Most of my posts during the past several months have had a decidedly negative tone. All the while, the equity markets have rallied and corporate bond credit spreads have narrowed. It has been difficult being a curmudgeon during this time of euphoria, but as with all periods of euphoria, investors and pundits can become overly exuberant, sometimes irrationally so.
Let's look at corporate profits. In many instances they have been better than expected. However, the profits have been by and large the result of cost cutting, not increased business activities.
What about smaller job losses as measured by the Non-farm Payrolls report and falling jobless claims. Job losses are declining because we are approaching the "right-sized" number of workers for current and expected levels of economic activity. After all, businesses cannot fire everyone. Employers are running out of workers to lay off. The same is true about jobless claims. Initial claims are falling (but disturbingly high) and continuing claims remain over 6 million. This is not a sign of recovery. Reductions in firings is not a sign of an employment recovery when the unemployment rate is approaching 10% (and should blow through it in the near future). The economic bubble was so large that jobs were created which fundamentally should not have existed. There lies the rub.
Bulls are waiting for banks to lend and credit to be freed up. I cannot believe that so many smart people do not understand lending in the United States. Approximately 70% of all lending in the U.S. is done via securitization.
Securitization has been impaired compared with what was the norm for the 10 years ending 2006. However, what these young raging bulls have to realize is that the lax lending standards and easy leverage of the early part of this decade was the exception, not the rule. It was unsustainable. Securitization still takes place. However, that usually requires GSE backing of the mortgage security, full disclosure of the quality of the underlying assets or higher yields for taking on the risk.
The result is that those borrowers with good credit, a comprehensive credit history and documented income which indicated the ability to repay the loan can get credit. What is so bad about that? The problem is that, since the popping of the tech bubble (and to some extent during the tech bubble), the U.S. economy and businesses have adapted to the levels of economic activity which can only be generated by a system of fog a mirror and get a loan. Those days are gone, at least for the next five or ten years as current investors have long memories and it takes five or ten years to get enough new players who do not know the past, but think the know everything being recently out of school.
We should all expect GDP to stabilize and even grow during the coming six to nine months as businesses replace inventories which had been permitted to deplete as cautious executives held back production while waiting for the economy to bottom. By next year, I think GDP growth will settle in at between 1.00% and 2.00%.
Tighter lending standards and slower growth spell trouble for Detroit automakers once the Cash for Clunkers program ends. I seriously doubt that GM and Chrysler can survive without more government help and / or shifting some production (especially smaller vehicles) overseas or at least to non-UAW plants in the American South.
Bank profits will decline once the profitable carry trade afforded by the steep yield curve disappears when the Fed begins raising short-term borrowing costs, thereby flattening the yield curve.
The companies which will do best from an investing standpoint will be telecom, utilities, consumer staples, discount retailers and cutting edge (only) consumer electronics). Housing will suck wind and large distressed banks could still be broken up, especially if the FDIC (Sheila Bair) becomes the dominant bank regulator.
I also publish articles on Seeking Alpha under the nom de plum Bernard Thomas.
No comments:
Post a Comment