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The double dip has begun.
Statistically, we will see a rise in GDP in Q3 and in Q4. This is anticipated and meaningless data, but the numbers will hit headlines.
In the real world, the double dip has begun. Here is why - no one seems to be willing to pull things together in one short argument, perhaps for fear of being bored by a bull wearing green shoots. Simply put, all the core factors in driving an economy upward are broken other than pundit comments talking about "it must turn upward base on historical data." My historical note - we exited the Depression due to Hitler and Tojo, not a return to historical norms.
Unemployment: The reported unemployment number is 9.8%; real unemployment is 20% if you include those who have stopped looking and part time workers wanting to work full time. And the labor force participation rate is at a 23 year low.
National Income: Wages are falling and work hours are stagnant, according to Friday's jobs report, and combine these data with a shrinking work force and rising unemployment and you continue to have a sharp downturn in national income.
Consumer Spending: National income drives consumer spending, which is contracting due not just due to falling national income but rapidly contracting credit lines and a near 40% loss of accumulated wealth in the property and equity markets. And while consumer spending ostensibly is 70% of the economy, this includes spending on health care - love those government statisticians - so contraction has an incredibly outsized impact on consumer discretionary spending - luxury goods, travel, restaurants, unnecessary goods, expensive goods - anything you can trade down from to a lower level of price with equivalent functionality.
Credit Contraction: The credit contraction has been ferocious for consumers and small businesses as noted this morning by uber analyst Meredith Whitney (one of my favorites) in the Wall Street Journal. Depending on how you slice data, almost all increases in consumer spending since either 2002-2003 or 1997 has been due to credit. Trillions have been withdrawn and Ms. Whitney postulates another $1.5 trillion dollars will disappear in the coming months due to banking caution and changes in regulations. Given the total lack of credit to small business, and this segment is 38% of GDP and 50% of new job creation, there cannot be a recovery until credit begins to flow.
Zombie Banks: Nothing has changed with toxic assets and zombie banks - nothing, and even the IMF said this - and another $1.5 trillion needs to be written down, at least. Just because these assets are not in the headlines, and the Fed, the Treasury and the FASB faked stress tests and changed accounting rules, this does not mean the banks are or will be lending in a meaningful way in the near future. The Fed prints money, the banks sit on it to shore up busted balance sheets.
Business Investment: There are too many factories around the world, too many shopping malls an stores, too much commercial real estate - and at levels beyond all historical norms or comparisons. The first several legs of a rebound needed to absorb this capacity before we see any uptick in business investment that materially helps the economy.
The End of Stimulus: The buy gold and build a bomb shelter types have been screaming about the Fed printing money - what the Fed did was print enough money (they added a trillion to their balance sheet) to replace what was lost in the shadow and real banking systems - but not enough to replace what will be lost in the next 12-24 months. That being said, there is no political support for more stimulus. Deficits and a Congressional election preclude another stimulus package next year and the Fed and Uncle Sam have already said they are definitely pulling back, beginning November 1. We saw what happened to auto sales after Cash for Clunkers ended; ditto for home sales data in the coming weeks as the $8K tax credit expires. The bottom line: the economy will be much on its own next year.
Corporate Earnings: Corporate earnings follow the economy and they may be all right for Q3 and perhaps Q4 but they are going to disappoint the Street in 2010, big time. You can only cut costs so much - you need some top line growth - and it is only going to be there next year.
Markets: And one historical norm I like is the regressing of markets to the mean of corporate earnings. Translation - the market should be coming down next year or perhaps in 2011.
What to Do:
If you like to short, consider the following - short the S+P (puts on the SPY), long term; short consumer discretionary spending via puts on the XLY; short the companies making stuff know one needs, like Harley Davidson (HOG) and Brunswick (BC); short companies making things no one can get credit to buy, such as new homes, via puts on the XHB ETF; short business spending via travel companies, the first thing to be cut in a business cutback, via puts on Avis (CAR); short retailers with terrible balance sheets, notably Macys (M).
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This article has 16 comments:
I'm already short BC.
someone pulled off a nifty short squeeze on this company;
they lost over a billion dollars last year, $13 per share,
but their share price has gone from $2 to $12 in the last three months. A juicy plum, ripe for the picking!
With earnings season upon us, there is growing pessimism in the marketplace that a repeat of July is possible. As the Financial Times recently noted, the breadth of collapsed earnings is deep and pervasive; especially in the materials sector. The "wall of worry" may well be about to give way to the "slope of hope"!
