SPG Trend Advisors Blog

On Friday the Commerce Department released its first revision of second quarter GDP, Fed Chairman Ben Bernanke delivered the opening speech at the Fed’s annual summer retreat and Intel announced a downward revision to its third quarter earnings outlook. All of these items were important news stories and all served to cement our previous comments on our blog and website that the economic recovery in the U.S. has stalled and is in danger of aborting.

The downward revision to second quarter GDP was expected after the June trade deficit widened to almost $50 billion led by a surge in imports and a surprising decline in U.S. exports. Economist estimates dropped into the 1%-1.5% range. The actual number reported on Friday was 1.6% and the equity markets breathed a sigh of relief and rallied that the number wasn’t worse. It shouldn’t have. Details behind the headline number reveal economic growth from the last vestiges of federal stimulus that we believe will not be repeated in future quarters. So we view the revised GDP report as dangerous to the outlook for the economy going forward. Personal consumption is not improving and government and business spending in the quarter have been augmented by factors we do not believe will continue.

Ben Bernanke announced on Friday the Fed would not allow the economy to fall into a deflation cycle similar to the Japanese experience in the 1990’s. However, his speech was devoid of new details about how that would be accomplished. Nonetheless, the stock market was reassured and rallied strongly if incorrectly.

Lastly, Intel reported a downgraded outlook for revenues in the current third quarter. Of all the news on Friday we believe this was the most important because it is a warning to us of the vulnerability of the current recovery cycle in corporate earnings. A faltering in corporate earnings would remove the primary support to the stock market and a major prop to the U.S. economy.

Please see our detailed article on these items and a more thorough analysis of the economy in a new Economic Presentation we are publishing on our website, www.spgtrend.com.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends 2009 economy, corporate earnings, deflation, Economic Growth, economic outlook, GDP

In our July 6th website article, “Economic and Capital Markets Update”, we concluded our bearish forecast with the advice, “we would use an anticipated market rally in July from good second quarter corporate earnings to move towards our intermediate-longer term strategy”.  Despite our negative assessment of the economic data of the last two months and our downgraded economic forecast for next year, we expected the combination of an oversold stock market and strong second quarter corporate earnings reported in July, would produce a strong equity market rally that we would use to sell equity positions in favor of the re-allocation we advocated for the intermediate-longer term. As if on cue, the equity market rally we were expecting arrived the next day, July 7th, as the major U.S. equity market averages rose approximately 3%. Over the next five trading sessions, the major averages added another 3%-4%, peaking on July 14th on the backs of strong earnings from major bellweather companies like Alcoa, CSX and particularly Intel. However the economic news released last week continued a string of weak reports including retail sales and industrial production for June, a pessimitic Federal Reserve economic outlook and finally another collapse in consumer sentiment, this time in the University of Michagan survey reported on Friday. The weakening economic data and outlook  undermined the earnings rally and accompanied by weak operating earnings from major international banks, the stock market rally of July 7-14 reversed with a 3% decline in the major averages on Friday. Importantly, the rallies in virtually all of the major U.S. equity indices failed at or around the 50% retracement from the June market lows, a key development for market technicians and traders who now believe the aborted rally at such a key technical level spells the end of the July rally and a resumption of the market decline begun this past May.

From a technical standpoint they may be right. From an economic standpoint they could also be right. The stock market is a forward looking mechanism and the increasingly weak economic data being reported look like it is corroborating our stated belief that the economy is stalling. The Fed’s downwardly revised economic outlook and the huge decline in consumer sentiment in both the Conference Board and University of Michigan surveys portend the kind of economic retrenchment we warned about in our July 6th website article. The consumer sentiment readings are particularly worrisome because they reflect a deep level of pessimism that can be a self fulfilling contraction in consumer spending, already weak in this recovery. We still expect a summer spike in consumer spending from increased vacation travel and we think it may provide another oversold rally in the equity markets when reported in August and September. However, the stock markets could be at or below the June lows when the news hits and the economic outlook for late this year and next could have eroded further.  This week will be crucial to see whether Q’2 earnings can halt the market reversal and give investors a better exit point. We still believe stock market rallies in July or later should be sold into. The stock market uptrend from March, 2009 is over.  Current earnings no matter how strong cannot outweigh a deteriorating economic outlook that portends a peaking in the earnings cycle over the next four quarters.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends aborted stock market rally, consumer sentiment, oversold stock market rallies, peaking in corporate earnings cycle, pessimistic Fed outlook

Friday’s unemployment report for the month of June was weaker than economists had expected and weaker than the surface numbers show. It also was the latest in a series of weaker and disappointing economic data reported last week. Last week saw a continuation in weak consumer spending  in May for the second month in a row despite healthy gains in consumer incomes over the April-May period. The consumer savings rate increased in May for the second month in a row to 4% reflecting consumer caution. Also, last week, the Conference Board reported consumer confidence in June fell dramatically from 62.7 to 52.9. Clearly the stock market declines in May and June are depressing consumer attitudes but respondents are also again expressing difficulty in getting jobs and are increasingly pessimistic about both current conditions and future expectations. We have repeatedly stated in our economic presentations, since the economy began recovering last year, that the absolute level of consumer confidence in this survey have been well below levels normally seen in postwar economic recoveries and indicated to us a muted consumer reaction to the economic recovery.  Rounding out last week’s economic reports were: a greater than expected decline in the ISM purchasing managers index reflecting a pause in the upward trend in orders and shipments seen since last year and a decline in hiring  by respondents; an increase in first time unemployment claims for the last week in June, taking first time claims to over 470,000 for the third time since May and well above the level of 350,000 seen in previous economic expansions; and finally, factory orders for May dropped for the second consecutive month after rising steadily since last spring. 

But the June employment report contained cause for concern despite the expected decline in census worker jobs and a reduction in the unemployment rate for the first time this year. The number of discouraged workers at 1.2 million is up by over 400,000 from last year. The number of people in the work force, as measured by the Household monthly data,  is down by over 1 million workers since June of 2009 and despite that drop in the labor force, the employment participation rate is down to 64.7% from 65.7% in June, 2009. A full year after the economy began recovering, the average workweek is only at 33.4 hours versus 33.0 hours in June, 2009. Over the last twelve months, average hourly earnings are up by only 1.7%, less than the 2% annual rate of inflation as measured by the CPI through May of this year. The private sector created only 83,000 jobs in June, below an expectation of approximately 100,000+. Of that 83,000, approximately 21,000 were in temporary help services and 37,000 were in leisure and hospitality. A number of leisure and hospitality jobs, 28,000, were in amusements, gaming and recreation that may be seasonal hires to cope with a very active vacation season. Other professional and business services added another approximately 25,000 jobs and healthcare added approximately 17,000 jobs. Most of the remaining sectors in goods producing, services and governments cut jobs in June. The June numbers follow a downwardly revised estimate of 33,000 private sector jobs created in May and establishes a pattern of weak private sector hiring for the two month period when empirical and other evidence should be creating the opposite result.

Tomorrow we plan to publish our updated economic and capital markets analysis and forecast on our website, www.spgtrend.com. It will extend the theses we have articulated in our blog articles since May. That is the expansion cycle in the U.S. equity market has reversed because of the international credit alarms caused by sovereign debt issues in Europe and these developments are having a negative impact on the U.S. economic recovery cycle. The economic data of last week, particularly the monthly job report, lead us to believe the U.S. economic recovery is  pausing while businesses and consumers assess the outlook for the remainder of this year and next.  We are afraid businesses in particular are already starting to plan “cutbacks” in anticipation of a weaker economy going forward.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends recovery cycle, stock market, unemployment

Today looks like one of those watershed events which could mark a defining moment in the Presidency of Barack Obama. First, the President is forced to fire his hand picked general leading the war in Afghanistan for at the least conduct unbecoming and at the worst insubordination. Second, the Federal Reserve Board at its monthly meeting described the economic recovery as “proceeding”, i.e. stalled and weakening. Today’s Fed statement confirms for us the change in our economic and capital market outlooks we have been expressing in our prior blog articles beginning last month. We have believed the situation in Europe is serious and will get worse and it is having a depressing effect on the capital markets and in turn our economy.

In our website article, “The Election”, November 17, 2008, we commented that Barack Obama and the Democrats in Congress had a “short window to pacify a desperate electorate” and risked enacting programs that had “short term palliatives at the risk of eroding longer term U.S. financial strength and flexibility”. It would appear that window of opportunity to turn the economy around and fulfill the mandate of 2008 is about closed. The angry electorate of 2008 is absolutely livid in 2010. Voters are angry with the “bailouts” of Wall St. and corporate America while “Main Street” still struggles with unemployment, stagnant income and surging health care costs. The lack of success in the wars in Iraq and Afghanistan add to voter discontent. The object of voter ire is President Obama and his party that look disconnected and ineffectual. The President’s style of eloquent speeches but lack of decisive follow through is wearing thin on the American electorate.

Nowhere does the President look more ineffectual than in the arena of foreign policy. We commented in our website article on “The Obama Foreign Policy…”, January 7, 2010, the President was in danger of committing serious mistakes in Afghanistan by forcing a short timetable for military victory on the U.S. military. The President’s Afghanistan policy was clearly not supported by military leadership in the field who felt they were given an impossible task predestined for failure. No military officer accepts that. The shock in General McChrystal’s dismissal is the fact that he and his aides were so publicly contemptuous of the President and his administration. You have to go back to Vietnam for this kind of military “mutiny” to the President’s war policies. On the heels of foreign policy setbacks in the Middle East, soured relations with Turkey and Brazil and now a disconnect on economic policy with Europe, the Obama foreign policy is notably devoid of success and apparently now losing respect.

The loss of confidence in the President and his party to successfully deliver results domestically and overseas is in our opinion,  making the Obama presidency resemble that of Jimmy Carter and we believe will have similar electoral results in this year’s congressional elections and the presidential election of 2012.

Morris R. Segall

Morris Segall Economic Trends Barack Obama, elections, foreign policy, Jimmy Carter

May retail sales reported this past Friday showed a surprising decline of 1.2% from upwardly revised April levels. We usually would would look at the May decline as a normal respite to strong gains in the previous month. So while retail sales, excluding food and gasoline sales, did increase significantly (.7%) in April, the comparable decline in May sales amounted to 1.2% and the declines encompassed many areas of discretionary consumer spending including building materials, clothing and autos. In addition, the level of retail sales in May, again excluding grocery and gasoline station sales, was also approximately .5% lower than comparable retail sales reported in March. After surging through the first four months of this year, consumer spending may be stalling, at least temporarily, as a result of the dramatic and severe decline in the stock market last month. We commented in our last blog posting, June 6, 2010, that “ the pace of the U.S. economic recovery could be retarded by the current stock market decline”.  Combined with the expiration of the home buyer tax credit and impending expiration of extended federal unemployment benefits, consumer spending could be at least taking a hiatus if not a more serious retrenchment. We expect consumer spending will rebound from May levels over the summer as Americans take vacations this year and increase domestic travel  due to lower gasoline prices and overseas travel due to the strong value of the U.S. dollar.

 The question is will it and if so by how much. Consumer incomes will have to grow consistent with the .3%-.4% rates of the March-April periods to provide the resources necessary for consumers to step up their spending. The psychology of consumers facing new wealth destruction from the stock market, suppressed equity in their homes and new fears regarding economic and job growth could cause consumers to become cautious again. A cautious consumer will not fill the void being created by abating Federal stimulus and aid programs.

At this time we are sufficiently concerned about the recent confluence of negative events in Europe, the worldwide capital markets and the suppressing effects on U.S. economic growth to revise downward our projections of  U.S. and overseas economic growth for this year and next. In our April 4th blog posting, “Happy Days Are Here Again…”, we projected U.S. economic growth in the second quarter would be in the range of 4%-6% largely based on the surge in consumer spending we were detecting coming out of the severe winter. Indeed, consumer spending in the first quarter accounted for 2.4% of the 3% growth in the first quarter, the highest level since the onslaught of the recession. We now believe second quarter GDP growth in the U.S. will range between 3%-4% due to lower expectations of consumer spending from our previous forecast. We continue to project total U.S. GDP growth for 2010 of 3% but within a range of 2.5%-3% rather than the 3%-3.5% previously projected. For 2011, we are using a projected range of 1%-3% for U.S. GDP growth next year, down from our previous expectations of 2%-3% growth and we are telling clients and audiences that this revised outlook is subject to further change as developments here and in Europe become clearer. Commensurate with our lower expectations of  U.S. and worldwide economic growth this year and next, we now project disinflation in the U.S. over the remainder of this year and into next as the upward pressure from rising commodity prices seen in the first half of this year reverses from the recent fall in energy and industrial commodity prices.  

We will publish a more detailed discussion of our current economic and capital markets analyses and forecasts on our website, www.spgtrend.com.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends consumer spending, disinflation, wealth destruction

Friday’s unemployment report for May was just what the stock market didn’t need- a disappointing jobs creation picture. Total nonfarm payrolls grew by a little over 400,000 in the month of May, but virtually all of that increase was due to temporary hires for the U.S. Census. Most of those workers will be terminated by the end of the summer. Only 41,000 jobs were created in the private sector in May according to the business establishment survey, well below the 150,000+ jobs expected. We have been commenting in previous blog postings about the increasing inaccuracy of the monthly business establishment survey in reporting job creation. Most of our criticism has been focused on the erroneous seasonal adjustments and the errors in reporting job creation in the small business sector. Most of the monthly reporting errors result in overstating job creation that are then reversed when the Labor Dept. makes its semiannual revisions in the winter and summer of each year. However, this time we believe the May jobs report is actually understating job creation. Empirical data and other employment measures point to a larger job creation in May than the 41,000 reported on Friday. We believe the May number will be revised upward in subsequent monthly reports over the summer. But that is where the good news on jobs ends. First time unemployment claims are “stuck”  around 450,000, far too high to indicate strong  job creation. In addition, other measures in the May jobs report continue to point to high levels of discouraged and underemployed workers and most discomforting,  a continued high level, nearly 50%,  of workers unemployed are jobless for 27 weeks and longer. We estimate that we are building a “hard core” unemployment rate of over 6% as a result of the recession and the historically weak economic recovery.

Also on Friday was news from Hungary that their fiscal situation was becoming dire to the point of possible debt default. The announcement was a surprise since it was assumed the IMF bailout of Hungary last year was sufficient to avoid default. The prospect of another European country sliding toward debt default was sufficient to break the euro below critical levels of $1.20 on Friday and raise the threat levels again of more widespread financial crisis in Europe. The Hungarian announcement created new strains on the financial system in Europe with lending spreads and costs of credit default insurance rising again. The situation in Europe is becoming more alarming as default risks spread from Southern Europe to Central Europe and likely to Eastern Europe next. The austerity programs being enacted by the governments in Southern and Western Europe and the U.K. will exacerbate the problems in Central and Eastern Europe that depend on exports to the Eurozone for much of their GDP growth. The financial system is now on heightened alert again to see where this latest emergency in Europe will lead. The outlook for containing the European sovereign debt problems is becoming more bleak.

