Last
week, the National Bureau of Economic Research, a private nonprofit group of
economists, proclaimed what everyone knew, except our elected officials, that
the United States was now officially in a recession and has been since December
2007. The economists continued in saying that the US economy, may be in
the midst of the longest slump in the post World War II era. The good
news is that the longest economic slumps since 1945 were the 16 month downturns
that ended in March 1975 and November 1982, and if the current recession began
in December 2007, we are already 12 months into the downturn. The bad
news is that this current recession seems to be accelerating as evidenced by
the latest unemployment figure which showed that over 500,000 Americans (and
this figure is probably very understated) lost their jobs in November alone. In
fact, US companies slashed payrolls in November at the fastest pace in 34
years. So far, job losses for 2008 total over 1.91 million which translates to
an unemployment rate of 6.7 percent. Most economists are now forecasting
that the recent job figures suggest that the economy shrank at an annual rate
of 5 percent in the final three months of the year. To fight the
downturn, President Elect Obama is promising an economic stimulus package
including government spending and tax cuts that will range in the $350 billion
to $500 billion range. Included in the package would be much needed help
for homeowners and the largest public works spending program in over 50
years. Of equal importance is that Mr. Obama has backed off his campaign
claim of raising taxes on the richest American households (taxing capital in
the midst of the worst downturn since WWII would have made a bad situation far
worse). Mr. Obama finally admitted that the economy will get worse before
it gets better. This is not exactly
surprising with the auto companies begging for money in Congress along with a
real estate market where one in ten American homeowners, sub prime- or prime,
have now either fallen behind on their mortgage payments or are in foreclosure. We, of course, remain confused that despite
all these factors the markets have rallied from time to time, albeit on low
volume.
Over
the past week we were treated to more theatrics on Capital Hill with
Congressional leaders baffled and amused at the reckless mismanagement in the
auto industry. How a company like GM,
for example, whose current market value is just under $3 billion, can ask for a
taxpayer funded loan in the amount of at least $15 billion is a travesty in
itself. The enormous sums of money being
thrown around have turned the bailout story into more of a political comedy
than a business issue. It’s becoming hard to keep track of all of the different
bailouts:
- TARP: Troubled
Asset Relief Program. This is the Treasury's big $700 billion ($850B including
pork) program that has been used to prop up financial institutions.
- TAF: Term
Auction Facility (or TAFfy). Program by which the Fed auctions funds to
financial institutions — allowing them to use their toxic assets for
collateral.
- TALF: Term
Asset-Backed Lending Facility (or "son of Taffy"). Recently announced
Fed program designed to help the market for student, auto and other consumer
loans.
- CPFF: Commercial
Paper Funding Facility. Buys commercial paper directly from corporations.
- AMLF:
Asset-Backed Money Fund Lending Facility. Fed program designed to buy
short-term paper (including commercial paper) to prevent money market funds
from "breaking the buck."
- TSLF: Term
Securities Lending Facility. Fed program that lets banks swap bad mortgage and
other debt from their books in exchange for Treasuries.
- SLF: Special
Lending Facilities. Originally designed to loan money to fund JPMorgan's
purchase of Bear Stearns in March. Also used to back AIG's balance sheet to
avoid total collapse.
- PDCF: Primary
Dealer Credit Facility. This is the Fed program that allowed broker/dealers and
other non-banks to tap the Fed's discount window (back when there were independent
broker/dealers).
And
with the auto bailout a forgone conclusion, we would recommend the newest
program be called the Bailout Auto Relief Facility or more
simply, BARF.
The
failure of the auto companies should lie squarely on the executives, unions,
and parts suppliers who are participating in an industry that is basically
making non-cost competitive and inferior products compared to its competitors.
It’s also fair to ask the question, are these really car companies, or are they
finance companies that happen to make cars?
We find it laughable that the auto industry executives are calling this
a global problem when we haven’t seen Toyota or Honda at the trough asking to
get bailed out. It’s also disheartening to see lawmakers, such as Barney Frank,
use the unemployment figure as a red herring to plead the case for bailing out
the auto industry.
Despite
bailout after bailout, and failure after failure, we still haven’t heard anyone
take any accountability or apologize for the mismanagement and lack of
foresight at either the public or private level. Instead, we are getting excuses as to why
they should stay on as chiefs of their failed entities and even receive bonuses
in some cases. Unbelievably, the CEO of Merrill Lynch, a company that is only
still in existence because of a shot gun wedding to Bank of America, asked for
a $10 million bonus, only to back off the request after public outcries of
disgust. And of course, the joke of the
year, seeing the auto executives, hat in hand, asking for money from the taxpayers,
but arriving at the hearings on company funded private jets. The list goes on and on exemplifying just how
out of touch these executives and politicians remain. They just don’t seem to get it.
