2007 Market Review: Things May Be Better Than They Seem

"If I were your age, I'd be depressed."

That is a quote from a conversation my grandfather and I had over Thanksgiving. It came after he listed off several of the recent global economic and political events. While I'm about as far from depressed as it gets, I do share some of his views on what's happening economically.

Many financial professionals have publicly stated their belief that the US economy is running strong, or at the very least won't be hindered by some foolish recession in 2008. If the Fed keeps lowering rates and the world's central banks continue injecting money into the global economy, how could the machine not go back to running smoothly? Here's why: the foremen (central banks) can't run the machinery (economies) properly if the production line (credit markets) is missing an entire section (willingness to lend).

My view of the 2008 economy is as follows. The effect of all this nonsense will be regulatory changes (already in motion) and an atypical recession (think of 2008 as the hangover from drinking a large amount of cheap wine – it may be a doozy). While each side has a stack of stats the size of the Lincoln Memorial, let's lay it all out there for a birds' eye view.

1. Retail in 2007 was weaker than expected

Even with recent statistics stating retail was strong close to Christmas, when the real numbers are crunched I bet we'll see a much different picture. Weather caused massive shopping blackouts for several weekend days this December across a good portion of our great country. The US dollar, while recently rebounding, has been weak causing imports to rise in price. Fuel costs have been very high causing a negative impact on consumers and businesses. Consumers have seen their access to spending capital decrease as the credit markets tighten. No longer are the days where getting a home equity loan was as simple as asking for one.

2. Housing….. need I say more?

What has caused the majority of our recessions? Declines in housing. What is the state of the housing market currently? Bent, but not yet broken. I say this because the actual prices of residential properties have not fallen nearly enough to reflect the magnitude of what has occurred. Values have not fallen yet because there aren't enough people buying. Once buyers enter the market expect to see prices emerge, and well below current expected levels. Also, hundreds of thousands of mortgages are going to reset each quarter of 2008. Plain and simple, that is not good. An interesting and terribly sad side note is that we're already seeing some tent towns popping up. I read about one in California just yesterday.

3. Financial institutions require transfusions to stay alive

No, not blood transfusions but that of the green paper kind. Citigroup (C), a massive financial institution, is currently paying 11% (I believe) on $7 billion worth of convertible notes they sold to an Abu Dhabi investment group. 11% may be considered junk bond status. One of the largest banks is paying junk rates on their debt?!? Several other banks are receiving cash injections from abroad as well.

4. Stock Markets

The stock markets are positive on the year. This is either an exceptionally positive fact or an exceptionally negative fact. Time will tell which is which. How these markets could have sustained their levels following all of the economic uncertainty and negativity within the Finance sector is beyond me. I'm not sure what it's going to take to shake the finance players out of their optimistic comas, but I hope I'm out of the market (or short) when it happens.

Conclusion? Things may be better than they seem, and I hope they are. I'm out of the market with the exception of one company which is fully insulated against any economic downturns. The next few months should clarify things for all of us. One thing is for certain, there are exceptional buying opportunities coming soon.

Comments

[sol:]

Great summary, I agree with the points you took out of the economy. So why do you feel "Things May Be Better Than They Seem?". Might not be a great depression coming what makes your grandfather wrong?

2007 Dec 28 09:25 AM

[David Schrader:]

sol

To be honest, they changed the title on me. My intention was to get across how negative I view the current economic conditions. Moving forward, I see an atypical recession (a very, very strong one). My original title was "If I were your age, I'd be depressed". The editors changed it on me (which is fine) but it conveys a message I didn't intend.

2007 Dec 28 12:00 PM

[User 134244:]

You are just another market timer. No more, no less.

2007 Dec 28 01:44 PM

[David Schrader:]

To the person not confident enough to provide a real name (User 134244)

The idea is to protect your wealth as best as possible, no? If one believes there will be harder times ahead, why would he/she not pare back their holdings? You speak as if attempting to outsmart others, to compete, is a negative thing... why such a negative bias?

2007 Dec 28 03:38 PM

[stckpkr7000:]

Well Written David! I couldn't agree more as I see a severe recession coming in 2008. Many don't understand the risks that accompany our current economy and equity markets. I see Dow 11,500 in 08. Keep up the great work!

2007 Dec 28 08:01 PM

[omooc:]

I had lunch the other day with a real estate agent. From hearing from her, it seems that the so-called illegal immgrants, as a group, are both resourceful and responsibile -- they have the downpayment to buy modest homes and the self-discipline to pay the monthly mortgages. When the new president enacts laws barring these illegal immigrants, I tend to think that the housing market would be more severely affected than people are willing to predict. omooc

2007 Dec 28 11:29 PM

[David Schrader:]

omooc
The strictness of legislation I believe you're thinking of will (probably) only come from the Republican party. I doubt a Democrat will come into office and enact a strict immigration law, much less enforce it. They'd rather spend that money on a countless number of other social programs.

That being said, only time will tell who takes over the White House. More importantly is whether or not that person continues the current pendulum's swing of power to the Executive Branch. I suspect in either case we're going to see the other two branches lash out and grab for some of their strength back. A strong President can get more accomplished than a weak one, so the impact on illegal immigrants will (in my opinion) be impacted mainly by this.

2008 Jan 02 04:06 PM

[GH:]

"When the new president enacts laws barring these illegal immigrants..."

Such shallow thinking! Why would some new law(s) be more effective than the ones that already exist?

Concerns over illegal immigrants exist primarily in the minds of a small group of xenophobes that Republicans are trying to motivate to vote - the same ploy as same-sex marriages in 2004. There will be no significant changes in this regard for the simple reason that the so-called illegal immigrants are a crucial part of the U.S. economy. We are talking about 15 million employed people, all of whom are paying taxes including social security, and providing fundamental services at extremely low cost. Without them the economy would founder and the candidates all know it. Demand an actual immigration policy from any candidate and you'll hear "border enforcement" - a completely safe policy because it's manifestly impossible.

2008 Jan 02 05:51 PM