The combination of a weak employment report and the dire news from Hungary, reversed a stock market rally that began before Memorial Day and carried strongly through last Thursday. The market decline on Friday eroded market technicals and has cast doubt on the view that the market decline in May was a correction and not more serious. We have stated in our most recent blog entries that we believe the market action in May signals a “Sea Change” in the international capital markets cycle. The market action on Friday confirms that view for us. We now believe we are moving towards a short-intermediate term trading range on the Dow 30 Industrials of between 9,000-11,000. We reiterate our belief that the market highs recorded at the end of April-early May, are the highs for this market cycle. While the U.S. economic news has been improving since last summer, going forward, the economic news becomes more problematic as Federal stimulus recedes and the stock market itself becomes the main story in the economy. It is estimated a trillion dollars of market value was lost in the month of May and June is extending that. The market decline is replacing risk assumption with risk aversion and when investors see their portfolio values at the end of May, there is the fear consumer spending will retrench just when the economy needs more robust consumer spending. We believe it is possible the pace of the U.S. economic recovery could be retarded by the current stock market decline. We  continue to stress defensiveness in our capital market strategies and emphasize U.S. dollar denominated assets.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends capital markets strategies, Economic Growth, European sovereign debt, May unemployment, stock market

As we conclude the celebration of Memorial Day and the end of the month of May we look back at a month that in our opinion signaled a “Sea Change” in the international capital markets cycle of 2009-10 and a refocusing on the crisis of international sovereign debt. As we wrote in our blog entries of May 6th, “From Optimism to Panic: A Greek Tragedy” and May 10th, “From Panic to Relief…”, the swift and severe collapses in equity and commodity prices signalled to us something more than a correction in overbought markets. The events since then have confirmed that despite substanial moves on the part of  worlwide international banking authorities to support the Eurozone and the euro currency. As we forecast, international monetary support has also been joined by austerity fiscal programs forced into enactment by the large debtor nations of Europe. Very good economic news around the world, particularly in the U.S., has largely been wasted by eroding asset prices and declining investor confidence. Unfortunately, the European efforts to “turn” the crisis are shorter term palliative measures and do not address the longer term concerns of successful debt reduction and economic vitality. We mentioned in our previous posts that the sovereign debt issues in Europe and the U.S. are longer term problems that will not go away with monetary bailout and fiscal austerity programs. The capital and commodity markets are signalling that. We will publish shortly our analysis of sovereign debt problems on our website, www.spgtrend.com. Suffice it that we are pessimistic because of retarded economic growth and strained liquidity in Europe and our belief lower debt/GDP targets in Europe over the next 2-3 years will not be met. We believe this will continue to overshadow the equity markets. 

As a result, we have dramatically shifted our capital markets strategy after our May 10th posting. While near term rallies from oversold conditions are likely, we are not expecting the capital markets to resume their sustained “uptrends” and reach new highs in this cycle. We have been counseling our clients and our audiences of our concerns and the need to become more defensive, reduce volatility and protect principal. We will delineate our new Capital Markets strategy in a new website article also forthcoming.  Readers should contact us for details.

The ongoing oil spill in the Gulf of Mexico is a long term ecological disaster and will have more serious economic consequences the longer it continues. The governmental and public response will parallel the reaction to the Nuclear power accident at Three Mile Island in 1979. America’s nuclear power program has been stunted ever since. We believe one of the beneficiaries of the Gulf oil spill will be a revisiting of the nuclear option as an answer to America’s power generating problems.

Lastly, some good news in May. On Friday, the Commerce Dept. announced  increases in personal income in March and April that would signal improvement in consumer disposable incomes. Just what is needed to support a continuation in consumer spending that increased in the first quarter. While consumer incomes increased in April, consumer spending did not and we now have to worry whether the stock market decline in May will show up in restrained consumer spending in June and beyond. With the stimulus to housing expiring, elevated consumer spending will become more important to overall U.S. GDP growth going forward into next year. Readings on consumer income and spending will become amongst the most watched economic statistics as we go forward. We will certainly be among the spectators.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends

In our last posting, “From Optimism to Panic…”, May 6, 2010, we stated last week’s panic in the capital markets needed a quick and forceful international response to restore order to avoid further destructive speculation. Refreshingly, the Europeans moved quickly and decisively and along with assists from the IMF, the Federal Reserve and the Bank of Japan, structured an aid and liquidity package totalling almost $1 trillion. Importantly the package includes mechanisms for the European Central bank to purchase sovereign and bank debt and, along with other central banks, add liquidity to the Eurozone. Clearly, the EU leaders and finance ministers meeting in Brussels over the weekend learned the lessons from their mistakes in the Greek bailout. They wasted little time and came up with a large package that addressed the current problems facing  European governments and banks. It was also important for the response to be global so the participation of central banks around the world left no doubt of the international support for the euro and the eurozone.

In response, equity markets around the world, led by Europe, have surged today, relieved at the strong international response to the current crisis.

However, the sovereign debt problems in Europe are not solved and the countries of southern Europe and the U.K. will need to initiate significant spending reduction programs as part of overall debt reduction plans. Those spending reduction programs will not be popular domestically and social unrest should be expected.

 There are political costs as well as seen in the indecisive elections in Britain which turned out the long reigning Labor Party but left the victorious Conservative Party short of a majority in Parliament. The Conservatives will have to fashion a parliamentary coalition in order to govern. In yesterday’s regional election in Germany, Chancellor Merkel’s governing Christian Democratic Party lost decisively thus depriving Chancellor Merkel of a mjority in the Upper House of the German Parliament. She will now have to compromise with opposition parties to successfully govern. Indeed, today Chancellor Merkel announced she would not be seeking tax cuts that she had promised to pursue in her fiscal agenda but have been opposed by her principal political opposition.

The political uncertainty now being created in Europe will raise political and economic risks in Europe and the U.K. While Europe has for the time being avoided financial disaster, the longer term problems of sovereign debt risk remain.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends

Thursday’s roller coaster ride in the stock market, punctuated by a nearly 1000 point drop in the Dow Industrial average before recovering 700 of those points, is culminating a shift from market optimism to outright panic. Since Monday, May 3, the major market averages have declined 6%-7% based on increasing fears of debt defaults in Europe led by the well publicized difficulties in Greece.  After protracted negotiations with its eurozone partners and the International Monetary Fund, a financial “bailout” package for Greece was announced last weekend that would appear to have headed off an imminent debt default.  Prior to the selloff of the last three days, the major market averages had risen on average 9% from the period February 3 to May 3  spurred by improving economic news in the U.S. and confidence in a “bailout” solution to Greece’s debt problems. Investor sentiment was overwhelmingly positive and risk aversion had been replaced by risk assumption. So what went wrong?

First, the Europeans, particularly Germany, horribly botched the Greek bailout and turned a serious dilemma into a full blown crisis. The reluctance of Germany to agree to contribute to a eurozone loan facility for Greece dragged out the process of support and brought Greece to the precipice of default. It allowed market traders and creditors to speculate on a Greek default when the issue should have been put to rest weeks ago.

Second, the draconian spending terms imposed on Greece by its European partners and the IMF apparently did not allow for the response of the Greek people. Reform of Greek finances and reducing its outsized debt must certainly entail large spending cuts by the Greek government. However, a population long dependent on public spending was not going to accept such life changing spending reductions without protest, including demonstrations, riots and strikes. The violent reaction of Greeks to the austerity program approved by its government has upset investors, market analysts and market traders. It has led to questions about the ability of the Greek government to enact the austerity program and thus successfully access the bailout money and avert default.

Third, once again the credit rating agencies have not done their jobs and have added to the current climate of fear by now lowering credit ratings on eurozone countries including Spain and Portugal. Italy may be next. Where were these agencies over the last two years when the balance sheets of these countries became so leveraged?  The credit ratings of these countries should have already been lowered. Reducing them now only adds to the negative speculation.

This “Greek Tragedy” has now led to rampant speculation about possible debt defaults in other eurozone countries, namely Spain, Portugal and Italy. It has refocused attention on the massive sovereign debt levels of the industrialized world, including the U.S. and raised fresh questions on how these debt levels will be reduced or if they can. We believe the events of the last three days have dramatically changed the equity market environment here and abroad. In the short term the panic selling of the last three days will expend itself. It may have done so on Thursday. It is also possible that U.S. equity markets may have seen their highs in this cycle. We are reevaluating our capital market strategies.  A strong employment report for April will help stabilize the equity markets temporarily.  A dissapointing report will accentuate the current market downslide. 

The sovereign debt issues in Western Europe are not going away. They will overhang debt and equity markets until creditors and investors are convinced credible debt reduction fiscal programs are enacted and accepted by the local populations. We will address the intermediate and longer term issues of soverign debt in a more extensive article on our website. For the moment, we believe a forceful international response to the destructive speculation regarding soverign debt defaults in Western Europe is necessary, and quickly, to restore order to the equity and credit markets.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends

The March monthly unemployment report was the latest in a series of positive economic reports that confirms an expansion in the economic recovery. Since late February, we have observed a perceptible pick-up in consumer spending since the end of the severe winter weather. We have noticed an increase in traffic in restaurants and malls and have heard firsthand of increased travel by consumers. This empirical data has been confirmed by reports from major retailers and cruise ship lines over the past two weeks of increased revenues in the month of March.  The spring thaw has unleashed pent up spending which we have expected would spur a real economic recovery when the unemployment situation improved. While we believe new job losses have peaked, we have stated in previous comments that the chronic level of long term unemployment and the suppressed level of wage and salary income growth would be depressants to increased consumer spending.  Despite repeated evidence that the level of long term unemployment is not improving, consumers are apparently satisfied with their financial conditions to allow an increase in discretionary spending.  Combined with a continued surge in factory orders from businesses and rising exports, we expect first quarter GDP to be a solid 3% based on a strong March performance and the second quarter could be even stronger with growth in the 4%-6% range based on:

1. A strong rebound in housing to take advantage of the extended home buyer tax credit set to expire in June. We  would not be surprised to see that credit extended again to compensate for the lost time in January and February due to harsh winter weather.

2. An increase in auto sales as replacement demand increases due to the extended age of the automobile fleet and the detrimental impact on cars from this winter’s weather.

3. Continued and broader increases in capital equipment orders from businesses that are seeing increased sales, pent-up demand for capital equipment and rising corporate profits.

4. Increasing exports to fast growing and recovering overseas economies.

5. Increased federal spending from the accelerated release of stimulus funds.

If our projections are correct, strong consumer spending in the second quarter will lead to an inventory replacement cycle in the third quarter and increased industrial production from building backlogs. We do not foresee a double dip recession in the second half of this year.

However, we do expect a slowdown in GDP growth in the second half because the current surge in consumer spending cannot be sustained under current employment and consumer income conditions. We expect the current increase in consumer spending will come from savings and reduced reduction in consumer debt. While that helps spending in the short term it is cause for concern longer term. We have consistently commented in our posted economic presentations that a consistent effort on the part of American consumers to save more and reduce debt results in a healthier, more consistent and more creditworthy consumer that can sustain an increasing level of economic growth. Thus, while the industrial sector and exports can keep economic growth going through this year, reduced federal subsidy programs and lower levels of consumer spending make the economic outlook for 2011 more difficult to predict. Furthermore, commodity and energy prices are already on the rise which will increase inflation going forward and we expect the Fed will have to raise interest rates by this summer. The confluence of rising prices and interest rates will put additional pressure on consumer incomes and spending.

So while the economy is improving, sustained recovery still needs permanent job creation and the absorption of the large pool of long term unemployed.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends business landscape, consumers, economics, GDP, government, March monthly unemployment report, trends, unemployment

Beginning with last week’s sudden increase in the discount rate by the Fed, the expanding product scandal at Toyota and Tuesday’s surprising decline in the consumer confidence index from the Conference Board, the news has been bad for the economy and bad for the equity markets.

While the increase in the discount rate was no surprise, given Chairman Bernanke’s prior comments signalling such a move was likely, the timing and manner of the increase was quite surprising and unsettling. For months the Fed and Chairman Bernanke have stated the economy was still quite fragile despite its recovery. Public statements repeatedly reaffirmed the highly accommodative Fed policy of low interest rates. So why did the Fed not wait for its March Board of Governors meeting to announce its increase in the Fed funds rate?  Why did the Fed wait until the stock and bond markets were closed last Thursday to make its announcement?  These actions have been uncharacteristic of Fed actions which have emphasized transparency. We believe the Fed action is another in a series of moves toward normalization of monetary policy and an effort to drain excess liquidity from the financial system. But we believe the nature of the Fed action was aimed more toward foreign investors than for domestic consumption. We believe the continuing rumblings of overseas discontent with current American monetary policy and the revelation of significant sales of U.S. Treasury holdings by China created enough unease in Washington to send a signal to foreign investors that the Fed was ready to move on excess liquidity concerns. Keep in mind the current backdrop of increasing sovereign debt risk in Europe and the Middle East. The rising concerns over the increasing national debt and credit ratings of the U.S. government and the ongoing auctions of U.S. Treasury notes and bonds that are running on average at $100 billion per month. If the Fed action was precipitated by foreign concerns, monetary policy may not be as dependent on the fragile state of the U.S. economy as the Fed has stated.

The unraveling of the Toyota product image as more and more product defects surface and the company’s response becomes more suspect will hurt Toyota manufacturing and sales in the U.S.  Of course this will benefit Ford and GM but the manufacturing, parts supplier and dealer networks of Toyota in the U.S. are important contributors to the U.S. economy and are not fully replicated by domestic manufacturers, particularly given the downsizing of Detroit in the recession. Toyota imports are important economic contributors to West Coast ports and domestic rail and truck volumes. The problems of Toyota are an important reminder of the vulnerability of brand image and customer brand loyalty and how vigilant company managements must be to maintain them. This will be a textbook case taught in business schools of how not to handle quality control and customer relations issues.

Tuesday’s unexpected steep decline in the Conference Board’s consumer confidence index for February is very disturbing.  After showing improvement as the economy recovered and the stock market moved higher the Conference Board index plunged to a reading of 46 from a level of 56.5 in January. The steep decline in the third quarter of economic recovery is not at all typical.  The reading of 46 is consistent with the low levels recorded in the depths of the recession last year.  More distubing are the subsector readings within the index.  The measure of responses indicating positive sentiment to  current conditions was less than 20%, a 27 year low. Almost 50% of respondents felt jobs were hard to get versus less than 5% of respondents who felt jobs were easy to get. Over 45% of respondents felt business conditions were poor. Sentiment readings on the near term outlook also fell significantly from January levels. In short, consumers are depressed currently due to ongoing unemployment and consumer income pressures and discouraged about meaningful improvement in the near term. This level of pessimism can be self fulfilling and act as depressants to consumer spending which must improve if the current economic recovery is to be sustained and expanded.

All of this will not be lost on the stock and commodity markets as witnessed by Tuesday’s declines.  Unless news from the consumer sector reverses, the equity and commodity markets will be hard pressed to rally further from current levels in the near term. Conversely, strong corporate earnings and a steady improvement in the manufacturing sector are providing support to the markets. We still believe the markets are vulnerable to correction in the near term but remain positive on equities and commodities intermediate-longer term. The signals coming from the Fed herald the end of zero interest rates and augur ill for the fixed income markets, particularly at the short end of the maturity spectrum.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends business landscape, Consumer Confidence, consumers, economics, economy, government, The Fed, Toyota

We recently updated our presentation on today’s economic landscape and what’s on the other side with some fresh data.  We hope you continue to find value in our slides:

Morris Segall Presentations 2009 economy, Add new tag, business landscape, Capital Markets, consumers, crisis, debt

Today’s unemployment report for the month of January was revealing for what it did not tell us. That is, are we about to turn the corner on unemployment ?  The report showed a modest 20,000 loss in jobs in the month of January,  a virtual flat performance with the month of December, 2009. Of more note was a .3% drop in the stated unemployment rate from 10% to 9.7%, the lowest rate since last summer. However, as we commented in our blog article, “November Unemployment: Is this the Peak?“, December 4, 2009, the Labor Department made annual revisions to its monthly employment reports. As expected, the revisions show more job losses in 2009 than previously reported. According to the revised calculations, the economy lost over 600,000 more jobs in calendar 2009 than previously reported including a large downward revision of 65,000 lost jobs in the month of December, 2009 to a revised total of 150,000 lost jobs in that month. So a flat January job loss result with December is not a job improvement. We therefore are skeptical of the drop in the unemployment rate. In addition, the average workweek in January remains depressed at 33.9 hours and the civilian labor force participation rate in January continued to reflect historical lows below 65%. There are other important items in the January employment report. Goods producing industries, largely in construction, lost another 60,000 jobs bringing the total for the last three months to almost 150,000. Financial activities and transportation and warehousing sectors lost another 35,000 jobs in January on top of the almost 29,000 jobs lost in December. These are generally high wage jobs.  Finally, long term unemployed, those out of work 27 weeks and longer, continue to rise to a record 6.3 million in January. This is the chronic problem in the unemployment picture. While new job losses continue to diminish, continuing job losses continue to rise.  The increasing universe of long term unemployed will continue to suppress consumer spending and therefore an acceleration in the economic recovery.

