Merrill Lynch: Recession's Already Here

While most of the market fusses about whether the odds of a recession hitting the U.S. economy are 30%, 40% or 50%, Merrill Lynch (MER) isn’t wasting much time with that. That’s because the firm’s North American economist David Rosenberg is convinced the hard landing has already arrived.

And why does he think the consumer recession is here?

Last Wednesday, the Beige Book showed that seven of 12 U.S. Federal Reserve districts reported slower growth, up from five in October, four in September, two in July, and zero in June and April, he told clients in a note.

The Beige Book also contained some derivative of the word “weak” or “slow” 132 times – the highest level since January 2003 when the economy was on the verge of returning back into recession.

Mr. Rosenberg says another indication that a recession is looming is how much easing is needed from the Fed. He says it is clear that the Fed “is going to have to do way more than 75 basis points, and when it has been forced to go beyond that in the past, recessions almost always followed suit.”

Among the other factors on his top ten list of reasons a recession may have arrived is weakness in the Chicago National Activity index, plunging new home sales and falling home prices, declining corporate profits, momentum being lost in the labour market, plunging consumer confidence, weaker spending trends, and finally, GDP that is expected to grow only 0.4% in the fourth quarter.

As a result, Merrill now expects 2008 operating earnings per share for the S&P 500 will come in at $83, down 7.5% year-over-year and from $89 previously. On a reported basis and including writedowns, they are forecast to fall 12% to $68, compared with the consensus at $96.

Mr. Rosenberg said,

We did some sector work and found that if we are anywhere close to being on the mark, then the areas of the market with the greatest downside risk next year from an earnings surprise standpoint are consumer discretionary, financials and tech. In contrast, the areas where we see the least downside risk (or the greatest safety) would be in telecom, health care, and utilities.

Comments

[Al Capital:]

Well I agree that the recession is here for Merrill Lynch's stock price, but the macro picture is not that clear despite the dark clouds around the consumer. Simply put, it is difficult to explain why there is enough credit being demanded by the economy to support the current yield spread if there was no growth.

mnrtrading.blogpost.co.../

2007 Dec 06 03:29 PM

[David Roskoph:]

This hysterical volatility should alert everyone that a recession is a great possibility when you consider (by my odds) a 1:3 chance of 70's style stagflation or 1:10 of a Japan style deflation. The governmental tapdancing is a sideshow to distract you from the blood they're perspiring. If the situation that exists in houses were in a more liquid instrument, we would definately be in for a few years of deflationary ugliness. You can slow down the housing train wreck but gravity is relentless.

2007 Dec 07 04:04 PM