The Economy: Getting Through The Recession (updated)

Morris Segall      climate, depression, economic, economy, global, government, international, recession, slowdown, strategy, survival, trends

Today’s Business Landscape And What’s On The Other Side

Morris Segall      business, business landscape, economics, economy, future trends, macro, micro, trends

Methinks We Protest Too Late

Morris Segall      Afghanistan, hezbollah, India, Iraq, obama, protest, syria

Western nations are protesting the so called peace deal reached over last weekend between the Pakistani government and the Taliban and Al Queda forces occupying the Swat Valley in northwest Pakistan. Under the agreement, the anti-democratic forces will be allowed to govern their territory using Islamic law. This agreement essentially cedes this territory to extremist elements within the country. We called attention to this very unfavorable development in our website article, “Setback in War on Terror“, May 28, 2008 and warned this would undermine the democratic central government in Pakistan and our war against the Taliban in Afghanistan. This additional capitulation to Islamic extremists by the Pakistani government will only hasten its downfall. The West as usual has reacted with too little too late. This additional secession of territory from central government control is adding to the power base of Islamic extremists within Pakistan that will foster additional anti-democratic activity against the central government and bolster the Taliban resistance against NATO forces in Afghanistan.

Since November, 2007 we have written a number of articles warning of the increasing threat of anti-democratic actions against the government of Pakistan that would undermine it and left unchecked could topple it. The events of last weekend are further evidence of the weakness of the Pakistani government. The logical course of events from here is a period of cessation of violence while the anti-democratic forces within Pakistan consolidate their gains and prepare for further action against a visibly weak government. As the strength of the extremists grow it will influence and coerce the population AND the military to cooperate with them against the government. The West is not prepared to subdue these extremist elements with force and increasingly neither is the Pakistani military. So what is to stop these elements from continuing to expand their influence and territorial control within Pakistan? Not much. There does not appear to be grass roots sentiment among the Pakistani public to repulse the anti-democratic elements so there is no pressure from within Pakistan for the government to take a harsher stance towards the Islamic militants. Unless pro democracy elements within the Pakistani military assert themselves and dictate a change in military policy and actions against what must be called rebel elements against the elected central government in Pakistan, the country may be doomed to an Islamic fundamentalist takeover. This nightmare scenario is only now awakening a public response from democratic governments outside Pakistan.

It will be interesting to see how the new Obama administration deals with this threat. The fall of Pakistan would represent a greater geo-political disaster than the loss of Iraq and Afghanistan combined. It would place nuclear weapons in the hands of Islamic extremists. It would spell defeat in Afghanistan. It would threaten India which has already been attacked by Islamic extremists from Pakistan (See our blog article, “And Now It’s India“, January 21, 2009) and create an Islamic extremist power bloc from Syria to the Indian subcontinent. Bolstered by such a power bloc, Lebanon would also fall to Hezbollah and Israel would find itself arrayed against insurmountable forces. The threat of nuclear war in the region would be heightened. This will provide the real foreign policy strategic test of the Obama administration and we should not underestimate its seriousness.

Morris R. Segall

If you think it is bad here…

Morris Segall      bailout, economy

As bad as economic conditions are here in the U.S. they are worse overseas. In our website articles, “The Economy, Bailout and the Capital Markets“, December 8, 2008 and “… The Virus Has Spread”, August 6. 2008 we project the U.S. recession spreading overseas with more dramatic negative impact. In our December 8 article we highlight the fall of foreign economies into recession making the current recession worldwide in scope.  We were not pessimistic enough. The rapid erosion of overseas economies into deep recessions has been a surprise to most analysts and economists. The just announced decline of the Japanese economy in the calendar fourth quarter of 2008 at a nearly 13% annualized rate is the latest in a series of economic contractions recorded in the fourth calendar quarter of last year, including most of the countries in Western Europe and the U.S. It confirms our analyses in previous articles that the worldwide recession would be led by the mature, export oriented economies of Western Europe and Japan. The worsening economic conditions in the industrialized world would telescope back into the export dependent economies of Asia, Africa, Eastern Europe and Latin America. These emerging market economies have also been severly wounded by the collapse of oil and other industrial commodities which had been major stimulants to the accelerated growth of these economies.

The combination of collapsing commodity prices, virtually zero import demand from major trading partners, the bursting of overbuilt and overpriced real esate and manufacturing projects has caused a rapid increase in foreign unemployment and a deepening banking credit crisis in many foreign countries. Without the countervailing strength of healthy domestic consumption sectors, most emerging industrialized countries are joining the mature, industrialized economies in deepening recession which have further to go given the 6-12 month time lag of overseas economic trends to those of the U.S.