The January unemployment report did contain some positives. The number of temporary help workers increased by another 50,000 in January and since September by nearly 250,000. While this number is being augmented by hiring for the U.S. Census this year, the recent five month trend augurs well for ultimate permanent job creation later this year. For the first time since the recession began, manufacturing added jobs in January, albeit a small number (11,000), but it is significant and supports the economic improvement in the factory sector which we noted in our recent “Economic and Capital Market Update“, February 1, 2010 on our website. We expect further improvement in manufacturing employment reflecting the upside momentum in factory orders, particularly in the technology sector.

All in all, the January monthly unemployment report while encouraging is still not conclusive evidence of a transition to meaningful job creation in the current economic recovery.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends business landscape, consumers, economic improvement, economics, economy, GDP, government, January Unemployment, Labor Department, politics, U.S. Census

After playing politics with Ben Bernanke’s nomination in the wake of last Tuesday’s election loss in Massachusetts, the Democrats with help from the stock market on Friday, thought better of their populist pandering on Monday and began to rally around the beleaguered Fed Chairman. Criticism began late Friday with the stock market selloff and built up over the weekend. In our blog article of December 8, 2009, “Ben Bernanke: Hero or Goat“, we warned of the market ramifications of politicizing the Fed and its Chairman’s reappointment process. Congress got the message over the weekend and will now probably vote to reappoint Ben Bernanke.

Friday’s stock market sell off culminated a week that saw the market decline over 500 points and erased the gains accrued in the first two weeks of the year. After rising virtually non stop since its lows in early March of last year, the stock market entered 2010 strectched and overdue for a correction. Last week’s market decline could be the beginning of such a correction. Despite good news on corporate earnings and sound fiscal action on the part of the Chinese government to curb speculation in their economy, stocks sold off reversing their pattern of seeing the “glass half full” on virtually all economic and corporate news. It remains to be seen if this new pattern of stock price decline will revert to the short lived selloffs of last year or develop into a long overdue correction. Such a correction would be good for the stock and commodity markets longer term. The latter have been particularly ebullient over the last year with outsized gains that are ripe for profit taking.

In a couple of days we will get our first look at the fourth quarter GDP. Consensus estimates are for growth of 4%-5%. In our blog article, “Third Quarter GDP Revised Down“, November 25, 2009, we stated “strong contributions in consumer spending and business fixed investment would be needed from downwardly revised third  quarter GDP levels”.  After watching numbers “see saw” in housing, unemployment and retail sales in the fourth quarter, we believe fourth quarter GDP will be within consensus estimates led by large gains in business fixed investment, notably machinery and equipment, and government spending with a solid contribution from personal consumption and a positive contribution from net exports. Since the third quarter of last year the manufacturing sector is the strongest part of the economy with factory orders and shipments maintaining their recovery from depressed recession levels. However, the strength in fourth quarter economic data is not expected to be sustained in the first quarter of this year. Post holiday retail and housing sales are expected to dip leaving economic growth to the government and industrial sectors. Economic growth is still dependent on government stimulus in the face of continued high levels of unemployment and the improvement in unemployment is still the key to sustained economic recovery. At this time we do not expect a “double dip” recession when government stimulus ends in the second half of this year but the visibility of economic growth is clouded by the stimulus programs which have distorted the normal trends of economic recovery and have resulted in a “sawtooth” pattern of economic data since the recession ended in the third quarter of last year. We expect that to continue until the private sector can sustain this recovery on its own.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends Ben Bernanke, economy, employment report, GDP, government, stock market, trends, unemployment

Tuesday’s  stunning victory in Massachusetts by Republican Scott Brown to fill the Senate seat of the late Ted Kennedy is undeniable evidence of the failure of the Democratic Party and President Obama to capitalize on their voter mandate in 2008. In what should have been a year of great accomplishment with passage of landmark legislation in healthcare, the environment and economic reform the President marks his inaugural anniversary with no great success in his domestic agenda and his party losing its super majority in the Senate. Coupled with recent Republican victories in gubernatorial elections in New Jersey and Virginia and the retirement of several leading Democrats in the Senate, the Democratic Party is firmly on the defensive with low voter approval ratings and the object of intense voter anger. We have been commenting on building voter anger in our website articles (See “Long Term Outlook“, October 8, 2006, “The Election“, November 17, 2008 and “I am Mad as Hell…”, March 23, 2009) and it has now reached a fever pitch exacerbated by the severe recession. We repeat the mantra we have stated since 2006, “an angry electorate is an unpredictable electorate”.  A more detailed review and analysis of the domestic political environment and its implications will be covered in an upcoming website article. For now, we make the following observations:

1. The President must take responsibility for his party’s decline and his program failures. The President is an eloquent speaker but he does not follow the speeches with forceful actions. We commented in our July and August blog articles on the failure of the President’s healthcare initiative BECAUSE of splits within the Democratic Party. With all of the political capital expended by the President on healthcare, his failure to unify his own party and rally public support on this issue have been fatal. The election of Scott Brown in Massachusetts and the decline in public approval have made the President’s healthcare initiative all but dead.

2. Likewise, the loss of the Massachusetts Senate seat will now slow if not halt the President’s initiatives on carbon taxation, immigration, financial system regulation and other major agenda items that encompass higher taxes and increased federal government presence.

3. The anger in the electorate and the failures of the President and the Democratic Party have now resurrected the Republican opposition and make them a credible threat to unseat Democrats in this year’s Congressional elections. Faced with public anger and reelection, Democrats in Congress will be less inclined to support the President. Significant losses by the Democrats in the House and Senate will likely result in legislative gridlock for the remainder of President Obama’s term. The President would increasingly look like a one term president. This will prevent solutions to the major socio-economic issues we face in the next decade and cloud our longer term economic outlook. This will however alleviate increased regulation of business and provide a more benign environment for the stock market in the shorter term.

4. This latest political setback for President Obama will not go unnoticed overseas. A president already viewed as weak and unsuccessful overseas (See our recent website article, “The Obama Foreign Policy“, January 7, 2010), will be weakened further if he cannot control his own political party and win the public debates on domestic policy.  It will be harder to get agreements from allies and concessions from adversaries particularly if the president looks like a one termer.

Tuesday’s Senate election in Massachusetts has altered the domestic political landscape and thus the economic outlook for the next two years. Its repercussions will be felt not only here in the U.S. but around the world as well.

Morris R. Segall

Morris Segall Economic Trends Democratic Party, democrats, economy, Election, government, Massachusetts, Massachusetts Senate, political, politics, President Obama, Republican Party, republicans, Scott Brown, Ted Kennedy

We recently updated our presentation on today’s economic landscape and what’s on the other side with some fresh data.  We hope you continue to find value in our slides:

Morris Segall Economic Trends 2009 economy, Add new tag, business landscape, Capital Markets, consumers, crisis, debt, economic, economics, employment report, future trends, GDP, government, recession, unemployment

Ben Bernanke appears to be fighting for his life before Congress where several members from both major parties and one of the independents in the Senate are rejecting his reappointment as Chairman of the Federal Reserve Board for a second four year term.  The opponents of his reappointment blame Mr. Bernanke for aiding and abetting the excesses in the financial system that resulted in its meltdown and taxpayer bailouts of many of its institutions. In their zeal to lash out at the stewards of fiscal and monetary policy during the financial crisis of the past two years, the critics of Ben Bernanke fail to include one of the most culpable parties to the worst financial crisis since the Great Depression and that is Congress itself. From the enactment of the Bank Holding Company Act in 1956 and its subsequent amendments which allowed banks to buy non bank financial entities outside of the supervision of the Federal Reserve System, to the repeal of the Glass Steagall Act which had separated the commercial and non-commercial banking activities of banks in 1999, to the lax oversight of Fannie Mae and Freddie Mac, federally chartered institutions that were the backbone of mortgage securitizations and transactions which fed the lending bubble. For over 40 years the Congress has consistently enacted legislation that enabled banks and other lenders to engage in high risk activities OUTSIDE of the supervision of the Federal Reserve Board. So when the Fed complained that it was losing control of the financial system, Congress did nothing.

In our website article of December 7, 2007, “The Treasury Plan: Is This the Solution?“  we outlined our skepticism of the success of the Treasury plan of then Treasury Secretary, Henry Paulson, to effectively “dance around” the mortgage crisis by adjusting mortgage rates and terms in the hope of forestalling the inevitable losses from mortgage defaults. It was not until March, 2008 that the Federal Reserve forcefully attacked the loan loss problem by swapping Treasury paper for the problem debt held by mortgage lenders. The Fed subsequently expanded Discount Window facilities to both commercial and for the fist time, non-commercial banks like investment banks and brokerage firms so these firms could have liquidity. In fact in our ongoing economic presentations such as the ones  posted on our blog and website,  there is an entire section of slides and commentary entitled “The Government”s Response” to the severe credit crisis. It shows the leadership of the Fed in increasing the money supply, reducing interest rates and expanding its own balance sheet by purchasing the “toxic” assets of the banking system to provide it with liquidity necessary to keep the system afloat.  By most objective scutiny of the Federal Government’s handling of the credit crisis, including our own jaundiced view, if there is a hero in this debacle, it is Ben Bernanke who literally pulled out all the stops to keep the financial system in this country from totally collapsing, particularly after Henry Paulson triggered a system panic by allowing Lehman Bros. to fail. We may not have liked the bailouts of many of these instituions but as we have stated in prior commentaries, the country runs on credit and letting the banking system fail was just not an option.

If one wants to point a finger at the Fed for allowing the credit bubble to build, it needs to be pointed at Alan Greenspan who instead of musing on the illogical low level of interest rates in 2004-05 in the face of the real estate boom should have raised interest rates and loan reserve and capital requirements to slow the creation of credit. Upon succeeding Greenspan in January, 2006 Ben Bernanke’ s Fed started raising interest rates through the spring and into the summer of that year and held those higher rates until the recession began in late 2007.

We and other observers believe Ben Bernanke will be reappointed to another term after this current thrashing. He better be. A rejection of Ben Bernanke AND an ill advised replacing of the Federal Reserve as the nation’s principal regulator of monetary policy and the financial system, would create a loss of confidence in foreign bankers, creditors and traders and would depress our bond markets and exacerbate an already “free falling” U.S. dollar. The President needs to show leadership on this issue and strongly reaffirm his support for the reappointment of Ben Bernanke and not let Congress make him the “goat” of the recession. If Congress wants to assess blame for the financial mess, they should begin by looking in the mirror.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends Ben Bernanke, business landscape, Capital Markets, credit crisis, economics, economy, government, obama, treasury, trends, unemployment

Today’s unemployment data for November was a surprising loss of only 11,000 jobs, well below economists’ expectations of 100,000-150,000 jobs lost in the month. In addition, the unemployment rate for November declined unexpectedly to 10% from October’s 10.2%. Consensus expectations were for the unemployment rate in November to be flat at best with October’s cycle high. The Labor Dept. also revised downward previously reported job losses in September and October. Monthly job losses have been revised downward for each month since August by a total of over 200,000 jobs. Since August, monthly job losses have averaged below 200,000 versus over 300,000 average monthly losses in the May-July period. The decline in monthly job losses parallels the strong improvement in first time unemployment claims reported weekly. Since mid September, first time unemployment claims have fallen approximately 100,000 and are now running at approximately 450,000 for the last two weeks in November.

In isolating the areas of reduced job losses we note that healthcare continues to be the area of the economy that has consistently added workers during the recession. Since September, healthcare has added an additional 100,000 workers and nearly 900,000 workers since the recession began in December of 2007. Other areas of job improvement since September are: the federal government and state government education accounting for an increase in approximately 50,000 jobs; and professional and business services adding over 100,000 jobs largely in temporary help services.  Importantly, for the first time this year, the average workweek increased to 33.2 hours from a cycle low of 33.0 hours in October.  The average workweek improved more in the manufacturing sector expanding to 40.4 hours from 40.0 hours in September. This reflects the recurring order and shipment strength in the manufacturing sector since last summer.

Conversely, most other areas of the economy continued to record job losses including manufacturing, finance, construction, retail and wholesale trade and information services. While the Labor Dept. reports almost 41% of reporting industries are now hiring, a cycle high, that leaves nearly 60% that are not. The surge in temporary help jobs indicates businesses are wary of the economic recovery and are reticent to add to payrolls. Furthermore, the labor force has declined by over 100,000 workers since September indicating an increase in discouraged workers despite the improvement in the economy. The decline in the civilian labor force would also partly explain the decline in the unemployment rate in November. Another benchmark of employment in the weekly and monthly reports indicate no improvement in the numbers of long term unemployed and under-employed workers. In fact, the numbers of long term unemployed increased to over 9 million or 38% of total unemployed at the end of November, a record level.  In addition, while first time unemployment claims have declined sharply, they are still recording well above 400,000 claims per week. Finally, the response from consumers in recent surveys indicate jobs are hard to get by an overwhelming margin despite the economic improvement in the third and fourth quarters. These measures do not support the monthly improvement in employment reported by the Labor Dept. since August and we have repeatedly said so in our blog articles on the monthly employment reports going back to last July.

Nonetheless, if the monthly employment report from the Labor Dept. is indeed true and not distorted by seasonal adjustments and faulty assumptions that are part of this survey’s results, then  it would appear that unemployment in this cycle is peaking and job creation is virtually around the corner early next year. This would be well ahead of consensus expectations, including our own, in projecting a peak in unemployment and the transition to job creation in the middle and latter part of 2010, respectively. It is important to note that the Labor Dept. will be making final revisions to its 2009 monthly employment data in March of 2010. In its initial revision to 2009 monthly employment data in August, the Labor Dept. revealed that unemployment this year was actually almost 900,000 workers higher than originally reported. Similar revisions were made to monthly data in 2007 and 2008. With that as a background and the contradictory results of other unemployment data and surveys, we are skeptical the employment cycle is turning this strongly and this fast.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends consumers, debt, economic, economics, economy, employment report, GDP, government, recession, trends, unemployment

Yesterday’s second reading on the third quarter GDP showed a downward revision from the robust 3.5% preliminarily reported at the end of October. As November wore on expectations of the second and more definitive read on the third quarter was for a downward revision to the 3% level but no one was alarmed. It was considered more or less statistical.

After taking a look at the revisions from the preliminary report we are concerned for the following reasons:

1. Personal consumption was revised down from 3.4% growth to 2.9% with spending on goods dropping from 8.1% growth to 7.2%.
2. Business capital spending dropped from 11.5% growth  in  the preliminary report to 8.4% in the revision with large downward revisions in the growth of inventories and business structures.
3. Federal government spending growth was revised upward from  2.3%  to  3.1%.
4. Growth in final sales of domestic product was revised downward from 2.5% to 1.9%.

This revised mix of weakness in business and consumer spending with all of the federal government stimulus in the quarter is alarming and casts further doubt on the underlying strength in the economy as federal stimululs abates going into next year. Our assumption of 1%-3% GDP growth in the fourth quarter will need strong contributions in both consumer and business fixed investment from the revised third quarter levels. We detect an improved level of retail sales in the quarter but  will need to see sales results of “Black Friday” to see if that is true. A disappointment in this weekend’s sales will cause a shift in outlook for both the economy and particularly the capital markets which have been seeing the glass “half full” in November despite the warning signs in consumer sentiment, new home sales and continued high levels of unemployment. It is noteworthy that the market gains in November have been accompanied by low levels of trading volume, an ominous sign for sustained capital market gains.

In our previous website and blog articles on the preliminary third quarter GDP, we remained skeptical of the durability of the third quarter gains and said we would be watching fourth quarter economic data closely for future direction. With the downward revision in third quarter numbers, we will be even more vigilant to see if this economic recovery has “legs”.
Best wishes for a Happy Thanksgiving holiday and stay tuned.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends 2009 economy, consumers, economics, future trends, GDP, global, government, recession, stimulas, unemployment

We recently updated our presentation on today’s economic landscape and what’s on the other side with some fresh data.  We hope you continue to find value in our slides:

Morris Segall Economic Trends 2009 economy, Capital Markets, economics, GDP, global, government, international, treasury, trends, unemployment

GDP for the third quarter comes in strong stimulated by the government but the details and other consumer economic data create doubts on sustainability and make the capital markets nervous. Continue reading this premium article at spgtrend.com.

