 |
Printer Friendly View (with text zoom)
Library Home Street Smart Report Home This is a copy of Sy's weekly (weekend) newspaper column 'Being Street Smart', which appears in a few newspapers and on a number of financial Internet sites. You may post this as content on your own website as long as full credit is given exactly as at the bottom of the article. BEING STREET SMART by Sy Harding RECESSION TALK HAS RETURNED! August 3, 2007. A Wall Street Journal/NBC poll released Friday says that fully two-thirds of Americans believe the economy is now in recession or soon will be. The Journal noted that "Growth in consumer spending has slowed, and concerns about health costs, job security, and the gap between the rich and poor have apparently left Americans downbeat about the road ahead." Hey, it's not my fault. I don't make these things happen. But I warned six months ago that a recession was likely by year end. The economy was slowing dramatically, and the yield curve had inverted, an event that always in the past has eventually been followed by a recession. My biggest concern regarding the economy has been that consumer spending, which accounts for 65% of GDP, was still being depended on to provide the heavy lifting in the economy. Yet consumers have been tapped out, with record debt, for quite some time. Their homes are no longer bottomless piggy banks being refilled by rising home prices. And their basic survival costs have escalated with the rising prices of gasoline, food, and mortgage payments. Wall Street has been providing assurances that as long as employment remains strong there will be no problems with consumer spending, or for the economy. That claim even lost some of its glitter with Friday's release of the jobs numbers for July. Only 92,000 new jobs were created in the month, well short of Wall Street forecasts of 130,000. There was yet another indication that the improvement in the economy that seemed to take place in the June quarter may have been a temporary aberration. Trucking volume is usually a quite accurate predictor of the economy. If goods are being sold, and replaced by more goods being produced, trucking volume grows to move the goods. But the American Trucking Association reported this week that trucking volume hit a seven-month low in July. (Seven months ago, at that previous low, the economy was definitely slowing dramatically). Meanwhile, the stock market has more than enough worries without having to add a potential recession to the mix. The
real estate slump continues to worsen. The spread of its problems into the rest
of the economy has become more obvious. First the sub-prime mortgage industry
was wasted and disappeared. Now lenders, panicked by their sudden inability to
package and sell debt to wised-up investors, are raising rates and tightening
standards for all kinds of debt. And that is freezing up sections of the
economy. Lenders became even more worried after American Home Mortgage
Investment Corp., the 13th largest mortgage lender in the Several more hedge funds reported serious losses on mortgage-backed securities this week, as that problem also spreads. Among them, Sowood Capital Management, a $3 billion Boston-based fund, reported that it lost 50% of its value in July and is closing up. Financing for corporate LBOs (leveraged buyouts) has not only gone into decline but has completely gone away, and cannot come back any time soon. Hedge funds and institutional investors, stunned by what happened to them in home-mortgage backed securities, just have no interest in buying any more of the similar debt offered by banks for LBO financing. The total freeze-up in that area has resulted in 46 LBO deals around the world being withdrawn in just the last two weeks. How many deals had to be withdrawn in the euphoric LBO craze of the previous year? None. Not one of the $2 trillion in corporate loans sold to investors last year was considered by investors to be too risky. Is this a total turnaround or what? Meanwhile, on top of all their other problems, unable to sell LBO debt to investors any more, banks are stuck with the debt on their books for deals they had already committed to finance, estimated to be more than $200 billion. Unfortunately for the stock market, it was the corporate buyout craze that provided most of the liquidity that allowed it to continue to rise in spite of the unusual number of negatives in the economic picture. And that magic potion has gone away. And now, with their confidence already shaken by the bursting debt bubble, investors must face the return of concerns about a slowing economy, even recession talk? That's just not fair. Meanwhile, the high volatility is doing nothing to calm investors' concerns. An unusual eight of the last eleven days have seen triple-digit closes by the Dow. Six were to the downside for a total of 1,320 points, and two were to the upside for a total of 250 points. The intraday swings between the day's highs and lows have been even more dramatic.
Sy Harding is President of Asset Management Research Corp., and publisher of the financial website www.StreetSmartReport.com, and the free blog www.SyHardingblog.com. He also authored the timely 1999 book Riding the Bear - How to Prosper in the Coming Bear Market. |
 |
||||||
