Exactly How Bad Will It Get?

On Tuesday Dow Chemical (DOW) reported and there were two numbers related that have thus far, been ignored as to their greater affect aside from Dow.

Some background. Dow makes the "stuff" and is used to producing the items that go into almost everything we use. So, if the company is not selling its products, it is because end users, (you and me) are not buying cars, houses, anything made of plastic or things that need to get shipped. Without going into a chemistry lesson, they are a "building blocks" manufacturer in short.

Dow said that Q4 production ran at 65%, a low number not seen in over 25 years. Here is the worse number. December, was 44%......44%!! That means that until December Dow was running approx. 75% in both October and November. Essentially in December international manufacturing activity fell to a bare subsistence level (Dow does business in over 160 nations)(Call Transcript).

Dow also said it has seen "December trends continue through January". From this we can see that Q4 U.S. GDP does not accurately reflect the current world economy its direction and a 3.8% fall does not reflect the condition we are seeing now in 2009 Q1. Simply put, erase Q4 from your mind and concentrate on just December, that is the trend going forward.

Here is the current employment picture:
The blue dots are ADP numbers and the red "x" are the acual BLS numbers (Bureau of Labor Statistics).

Not good and getting worse.

What is the point? Folks keep asking me what I am buying. Answer? Not stocks. Not now. I think Q1 numbers are going to be really bad (yes, worse than Q4 2008) and lower prices will be had. I do not think the current "stimulus" plan as it is currently proposed will do anything in the short term (6 months) and most likely longer as most direct job creation spending there actually is in it (very little) does not occur until the end of 2009 and 2010. There is virtually nothing coming soon.

Are we doomed? No. Are we going to lose our international standing? No. The world itself cannot recover unless we do. I do not see any significant recovery until the end of 2009, which means low equity prices are in order through this summer. Even if you are "long term", I would advise waiting. There are scores of quality companies that may be cutting dividends ([[Dow]], GE to name just two) and that would cause additional price fluctuations and for those who may be buying them for income, dramatic reductions there would be in store.

In short, most investors today have never really seen a hard recession. If we are headed for a year not seen in 25 years, and based on Dow's numbers we are, that would put us back to the 1980-81 recession. I was only 12 then and most of today's investors do not know what it was like. I do remember gas lines and I am not saying we are heading back there but most folks today have only really experienced economic bumps in their adult lifetime, not a huge pothole and that is where we are headed. How they will react is really an unknown.

They could continue to spend and make their individual situations even more tenuous OR they could retrench spending and make saving a priority. The former is better for the economy for now but the latter is better for long term prospects.

Am I going to panic and sell everything? No. I'll continue to collect my dividends and wait. But I do have new money to invest that is sitting OR going into oil (USO), (DXO) and Gold (GLD) for reasons discussed in previous posts (there are more but those are just two examples).

All this means that in order to make "market comparisons" one has to go back to the 1970s and early to mid 1980s and ignore recent history as we really have not seen the same economic conditions since then. To compare market behavior since then in recent economic dips and draw conclusions to today is meaningless to a certain extent.

Just hunker down and don't panic, this too will pass. Just do not get fooled by the occasional market jump...


Disclosure: Long DOW, GE, DXO, GLD

Comments

[fatcat:]

A little bit of over-reaction...Many manufacturers had closing extended from Thanksgiving-New Year.Also, inventory drawdowns would explain some of Dows late-year results.

But yes,things are really bad out there!

Feb 05 05:23 AM

[Dave Wrixon:]

So your not going to lose your International standing even though China has just become the World's largest car market?

I am sorry to wake you up, but the fundamental core of this problem is not so much about over borrowing, which is really just a symptom rather than a primary cause, but it is about Change in World Order. The days when the US ruled the roost are over. You should read more Kipling:

What of the hunting, hunter bold?
Brother, the watch was long and cold.
What of the quarry ye went to kill?
Brother, he crops in the jungle still.
Where is the power that made your pride?
Brother, it ebbs from my flank and side.
Where is the haste that ye hurry by?
Brother, I go to my lair to die!

Feb 05 06:33 AM

[Tom Armistead:]

Dow as the author notes is big enough to provide useful information on trends in the world economy.

It is difficult based on one quarter's results to distinguish what portion of the downturn is permanent demand destruction and what part of it is inventory reduction. I read the conference call and Liveris was guardedly optimistic about agriculatural and polyethelene and concerned when looking at basic chemicals. So it varies by subsector.

From Liveris' discussion of cash flow Dow has reduced inventory radically in order to conserve cash. Given the poor visibility and reduced availability of financing, almost all companies are reducing inventory in order to retain cash.

I think we need to wait another quarter and then look at inventory levels before assuming that the current downturn is permanent demand destruction.

Feb 05 08:23 AM

[Doug Poretz:]

The economic crisis is not simply the result of economic factors and will not have economic consequences alone. Our current situation is the consequence of cultural and societal factors, including the hyper-consumerism that characterized the American culture. Thus, whereas strange credit and lax credit were economic factors, the willingess of the American public to use that credit as a narcotic, regardless of consequences, was a cultural factor. Whereas the economic consequences of this crisis will be significant, I fear that the cultural consequences, which seem to be unexamined at the current time, will be even more significant. So, when asking: How bad can it get? The answer should include cultural/societal/poli... consequences -- and the prospective consequences should be envisioned in a world interconnected by the Internet, where global coalitions can be quickly created, and the members of such communities can be moved to action 24/7 without regard to language, borders, or social and ethical mores.

Feb 05 08:53 AM

[Brahm:]

Is it posible that the comments and analysis provided are unnecessarily harsh and somewhat off-track? December's very low plant operating or production levels may reflect DOW's compulsion to reduce product inventories. After all very high accumulating inventory levels in the face of rapidly falling raw material/energy prices is a drag on the performance of a pet-chemical company.

Feb 05 09:11 AM

[kelm:]

Decembers numbers could be off due to plant shutdowns but looking at fundamental building block companies like Dow is a sound thesis I think.

Feb 05 10:22 AM

[Jason Rines...:]

1) Although I argued against GS forecasts in the past on things such as oil for example, I fully agreed with there GDP decline forecasts of -5% Q4, -3% Q1 and -1% Q2.

2) Review of doing search of my comments on this from April of 2008 I stated -10% coming off in 2009 and another 5%-10% coming off over an additional three year period. I am not so sure how the reinflation attempt will affect the second part of my forecast at this point or a deflation/inflation outcome now being debated. I don't think any of us really know, but I lean towards serious inflation second half of 2010-2011 but not hyperinflationary. And energy will be the main source of inflation along with higher interest rates cooling a recovery period. Stay with my forecast of next Bull 2013. But of course, Washington to could delay this outcome by a year or two or perhaps improve it (but I doubt it). I think many will be pulled into thinking it's a V shape event when the reinflation attempt lifts most sector boats for a time, but it still looks like a W shaped event to me with the worst of the first leg down almost over.

Feb 05 10:31 AM

[Graham Jervis:]

Unfortunately i dont think Rohm & Hass really cares if DOW goes bankrupt, it seems all they want is to be bought out at the 78.00 premium and go and relax in the sun with their loot. Its unfortunate that DOW's CEO didnt protect the shareholders just incase the deal couldnt go thru like Rohm did.

Long DOW unfortunately.

Feb 05 11:30 AM

[T.Stamps:]

Obama doesn't care. He' s to interested in taking care of all his
constituents. The so-called stimulus bill is full of pork.

Feb 05 11:42 AM

[AndrewBaker:]

It's gonna get a lot worse. Stuff isn't moving 'cos no-one is buying. Any stimulus is wasted if no-one wants or can afford what's being stimulated. The best hope is that TARP and other programs take the sting out of the pain we're gonna feel. The bad medicine, such as giving banks money, tastes awful, but it's necessary if we're gonna get out of this sooner rather than later.

Feb 05 03:04 PM

[Lonestar1:]

The reality should be worse than shown in this article. Defaults are across board. Of all fears in the market, default is the main one. Fear of defaults freezes business activities, which in turn results in large layoffs. Things are spiriling down. Here are some examples:
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Wholesalers now would rather hold the mechandise instead of distributing to retail chains and department stores for fear of not getting paid. The larger the retail chain, the more likely it will default on payment.
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Banks would not lend due to fear of defaults of counterparties. They are households and businesses.
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No liquidity in credit market is due to fear of defaults by issuers, & defaults by trading counterparties (hedge funds and other brokers, baks etc).

Feb 05 06:52 PM

[tonyb:]

dear mr. sullivan:
in 1970 and 1980 things were different. we have now:

an insolvent fed gov. its all borrowing and printing money from here

an economy based on a house of cards of debt, 72% consumer driven [the so called burger flipping and paper pushing economy]

an insolvent consumer spending 114% of what they have made for
a decade or more, who will now hunker down and save for years to the tune of 6-8% or hopefully more

massive gov debt and unfunded liabilities greater than all the total wealth of the country

an insolvent banking system with 1.4 T in capital and toxic debt totaling anywhere from 1.8, to 3.6 T, to senator schummers estimate of 4 T.

5-6 million further foreclosures over the next 3-4 years to get through, with a re-default rate of 50-60%, and home prices estimated to fall another 15-20%

bankrupt states and municipalities every where in the country

massive increases in unemployment [real number near 14% if you count the uncounted disgruntled who longer look for work, the U6 government number. unemployement continues to rise and we are only on the first leg down of the 'W' pattern exhibited in all previous severe recessions and the great depression

a collapse in world trade and increasing protectionism.

a massive number of business and personal and corporate bnkrupcies yet to be realized

and you ask are we doomed. we will continue the deleveraging process and fall ever deeper into depression. i agree with the hunker down and be patient advice you have given, and i have done all this and more, however this time the time-course to recovery is going to be a very very long time.

Feb 05 09:01 PM

[mrresponsible:]

Correct me if I am wrong but I don't remember lines for gas in the 1980's, maybe in the 1970's?

Feb 05 09:11 PM

[Kunst:]

I imagine he means 1979. Pretty close.


On Feb 05 09:11 PM mrresponsible wrote:

> Correct me if I am wrong but I don't remember lines for gas in the
> 1980's, maybe in the 1970's?

Feb 07 01:19 AM