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Morris Segall Economic Trends 2009 economy, Capital Markets, commodity markets, consumers, debt, depression, economics, GDP, unemployment

After reaching the 10,000 level last week, the Dow Jones Industrial Average stalled reflecting an overextended condition. Over the same period the U.S. Dollar and commodity prices, led by oil, moved to new lows and new highs, respectively, for this year. These trends are inconsistent with a rising stock market and something had to correct. Either commodities, driven recently by speculation, reversed course or the stock market would retreat under the downward pressure from a falling dollar and rising commodity prices. We have expected a correction in the stock market as it became overextended and vulnerable to softening economic data for the month of September. That correction may have started today with a nearly 100 point decline in the Dow that accelerated in the last hour of trading, reversing the recent trend of strengthening prices as the market closed. As expected, corporate earnings reported for the third quarter were a catalyst for the market “run up” in October. Analysts and investors took heart that earnings were better than expected, notwithstanding that expectations were quite low. However, the economic data on retail sales, factory orders, housing starts and consumer confidence measures for the month of September receded from the July and August increases. This faltering of economic growth is our main concern for extended stock market gains from current levels. We will continue to digest economic data for signs of the direction of the economy in the fourth quarter as government stimulus wanes.

The free fall of the U.S. dollar is now a chronic problem for international finance and capital markets. We noted in our September 8, 2008 website article, “Stocks, Recession and the Bail Out”, the adverse impact of the government’s stimulus programs on the U.S. dollar and the U.S. government balance sheet on international currency and credit markets. With the Dollar at record lows versus other international currencies, foreign governments will now put pressure on the U.S. to support the Dollar. They in turn will consider measures to restrain the rise in their currencies to protect the competitiveness of their export industries, including protectionist measures which we expected to be a reaction to the severe worldwide recession. Unfortunately, the U. S. economy is not strong enough to endure a rise in interest rates which would make the Dollar more attractive on international currency markets. So the Fed is in a quandry with no near term solutions to the falling Dollar given the weak U.S. economy and the massive federal deficits that have been incurred. As we have stated previously, a weak U.S. dollar is inflationary as imports become more expensive. Combined with the large increase in oil and other commodity prices, inflation becomes a problem despite the weak economy. Already manufacturers are reporting a rise in the cost of production inputs which most cannot pass on to customers. Gasoline prices have also risen and will negatively impact consumer discretionary spending.

The rise in oil and commodity prices are a reaction to the falling Dollar. They do not reflect current supply/demand conditions. So the more the Dollar declines, the more commodity prices increase. We believe commodity prices, including oil, are streched and will recede if U.S. economic growth weakens in the fourth quarter and/or the first half of next year. Longer term, gold, oil and other commodity prices will increase reflecting the longer term weakness in the U.S. Dollar and rising overseas demand, particularly from emerging industrial economies in Asia and Latin America, for raw materials. China is aggressively buying up raw material sources in Africa and Latin America, outbidding U.S. companies. This will also raise commodity prices on international markets, longer term.

In summary, capital markets, both bond and equity, here and overseas have had huge gains since the March lows as have commodity markets. We believe all of these asset classes are overextended and vulnerable to faltering economic data, particularly from the U.S. We remain vigilant to near term trends in the economy and price levels in capital and commodity markets. Longer term, a weak U.S. currency and rising commodity prices raise the specter of inflation which validates our commitment to gold, energy and other commodities in our strategic asset allocation model.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends 2009 economy, Capital Markets, Commodity Prices, consumers, Dollar and Commodities, Dow, Dow Jones, Dow Jones Industrial Average, Economic Growth, economics, trends, Wall Street

Friday’s monthly employment report for September was bad. September job losses, per the Business Establishment series, was a -263,000, worse than analysts projected. Job losses were widespread between manufacturing, construction and a huge 147,000 loss in service sector jobs. The stated unemployment rate increased to 9.8%, another record level. The unofficial unemployment rate that includes underemployed and discouraged workers rose to 17%. The average workweek declined to a record low 33 hours and the employment to population ratio declined to a record low of 58.8%. That means less than 60% of the available working age population are employed in full time jobs. Unemployment rates increased in all demographic groups led by teenagers at a crushing 26% and minority groups in the low to mid teens. The unemployment rate for adult men escalated to over 10%. While these numbers have chronic economic implications they also have negative social impact as well and we are seeing it in an increase in crime, divorce, domestic violence and physical and psychological disorders. We wrote about the social and emotional toll of this recession in our website article of March 23rd, “ I am Mad as Hell…“. The scars from this growing and continued high level of unemployment will be felt long after the economy recovers.

As if the current level of unemployment were not distressing enough, the Labor Dept. announced that a preliminary estimate of its annual benchmark revision to the monthly unemployment data shows that private sector employment going back to March of this year is lower than originally reported by 855,000 jobs. In a previous blog article, “The July Employment Report…“, August 10, 2009, we stated that we believed recent monthly unemployment numbers would be revised downward when the annual revisions are made next March. The 855,000 increase in lost jobs is a PRELIMINARY estimate and we are expecting it to go higher when the final revisions are made next year.

Friday’s unemployment data on the heels of Thursday’s increase in first time unemployment claims is the latest in a string of weakening economic data last week. We stated in our last blog article, “The Economy, Capital Markets…“, October 1, 2009, that we are getting “uneasy about the underlying improvement in the economy”. Friday’s unemployment report is more unsettling and increases our unease.

To be sure we need to see more economic data for the month of September before making revisions to our economic and capital market outlooks. However, we are advising our capital markets clients to take some capital gains where tax considerations are not an issue and hold onto cash as a defensive measure. We still believe there was enough “pop” in the government stimulated economy in the third quarter to generate 3%+ GDP growth. But we are increasingly unsure about subsequent quarters as government stimulus wanes. If our fears are realized, equity markets here and abroad have considerable downside risk from current levels. As we have stated repeatedly in previous blog and website articles, there is no recovery without the consumer moving “goods off the shelves” on a continuing basis. Worsening levels of unemployment just keep postponing that development. Investors and businesses will need to be flexible and nimble in planning for next year. Stay tuned as we continue to analyze data and events over the remainder of this year.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends 2009 economy, business landscape, consumers, economic, economics, employment report, unemployment

Today the government released its third and final revision to the second quarter GDP numbers and shaved the 1% contraction to .7%. There were no major shifts in trends from the previous report but the positive direction of business fixed investment and consumer spending was aided by a surge in government spending, as expected. As we have stated previously, it appears the recession ended in the second quarter. Led by rising home and auto sales, positive trends in industrial production and retail sales continued through July.

The expectation was for these trends to continue through August and into September led by continued government stimulus and subsidy programs. However, August numbers for existing and new home sales declined in August from July levels and factory orders for durable goods in August were also unexpectedly down from July levels. This makes us uneasy about the underlying improvement in the economy. We have stated previously that government stimulus and subsidy programs, notably the “Cash for Clunkers” program and the tax credit for first time home buyers, were likely to spur positive GDP growth in the third and fourth quarters of this year. The question in our mind was what happens when those programs expire. Now we see that despite the positive demand stimulus from the government programs and the momentum of increased home sales and prices and auto sales in June and July, there was no follow through in August. And there should have been. The decline in factory orders is particularly disturbing because the positive trend in auto and home sales should be leading to a steady improvement in factory orders and production to replace goods sold.

The decline in many of the components of the factory orders report suggest that businesses are not ready to ready to begin a sustained capital spending uptrend. If they are not going to increase spending with government stimulus, what happens when that stimulus ends. It will be very important to see housing and business spending levels for September and the remainder of this year to gauge whether we are really in recovery or facing a downleg in the “W” shaped economic outlook we raised in our August 3rd blog entry, “Turning the Corner…“. While the “Clunker” program has expired we expect the current home buyer tax credit program to be extended into next year given the success of that program.

Today also marks the end of the third quarter and stock markets around the world concluded one of the most successful quarters in decades. The Dow Jones Industrial Average gained 15% in the quarter and overseas markets showed bigger increases including Europe and Japan as well as emerging markets. Fed by infusions of liquidity from central banks and the specter of worldwide economic recoveries, capital markets surged. In recent weeks, increased speculation and appetite for risk have reappeared in debt and banking transaction markets. Year to date the Dow is up 50% from its March lows. Overseas markets show comparable and greater gains. But at this point both bond and stock markets here and abroad are stretched and need further evidence of economic and corporate profit improvements to protect present gains and sustain additional appreciation. If the outlook for worldwide economic growth proves correct we believe worldwide debt markets are vulnerable to declines from higher interest rates next year from the current depressed levels. Here again, economic data over the remainder of this year will influence the direction of worldwide capital markets. If our concern over a “W” shaped economic outlook proves correct, expect a major correction in U.S. and overseas markets from current levels. We are watching developments closely.

In our blog entry, “Healthcare Reform and the Democrats…“, of August 6, we raised concerns over passage of the President’s healthcare proposal and the split in the Democratic Party that we felt would be the undoing of the President’s plan. Events since then have validated that concern and it now appears that for the same $1 trillion price tag Congress will pass a healthcare bill that omits a public option. This will leave the private healthcare and pharmaceutical industries intact and escaping significant third party competition. The political “fallout” is considerable. The President is wounded and his party is split. There is concern about Democratic Party losses in next year’s Congressional elections as the debate over healthcare reform has been framed as big government socialism versus libertarian, individual democracy. A perceived defeat of the President and a fractious Democratic Party will have international implications as both our allies and foes evaluate the strength of this President.

Speaking of geopolitics, this weekend’s victory of Angela Merkel in German elections lends further support to our contention that Europeans are turning to the political “right” (See our website article, “I am Mad as Hell…“, March 23, 2009). Running on a pro business, lower tax platform, Chancellor Merkel and a right of center, pro business party won nearly 50% of the popular vote. The long time Social Democratic Party garnered less than 25% of the popular vote, its worst defeat in postwar history. Angela Merkel joins Nicholas Sarkozy of France heading a center right European government and the victory of center right parties in this year’s European Parliament elections. Furthermore, it is widely believed Britons will elect a Conservative government in next year’s elections. The disillusionment of European voters with socialist governments is the direct result of the economic damage to those electorates from the recession and the increase in protectionist sentiments to protect domestic jobs and incomes.

Additionally, geopolitical events from Afghanistan to Honduras are hurting President Obama and his foreign policy agenda. The President is in danger of being viewed as impotent and more style than substance. While he remains very popular overseas, his policies and lack of forceful actions in the face of antagonistic behavior will erode his ability to lead a free world coalition against rising threats. We will publish on our website in the near future an in depth analysis of international events and the Obama foreign policy.

In summary, as we conclude the third quarter recent economic data is disquieting and if continued will threaten the outlook for economic recovery in the U.S. and the large gains in worldwide capital markets achieved to date. Overseas events also threaten to undermine the “honeymoon” in foreign affairs enjoyed by President Obama to date. We are not changing our intermediate and longer term positive economic and capital markets outlooks at this point but we are watching data and events over the next three months very carefully.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends 2009 economy, Capital Markets, Cash for Clunkers, economics, Geopolitical, healthcare plan, trends, unemployment

It looks like it is all falling into place. Improved housing sales, increased factory orders and shipments, the “Cash for Clunkers” program moving autos off of dealer lots and stimulating increased automobile factory production and the best news of all, stock markets around the world are hitting 12 month highs. World central bankers, including our own Ben Bernanke, pronounce the recession over as GDP for the June quarters show positive growth in France, Germany, Japan and most of Asia. The capital markets buying the rumor are soaring fed by huge amounts of liquidity added to monetary systems by the world central banks as they embarked on economic bailout and stimulus programs. This past Friday’s U.S. stock market action has typified the recent ebullience among bankers and investors. The Dow Jones Industrial Average breached the 9500 level for the first time since last October buoyed by further good news in existing home sales and Ben Bernanke’s positive comments.

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Morris Segall Economic Trends 2009 economy, business landscape, Cash for Clunkers, consumers, economics, recession, trends

On Friday, the Labor Department reported the monthly employment situation report for the month of July. The Establishment Survey, the one most widely used as the benchmark for measuring monthly job creation showed nonfarm payroll employment declined by 247,000 in the month of July, a number better than widely held forecasts. It is the lowest level of monthly job losses since last August before the massive economic declines in the fourth quarter of last year and the first quarter of this year. It is also two thirds lower than the peak level of monthly job losses recorded in January of this year at over 740,000. With a number this low, naturally job losses in most major industry sectors measured by the survey saw significant declines in job losses from the surprisingly weak June levels. The exception was retail trade which saw job losses in this category double from 21,000 in June to 44,000 in July reflecting the continued poor consumer spending environment. Nonetheless, economists and financial commentators viewed the dramatic improvement in the monthly numbers as further evidence of the recession’s end and imminent economic recovery. To be sure, we concur the huge decline in monthly job losses reported since March’s 652,000 follows the general trend in first time unemployment claims which peaked at 674,000 in late March and has declined to 550,000 as of August 1st and signifies a peaking in new job destruction in this cycle and fortifies other economic data suggesting the recession has bottomed.

However, as we have written in previous posts, “Current Economic News Needs a Dose of Reality“, May 15th, 2009, the dramatically improved job loss numbers in the government’s Establishment Survey continues to be at odds with other government employment reports and empirical data we are getting from job seekers and businesses. Inconsistencies include:

1. While job losses in July measured 247,000 and a 9.4% unemployment rate, the civilian  labor force saw over 400,000 people leave it in July versus June and over 570,000 since May. The civilian labor force participation rate in July fell to 65.5%, matching the lowest level of worker participation in this cycle in March of this year.

2. While monthly job losses per the Establishment Survey have declined from 652,000 in March to 247,000 in July, first time unemployment claims, representing new job layoffs, have declined from 674,000 to 550,000 over the same period. A figure twice as high as the establishment survey estimate.

3. The number of unemployed workers including discouraged workers and part time workers who cannot get full time employment continued to increase in July. The number of people leaving or not in the work force increased substantially (over 1 million people) in July reflecting discouragement with finding gainful employment. This is consistent with the empirical information we hear from job seekers who say jobs are very hard to land and employers who tell us they are still not hiring and will have to lay off more workers if sales do not pick up.

4. The average work week increased by .1% to 33.1, the second lowest work week during the entire recession. We will see if the recent three month trend of monthly job losses per the Establishment Survey of approximately 330,000 is accurate. We continue to believe these recent numbers are vulnerable to downward revision when the Labor
Department makes it annual benchmark revisions next March. For now, the consensus is taking the numbers at face value.

There was another very important economic announcement on Friday. The Federal Reserve released its report on Consumer Credit for the month of June and for the fourth consecutive quarter, consumer credit declined. Consumer credit contracted at nearly a 5% annual rate in June, nearly double the 2.6% annual rate of decline in May. Since its peak in the third quarter of 2008, consumer credit outstanding has declined 3% or over $75 billion at the end of June, 2009. Most of this decline has occurred in revolving credit, i.e. credit cards. Since the third quarter of 2008, revolving credit has declined 6% or over $55 billion. Clearly consumers are continuing to pay down their debt in an attempt to de-leverage their balance sheets. Combined with a continued high savings rate in excess of 4% at the end of the second quarter, it is clear American consumers are paying down debt and increasing their liquidity. These trends and the existing high levels of unemployment continue to suppress consumer spending.

