No Recession? No Inflation? Don't Make Me Laugh!
The anticipated bear market bounce in Financials has led to the usual fools' chorus that the worst is behind us, the economy is on the mend, and a recession is avoided. If their song sounds familiar, it is because you heard the same tune with the home builders, and the same melody with the monoduoline insurers.
For those with their head in the sand, here is a broad and varied look at where the economy is contracting. Note that this isn't a cherry picked list of negatives -- it is the crème de la crème of corporate America, ranging from consumer to finance to industrial to transports, and includes such stellar names as Apple, Toyota, American Express, UPS, Catepillar, Costco and JPMorgan. (There's not a slouch in the bunch!)
How's the economy doing? You tell me:
• Not just GM and Ford, but mighty Toyota warns of lower 2008 vehicle sales (MarketWatch)
Toyota (TM) lowered its forecast sales for the year due to an unexpectedly (?) steep decline in demand for new vehicles in the U.S. market. Toyota reported a drop in U.S. sales of 21.4% in June (Passenger cars -9.4%, trucks -38.8%). Shares of Toyota are down 25% over the past 12 months.
Slowing auto sales were blamed on the big 3's heavy lineup of SUVs and trucks. Now that the world's best automaker has declared a slowdown in the US, the cheerleaders are running out of excuses.
• JPMorgan CEO Jamie Dimon: (JPM) “Our expectation is for the economic environment to continue to be weak – and to likely get weaker – and for the capital markets to remain under stress…We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer.” (Bloomberg)
• What about Apple (AAPL) -- they continue to do well? They have been -- but even the iPod/iPhone maker is expecting a consumer slowdown: Thinner profit margins, more discounting, diminished profitability through the rest of 2008 and into the following year. (BusinessWeek)
• American Express (AXP): The credit card company said that even its most
creditworthy, long-standing customers felt the effects of the economic
slowdown that's currently sweeping the U.S. "With bad debt occurring even in the superprime card segment, AmEx's
earnings clearly show that the credit crisis is going upscale, which
does not bode well for the U.S. economy."
American Express is known for catering to wealthier customers, so some investors expected the company to withstand the economic slowdown relatively well. Amex noted that its richer clients were often given cards with bigger credit lines. Now that some of these customers are missing payments, the losses are bigger. (MarketWatch)
• State Budgets are under pressure, as deficits increase, and tax revenues falter. The stumbling U.S. economy is forcing states to slash spending and cut jobs in order to close a projected $40 billion shortfall in the current fiscal year. (WSJ)
• We have Oil Prices falling -- the knee jerk response was optimism -- but that misses the big picture. Its not difficult to explain, its merely cooling global demand courtesy of a US induced global slowdown.
• UPS: Earnings fell 18.3% per share -- and that was after UPS issued a profit warning (June 23) -- its second in two quarters. The company reduced its full-year outlook, and Chief Financial Officer Kurt Kuehn: "Slow U.S. economic activity and fuel-price increases hit us and our customers during the quarter" (Reuters) (How anyone possibly thought this was a good report is simply beyond me).
• Costco Warns on Profit As Inflation Clouds Outlook: COST was supposed to be one of the firms that was going to thrive on a recession. It warned that its fiscal Q4 and full year profits will be well below analysts' estimates. They blamed inflation, particularly energy costs. "Factors negatively affecting our fourth quarter earnings outlook arise largely from inflation, particularly as to energy costs," Costco Chief Financial Officer Richard Galanti said in a statement. (WSJ)
• Caterpillar: Despite good overseas earnings, Caterpillar (CAT) CEO Jim Owens cited "softening'' in Japan and Western Europe. The U.S. may find it hard "to avoid a recession." CAT sees further employment declines, no sign of housing recovery, and expects non-residential building to soften further. North America will be its weakest region. (Bloomberg)
• Beige Book: Describes the economy
as having 'slowed.' In all districts, consumer spending was
sluggish or is slowing. Manufacturing declines were seen in many districts.