If we do indeed enter a correction, there is a long way down before the S&P500 finds strong support at around 940! Whatever the outcome, the 'easy' money has already been made!
BUT ISN'T 60% OF CONSUMER SPENDING DONE BY THE TOP 40% INCOME EARNERS. THE UNDEREMPLOYMENT RATE AMONG THOSE WITH A BACHELORS DEGREE OR HIGHER IS ONLY 10%. THE REASON YOU HAVEN'T HAD ANY CHANGES--EXCEPT FOR THIS CORPORATIST GAMBIT--IS THAT SUBURBIA IS STILL WORKING. YOU WON'T SEE ANY CHANGE UNTIL THE B.A. UNDEREMPLOYMENT RATE IS 40%.
There are too many factories around the world, too many shopping malls an stores, too much commercial real estate - and at levels beyond all historical norms or comparisons. The first several legs of a rebound needed to absorb this capacity before we see any uptick in business investment that materially helps the economy.
THAT CAPACITY DOESN'T NECESSARILIY NEED TO BE 'ABSORBED.' IT CAN SIMPLY BE DESTROYED. AND THAT IS WHAT IS HAPPENING. NOTHING WILL CHANGE IN THIS RESPECT UNTIL SUCH CAPACITY DESTRUCTION VERY SIGNIFICANTLY UNDERMINES THE SUPPLY CHAIN.
LOOK FOR THIS TO OCCUR IN AGRICULTURE, WHICH IS HIGHLY LEVERAGED JUST LIKE COMMERCIAL REAL ESTATE.
WHAT YOU DON'T UNDERSTAND IS THAT THE WEST COAST HOTEL V. PARRISH "SCRUTINY" REGIME NEVER OUTLAWED MELLON'S "LIQUIDATE LIQUIDATE LIQUIDATE." THAT IS WHAT IS HAPPENING NOW, AND IT HAPPENS IN TWO PHASES:
1. CIRCLE THE WAGONS--PROTECT THE POWERFUL, BACKSTOP BONDS.
2. SHOOT OUT AT THE INDIANS--THE FEDERAL GOVERNMENT WITHDRAWS FROM AMERICAN SOCIETY.
EVERYTHING IS GOING RIGHT ON SCHEDULE. YOU SHOULD STUDY THE DEPRESSION MORE CLOSELY. THE FEDERAL GOVERNMENT IS PROGRESSIVELY, STEP BY STEP AND ACCORDING TO THE MOST APPROVED MELLON PLANBOOK, WITHDRAWING FROM THE COUNTRY.
THE QUESTION IS, WHERE WILL THE NEW REGIME COME FROM. IT WILL BE THE "MAINTENANCE" REGIME--NEW INDIVIDUALLY ENFORCEABLE RIGHTS (SUCH AS TO HOUSING AND MEDICAL CARE) IN SUPPORT OF A GOVERNING DOCTRINE WHICH SAYS THAT POLICY MAINTAINS IMPORTANT FACTS (BY THE WAY, THE "SCRUTINY" REGIME DOCTRINE IS THAT POLICY RATIONALLY RELATES TO A LEGITIMATE GOVERNMENT PURPOSE--AS ANY LAWYER).
"MAINTENANCE" IS USED EXPLICITLY IN THE THREE MOST IMPORTANT SCRUTINY CASES:
1. WEST COAST
2. UNITED STATES V. CAROLENE PRODUCTS
3. BERMAN V. PARKER
LOOK FOR THE SUPREME COURT TO VETO SOME LAW WHICH UNDERMINES SOME IMPORTANT FACT, STATING THAT THEY ALWAYS GROUNDED DISCRETION IN POLITICAL SYSTEM, ON MAINTENANCE OF IMPORTANT FACTS.
THAT WILL SHOW YOU THAT THE REGIME CHANGE HAS COME. AND IT HAS TO COME. IT IS THE ONLY CREDIBLE ALTERNATIVE. THE ECONOMY IS COLLAPSING BECAUSE THE SCRUTINY REGIME HAS LOST CREDIBILITY.
IF YOU KNEW ANYTHING WHATSOEVER ABOUT THE LAW, YOU WOULD KNOW THIS.
AND WHERE IS THIS CHANGE COMING FROM? WHY, FROM OUR SEMI-FASCIST SUBURBAN CLASS. THEY'RE SCARED SH-TLESS ABOUT IMPORTANT FACTS SUCH AS HOUSING AND MEDICAL CARE.