The government is artificially creating increased consumer spending and retail sales via its “Cash for Clunkers” program and the other stimulus package spending that will be impacting the economy over the next four quarters. However without job creation rather than “less worse” job destruction, a sustained consumer led spending increase is unlikely. In fact, to the extent the government creates consumer spending near term, it could result in deflated consumer spending longer term when the government stimulus ends. The key to a real economic recovery continues to be the revival and return of the consumer, with a job and the financial capacity and creditworthiness to spend. The consumer led us into the recession. He will have to lead us out. Recovery in this cycle was always going to be a long stretch in re-liquifying and de-leveraging the consumer so he could “get back in the game”. He is doing just that but the loss of his job is making those tasks longer and more difficult. While these trends hurt the economy in the short term, they will help sustain the recovery in the longer term.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends 2009 economy, Cash for Clunkers, consumer credit, economic, employment report, Establishment Survey, Federal Reserve, government, unemployment

As I feared from the beginning, the future of President Obama’s proposals were going to be in the hands of conservative or “Blue Dog” Democrats largely from the south, west and midwest. Their opposition to the high costs of the plan and a large federal presence in the system was going to be the defeat of the President’s program, rather than the expected “knee jerk” Republican opposition. The Republicans are now a marginal party lacking numbers and influence in the Congress to pass or defeat any legislation. It now appears the “Blue Dogs” will win out and “water down” the President’s plan to the point where it will be largely a failure in terms of progressive healthcare reform. It will eliminate a federal entity to offer insurance in competition to the private insurance industry. It will exempt thousands of so called small businesses, even those with payrolls of $500,000. It will also extract higher health insurance premiums on low-middle income wage earners. And most egregiously, push more of the increased Medicaid burden on the states who are already facing massive budget deficits and have no money to pay for anything. As a result of the “Blue Dog” opposition, in conjunction with the negative statements from the Republicans and the propaganda from the healthcare industry, popular support for the President’s program has been seriously eroded and the fact that Congress will adjourn for the month of August without passing healthcare reform legislation will give the President’s opponents an entire month to erode popular support further and “gut” the pending bills in committees even more.

I fear the final result will be little if any real healthcare reform; increased premiums for insured’s, particularly if private insurance firms have to accept less healthy members; and a continued increase in uninsured people as businesses are exempt from providing mandatory healthcare coverage. The winners will be the insurance and pharmaceutical industries who will have “dodged” a bullet for massive healthcare overhaul and reform. The costs to them will be a fraction of what the President’s program would have cost them and they will make it up by charging higher prices to the public. The losers will be the public who will continue to pay more for an unworkable system and doctors who will get paid less in an effort to control healthcare costs. By the way, the cost saving from the current compromise plan agreed to by the Democrats in the House is  $100 billion, the amount we sunk into General Motors and Chrysler in a futile attempt to save them from bankruptcy. As I said in my previous piece, it would appear we are more prone to spending billions saving corporate America than insuring the health of the American public.

The Democratic Party offered the American public comprehensive healthcare reform in the last two elections and the American public gave the Democratic Party the electoral majority they needed to get it done. It appears the Democrats decided that was a promise they are not willing to keep.

Morris R. Segall

Recommended reading:

Turning the Corner: GDP, Housing and Cash for Clunkers

An Open Letter to Congress

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Morris Segall Economic Trends Blue Dog Democrats, democrats, economics, economy, healthcare plan, healthcare reform, obama, republicans

Friday’s news of the “less worse” second quarter GDP was received as another piece of good news by the stock market as further evidence of the end of the recession. It capped a week of improving economic news on housing. But the real economic sweetener that offers a tangible boost to the economy in the near term was the announcement on Friday that the government’s “Cash for Clunkers” program was extended by the House of Representatives and augmented by a further $2 Billion in government funds.

Of all of the various government schemes and bailout programs to stimulate the economy over the past two years, the government finally got it right with this one. We have stated repeatedly, the economy was not going to recover until the consumer started moving “goods off the shelves”. Well goods are moving off the shelves or rather cars are flying off of car dealers lots. OK  the U.S. government is buying the cars but the end result is dealers are emptying their inventories and will soon reorder from the factories as long as the government program is in force. The Senate needs to also approve the program’s extension or it will expire by the end of this week. We are optimistic the Senate will vote to continue the program before they adjourn this Friday. This will in turn start the manufacturing replacement cycle. The “Cash for Clunkers” program is expected to increase retail sales beginning in July, increase industrial production by the fourth quarter and even help factory employment due to the higher production rates. Higher auto production will have a widespread positive impact on manufacturing and distribution sectors. It is our belief this program will insure a positive growth in U.S. GDP in both the third and fourth quarters of this year. Now let’s be clear. This is artificial consumption and will deflate when this program expires which we assume will be at year end. We don’t think Congress will ante any more money for this when the current funding is used up. By that time, the rest of the economy may be starting to fill in the void .

To that end, we are seeing for the first time a trend of positive news on housing that would support our long standing forecast of a bottoming in the housing cycle in the second half of this year and obviously remove a major depressant to the economy. This past week both new and existing home sales rose for the third month in a row. And for the first time since the housing market imploded, home prices showed a monthly increase according to the widely followed Case-Shiller Home Price Index. In addition, inventories of existing and new homes are now getting down to normalized levels. Here again, the recovery process is not widespread and is largely centered in homes in the $150,000-$300,000 price range as home buyers take advantage of bargain prices, ample supply and willing sellers in the deflated housing market.

Lastly, the second quarter GDP was reported with a contraction of 1%. While this was better than consensus economic forecasts including our own, it is the first of three readings on the quarter and the one subject to the most revision as more data is processed over the next month. The second reading on the quarter will be reported at the end of August and will be more definitive. While the report was mixed with continuing depressants in consumer spending and business fixed investment, the quarter saw the beginnings of increased government spending which helped offset the weakness in consumption and business investment. Nonetheless, the quarter fulfilled our forecast of a decidedly “less worse” performance than the severe contraction of the first quarter. Importantly, the huge decline in business fixed investment appears to have bottomed in the second quarter and will not be the huge depressant on the economy going forward.

So for the following reasons we now believe the third and fourth quarters of this year will show positive growth though we are not forecasting an economy embarking on a full recovery. Unemployment is still too high and there is a great deal of unutilized production capacity that will keep private sector spending suppressed. However, the bulk of the government stimulus spending will hit the economy in the next four quarters providing a strong plus for GDP growth and exports are picking up from rising economic growth in Asia led by China. These pluses along with reduced minuses from consumption and business fixed investment should equate to positive GDP growth in the second half. The question is can the private sector recover on its own without the huge and finite pull of the federal government. The answer remains the level of unemployment and consumer incomes.

As the macro economic environment improves, the outlook for corporate profit growth also improves providing further stimulus to rising stock markets here and abroad. The likelihood of a sizable correction in the equity markets is diminishing the further we go through this year and into next. We have long been bullish on equities over the 2010-2012 period and increased equity allocations in our capital markets strategy this past spring once a bottom in the recession was perceptible. We have hit that bottom and reaffirm our longer term capital markets strategy of getting fully invested in U.S. and overseas equities with a strong allocation to commodities, including gold.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends 2009 economy, Cash for Clunkers, consumers, economics, GDP, government, housing

In our July 5th blog entry, “June Employment Report–Green Shoots Fading“, we commented that a doubtful economic recovery expected in the third quarter and pessimistic earnings guidance from companies reporting second quarter earnings this month would in our opinion herald stock market corrections here and abroad near term. Since that posting the Dow Jones Industrial Average declined approximately 5% in the ensuing five trading sessions before rebounding on expectations of robust bank earnings to be reported this week. Indeed, Goldman Sachs reported a “blowout” quarter led by its investment banking activities. However the more significant earning news yesterday came from Intel that reported a surprisingly strong second quarter highlighted by a surge in revenues and unexpected expansion in gross margins from increased unit volumes of consumer products. Even more importantly, the company reestablished earnings guidance for the remainder of the current fiscal year as the outlook for its business became more visible and positive. This is the kind of earnings encouragement that is necessary to sustain the market recovery begun last March. To be sure, Intel’s business turn may be truly singular to itself and not indicative of a broader upturn in the technology sector but as a bellwhether in the industry and in the major market averages, the substantial improvement in Intel’s performance and outlook lead us to believe we are at or near the bottom of the earnings cycle for non-financial companies. Indeed, we feel Intel’s results signal the same kind of shift in corporate earnings we saw at the opposite end of the spectrum in early 2008 when we wrote our article, “GE, the Earnings Cycle and Food”, April 14, 2008. In that article, we noted the deterioration in GE’s first quarter 2008 earnings and the very negative implications for the rest of S & P 500 corporate earnings last year.

The Intel results reflect successful new product introductions, stringent cost control, inventory reduction and strong sales. The strong sales reflect strong demand for PC products from China and the U.S. aided in the latter by bargain selling prices by the company’s resellers and buying stimulus from accelerated write-offs offered by the Federal government. The higher sales volume and cost reductions allowed the company to record much expanded gross margins in the quarter despite lower average selling prices and lower unit margins on consumer products. This has been a theme of ours supporting a positive outlook for common stocks led higher by rapidly increasing corporate profits from increased gross margins from increased unit sales volume.

The new, improved visibility for increased unit sales, continued cost controls and tight inventory control is allowing the company to forecast improved gross margins for both the third and fourth quarters of the current fiscal year which may force analyst earnings forecasts to be raised. This is also reinforcing another of our themes for the recovery cycle, namely the pent up demand for computers that can only be deferred for so long before a new sales cycle begins. Currently, the new demand is coming in consumer products but the company expects business demand to pick up next year for the same reasons. Importantly, the higher end business products carry higher unit margins which should amplify Intel’s earnings when the economy recovers.

Thus, we are encouraged that the Intel earnings report contains the seeds of a bottoming in earnings in the technology sector and possibly other areas of Producers Durable Equipment sector, i.e. capital goods as pent up demand, bargain purchase prices, accelerated equipment write-offs and fast return on investment and increased productivity lead to a recovery in this sector. We expected this sector to be a leading element in the economic recovery forecasted for next year due to short lead times for purchase and profitable returns. The Intel earnings report and new guidance give us reason to believe in that forecast. And yet we still believe in our comments of July 5th that many companies will not have the positive guidance outlooks of Intel, i.e. consumer discretionary, real estate, transportation to name a few. In view of this and the continued weak near term economic environment, we still believe the capital markets are vulnerable near term to the downside as economic and corporate earnings remain weak. Neverthless, our intermediate and longer term outlooks are reinforced by the Intel results.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends 2009 economy, business landscape, earnings report, economic, economic recovery, economics, GE, Intel, trends

We recently updated our presentation on today’s economic landscape and what’s on the other side with some fresh data.  We hope you continue to find value in our slides:

Morris Segall Presentations 2009 economy, business, business landscape, climate, crisis, debt, economic, future trends, globalization, recession, slowdown, strategy, trends, unemployment

Dear members of Congress,

I am writing to you regarding the current debate on President Obama’s national healthcare plan. As you may know I head an economic and capital markets research and consulting firm. My firm and our affiliate, Sage Policy Group, engage in economic and public policy analysis and ideas. Healthcare is one of several policy issues we have and are currently studying.

I have been involved in either administering or participating in private sector insurance programs for most of my 25 year corporate career. More recently, I have had to engage both the public insurance program of Medicare and the private hospital and insurance industry as a result of chronically ill parents who are both incapacitated. As a result, I have developed a keen understanding and awareness of the mortally broken and dysfunctional healthcare system currently in place in our country. After opposing the Clinton healthcare plan over 10 years ago I have come to the realization that comprehensive and affordable healthcare for most Americans must be built around a Federal entity.

The present system based on the private insurance and drug industries has not contained healthcare costs and has not increased the number of insured Americans. To the contrary, medical insurance costs are skyrocketing, even in the midst of this great recession. Many businesses report medical insurance plan increases in 2008 and 2009 well in excess of 20% and employees in those plans are facing higher deductibles and increased insurance premium and co-insurance payments, in some cases of nearly 50%. This at a time when American workers are facing historic unemployment and reduced “take home” pay from wage and salary reductions and fewer hours worked. Seniors on Medicare are now facing exorbitant costs for required drugs as they hit the “doughnut” hole in prescription drug coverage. While the costs of medical insurance and drugs go up, the reimbursements to doctors and hospitals are being reduced causing doctors to either leave practice or refuse to accept private insurance and Medicare patients. The increase in uninsured Americans forces them to seek medical treatment at hospital emergency rooms overwhelming those facilities. Likewise the increase in our aging population is now overwhelming acute care hospitals and nursing home facilities that are facing chronic shortages of trained personnel to care for an increasingly sick patient population. And the costs of hospitalization and nursing home care are crushing. Hospital and related services costs have increased nearly 8% in the six months ended this past May according to the Government’s CPI report.

So after decades of trying to fix America’s healthcare system and control escalating costs what is wrong? What’s wrong is we are asking FOR PROFIT companies that are primarily focused on increasing earnings and shareholder value and paying bonuses to its senior managers for doing so, to make less money by reducing its prices and accepting less than totally healthy insured’s that will “eat” into their profits. Critics of national healthcare raise the alarms of out of control costs, rationed and inefficient treatment in a federal system. Healthcare is already rationed if you are not on a corporate healthcare plan and if you have the misfortune of going to an emergency room and waiting for a physician for up to 12 hours, you will see firsthand the inefficiency of healthcare in today’s environment. This system is broken and will collapse entirely under the weight of the impending case load of the baby boomers. There are national crises that inure properly to the Federal government for solution.

It is now time to recognize the failures of the present system and move boldly toward a federal government health insurance program offering and administering, preferably under a single payor system, comprehensive, diagnostic and wellness programs to all Americans. It is also time to rectify the injustice in the Medicare prescription drug program and eliminate the so called “doughnut hole” in prescription drug coverage for seniors that forces many seniors to either skip their medications or have to choose between their medications and other necessities. But the cost of such a comprehensive federal program you say. How will we pay for it? What will it do to the federal deficit? How can it be run efficiently with some cost effectiveness?

No one is more cognizant of the erosion of U.S. finances than we. We have been warning our clients and audiences since last September when we first raised the specter of the long term cost to our currency and balance sheet from the huge bailout spending programs to resuscitate our economy. Now on top of that spending are ambitious spending programs of the President for energy independence, healthcare and education. The costs of huge federal deficits which we have projected in excess of $2 trillion this fiscal year and nearly that much in fiscal 2010 are already being felt in the currency and bond markets. The costs of such deficits will have to be borne by all of us, consumers and business, in the form of higher taxes and fees. We will also have to be creative in charging for increased government services on a means testing basis including higher co-payment terms for health insurance for those that can afford it. And don’t let the recent spate of propaganda from some medical authorities convince you there are no healthcare cost savings from wellness programs. You and I both know that just isn’t so.

We believe the American public has endorsed an increased federal presence in their lives with the election of a Democratic Congress in 2006 and the sweeping victory of President Obama in 2008 on a populist platform. We believe Americans are willing to pay higher taxes for increased government services and assistance in healthcare, education and energy which are draining middle class incomes and threaten our standard of living. If the U.S. government can spend billions on bailing out GM, AIG, credit card, banks, investment and insurance firms, what is our economic future and public health worth?  Therefore, I ask you to support the President’s proposal for a strong, comprehensive federal insurance program including a payor system. By the way, such a program would be an enormous help to the thousands of unemployed white collar managers, professionals, and administrators who have been especially hard hit in this recession. You might look at a federal health insurance program as the equivalent of the WPA program under President Roosevelt in terms of putting people back to work and helping to resuscitate the economy. Furthermore, this pool of highly experienced managers and professionals is one of the reasons I believe you can implement a large federal healthcare program successfully.

Sincerely,

Morris R. Segall

President

msegall@spgtrend.com

Morris Segall Economic Trends government, healthcare, healthcare plan, insurance, medical insurance, Medicare, obama

Thursday’s release of June unemployment numbers has cast a pall over the economic recovery thesis for the second half of this year. The report was pervasively weak. The overall job loss reported of 467,000 was much higher than expected and the breadth of the job losses was even more disappointing. Every industry sector except healthcare saw
increased job losses in June than in May with striking increases in the Professional and Business services and Government sectors. The negative tone and implications of the June report sapped the stock market on Thursday, knocking the major market averages down almost 3% and leading market sectors like commodities down even more.