Residential real estate declined or were still weak. Due to economic weakness,
bank loan growth was 'restrained.' (Federal Reserve)
• Mortgage Applications Reflect Housing Trouble: No surprise here: Mortgage apps dropped 6.2% with similar declines in both the refinancing and purchase activity components. The depressed state of the housing market, very tight credit conditions in the mortgage market, mortgage rates rising an average of 35 bps all weighed. The one bright spot: Refi activity since August of 2007 has been occurring among sub-prime borrowers (in conjunction with the FHA to restructure loans) (AP) • Pawn shops are booming: It doesn't get much better than this for pawnshop operators, who are thriving in this environment. Tight credit and record food and gas prices have made it tough for a lot of consumers to make ends meet. Cash strapped consumers with no access to credit are exchanging personal possessions as collateral for loans. Business is booming. (IBD) • Unemployment has finally bypassed the "magic" 400k number (not there's anything special about that line). At 406k, it matches a three-year high, suggesting that we are nowhere near any sort of stabilization for labor markets (Marketwatch)
Thursday, July 24, 2008 | 08:30 AM | Permalink
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Well, minimum wage increased this week..and the unemployment numbers for the first time over 406k..I would think that burger joints, and other minimum wage payers will do what we always think they might...release marginal people since the wage is higher in the very tough economic times...
I hope people who were long this bounce are having a sober look at today's figures..
Bruce in Tennessee
Posted by: bruce | Jul 24, 2008 8:46:08 AM
This rally is a total gift to anyone who knows how to make money as a trader. I would love to see a continued huge short squeeze coupled with completely irrational bottom picking. Once that combo fades and we are back staring at the ugly anorexic economy, we will end up with another lovely downtrend that makes trading a delight.
Posted by: D.H. | Jul 24, 2008 8:55:56 AM
Barry, Great summary of the FACTS. Yet, the fools will be buying, buying, buying as they have been assured the markets are at "the bottom" AGAIN!!! By the way, Kudlow should try to get more oxygen to his brain. Perhaps his tie is to tight. I would hate to believe he is just plain stupid. Goldilocks my a**.
Posted by: Ecklebob | Jul 24, 2008 8:58:28 AM
Here amongst the great unwashed, whatever that stuff is that is trickling down on our heads does not smell like success - and besides, since when is success brown?
Posted by: Winston Munn | Jul 24, 2008 9:03:52 AM
The PPP's are out in full force - again - led by Kudlow. I did find it interesting that UPS said the 2nd half would be better than the first, this is probably why their report was viewed as good news.
Posted by: Fred in Jersey | Jul 24, 2008 9:14:26 AM
Dammit Barry, quit making sense.
Posted by: Donkei | Jul 24, 2008 9:14:38 AM
Excellent summation BR. Now you'll just have to find the courage to go back on Larry's show so he can hit you over the head with his unbounded enthusiasm...
Posted by: Chief Tomahawk | Jul 24, 2008 9:23:10 AM
Barry is just a nattering nabob of negativism.
BTW Barry, any rough idea of how much further you estimate this rally can go?
Posted by: Mike in NOLa | Jul 24, 2008 9:30:51 AM
No! Please stop feeding crap.
I can't handle reality. Please let me stay in my fantasy/delusional world.
Posted by: N! | Jul 24, 2008 9:36:38 AM
"We want you on that wall ... we NEED you on that wall"
Posted by: jessup | Jul 24, 2008 9:40:18 AM
Can someone please tell me I'm insane in thinking this financials rally cannot be sustainable, even with the coming bailouts from the Feds? It boggles my mind that many analysts out there think that it's "let the good times roll" again in the financials after everything that has happened. Even if the "worst is behind us" (how many times has that been said?), exactly how do they plan to replace the enormous gravy train that was the cheap credit/lending/securitization business that has basically ground to a halt? Am I insane here?
Posted by: Jeff | Jul 24, 2008 9:42:14 AM
these are the same people that couldn't see this whole crisis happening. so i would say they are just as clueless in these forecasts as they were in their past ones.
just something to keep in mind.
Posted by: Zo | Jul 24, 2008 9:46:26 AM
So Barry is in Marc Faber's camp..."colossal bust with inflation."
This is an amazing time to live in...massive credit bubble needs to unwind, causing asset deflation. Yet central banks printing money and worldwide consumption rising, causing commodity inflation. All at unprecedented paces. "May you live in interesting times" - a famous Chinese curse.
