This Could Blow a Hole in the Recovery

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

On Tuesday, I indicated that the accelerating pace of small bank failures is the canary in the coal mine with respect to further losses on commercial real estate loans at major banks such as Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Citigroup (NYSE: C  ) . The same day, the FDIC released its quarterly report on the U.S. banking industry; unfortunately, the report's data suggest the sector's difficulties could be a drag on the broader economy for some time yet.

The hits keep on coming
Here are some of the lowlights:

  • Banks' loan loss rate in the fourth quarter was higher than it has been in over two decades.
  • The number of "problem" banks rose to 702 at the end of December -- the highest number since 1993. FDIC Chairman Sheila Bair expects the number of bank failures in 2010 will handily exceed last year's total of 140.
  • In 2009, total outstanding bank loans suffered the most severe decline since 1942.

Even though overall loan demand is weak, even where such demand exists, we can expect supply to remain constrained as the prospect of further losses on existing loans continues to weigh on bankers' appetite to make new loans.

The pain isn't spread equally
That won't be a problem for large-cap names -- U.S. companies took advantage of the bond market rally to issue a record $1.24 trillion in corporate bonds last year. Firms like AT&T (NYSE: T  ) , Procter & Gamble (NYSE: PG  ) , Wal-Mart (NYSE: WMT  ) , and Verizon (NYSE: VZ  ) , the four S&P 500 non-financials with the largest bond maturities in 2010, should have little trouble rolling over that debt.

An investor's interpretation
However, small- and medium-sized businesses can't access the capital markets directly and must rely on bank borrowing to fund their operations and growth. If credit is tight, that will weigh on the economy, which is one of the reasons why I find it difficult to imagine the robust recovery that some are touting. It's also a reason to favor large-cap stocks over small caps, and small caps with a clean balance sheet over those that are leveraged.

Looking for "franchise" businesses that reward their shareholders even in tough economic times? Tim Hanson has six stock ideas for you.

Whether you believe the recovery will be robust or tepid, companies that perform well in either environment pay a (sustainable) dividend. The team at Motley Fool Income Investor can show you how to build -- and manage -- a portfolio of high-quality company stocks with robust dividend yield. To find out their six Buy First stocks, take advantage of a 30-day free trial today.

Fool contributor Alex Dumortier loves macro-themed investing; he has no beneficial interest in any of the stocks mentioned in this article. Wal-Mart Stores is a Motley Fool Inside Value choice. Procter & Gamble is a Motley Fool Income Investor pick. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 25, 2010, at 4:16 PM, judithjo wrote:

    Hurray for Alex Dumortier. Unlike so many Motley Fool contributors, he actually wrote a short but relevant and informative article. Others should follow your example.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1121283, ~/Articles/ArticleHandler.aspx, 10/27/2016 5:21:21 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 8 hours ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:00 PM
BAC $16.87 Up +0.15 +0.90%
Bank of America CAPS Rating: ****
C $50.01 Up +0.42 +0.85%
Citigroup CAPS Rating: ***
JPM $69.13 Up +0.33 +0.48%
JPMorgan Chase CAPS Rating: ****
PG $87.40 Up +0.43 +0.49%
Procter and Gamble CAPS Rating: ****
T $36.43 Down -0.27 -0.74%
AT and T CAPS Rating: ****
VZ $47.63 Down -0.21 -0.44%
Verizon Communicat… CAPS Rating: ****
WMT $69.59 Up +0.23 +0.33%
Wal-Mart Stores CAPS Rating: ***