday, 28 May 2009

The wisdom of market discounting

The following news item has been widely reported today (May 28, 2009)
NEW YORK (MarketWatch) -- J.P. Morgan Chase's Chief Executive Jamie Dimon said on Wednesday that he expects the firm's credit card losses, excluding business acquired from Washington Mutual, to be about 9% in the next quarter.

In remarks prepared for delivery at a Sanford Bernstein conference later today, Dimon also said that Washington Mutual credit card losses are expected to be between 18% and 24% by the end of the year.
It seems as though traders/investors are pretty unfazed by the the admission that up to 1 in 4 WaMu credit card holders may default. It must be just another wrinkle in the consumer de-leveraging story that the markets have already discounted and which the stress tests already anticipated.

By the same reasoning it also appears that the markets are not surprised by this item either:

NEW YORK (AP) -- A record 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit. And the wave of foreclosures isn't expected to crest until the end of next year, the Mortgage Bankers Association said Thursday.

The foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures. Nearly 6 percent of fixed-rate mortgages to borrowers with good credit were in the foreclosure process.

Should we be worried about the magnitude of these record breaking credit card losses and foreclosures? Apparently not, according to the experts. They are lagging indicators it seems and not like consumer confidence which is a leading indicator based as it is on higher equity prices. And traders in equities have already discounted all of the grim news about the de-leveraging of consumers. Haven't they?

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