Posted by: Steve Barry | Jul 24, 2008 9:48:31 AM
Barry, you need to read more of Bowyer's stuff...he says that there is no recession, and if a recession does occur, its Obama's fault.
"I don’t think that the current Dow bear market was caused by last August’s credit crunch. Nor do I believe it’s being caused by a recession that is allegedly starting right now (having failed to appear in the first or second quarter). Stocks are forward looking; when they drop now, it means investors are worried about things that are coming later – 6 to 9 months later. In other words, they’re worried about Obama."
http://www.cnbc.com//id/25600847
Who am i going to believe...you and your "facts," or Mr. Bowyer and his astute analysis of the market....
Posted by: Mr. Obvious | Jul 24, 2008 9:56:19 AM
The housing bailout will have unintended consequences...if actually used by the banks (and I don't think they are forced to do so), by letting borrowers off the hook for higher rates, banks are ensuring they will never get all the cashflows they projected when they made the loans...thus all the derivatives off those loans will not be worth what they thought(we already knew that anyway). But now there will be no way to avoid taking the marks...unless accounting obfuscation bill is passed.
Posted by: Steve Barry | Jul 24, 2008 9:57:09 AM
Barry you're totally cherry picking; didn't you notice that "The Dark Knight" had record attendance? Thus proving that consumers are not strapped for cash. (Note: sarcasm intended).
Keep fighting the good fight!
~~~
BR: Funny thing is, escapist films have always done well during economic contractions . . .
Posted by: heather | Jul 24, 2008 9:57:43 AM
Jeff, you may be insane, but not about the economy...you may be like Barry, and dress up like a giant watermelon every Christmas eve, but we still think his ideas about the economy and investing are pretty good.
I think the economy is a big, lumbering giant, and now that it is losing steam, momentum will carry it along this path for awhile..
Bruce in Tennessee
Posted by: bruce | Jul 24, 2008 9:58:19 AM
Insight on GDP
http://stefanmikarlsson.blogspot.com/
Tuesday, July 22, 2008
Statistics In Disconnect With Reality
Posted by: ARISTOTLE | Jul 24, 2008 10:03:14 AM
Jerry Bowyer is merely a circus clown, following the lead of Goldilocks ringleader Larry.......
I almost feel bad for people who actually take him seriously. Not quite, but almost.
Posted by: Jeff | Jul 24, 2008 10:03:41 AM
FYI - I've gotten into quite a few email battles with Bowyer in the past and they're quite similar to the tripe that he spews on TV. Mostly filled with arrogant personal attacks and very light on actual "facts" (e.g. the Obama theory really takes the cake, but I expect nothing less/more out of a guy who wrote "The Bush Boom").
Posted by: Jeff | Jul 24, 2008 10:06:20 AM
Funny though, worst crisis since the depression and google trends for "great depression" are near 5 year lows. Complacency kills. What else can we trend? Someone tried boat sales once.
www.google.com/trends?q=great+depression&ctab=0&geo=all&date=all&sort=0
Posted by: Steve Barry | Jul 24, 2008 10:09:28 AM
Barry wrote: "they continue to do well? They have been -- but even the iPod/iPhone maker is expecting a consumer slowdown: Thinner profit margins, more discounting, diminished profitability through the rest of 2008 and into the following year."
Then again, Apple always and predictably gives conservative guidance, for which Wall Street hammers the stock and the financial press gets the vapors. Then in three months they find that Apple has knocked one out of the park. But they don't care because the conservative guidance is such a buzzkill.
Posted by: Jon H | Jul 24, 2008 10:12:49 AM
But wait! wait! Ball park attendance has been great. Doesn't that mean everything's still ok?
Posted by: Steve in Flyover Country | Jul 24, 2008 10:22:36 AM
Barry is one of the few calling it the way it is.
Good post.
Posted by: Movie Guy | Jul 24, 2008 10:26:56 AM
Barry,
Given your sentiments in this post, what is your estimate for U.S. GDP in Q2? Are you predicting that the data will show negative growth? Consensus estimates are for growth at an annual rate of about 2.2%, if memory serves.
Posted by: DaveinHackensack | Jul 24, 2008 10:27:47 AM