For
the rest of the world, especially China, who holds the majority of US
government debt, the question of who is really going to pay for all of these
bailouts is being raised. To boot, China
just announced that its exports in November fell for the first time in more
than 6 years, showing that China is hardly immune to the global economic
crisis. It’s mind boggling why anyone
would lend money to the US government for ten years at below 3% when we are rapidly
spending money we do not have (although amazingly the recent Treasury auction
sold at an all in negative interest rate- probably not a good sign for equities
if people are paying the US government to hold their money for them rather than
invest in the equity market). And to
make matters worse, a recent Government Accounting Office report said that the
TARP “is lacking on internal controls, inadequate monitoring of bailed out
banks, and no real way to figure out if the TARP is working” at all. We aren’t smart enough to know when it’s
going to happen, but at some point, there will be a day of reckoning where
foreigners will simply not go for this any longer and the US will really be
backed into a corner. It is becoming
more evident; that a huge bout of inflation caused by a weaker dollar will be
upon us over the next few years- you can only print so much money…..
And
yet, with seemingly one bad headline after another, the stock market, from time
to time, is able to shrug off the bad news and muster interim rallies.
Interestingly enough, the day the horrific unemployment figure was released,
the S&P 500 ended the day up 3.65 percent, with the Dow Jones Industrial
Average and the Nasdaq posting similar gains. If there ever was a silver
lining to the “ Great Recession of 2008", it would be that energy prices
have fallen faster and further than anyone could have predicted, just in time
for the holiday shopping season which is by far the most important time of the
year for retailers. Crude oil, for example, has fallen over $100 per barrel
since July to close at a four year low, staying well within the $40 -$50 per
barrel range. The fall in oil prices has resulted in a welcomed drop in
gasoline prices which now average $1.77 a gallon nationwide, also a 4 year
low. Fuel has now fallen 57 percent since a high reached in July. For
the consumer, this drop in energy prices feels like a tax cut of sorts which
leaves him or her more disposable income to spend or save in other places,
although we believe that inflation will eventually kick in and all commodity
prices, including oil will skyrocket. Be
very, very wary that this short term ease in energy prices will stay with us for
long given all the monetary and fiscal easing the Fed and Treasury have pumped
into the system. As stated, we are predicting
that oil is going to be higher than ever. With
the major US stock market averages down as much as 40% from their highs, a
short to medium term rally can be expected as sellers begin to wane and buyers
start to proclaim the markets as oversold and/or cheap. Bear market rallies are
treacherous in nature since a countertrend move to the upside can be extreme,
with moves of over 30 percent being common. The rally phase after a serious
decline will frequently lead to a false sense of security and confidence in the
investment community “that the worst is over” because stocks are rebounding
sharply. Probably the most famous bear
market rally in history is the rise which took place following the October crash
of 1929. After the October 1929 crash,
the market had become oversold, much like today. The Federal Reserve cut the discount rate and
government spending programs were created to help repair the economy. In the
next four months, from November 1929 to April 1930, the Dow Jones Industrial
Average rallied 48% from its lows. In fact, between 1929 and 1933, during the
Great Depression, the Dow saw eight different bear market rallies with over
double digit percentage moves higher only to finally bottom in July of 1933 at
one tenth of its 1929 value. 
The
stock market and economy can diverge for months or even years in some cases as
investor sentiment shifts from greed to fear and vice versa ( a la the recent
wild up and down swings). It is highly unlikely, however, that given the
depth and breadth of the housing downturn, credit crunch, and subsequent bank
failures, that we have turned any corners.
A rise in stocks, while a welcomed event, should be viewed with caution. The buy and hold mantra works well in a bull
market, but in a global slowdown and bear market such as the one we are seeing
today, a more active money management approach must be taken.
As
we close out 2008, our hearts go out to all the people who have been hurt by
the negligence and greed of Wall Street and our politicians. Despite what all
the talking heads and pundits say, the facts speak for themselves: we are going
to have to live through the pain of spending money that we did not have for
years to come. No one has even yet to fess up to the huge problem of unsecured
credit card failures. Main Street USA is struggling right now in ways that haven’t
been seen in generations. This holiday season, perhaps more than ever before,
supporting charities of your choosing could be the best long term investment
one can make.
Happy
Holidays
Larry
Goldfarb