We believe the June employment report and the attending stock market reaction signal the beginning of the long awaited stock market corrections both here and abroad as the prevailing optimistic sentiment regarding the U.S. economy is now in doubt. This change in sentiment and the upcoming earnings guidance from companies reporting second quarter results this month are expected to put increased pressure on the elevated stock markets. We expect the capital market declines to be led by commodities, particularly energy, which have paced the market gains since March. The weakening economic outlook diminishes the recovery story for materials and energy given a protracted weak demand environment.

Our capital markets strategy of holding significant cash reserves in anticipation of market corrections, while the U.S. economic recovery was in doubt, should provide a cushion to near term market declines but more importantly, provide liquidity to invest in the market at lower prices. We are “bullish” on stocks over the 2010-2012 period and believe the stock market lows of this past March are the cycle lows for this recession. But the markets, particularly foreign stock markets have appreciated very much, very fast and needed confirmation of an economic recovery to stimulate an upsurge in corporate earnings to sustain the recent market strength. Failing that, the markets were in our opinion, fully valued. So we will watch the slope of market weakness to see where it lands but be prepared for at least a 5% to possibly 10% correction, particularly if corporate earnings guidance for the remainder of this year and the early part of next year is disappointing.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends business, economics, economy, employment report, unemployment

I continue to be surprised at the over-optimism of the mainstream financial press and government spokespeople on the current economic environment which is leading to increased forecasts of economic recovery beginning as early as this year’s third quarter.

Headlines indicating some economic improvement from higher consumer sentiment readings, a guarded optimistic reading on the economy from the Federal Reserve Open Market Committee this past week, a marginal improvement in the rate of economic decline in this year’s first quarter GDP and an impressive growth in the Advance report on Manufacturers Factory Orders for May were used as the basis for this continued optimism and a reversal in the stock market slide of the week before.

So once again I must put the facts on the table:

1. The fractional improvement in first quarter from -5.7% to -5.5% was entirely due to a smaller reduction in business inventories. In fact, consumer spending was actually reduced from a 1.3% gain to .95% thus shading the contribution from consumer improvement.

2. The strong improvement in Manufacturers Factory Orders in May is up only 1.5%, excluding transportation (primarily commercial aircraft), from the severely depressed level of March and is down 23% from May, 2008 levels. More importantly, the book/bill ratio of orders versus shipments in May was 95% versus approximately 96% in March and April. Thus non-transportation factory orders are no better and in some respects worse than they were at the end of depressed first quarter levels.

3. The Federal Reserve statement, while expressing guarded optimism that the worst of the economic contraction was behind us, kept interest rates at essentially 0% because the economy is still functioning at a depressed level.

4. On Friday, the government reported a surge in consumer incomes in May of 1.4% fed largely by government social security stimulus checks. On the other hand, consumer spending in May increased only .3% and the personal savings rate increased to 6.9%, a 15 year high. This low level of spending and the further increase in consumer savings on top of already historically high levels tells us the consumer is still very much concerned about the current economic environment, refuting his statements on consumer surveys, and is not ready to start pulling us out of recession by a surge in spending.

In our blog posting, “Beware Over-Exuberant Reactions to this Week’s Economic News,” (May 28, 2009), we stated “the second and third quarters of this year will be “less worse” than the first quarter but not an end to the recession”. We characterize the current economic environment as the bottom of an “L”. We have been projecting second quarter GDP to contract 2%-3% but with the continued weakness in consumer spending through May, GDP contraction in Q2 could reach 4%. Furthermore, we see little evidence that consumer spending will miraculously turn higher in Q3, particularly with continued high levels of unemployment which we expect will go higher over the summer spurred by layoffs from GM and Chrysler. Thus at this juncture, we expect Q3 GDP to be in a range of 0% to down 2%-3% depending on the level of U.S. government spending in the quarter. This is well below the 1%-3% growth in third quarter GDP many economists are currently projecting. If we are right, stock markets here and around the world are setting themselves up for a material correction from the elevated levels achieved this week.

An economic recovery will occur and we still believe it is largely a 2010 event but the continuation of the current economic torpor is pushing the recovery further into next year. We continue to be vigilant for real indications of a sustainable improvement in consumer spending which is a prerequisite to any recovery from this recession.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends 2009 economy, business landscape, consumers, economy, government, slowdown

After a year of speculation and discussion, President Obama released his plan for reform and regulation of the nation’s financial system. There were few surprises. With more oversight and control centered in the Federal Reserve and augmented with newly created boards, the plan brings under new regulation and supervision virtually all major sectors and products of the financial services industry.

Born out of the cataclysmic financial losses of the current recession, the President’s plan seeks to avoid a repetition of the circumstances and events that led to the recent financial system meltdown. It is the quid pro quo for the federal government bailing out the U.S. credit system and nobody should be surprised at the far reaching reform and regulation embodied in the plan.

In the most sweeping regulation of the financial sector in this country since the Great Depression, it creates unprecedented power to seize banking institutions and intercede in the transaction systems in the financial marketplace. This would include the “breakup” of large financial conglomerates that pose a heightened risk to the functioning and integrity of the financial system.

Critics are bemoaning that the increased intrusion of the federal government in the affairs of the financial marketplace may cause restriction and higher costs of credit to borrowers. With all due respect, that has already occurred as a result of the massive debt losses sustained by the nation’s credit intermediaries and its investors and placement firms.

Like it or not the financial marketplace and its players are going to have to deal with more stringent governmental oversight and regulation to protect the country from another financial meltdown from insufficient credit risk underwriting.  The constriction of credit, the inability to conduct market transactions in asset backed securities and consumer and banking failures necessitate the comprehensive overhaul of the nation’s financial system.

The mandating of increased oversight of the nation’s banks including higher capital and liquidity standards and the assumption of prudent risk and the offering of high risk products will force the banking system to adopt a more stable lending and responsible posture. The regulation of credit card companies and mortgage brokers and other financial intermediaries serving consumers is required to also enforce higher standards of professional conduct, better risk underwriting and most of all, consumer protections from fraudulent and abusive practices.

Importantly, the overhaul plan includes regulation of the “paper” created around the asset based lending that leveraged and securitized these transactions and have been a major contributor to investor and lender losses as the value of such paper eroded more than the assets they backed and became illiquid.

Unfortunately, the President’s plan does not use this opportunity to streamline the regulatory system. We believe there are still too many agencies involved in the new regulatory framework and may lead to inefficiencies and inconsistencies in industry oversight. However, no new regulatory plan of this magnitude was going to be perfect and the overall benefits will outweigh the organizational faults. We also believe industry participants will adapt and operate successfully in the new environment and/or exit the more risky sectors of the financial marketplace. This will inure to the benefit of lenders and borrowers in providing a safer and fairer financial system.

The credit industry over the 2004-2007 period lost its way and its mistakes in the extension of credit to poor credit risks and the leveraging of those risks would have plunged us into a massive depression were it not for the Herculean federal rescue. It’s time we got this critical industry and system back under control.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends 2009 economy, bailout, banking system, business landscape, economy, The new Fed actions

The recent European Parliament elections held this past weekend confirmed our observations in our blog and website articles, “I am Mad as Hell and I am not Going to Take it Anymore,” March 23, 2009. Voter dissatisfaction with left leaning and socialist governments and their policies handed conservative and right wing nationalist parties a clear majority in the European Parliament and unseated and inflicted major losses on sitting governments in Hungary, Ireland, Great Britain and Spain. This move to the political right is expected to have the following repercussions:

1. A move toward less free trade and globalization and more protectionist
measures to protect local businesses and local workers.

2. A move toward anti-immigration measures to protect local workers.

3. Increased divergence between Europe and the U.S. in regard to massive federal
government stimulus spending to accelerate economic recovery in the Eurozone. In our blog
posting, “Is the U.S. a Party of One, ” we called attention to the divergence of opinion
between the U.S. and Europe on this matter. The conservative electoral victories will make
this divergence even greater which will undermine the strength of the U. S. Dollar and the
attraction of U.S. Treasury debt and stall an increase in U.S. exports to Europe that would
stimulate the U.S. economy.

4. Some increased concern about the future of the European Union as more countries adopt
increased nationalistic policies and viewpoints and re-think subjugating national policy to a
European Parliament and European Union bureaucracy.

I also cannot help but see the parallels between the social and political movements in Europe today and those of Europe in the Depression of the 1930s. In the 1930s the Great Depression saw the rise of fascism as a solution to the terrible deprivation of Europe’s populations. Some of the parliamentary and national government gains over the weekend were achieved by far right wing, nationalist parties preaching anti-immigration and often bigoted platforms. The appeal to a population’s patriotism diverts attention from the real economic problems facing Europe’s governments and for which there are no easy answers and more importantly, no quick fixes.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends

Today’s unemployment report for the month of  May,  showed a stunning decrease in the monthly trend of job losses since the recession intensified in the fourth quarter of last year. The Labor Dept reported non farm payrolls declined by 345,000 in May, the lowest monthly level of job losses since last September, and far below analysts’ expectations of 500,000 lost jobs in May. Combined with the recent downward trend in first time unemployment claims seen in the months of April and May, we believe the current level of monthly losses in the U.S. economy has subsided from 600,000-700,000 to 500,000-600,000 reflecting the already massive cutbacks in payrolls over the last six months. However, we are highly skeptical that monthly job losses have declined below the 400,000 level at this point in the cycle for the following reasons:

1. The May figure of -345,000 is not consistent with the ongoing level of first time unemployment claims of 600,000+ reported through the month of May.

2. The May figure of -345,000 is not consistent with the rising level of long term unemployed workers that reached over 6.7 million during the month of May.

3. The May figure of -345,000 in the Business survey is not corroborated by the less quoted Household Survey which showed an increase in unemployment of 787,000.

4. The May figure of -345,000 does not reflect the continued increase in part time and discouraged workers which now number over 11 million.

We believe the May job losses will be revised downward when the June unemployment report is released next month. The monthly unemployment report from the government is becoming increasingly unreliable in its initial release, and has been subject to consistent and often large revisions in subsequent monthly releases.

Nonetheless, were it not for the forthcoming increases in job cuts coming from the restructuring of GM and Chrysler, we would be comfortable in stating that the rate of new job destruction has peaked for this cycle, which is a prerequisite to a bottoming in this recession. Next must come a peaking in the level of long term or continuing unemployment claims. But a recession bottom is not an economic recovery. The current level of TOTAL unemployed, and part time, discouraged and underemployed workers is approximately 25 million, and there can be no recovery until these people get back to work and start spending again. So while we have hit the nadir of this recession in terms of rate of economic contraction, we fear it will be the fourth quarter of this year before any measurable economic growth will be reported.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends Chrysler, economy, GM, unemployment

This week the Conference Board Consumer Confidence Index for the month of May came in at an impressive 54.9, a surprisingly strong increase over the rise in the index in the month of April. The strong increases in the Conference Board’s and Michigan Consumer Sentiment Surveys in April and May we believe are largely due to the continued strong gains in U.S. stock prices since mid March.

Indeed, we mentioned in our Economic Update of May 1, 2009 that the March reading in this index in the mid 30s would likely be the low point for consumer sentiment in the current cycle. The news of the cycle results and its  attribution to perceived improved labor conditions, mentioned in the  survey, were the catalysts for the recent strong stock market rally.

What Does it REALLY Mean?

There has always been a strong correlation between strong stock markets and rising levels of consumer sentiment. We, along with many other market analysts,  are skeptical of the intermediate and long term predictive value of consumer sentiment surveys. One of the unexpected measurements of  strength in the survey was a perceived improvement in job availability  among consumers to 44.7 from 46.6. Such a slight statistical  improvement is not a convincing improvement in trend particularly when one notes the absolute high level (approximately 45%) of respondents reporting “jobs are hard to get” versus the level of approximately 6% reporting “jobs are plentiful”.

We stated further in our May 1 Economic Update that consumer sentiment surveys can be fickle and inaccurate as a predictor of actual consumer spending trends. To be sure, we believe the just concluded Memorial Day holiday will show a strong increase in consumer spending as more Americans hit the road for vacation travel. We are expecting strong retail spending numbers for the first holiday weekend of summer. Our concern is that the current depressed economic environment may become one of a “sawtooth” pattern of economic activities. One month of increased retail sales and factory orders and industrial production followed by a retrenchment due to the continued  high levels of unemployment and weak consumer and business demand.

In short, we do not believe there is sufficient strength in consumer finances and psychology to sustain a consistent rise in consumer spending in the near term.

Take a Look at the Hard News

Conversely, the news coming into the Memorial Day holiday was far more disturbing for the following reasons:

1. Rising Interest Rates

The yield on the U.S. 10-year Treasury Note rose on Friday to nearly 3.5%, up from 3.17% since the middle of May and 2.53% since the middle of March. This is the highest yield on 10-year U.S. Treasury securities since last November. We have warned in previous blog and website articles the massive negative impact on longer term U.S. economic growth from rising interest rates and a large decline in the U.S. Dollar. Both of these developments are occurring now despite the action of the FED to buy Treasures to keep interest rates low.

2. Federal Budget Deficits

Coincident with the dramatic rise in intermediate and long term U.S.  Treasury interest rates have been equally dramatic increases in the projected Federal budget deficits for fiscal 2009 and 2010 and the chronic increase in the government’s national debt. This deterioration in the U.S. financial condition is causing alarm among national and world investors, including foreign governments and world banking institutions that the U.S. credit rating would be downgraded like that of Great Britain last week.

3. Credit Crunch on Farmers

Deteriorating credit availability for farmers which may affect the procurement of fertilizer, seeds, animal feed and farm equipment. The credit crunch on farmers could negatively impact upcoming harvests and thus cause a rise in food prices next winter.

4. The State of California

The continuing chronic fiscal woes of the State of California whose  budget deficits are projected to rise to more than $40 billion in fiscal 2010. We fear the Federal government will have to bail out the state within the next two-three years to avert a major state default and cutbacks to state services that would be injurious to the public wellbeing. A federal “bailout” of California would rank among the largest and most expensive and long lasting in this current financial crisis. It would certainly add to the deterioration of the Federal balance sheet and pressure our credit rating and currency. It would also lead to further  demands from severely depressed states for increased Federal assistance.

Reality Check

We continue to be wary of over-exuberant stock market reactions to encouraging news du jour which needs to be confirmed by improved and sustained underlying improvement in unemployment, a bottoming in residential housing and a peaking in bank loan losses.

Until we see that, we maintain that we have hit a DEMAND bottom at the end of the first quarter but not a recession bottom. The second and third quarters of  this year will be “less worse” than the first but not an end to the  recession. We might see some slight improvement in GDP in this year’s  fourth quarter but more likely we will have to wait until 2010 for gradual economic recovery. Bullish reactions to this week’s economic news is  premature.

Morris Segall Economic Trends consumer sentiment, economic

Pardon us for interrupting the party but we felt the economy was going to hit a DEMAND bottom at the end of the first quarter as inventories, employment, factory orders and consumer spending plummeted to depths at which they were unlikely to contract further. But a demand bottom did not mean we were at a recession bottom. The current economic condition is comparable to falling to the bottom of a swimming pool. You reach a point where you hit bottom. That doesn’t mean you rise back to the surface. One can lay on the bottom for a while longer. That is where we believe we are in the current cycle. Here’s why:

1. The April unemployment report which showed a reduction in job losses to under 500,000
masked a large component of temporary federal government hires for next year’s census.
Job losses in the private sector were over 600,000 and continued to afflict every industry
sector except government and healthcare, the only sectors that have added jobs in the
last seven months. In addition, prior months job losses have been revised downward. The
average monthly loss in jobs in the first quarter of 2009 is now approximately 700,000
versus a little over 500,000 in the fourth quarter of 2008. More importantly, continuing job
losses have risen to over 6.25 million from approximately 4.5 million at year end 2008. To
come are large job losses from the downsizing and restructuring of GM and Chrysler over
the summer.

2. Reflecting the increased level of job losses and constricted credit availability, consumers
continue to reduce their outstanding debt. In March consumer debt outstanding declined by
a record $11 billion. Since the third quarter of last year consumer credit outstanding has
declined by nearly $32 billion and consumers savings rate has climbed to over 4%. Further,
consumers are using debit cards instead of credit cards paying cash instead of increasing
the use of credit.