That being said, there is no political support for more stimulus. Deficits and a Congressional election preclude another stimulus package next year and the Fed and Uncle Sam have already said they are definitely pulling back, beginning November 1.
YOU'RE QUITE MISINFORMED. A SECOND STIMULUS BILL IS ALREADY IN THE WORKS. IT WILL PROBABLY BE INTRODUCED IN FEBRUARY 2010, AND WILL BE ABOUT $2 TRILLION. COMMERCIAL REAL ESTATE HAS TO BE BAILED OUT, OR 2000 COMMUNITY BANKS WILL FAIL.
As consumers run out of discretionary spending power they change their buying habits, they might switch from Whole Foods to Walmart, or from JC Penney to Ross Stores. The businesses themselves have tightened inventories and have taken other defensive measures to improve margins.
As investors we need to avoid the me-toos and the also-rans. There are plenty good retail stocks to invest in.
I request you to suggest shorting of those stocks that have climbed up 1000+% from the lows, without any strength. Your CAR falls under that category and and hence it is a good bet for shorting/puts. Do you have any other individual stocks for shorting or puts ?
Thanks,
I shorted ODP and WSM in the last two weeks. Both companies up more than 100 percent since March. Both have sell recommendations from S&P. ODP has -5.91 EPS, according to Google Finance. WSM has -0.16 EPS, according to Google Finance.
And yet, both continue to stay near their 52 week highs.
Just gotta be patient, I s'ppose.
That's why doctors have been coating medicine for so long.
Can you comment on the stark disconnect between the real economy, which you accurately disrobe, and the Wall Street economy, which has the eye of the media and government?
UNEMPLOYMENT - Not really a factor in future growth. Countries can have positive GDP growth even with high unemployment. It really depends on who and how much is earning and how these wages are spend. China is growing double digits while 60% of population are peasants earning nothing. Also, Michael, you can't have it both ways - if you counting NOW those who gave up looking for a job and part-time workers, then you also must calculate 2007 unemployment levels using the same methodology. You can have either 4.5% unemployment going to 9.8% using government numbers or 10% unemployment going to 17% ( correct number is 17% not 20% per Counsel of Economical Advisors) using your approach. Either way you have increase of 6-7% in both cases, not 15%!.
NATIONAL INCOME- In 2009 national income will either be at the 2008 level or will grow. There is also no long term contraction of national income. National Income and disposable income are not the same thing and we are looking at contraction of disposable income being compensated by potential deflation in prices. Federal Reserve is fighting inflation by pumping liquidity into the system. For that reason alone National Income will continue to grow.
END OF STIMULUS - At this point government deployed less then 15% of stimulus package funds. Majority of stimulus is scheduled for 2010 and 2011.
I disagree with ALL shorting recommendations in this article. I won't recommend shorting S&P. While the S&P growth will be moderate over next two years, inflation fears and increase in the corporate earnings will continue to S&P move S&P higher. It always bad idea to short great business capable of getting significant margin for their products. Its not about what people need, it is about these business ability to sell their product at premium. With great brand recognition and global reach, both companies will do just fine in this economy. Great American marketing machine will convince consumer to buy motorcycle or pool table when buying new car or new house no longer affordable. It also a bad idea to short travel related businesses right now. Companies always increase spending in order to foster future growth when getting out of recession and that automaticly means increased business travel. I have no opinion about retailers at this moment. Spending habits of American consumers are in transition and outcome of this process will surprise everybody. Anyway, I think it is too late to short retailers because all bad news and expectations are already priced in.
Just look at the rush of M&A's last week. This shows that large cap corporations have lots of cash, they don't know what to do with it but don't want to give it back to share-holders and find that acquisition targets are 20 - 30% undervalued.
Analysts also upgraded airlines based on the recent uptick in ridership (by 2+%). However, this uptick in ridership has come at the cost of a 19% unit revenue drop. Basic supply and demand theory says of you drop the price of anything enough, there should be more demand. The above change hardly seems likely to see the above airlines get into the black anytime soon. All of the above airlines are currently predicted to lose money in 2009. AMR and UAUA are currently predicted to lose money in 2010. DAL and CAL are currently predicted to make money in 2010. However, that might change at any time.
In addition to the economy, the swine flu, and the coming of age of video conferencing may put a big crimp in airline ticket sales for the next two years at least. CAL has the farthest to fall (the highest stock price of the four). It is likely a good short candidate. Its debt to capital ratio is 96%. UAUA is the most in debt. All 4 of these companies have to pay extra to service their high debt levels. This make it that much tougher for them to show a profit.