Banks Earnings Show Big Score for Wall Street, Not Much Hope for Main Street

Stocks took a breather Thursday, ending a four-day win streak on the Dow, after Bank of America posted second quarter results which saw their profit cut in half from a year ago.

That wasn't the only news to cross the tape on Thursday. Morgan Stanley's (MS) net income came in at an record $3.2 billion for the quarter, against the $2.2 billion the bank earned a year earlier and the $1.8 billian that had been expected by analysts in a Bloomberg poll.

Morgan Stanley’s investment bank had trading revenues up 68 percent, including a 168 percent increase in fixed income revenues, while investment banking fees were up 39 percent year on year.

Credit loss reserves were not of particular concern for the firm, posting just $239 million, as compared to consumer banks like JP Morgan Chase and Bank of America, which put aside multiple billions to shield against expected defaults on mortgages, credit cards and auto loans.

Overall, it was a banner week for the big banks, as all except Wells Fargo turned profits amid the confusion and government shutdowns stemming from the coronavirus.

Main Street businesses, which suffered the brunt of government action, must be looking at the banking sector with a jaundiced eye. While many small businesses were shut down for lengthy periods, the banks hauled in money as the stock market rallied wildly. Many of the small businesses - particularly retail, restaurant, health and beauty, and fitness establishments - will never reopen. Their silver lining will come with bankruptcy filings, where they will tell the banks that their loans will not be repaid.

While not a rosy picture for either side, the banks will manage to recoup some of their losses if they wish to claim real estate or significant assets in court proceedings from the broke businesses and sell them off in fire sales to the highest bidders, if any are to be found.

Vulture investors are sharpening their claws at the prospect of hundreds of thousands of commercial establishments and billions of dollars worth of salvage assets hitting the auction blocks at pennines on the dollar.

When the crisis is finally put to rest at some unknowable future date the retail landscape of urban and suburban America will be changed forever. Gone will be the majority of boutique retail shops and family-run restaurants.

If the future pans out according to the plan set out by the Federal Reserve, federal and state governments, it will belong to Amazon, Wal-Mart and Target and dining out will offer a choice between KFC, Taco Bell, and McDonald's.

Chains such as Cheesecake Factory, Buffalo Wild Wings and Applebee's may or may not survive, dependent upon how much longer the public feels compelled to submit to the madness of government mandates.

According to the loan loss reserves posted by the likes of Citi (C), Wells Fargo (WFC), JP Morgan Chase (JPM) and Bank of America (BAC), losses are mounting, but have yet to reach critical levels. Defaults on commercial and residential mortgages will take months and years to sort out, along with personal bankruptcies, credit card, and auto lease and loan defaults.

Thanks to the actions by the Federal Reserve, the banks appear solvent and well-capitalized for now, but that may change, dependent upon two primary factors: 1) the degree and length of government mandates on lockdowns, mask-wearing and social distancing, and, 2) the November elections for president, senate and house of representatives.

No matter the case, a deep and long depression appears all but certain.

At the Close, Thursday, July 16, 2020:
Dow: 26,734.71, -135.39 (-0.50%)
NASDAQ: 10,473.83, -76.67 (-0.73%)
S&P 500: 3,215.57, -10.99 (-0.34%)
NYSE: 12,350.11, -41.19 (-0.33%)