Main Street has a lot of issues but I think the flat yield curve could lead to more pre-announcements like this from regional and large cap banks…
"Main Street Banks, Inc. announced today that it has lowered its forecast for 2005 earnings per share growth over 2004 to between five and eight percent due to a flat net interest margin, investment in internal growth, a higher effective tax rate and the early adoption of FAS 123R….Main Street’s net interest margin has remained flat during the current rising interest rate environment. Strong demand for variable rate loans, a flattening yield curve and higher cost funds used to support rapid loan growth have hindered expected margin expansion. Through February 28, Main Street’s net loans have increased 19.1% on an annualized basis since year-end."
While the financial stocks might see some problems given the flattening yield curve, I don’t think it necessarily spells doom for the markets.
It seems that every professional money manager is worried about a flattening yield curve but I don’t see much to worry about unless the curve goes totally flat or inverts. The yield curve was abnormally steep for the past two years. Now it has simply returned to a more "normal" configuration.
An inverted curve would probably only happen if the Fed raises rates on autopilot for the remainder of the year. However, I don’t think that will happen (see my post on The Greenspan Put).
Here is the yield curve from Dec 2003 (super steep) and today (more normal) from Stockcharts.com: