Another Dismal Week in Review (Wk Ended 20 February)

Another dismal week in the books, with the broader markets selling off again amidst mounting concerns that Washington may be in over its head in trying to stem the negative influences on the economy and doubts about whether the stimulus plan will do the trick. It is increasingly looking like nationalization of some banks may be on tap. The White House insists this is not the case – but it may not have a choice.

The DJIA fell 479.96 this week, or 6.1%. On the year to date, the DJIA is down 1,406.58, or 16%. With expectations that unemployment is going to keep rising, companies reigning in the cash reserves and shelving any plans for expansion and growth, and no indication that the credit markets are loosening up, a second half turnaround looks all but unlikely.

Our outlook for the economy is borderline apocalyptic. We have this massive consumer infrastructure that has to get unwound and an economy that has come to depend on consumer spending as its lifeline.

Consumers represent more than 70% of GDP. This is a problem. This is the problem,and no one is talking about it. Our GDP is too big for consumers to be able to sustain this much of it. Just look at the fact that consumer savings, which used to range around 7% to 8% have fallen into negative territory for the past few years. This is not sustainable. The current meltdown is helping to prove that.

Now consumers are faced with increasing employment risk and job losses, and on the horizon, we are predicting that the impact of the massive debt being piled onto the national balance sheet will suck the value out of the remaining dollars in their pocketbooks. We will only mention here that there is $40 trillion in unfunded liabilities (Social Security and Medicare that are still looming).

Exports only represent 12% or so of GDP. This is a problem. The fact that we rely on consumption for 70% of our GDP and production exports for only 12% is an economic framework that is not sustainable – unless we keep borrowing from China and Japan and leveraging our own financial infrastructure. But that ship has sailed. We have no more financial infrastructure to leverage. So now we are leveraging the Treasury and this ultimately will put our ability to borrow from the likes of China and Japan in jeopardy, not to mention the devaluing impact it will have on our currency.

You would think someone would be talking about this toxic imbalance which has tipped our country into a consumptive dependence and gutted our productive infrastructure. But no one is talking about that. The gurus and economists, the politicians and pundits are all just talking about how they can get spending and lending back on track. That is just what commerce is right? Sure, but the missing component in our economy for far too long has been savings and any mention of that.

• Inflation – Wholesale inflation, according to the PPI index increase by 0.8% in January, the biggest jump in 6 months. The increase was driven by a 3.7% increase in energy prices and a 15% increase in gasoline prices. Backing out food and energy (which we see as a pointless exercise) wholesale prices were up by 0.4% still higher than the 0.1% increase in 'core' inflation that was expected.
• Consumer Prices – Consumer prices rose 0.3% while core CPI rose 0.2%. The data came in line with expectations.
• Profit Warnings – Daimler AG (DAI), Laura Ashley [ASH.DE], Host Hotels (HST), LDK Solar (LDK), Brady (BRC), Canadian Solar (CSIQ).
• Job Cuts – Smithfield Foods (SFD) (1,800 jobs), Delphi (DPH) (nearly 800 jobs), State of California (laying off 20,000 workers), General Motors (GM) (survival plan calls for cutting 47,000 jobs worldwide), Chrysler (cutting 3,000 more jobs), Anglo American (AAUK) (19,000 jobs this year), Best Buy (BBY) (40 jobs at headquarters), Borders (BGP) (laying off 136 at headquarters), Autoliv (ALV)(250 jobs), PPR (PPRUF.PK) (1,200 jobs), Faro Technologies (FARO) (7% of workforce),
• Unemployment – Weekly jobless claims came in higher than expected at 627,000 with continuing claims at 4.99 million – marketing the fourth straight week of record levels.
• Credit Ratings Cuts – S&P cut Prudential (PRU), S&P cut Whole Foods (WFMI), Fitch cut Sprint Nextel (S), S&P cut Host Hotels, Fitch cut Marriott (MAR), S&P cut CC Media Holdings (MDHG.PK), Fitch cut Tyson(TSN).
• Closing the Doors – Smithfield Foods is closing 6 plants, General Motors (survival plan calls for shutting down 6 factories), Hershey Co. (HSY) closing Peppermint Patty plant in Pennsylvania.
• Bankruptcy / Chapter 11 – Trump Entertainment Resorts filed (TRMP), Bearing Point (BE) filed, GM's Saab unit filed for protection, John Laing Homes,
• Auto Industry – General Motors and Chrysler are back asking for more money – this time another $39 billion. General Motors' stock price hit a 74-year low this week. The number of auto dealerships declined 4.2% (or 881) in 2008 to 20,084, according to Urban Science.
• Housing Industry – Median home prices in California fell 41.5% from a year ago, to $224,000 in January. This is the lowest median price since May of 2001.
• Retail Industry - The outlook for consumer spending over the next 90 days looks "grim," according to ChangeWave Research. The firm said a survey of 2,701 U.S. consumers taken in the February 2-9 period found "the worst spending outlook ever recorded in a ChangeWave survey." According to the survey, 61% of the respondents expect to spend less money over the next 90 days compared to the same period last year. That compares with 12% who say they will spend more. Of the survey group, 64% say the direction fo the U.S. economy will worsen over the net 90 days; only 8% expect the economy to improve. Asked about their feelings on the stock market, 42% say they are less confident than they were 90 days ago, compared to 14% who said they are more confident.
• Berkshire Hathaway (BRK.A) stock hits 5-year low.

Disclosure: Long LDK

Comments

[prudentinve...:]

I like the way you summarise one aspect of the current mess: "You would think someone would be talking about this toxic imbalance which has tipped our country into a consumptive dependence and gutted our productive infrastructure. But no one is talking about that. The gurus and economists, the politicians and pundits are all just talking about how they can get spending and lending back on track."

Very well stated. I would suggest that everyone is talking about reviving lending and spending, because its the only thing they know how to do, print money and scatter it around with helicopters, in other words, attack the symptoms, not the disease.

Fixing the underlying disease, the "toxic imbalance which has tipped our country into a consumptive dependence and gutted our productive infrastructure" requires discipline and honesty in facing reality, which is unlikely to be popular. No one in authority wants to see the elephant in the room (although everyone can smell his foul odor!).

and an unpopular Adressing acuse that's what they know

Feb 22 08:15 PM

[prudentinve...:]

Sorry folks, I hit the "publish" button before deleteing the junk at the bottom. Apologies.

Feb 22 08:36 PM