As economic trends get worse and last longer overseas in 2009-10, unemployment, currency values, industrial production, bank losses and corporate profits will worsen and are already resulting in credit downgrades of foregn sovereign debt. The latter is particularly worrisome in that it has already increased the cost of funding for foreign governments and is chasing money out of foreign currencies into the U.S. dollar which is near its November, 2008 highs. In newly industrialized economies in Eastern Europe and Latin America, credit downgrades may also lead to credit defaults by some governments. World banking organizations are working overtime to forestall such defaults but there may be too many “leaks in the dike” to be succesful. The erosion of foreign soverign debt ratings, the flight from foreign currencies and economic contractions more severe than in the U.S. will be another move from collateral damage of the U.S. recession to another contributor to the extension of our own by keeping exports suppressed and putting more pressure on the international banking system and credit markets.

Morris R. Segall, CFA, CIC

There is the Stock Market and there is reality

Morris Segall      Is this the stock market bottom or another bear market rally?

Today the Dow Jones Industrial Average rose over 200 points or 2.7% which lead to a gain for the week of 3.5%. Other major market indices also climbed today by over 2%. The NASDAQ led the week’s stock market gains with an increase of nearly 8%.

On the other hand economic and corporate earnings news for the last week show a downward spiral in U.S. and overseas economies. The week’s bad news was capped today by a weaker than expected U.S. employment report for the month of January. January’s job losses were just below 600,000 and worse than that were downward revisions in prior months and last year’s monthly job reports. According to the Labor Dept. the U.S. labor market has been shedding jobs at a monthly rate of approximately 600,000 since last November.

This is substantially higher than previous reports of approximately 500,000 lost jobs monthly over this period. Combined with a downward revision of 400,000 in lost jobs last year and we have the worst job market since the recession of 1973-74.  The Federal Reserve today also reported a third consecutive month of consumer credit contraction. This week also saw contractions in construction spending and factory orders.

We are at levels of economic deterioration usually seen at recession cycle lows. We do not believe we are at the bottom of the current recession. Indeed we have been forecasting further economic erosion through the first half of this year. If we are correct, the magnitude of the current recession as measured by unemployment, retail sales, industrial production, capital investment and credit losses will be more severe than current mainstream economic forecasts. Clearly the first quarter of 2009 will be worse in terms of economic contraction than the fourth quarter of 2008. As a result, the earnings reports for the first quarter which will be reported in April will be weaker than the decline currently being reported in January and this month. We stated in our last blog entry that corporate earnings are now in the same kind of “free fall” seen in the 2001-02 recession and it includes virtually every industry sector. With imploding earnings comes dividend cuts and corporate balance sheet erosion and credit downgrades.

So what is the stock market telling us today. We believe it is confirming the economy is in severe decline and the increased severity of the recession will force Congress and the Federal Reserve to quickly enact a broad program of economic stimulus and credit relief. Indeed the Senate this evening agreed to a $780 billion economic stimulus program. There is an old adage in the investment field. Buy on the rumor and sell on the news. That sure fits the current market rally. The stimulus package approved by Congress will be in our estimation too little, too late and in the meantime the current economic “death spiral” will continue through at least the first half of this year. It will be worse overseas as we have forecast in recent entries here and on our website. If we are at 600,000 monthly job losses now, where are we going over the next six months? What does the market think Congress and the Fed can do about that this year? To be sure, Monday’s announcement of further banking system relief from the Treasury Dept. will also be viewed by the equity markets as bullish. However, the credit system is so wounded that even with new relief the reality of risk aversion and credit impairment of borrowers will belie the euphoria of a perceived solution to the banking and credit crises.

From a technical standpoint, the stock market would give the appearance of making a cyclical bottom. We believe that is premature. While we are bullish on stocks looking out 1-3 years, we think this could be a “bear trap”. In addition to a depressed economy we need to look at interest rates and commodity prices. Very quietly the yields on 10 and 30 year Treasuries have moved up by .50% over the past month and oil looks like it is bottoming in the $30-$40 per barrel range. We believe this is the beginning of a trend towards higher interest rates reflecting the huge increase in the U.S. budget deficit and a bottoming in commodity prices as supply contracts in line with weak demand.

Bottom line, get ready but don’t pull your gun out yet.

Morris R. Segall, CFA, CIC

2001-02 Deja Vu

Morris Segall      2009 economy, business landscape, crisis, debt

The news this week from corporate America regarding job cuts and declining earnings is so bad that it marks a new unfortunate chapter in the current U.S. recession. The fourth quarter earnings annoucements being released this week reveal a rapid collapse in U.S. corporate earnings that rival the earnings implosion of U.S. companies in 2001-02. The U.S. recession has now hit corporate America hard and there is no sector of American business that is not feeling the impact of the current zero demand environment.

We expect a 4th quarter earnings decline for the S&P 500 Index to exceed the 22% year over year decline in last year’s third quarter. At this point, the magnitude of U.S. corporate earnings declines is now an active contributor to the recession rather than collateral damage from the recession. The continuation (six consecutive quarters) and deepening severity of corporate earnings declines are making the U.S. recession more severe by leading to further job cuts, reduction in pay for existing workers, weakening corporate balance sheets and credit quality. With further earnings weakness, the corporate sector is a major incremental negative for the economy in 2009 which will prolong the current recession. The decline in U.S. corporate earnings are being replicated by massive earnings declines in companies in Western Europe and Japan which will intensify recessions in those regions.