The market is always a topic of conversation, no matter where we end up going these days. I accompanied my son to his first day of school and the kindergarten teachers were talking about whether the stock market was safe to invest in again.
The number of market conversations are matched by a corresponding number of opinions. On a recent business trip I had a meeting where a chief executive was almost giddy that the downturn was over, the recovery was well underway and we were off to the races again…blue skies ahead. In the very next meeting, I spoke to another chief executive who said he was so excited about all of these people who thought difficult markets were past us as he was going to clean up when the coming “real” crash arrived. I wish I could have got them together in the same room.
So what are the indicators, positive and negative, in the payments industry that fall on both sides of the healthy market debate?
Good Signals
Upward sloping yield curve
Last year and earlier in 2009, the yield curve was flat or downward sloping meaning that interest rates on short-term debt were higher or the same as long-term debt. A flat or downward sloping yield curve is the result of panic investing in stable debt securities which drives down the overall yield to a point where there is no value in lending for the longer term. When the yield curve slopes up as it is now, bonds with more time until they mature are paying a higher interest rate than bonds that are maturing soon. This is the normal environment and is usually an indicator of economic growth.
Consumer Spending
Although the data from the back-to-school season has not been anything to crow about, spending was up in May and June (all the hard data available at this time). A great editorial in Forbes recently said that consumers were acting like they had already lost their jobs and were fearful of over-extending themselves. They suggested that expectations for a continued increase in spending is driven by the gradual decline in the savings rate. People are becoming less fearful and although not spending aggressively, have begun to relax the purse-strings.
Return of the IPO
The IPO market is far from robust, however, the number of new filings has steadily been filling the pipeline at the SEC. The typical time period between filing an IPO prospectus and pricing an IPO is 60-120 days. Given the large number of initial filings in the second week of August, a typically quiet period for filings, the queue of IPOs ready and waiting if the market re-opens between Halloween and Thanksgiving will be substantial.
Bad Signals
High Yield Debt Market
The health of the credit market is usually measured by the spread between the rates paid by borrowers with strong credit and those with markedly weaker credits. The spread between high-yield borrowers and US Treasuries is less than 10 percentage points. This is down substantially from the peak of 22 points in the fourth quarter of 2008. Unfortunately, the typical spread is five points so the market is telling us that there is still a fair amount of uncertainty in the riskier areas of the credit markets keeping growth capital for the industry more expensive.
Real Estate Market
The real estate market, both commercial and residential, continues to stay weak. Any weakness in this market will have a renewed impact on Wall Street and the nation’s largest banks. Fitch Ratings’ analysis of commercial real estate asserts that the performance metrics of the sector are “deteriorating at an unprecedented pace.” Any impact on the banks, especially the weaker money-center banks, will negate any progress toward a recovery we are seeing now.
Mixed Signal
Distressed M&A
We have seen a fair amount of M&A activity recently in assets that can only be considered to be
distressed. The fact that forced sales or credit-driven M&A is a part of a market that has historically had minimal levels of debt is distressing. The flip side, however, is that the demand from buyers/acquirers of these businesses has been overwhelming. Whether it is the opportunity to acquire assets or capabilities they are lacking or just not passing up a deal too good to miss, the buyers are out in force. This will eventually result in valuations recovering to historical levels.
So there is reason to hope that the market for the payments industry is on the mend. There are also a few reasons to doubt that we are ready to say things are back to “normal.” Put that down for one more market opinion. Or was that two?  |