3. After holding below 3% since the fourth quarter of 2008 the yield on 10 year U.S.
Treasury Notes rose above 3%, escalating to over 3.25% last week. We have been warning of the upward pressure on interest rates lurking in the skirts of a recession bottom. As optimism of such a bottom increases and stocks continue to rise, money shifts from bonds to stocks. More importantly, the supply of new Treasury financing for the burgeoning federal budget deficits are forcing interest rates up. Speaking of federal deficits, we have projected the current fiscal year deficit of $2 trillion
(See our latest Economic Update, May 1, 2009). Today, the White House increased its
projection of the current fiscal year deficit to $1.8 trillion. We don’t think they are done.

4. Not so quietly, oil prices have escalated 20% to over $55 per barrel since mid April. Likewise, gasoline prices have escalated and are now well over $2.00 per gallon at the pump.

We believe these factors are going to slow down the consumer recovery and prolong the demand bottom we believe we are now experiencing. Yesterday’s April retail sales report was surprisingly weak, further evidence of the consumer’s unwillingness and inability to increase his spending currently. Given the continued high levels of unemployment and consumer spending retrenchment plus the new increases in interest rates and gasoline prices, we do not think the nascent improvement in economic activity is sustainable through the summer when auto job losses hit. We may be seeing a “sawtooth” pattern of episodic improvement followed by retrenchment. We are hopeful the fourth quarter may be the first concrete period of economic recovery but the auto industry job cuts make that forecast less predictable than we believed earlier. This may push recovery into the first half of next year.

So yes it looks like we are reaching a deceleration in the rate of economic contraction but it is too soon to break out the champagne and the stock market needs a correction to stay healthy. We have been bullish on the 1-3 year outlook on U.S. stocks for some time believing the stock market would “smell” out a recession bottom well before the economy recovered as it always has. The rally in stocks since early March is consistent with that trend but it is now vulnerable to disappointing economic data. However, we believe the early March market lows are this cycle’s lows and we expect a correction near term to hold above the early March levels. We would use such a correction to increase investment allocations in equities with a 1-3 time horizon.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends economy, news, recession

We recently updated our presentation on today’s economic landscape and what’s on the other side with some fresh data.  We hope you continue to find value in our slides:

Morris Segall Economic Trends

In a recent article published March 23 for SPGTrend.com subscribers, we examined the social and political toll of the current recession and their longer term impacts on the U.S and overseas economies.  Over the course of several blog posts, we will take you through the content of this piece and put what we’re going through into context.

In part one, we outlined an introduction for this series.  Part two discussed the first four trends and developments.  Part three discussed public anger.  Part four discussed the declining economy causes spiraling stress.  Part five discussed the long-term implications for the recession.  And now we will wrap up this series with some concluding thoughts:

We expect the U.S. recession to end later this year and gradually begin recovery next year and accelerate through 2011, 2012 and 2013. The U.S. recovery will stimulate the export dependent economies overseas and they will recover accordingly.

After a strong cyclical recovery, the U.S. will settle into a stagflationary economic cycle characterized by a secular high level of unemployment, lower worker productivity, a resumption of higher energy, food and commodity inflation and slower consumer income growth and spending.

High deficits, increased entitlement spending, increased interest rates and a depreciated currency will deteriorate U.S. government finances.

Emerging markets overseas in Eastern Europe, Asia and Latin America will again pace future long-term economic growth.

Americans will shift politically to the left as they become more dependent on government spending for basic needs and income.

Populations in mature industrialized economies will shift politically to the right as they become more nationalistic to protect jobs, companies and existing social welfare programs. They will also be less inclined to pursue free trade in the future.

Free trade will still be important to emerging industrialized economies as they continue to pursue export oriented economic growth and employment. This will increase tensions between the mature economies such as Western Europe, Japan and the U.S. and the emerging economies of Asia, Latin America and Eastern Europe.

From a capital markets standpoint, we remain defensive in the short term as we look for evidence of an economic bottoming. However, we would prepare to emphasize common stocks, particularly large cap and NASDAQ U.S. stocks to participate in a bottoming in the recession and subsequent economic recoveries here and abroad. We would also increase our positions in gold and other commodities as the world economies reflate and commodity prices increase. Concomitantly, we would avoid bonds as they will see a shift in cash to stocks and an increase in interest rates in an economic recovery.  Please contact us with any questions regarding this article and for specific recommendations on your investment program.

Morris Segall Economic Trends economic, economy, government, investment, NASDQ, recession, recovery, stocks

In a recent article published March 23 for SPGTrend.com subscribers, we examined the social and political toll of the current recession and their longer term impacts on the U.S and overseas economies.  Over the course of several blog posts, we will take you through the content of this piece and put what we’re going through into context.

In part one, we outlined an introduction for this series.  Part two discussed the first four trends and developments.  Part three discussed public anger.  Part four discussed the declining economy causes spiraling stress.  Today’s entry discusses the long-term implications for the recession:

We believe the current trends and developments have longer-term significance and implications for the U.S. and overseas countries, politically, socially and economically.  From an intermediate term economic outlook perspective, we believe the current recession will “bottom out” in the second or third quarters of this year. We believe the worst of the recession is now being experienced in the first quarter. We do not expect an economic recovery to be measurable until the fourth quarter of this year, at the earliest, and possibly the first half of next year.

Assuming a recovery from the current recession gets underway next year and builds through 2011, 2012 and 2013, we expect such a recovery to be cyclical and quite robust given the pent-up demand that is accruing from consumers and businesses over the past 5 quarters. The economic recovery will be led by the U.S and extend overseas late in 2010 and more pronounced in 2011, 2012 and 2013.

However, longer term, we see the following resulting implications from this recession:

1.       Americans will be more circumspect in assuming risk going forward. They will not embrace the unbridled use of credit as they have in the past. First, the availability and cost of credit in the future will restrict credit to consumers. Second, many consumers will eschew the use of credit to maintain lifestyle given the difficulty they have faced in meeting debt obligations.

2.       Americans will be more conservative in their investment programs after the cyclical rebound expected over the next 2-3 years in worldwide equity markets. For one thing, Americans will be older and less inclined to take risk with their remaining and/or rebuilt capital, particularly in retirement plans. Second, Americans’ faith in the equity markets has been shaken by two market declines of 50% in the past 9 years plus the scandals also attendant with these declines. We believe Americans will retreat to a more basic and conservative investment profile that emphasizes intrinsic and transparent value and predictable future prospects. In addition, we expect a more highly regulated environment for financial firms and capital markets which should result in less leveraged and speculative investment products and strategies.

3.       Americans will have to work longer before retiring as a result of the huge losses in savings, net worth and retirement accounts. However, many of the current generation of middle aged and senior workers will be suffering deteriorated health as a result of the current emotional and physical stress they are currently experiencing. These workers will have aged faster than otherwise due to the emotional and physical stresses of this recession. This will result in many workers having to retire earlier than planned which will add to the cost of Medicare, Medicaid, Social Security and private pension costs. These increased costs will be in addition to the enormous increase in Federal entitlement program costs from the retirement of the “Baby Boomer” generation of workers who begin to turn 65 in 2011 and will reach age 70 in 2016.

4.       As a result of the wealth and job destruction in this recession and the impending retirement of so many workers, the demand for increased government services to handle a burgeoning aging and retirement population will put enormous strain on the U.S. Federal budget. This will be in addition to the huge strain on Federal finances that is now being incurred from the massive “bailout” programs that are being initiated to stabilize the banking system and end the current recession. It is likely the annual Federal budget deficits will range from $500 billion to $1 trillion or more over the next 5 years.  Clearly this will put upward pressure on interest rates and price inflation in the U.S. and downward pressure on the U.S. Dollar in foreign currency markets. Indeed, we and other economists have raised the threats of these developments presently and they are already of concern to foreign governments and investors that own U.S. Treasury bonds.

5.       Unemployment in the U.S. will be historically high even with a cyclical economic recovery projected over the 2010-2013 period. There simply will be no job opportunities for many of the former Wall St. and banking managers, executives and traders and automobile and related managers and executives, particularly over the age of 50.

6.       The increasing population of aging and retired workers will not have the financial resources anticipated for this population segment at the beginning of this decade when the stock market bubble at that time had created so many retirement plan millionaires. As a result, the projected retirement population will live more frugally than earlier projected and will not be the economic stimulus many had planned on. Indeed, for the reasons stated previously, they will be more of a drain on the U.S. economy than help. In addition, they will not provide the spending for increased foreign imports or overseas travel as previously predicted.

7.       We expect international trade agreements to be less liberal here and abroad, as the infatuation with globalization becomes a casualty of the massive unemployment in the current recession.

Be sure to subscribe to receive the conclusion of this series.

Morris Segall Economic Trends economics, economy, fears, politics, recession, social implications

In a recent article published March 23 for SPGTrend.com subscribers, we examined the social and political toll of the current recession and their longer term impacts on the U.S and overseas economies.  Over the course of several blog posts, we will take you through the content of this piece and put what we’re going through into context.

In part one, we outlined an introduction for this series.  Part two discussed the first four trends and developments.  Part three discussed public anger.  Today’s entry, part four, will discuss the ramifications of an even more insidious by-product of the recession: stress.

In addition to anger, the American public is emotionally stressed and physically debilitated.

After experiencing the heady and seemingly inexorable rise in consumer net worth and incomes from the expanding economy, rising stock markets and most importantly, the outlandish increase in real estate values over the 2003-2006 periods, the American consumer has seen his world literally come crashing down since the second half of 2007. It is estimated that the declines in housing values and the stock markets together over the last 5 quarters is more than $15 trillion or an entire year’s GDP.  As a result, the American consumer that exuded great confidence and risk tolerance has become stricken with fear.

In the article, “The Fed’s Conundrum,” April 5, 2007, we commented on what we felt was an increase in the fear factor for consumers, which was going to suppress consumer spending and appetite for risk, going forward. We based this on the increase in inflation at the time and the accelerating decline in the housing cycle underway, leading to increased mortgage foreclosures. In addition, as government statistics would later prove, job creation was peaking that spring.

Fear is something the American public doesn’t exhibit very often.  The post war period has been one of economic growth and a rising standard of living for Americans. To be sure, the American economy has experienced periodic and sometimes severe recessions, but they have been surpassed by longer and stronger growth periods.

Until this decade. The current recession is the second major economic downturn since 2000 and this recession is by far the most damaging and most pervasive in financial and social terms since the Great Depression of the 1930s. The loss of homes, jobs, net worth, financial security and retirement security has caused the American consumer to doubt his ability to survive and to doubt the American capitalist economic model.

In the current economic environment, Americans are full of worry.  A March 4, 2009 article in Advertising Age noted that prescriptions for sleeping pills and anti-depressants had escalated 7% and 15%, respectively, in 2008 despite a cutback in marketing for such drugs by pharmaceutical companies.

Based on the worsening economic climate in the first half of 2009, we would expect such numbers to increase. In the same Advertising Age article a poll by the National Sleep Foundation released on March 2, 2009, found over 30% of respondents said they are “losing sleep over the economy and their own financial situation”. The National Sleep Foundation Poll found an increase in sleeplessness and anxiety is leading to an increase in depression and a decrease in efficiency and productivity on the job.

Regional and local data particularly in cities hard hit by the recession indicate a dramatic increase in suicides, suicide attempts and calls to suicide hot lines. This emotional stress is taking its toll on the overall physical health of the country. We believe doctor visits for emotional or stress related physical illnesses have increased as well as absenteeism from work. The result is a significant increase in medical care costs for doctor visits and prescriptions as well as a decrease in overall worker productivity. In such an environment, people are more nervous and short-tempered, which often leads to increased aggressive behavior including violence. Witness the increase in mass shootings in the U.S. and shockingly in Europe as overstressed individuals react to the loss of their jobs and declines in their financial conditions. In addition, consumer outlooks for the future are negative.

Be sure to subscribe to receive part 5 in this series.

Morris Segall Economic Trends declining economy, economics, future trends, public unrest, recession, stress

In a recent article published March 23 for SPGTrend.com subscribers, we examined the social and political toll of the current recession and their longer term impacts on the U.S and overseas economies.  Over the course of several blog posts, we will take you through the content of this piece and put what we’re going through into context.

In part one, we outlined an introduction for this series.  Part two discussed the first four trends and developments.  In part three, we will outline the next trend - public anger

5.  Public anger is also being aroused by the scandals related to the “bailouts” of many of this nation’s large, international conglomerates, particularly financial firms, and the recently disclosed large bonuses paid by both financial and non-financial firms that have received billions in taxpayer assistance. The “bailouts” and the executive bonuses have stoked the fires of smoldering public resentment at the widening gap between the increasingly rich executive class and the struggling middle class in this country.  See the slide below showing the disparity in real per capital income growth in the economic expansion of the 2002-2007 period and that of the economic expansion of the 1982-87 periods under President Reagan.

6.  Now also look at the slide below showing the trend in retail inflation over the 2005-2008 periods and the most recent six-month reporting period of February 2009.

While the collapse in commodity prices in the last six months has been a primary cause in inflation turning negative in the last six months, note the annual inflation increases in 2007 and 2008 and the continued increases in many non discretionary consumer expense categories such as utility charges, education and tuition and healthcare costs. Add to this data the fact that American workers have now experienced the second major declining stock market cycle of this decade with major market indices declining by 50% from peak to trough in 2001-02 and 2007-2009. Importantly, excesses and mismanagement of risk have caused the current stock market debacle by many of the nation’s financial institutions that have needed taxpayer assistance to stay afloat. It is little wonder, the American middle class is angry and they are reflecting their anger politically.

It began with the Congressional elections of 2006 when an angry American electorate gave a sitting Republican President and his party the worst political drubbing since the elections of 1964. This at a time when the American economy was humming and creating approximately 2 million new jobs annually in 2005 and 2006. It continued with the recent Presidential election of 2008 where the unlikely candidacy of a first term Senator from Illinois first surprisingly won the Democratic nomination, upsetting the presumed party favorite, and then led the Democratic Party to its most overwhelming victory since Lyndon Johnson defeated Barry Goldwater and the Republican Party in 1964. The 2006 and 2008 election results were a loud dissatisfaction on the part of the American electorate with the economic, social and political status quo. Their statement was clear, “They were mad as hell and not going to take it anymore”.  We have long noted this building anger among American voters and counseled candidates running for office in 2006 and 2008 that the American electorate was angry and wanted dramatic change.

We also felt that change was being translated in two very distinct demands. First, the inequities of the economic system that allowed excess and corruption by corporate CEO’s and politicians were unacceptable and needed to be reformed. Second, the middle class wanted the Federal government to do more to help them with the draining expenses of energy, healthcare, education and retirement necessities.  To their credit, the Democratic Party and Barack Obama, grasped voter dissatisfaction and embraced a populist agenda of job protection, increased government spending and tax reform to answer that dissatisfaction. American voters responded with a landslide victory for President Obama and the Democrats that now control both houses of Congress as well as the White House. But the intensifying recession since the end of the third quarter of last year has created more pain and suffering among American workers and consumers. President Obama’s stimulus programs highlighted by huge taxpayer financed “bailouts” of major financial institutions are wearing thin on the American public. Already angry American voters are now livid with the revelations of continued bonuses to failed executives and the failure of newly elected Democratic congressmen and senators and newly appointed officials within the Obama Administration to stop “politics as usual”. The embarrassing revelations and resulting voter backlash is forcing the President to adopt a defensive posture of trying to convince voters and congressional opponents of his program both within and outside of his party to support him. This is not the position the President wanted to be in within the first 100 days of his administration. The current recession belongs to the Democrats now and voters want to see tangible improvement from the Congress and this Administration.  Continued corporate excesses at the expense of taxpayers and middle class workers are only adding to the anger of the American public.

This anger is resulting in growing frustration and doubt about the current state of American capitalism. An angry electorate is an unpredictable one. Previously accepted beliefs regarding American social, political and economic behavior, attitudes and most importantly, demands, are being re-evaluated and adjusted by a citizenry whose ideals and aspirations are not being met.

