Just a quick one

If you didn't hear, a week or two ago American Express announced a program to certain cardholders whereby the cardholder will receive $300 from Amex if they close their accounts by April. Membership has its priviledges. A lot of banks apparently are clawing back unused credit lines and otherwise generally tightening potential exposure to the less creditworthy.

Did you know that 1/3rd of your credit score is based on your total credit outstanding as a percent of total credit available? With that in mind, each time the banks claw back credit, they are lowering credit scores. The only thing a person can do to counter this credit score degradation would be to add more credit. However, that creates an inquiry which, if there are too many, also lowers credit scores.

Now we have downward pressure on credit scores while we are trying to get people to refinance. You following me on this? All the new credit in the world can be provided, at the lowest interest rates ever, and that won't change the undertow of the decline in home values dragging the economy down.

This is another case of folks not thinking about the unintended consequences. [Not that I don't support reducing people's credit lines.] It is also another case of focusing on numerators when we should be focusing on denominators (or vice versa). For example:

The S&P is cheap based on price coming down therefore P/E ratios are going up? Sorry, E's are falling faster than P's these days.

The S&P is cheap based on the dividend yield because prices are coming down? I don't know if you've noticed, but dividends are being cut at a record pace.

GE lowered it's dividend Friday. Just before it did, it had a dividend yield of something like 15%. Still think high dividend yields are a signal to buy stocks? Now they've cut it to be a yield of 3-4% I guess. Whether it is a company setting earnings or revenue guidance or a company evaluating its dividend, the current price of the stock goes into their thinking. "Wall Street isn't giving us credit for what we're doing (because the price is so low in management's mind), so we should just lower expectations now while the stock is so depressed." This makes all the sense in the world in a bull market. But, in a bear market, the lowering of expectations perpetuates the concern over the stock and, in effect, you get a virtual "run" on the stock because the lowering of expectations implies that management doesn't know what they are doing. All anyone is looking for these days is for somebody to do what they say for longer than about 4 weeks. And nobody can live up to the challenge.

All of this is exactly what happens in a deflationary depression.

Joe