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Morris Segall Economic Trends 2009 trends, anger, bailouts, economics, finance, future of economy, government, taxpayers

After months of debate about suspending the cardinal principle in accounting regarding reflecting asset value impairment in both the balance sheets and income statements of public financial statements, the Financial Accounting Standards Board (FASB) ignominiously and even in a measure of surprise, voted at its April 2nd Board Meeting to suspend the strict application of “mark to market” accounting for banks. The financial news media has reported on the story since last Thursday with almost universal condemnation and criticism. We wanted to see the text of the FASB’s statement to see exactly what the rule changes were going to be.

Unfortunately, the text of the pronouncement, FSP FAS 157-e, confirms many fears and criticisms of financial analysts, the accounting profession, investors, lenders, portfolio managers, creditors and the lay public. That is the FASB was “buying into” the argument that the illiquid, value impaired securities backing the personal and real estate assets the banks had previously lent on were not really impaired because the asset impairment was due to an illiquidity in the market for such securities which artificially had depressed prices for these securities. The position of the banking industry is that  in reality these securities were  going to be held until maturity so as long as principal and interest were current, hence there was no need to reduce the holding value of these securities to what they believe are distressed market conditions. The pronouncement contrasts forced liquidation valuations from orderly transaction valuations and allows discretion on the parts of managements, with the blessings of their auditors, to ascertain whether the security value impairment is temporary due to distressed market conditions and to declare whether management intends to hold the securities to maturity and not sell them before “recovery of its cost basis”. It further allows holders of these securities to recognize the permanent credit loss component of a security in earnings BUT the temporary impairment of a debt security in “other comprehensive income”. That account is not defined.

So, in what appears to be a total cave from pressure by Congress and the banking industy, the steward of hard accounting principles and standards which govern the integrity of financial statements, has given the banking industry what the U.S Treasury Dept., the Federal Reserve Board, the SEC and the world financial marketplace couldn’t do. It is allowing them to ignore the impact of current market forces on the net realizable values of major classes of assets and concomitantly, the net book value of its capital accounts. Reporters and commentators are now suggesting this shift in accounting treatment of impaired collaterized debt securities will not only abate further bank losses, it will allow banks to actually “write up” valuations on previously written down securities and could actually result in bank profit growth in the first or second quarters of this year. This from a governing board of a profession that some years ago prided itself on the credo. “Anticipate no profit; provide for all possible losses”. This was when auditors and CPA’s were the acknowledged protectors of fair, independent and honest accounting treatment of financial transactions and valuations. Not only does Thursday’s pronouncement liberalize accounting treatment for financial companies, it gives a “pass” to the company’s auditors to approve it without being accused of false and misleading financial statements, the basis of all security class action lawsuits.

In our blog piece of March 5, 2009, “Is There A Plan Here?”, we outlined specific measures we believed actionable that would be effective in stemming the recession and providing an “arms length” and long term solution in cleansing the banks’ balance sheets via a “bad debt bank”. This argument also articulated in our website comment, “The Treasury Plan”, December 7, 2007, recognized the underlying philosophy and theory behind securitized assets. First, these securities were CREATED by the investment and commercial banking industries to provide liquidity behind the funding of hard assets. They were created to be traded. Trading desks were created to buy and sell them at negotiated prices. Asset indices were created to track price and performance. The securitized portfolios were leveraged with derivatives and credit default swap instruments, also traded in negotiated markets. The volume of these primary and attendant instruments exploded into the hundreds of trillions of dollars and were marketed around the world over the past two decades and in particular in the frenzied real estate and consumer spending expansion of the last decade. To now decide or even allow to be decided that these securities were going to be held to maturity flies in the face of financial reality. If these securities were going to be held to maturity they would have been valued similar to private equity or venture capital investments where there is no public market and investors know they are holding an illiquid investment that is not marked to market but whose valuation is determined annually by independent appraisal. Following this theory further, there would have been no reason to mark these securities to market. The banking losses would have been avoided and the Government’s TALF program to purchase these eroded securities from the banks would not have been necessary.

The action of the FASB is an expedient one and is another in a series of public moves to short circuit this recession by avoiding the real and painful long term solutions to sounder finances and more transparency in financial transactions and accounting. The downside of this action will be an increase in distrust of the system, banking and accounting and will lead to fewer high risk transactions in the future. Who will be able to accurately ascertain what these man made paper assets are really worth if we don’t let market forces be that ultimate arbiter?  Ironically, the action of the FASB may hurt the Treasury’s TALF program if investors believe the prices they will have to pay to purchase these assets are arbitrarily too high. Clearly, investors will be skeptical of an individual bank’s asset valuations and net worth and financial analysts and lenders will be uncertain as to the real value of these bank’s investment and creditworthy values. Our response to investors is to “play” the ultimate recovery in financial stocks by utilizing sector ETFs and index funds. That is a sector bet and there is safety in numbers.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends FASB, Financial Accounting Standards Board, private equity, securitized asset, TALF, treasury

In a recent article published March 23 for SPGTrend.com subscribers, we examined the social and political toll of the current recession and their longer term impacts on the U.S and overseas economies.  Over the course of several blog posts, we will take you through the content of this piece and put what we’re going through into context.

In part one, we outlined an introduction for this series.  Part two will discuss the first four trends and developments that are unfolding:

1.       Social unrest in Russia, Eastern and Western Europe as rising unemployment and cutbacks in domestic government spending programs and consumer incomes. Of particular note are the

street demonstrations and strikes in Western Europe where we have not seen this type of reaction to economic distress since the Great Depression of the 1930’s. It speaks volumes about the level of angst and anger among foreign workers and consumers.

2.       This social unrest is creating political change. Governments in Latvia and Iceland have already collapsed and there is increasing pressure on the governments in Ireland, France and Great Britain to stop the bleeding in those economies. Even in Russia, discontent among the populace is being aimed at the current government, which had been quite popular last year.

3.        Worker protests abroad are leading to increased calls for expulsion of immigrant workers and protectionist measurers to protect domestic jobs and companies. Globalization has now become very unpopular in the advanced industrialized countries of Western Europe as they face the same erosion of their industrial base as we have suffered over the past decade.    There have been attacks on immigrant workers in Western Europe and Russia as frustrated and angry citizens fight for the shrinking job markets in their countries. In short, we see a movement to the political right as nationalist feelings replace the internationalist perspectives previously held overseas. This does not augur well for the future of the European Union and free trade policies.

4.       The rise in protectionism is also occurring here in the U.S. as shown by the recent rescission of long haul trucking privileges to Mexican companies that were hauling freight into the U.S. from Mexico. That freight must now be transported from the border by U.S. firms. Mexico responded by putting tariffs on a list of U.S. imports. This backlash against free trade agreements is putting pressure on government leaders who still champion globalization as desirable for U.S. economic growth. Policymakers in Washington and Fortune 500 companies that manufacture and trade overseas are finding themselves at odds with workers and consumers who are losing their jobs to lower cost foreign labor. With unemployment in this country effectively at 9% and going higher, American workers are “mad as hell and aren’t going to take it anymore”. Labor unions helped elect Barack Obama. They expect “payback”.  Importantly, Democrats in Congress and the President himself have pledged to re-evaluate America’s free trade agreements and policy. We expect some “pullback” from the liberal free trade policies of the last decade.

Next up, we’ll outline additional trends and provide context for where all of this is heading.  Don’t forget to subscribe to our blog to get the rest of this series.

Morris Segall Economic Trends economics, economy, future trends, international, macro, micro, monetary policy, political, social, social unrest

In a recent article published March 23 for SPGTrend.com subscribers, we examined the social and political toll of the current recession and their longer term impacts on the U.S and overseas economies.  Over the course of several blog posts, we will take you through the content of this piece and put what we’re going through into context.

The above mantra from the movie “Network” is but one symptom of the increasing social, emotional, physical and political cost of the worldwide recession which is now entering its second year.  For those of you that have been following our commentaries over the past three years you know that we have written extensively on the financial and economic trends and developments that have led to the current severe worldwide recession and our views of the reactions of the U.S. and foreign governments to this recession. However, the length and severity of this recession are causing in our opinion additional high, and we believe, long lasting social, physical and political costs that will represent significant changes in worldwide economic growth and social and political attitudes, particularly in the U.S., going forward.

As we have been stating for some time, this recession was initially caused by the bursting of the housing bubble here in the U.S. which then spread to the financial system and finally to the business, non-residential real estate and state and local government sectors. The U.S. recession has spread worldwide as our economy contracted and credit losses expanded to overseas banking and export dependent economies. Indeed the negative impacts of recessions overseas are more severe on foreign economies than here in the U.S.

Be sure to subscribe to our blog to read the rest of this ongoing series.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends domestic policy, economy, globalization, recession, trends

Today the Federal Open Market Committee voted to increase the stimulus to the credit markets by keeping the Fed Funds rate in a 0%-.25% target range. In addition they voted to have the Fed purchase:

• Up to $300 billion of long-term Treasury securities
• Another $100 billion of U.S. Government Agency debt making a total of $200 billion
• An additional $750 billion of mortgage backed securities making a total of $1.25 trillion

In addition the Open Market Committee voted to launch the Treasury’s TALF program to purchase consumer and business asset backed securities. This program will start at $200 billion but could expand to a $1 trillion.

The Fed’s actions are based on what the Open Market Committee states are continued recessionary pressures in the U.S. economy. With today’s actions, the balance sheet of the Federal Reserve is estimated to have expanded to approximately $3 trillion. This compares to assets of less than $1 trillion six months ago. It would seem the Fed is throwing in the towel on a recession bottom in 2009.

This compares to Chairman Ben Bernanke’s testimony on February 14th before the U.S. Senate Banking Committee in which he forecast an end to the recession by the end of this year. Clearly there is some disconnect between the Fed’s current actions and the Federal Reserve Chairman’s outlook.

Indeed, the most recent economic data released this month and recent corporate announcements from several large banks indicate there is some hope the pace of economic and earnings contraction may be slowing. We have communicated to our clients and audiences that we felt the worst of the current recession would be felt in the first quarter of this year. If we and Chairman Bernanke are correct, today’s Fed actions are too much at the wrong time and will have negative consequences intermediate-longer term. We warned in our last blog posting, “Is There a Plan Here?” the increasing concern among international creditors about the future creditworthiness of the U.S. government given the outsized spending of the current bailout programs. It is noteworthy that the Chinese government just last week expressed misgivings about their large holdings of U.S. Treasury debt and further purchases going forward. Today’s massive new spending by the Fed will cause further alarm in international financial circles. While today’s announcement of Fed purchases of long term Treasuries suppressed interest rates on government debt and provided fresh fodder for further stock market gains, it is important to note today’s large decline in the value of the U.S. Dollar in currency future markets and the simultaneous large increase in the price of gold futures in commodity markets.

The Federal Open Market Committee is preoccupied with deflation as a result of the current recession. Yet the price of oil has moved to nearly $50 per barrel from approximately $35 per barrel a month ago. In addition the most recent reports on consumer prices for January and February show an annualized rate of inflation of 2.5% excluding food and fuel and inflation and rates much higher in key non discretionary spending categories. The recent rise in energy and service prices belie a chronic deflationary environment or outlook. The unbridled U.S. government and Federal Reserve spending on the multitude of stimulus and bailout programs has been rejected by our overseas trading and financial partners despite this government’s pleas for more foreign government stimulus spending. These governments are afraid of the inflationary bubbles and sovereign balance sheet erosions that will result from such unfettered spending. So the Treasury Dept. and the Fed plot their own course of uncapped spending as their answer to the current credit and economic dilemmas.

Speaking of dilemmas, President Obama is feeling the heat on what is clearly a botched bailout of AIG and an erosion of confidence amongst economists and politicians in Treasury Secretary Geithner. The public is angry and very stressed over the recession. The economy is President’s Obama’s and the Democratic Party’s problem now and the public wants to see results from the hodgepodge programs the government is implementing. The current scandals regarding executive bonuses and the perceived inadequacies of the Treasury leadership will in our opinion start to erode the President’s poll numbers adding a further difficulty to the current social and economic environment.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends bailout, banking system, economy, government, The new Fed actions, their implications and political fallout, treasury

Like Alice’s plunge down the rabbit hole, the government’s proposed recovery strategy gets curiouser and curiouser every day!  Rather than helping the consumer to save, pay down his debt and get back into the game, we continue pumping money into faltering and distressed Fortune 1000 companies. Most of these wounded entities have pursued risky and inept business strategies and made ill-advised acquisitions in the last two years.  If BOA is choking on the debt from buying Countrywide Credit and Merrill Lynch, why shouldn’t it be forced to sell off assets to raise capital?   Capital One, already in trouble with underperforming credit card debt, has made two commercial bank acquisitions since 2005, the peak of the housing bubble.  Infusing taxpayer money into these large corporations on the premise that they are too big to fail is just not sound fiscal policy. Perhaps they shouldn’t have been allowed to “get too big to fail” in the merger and acquisition mania of 2005-07. At what point do we hold the senior managements and boards of directors and even the shareholders of these companies accountable for the disastrous decisions that now taxpayers are asked to pay for?  Remember, these are some of the biggest multi-national corporations in the world with supposedly the best managements, at least according to their paychecks. As the song says, “breaking up is hard to do” but we unwound the conglomerates created in the 1960’s in the recessions of 1973-74 and 1980-82. Divestiture raises capital and creates competition.

Rather than keeping banks and other industries on life support with more capital infusions, we should be:

• sending rebate checks to middle class taxpayers earning below $150,000 with an inducement to encourage saving and debt reduction;
• creating a graduated sales tax to help middle and lower income consumers;
• boosting tax revenue by instituting luxury consumption taxes on big-ticket items: luxury cars, boats, second homes, etc.;
• forcing troubled companies to raise capital by selling assets they have acquired;
• repealing the Alternative Minimum Tax for taxpayers earning less than $250,000 in taxable income;
• creating a “WPA” program for unemployed accountants, managers, IT programmers, administrators and researchers to oversee and manage the bailout money and stimulus programs.

The only worthwhile prescription to save struggling banks is for the Federal government to set up a “bad debt bank” to get nonperforming loans off the balance sheets (see our website article, “The Treasury Plan”, Dec. 7, 2007).  Banks won’t lend while they’re strangling on the paper that’s backing bad loans.  A “bad debt bank” will allow the U.S. to renegotiate bad loans, forestall foreclosures and hold bad assets for long-term resale. It’s the only way we’re going to free the banks and credit intermediaries to make new loans.

Now the President wants to curtail the tax deductions for charitable giving and mortgage interest on upper income taxpayers just as we are trying to stimulate housing and asking charities to do more in this recession.  Cutting back on deductions for mortgage interest and charitable donations would be disastrous!  Rather than raising revenue, the former would stop many upper income homebuyers in their tracks. The latter would be devastating for non-profit organizations.  Upper income taxpayers are the backbone of charitable giving.  If charities are expected to carry more of the social service costs during tough times, why cut their major source of giving?  If this pattern of penalizing the rich continues, expect America’s wealthy to move their assets to offshore tax havens and more taxpayers will create trusts to escape taxation altogether thus reducing rather than increasing tax revenues.

The litany of misdirected tactics goes on and on!  Another bank or industry bailout is just a waste of your money and mine. The Federal government is already the de-facto banking industry in this country given all the money invested in the industry and the widespread guarantees of deposits. Recovery of this recession was always going to take a long period of time until the consumer got his balance sheet back into creditworthy condition thus allowing him to “get back into the game”.  These bailout and stimulus programs are costly diversions from the underlying cure and they are now, along with the President’s ambitious spending budgets, creating concern among economists and international traders about the future creditworthiness of the U.S. government. We warned about this possibility in our website article of Sept. 8, 2008, “Stocks, Recession and the Bailout”.  Apparently we are not alone.

Morris R. Segall, CFA, CIC

Morris Segall Economic Trends collapse, economics, economy, failure, future, government, plan, recession, tax, world

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

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