Whither Goldilocks?

Friday, September 22, 2006 | 06:42 AM

Every good adventure -- be it an advertising campaign, religious evangelism, political battle, or even a war -- requires a memorable phrase, repeated over and over again, as part of the broader marketing effort. It can even something as pedestrian as a catchy jingle or theme song.

Market rallies too need their marketing spin, something to give comfort to its adherents in times of stress. For the Bulls who have enjoyed the rally off of the summer lows, that mantra has been "Soft Landing / Goldilocks Economy." 

This despite a plethora of evidence that shows that a soft landing is an exceedingly rare and mythical creature. Consider the 1994 soft landing -- the one true soft landing out of 16 Federal Reserve tightening cycles. It is the equivalent of performing successful neurosurgery with a shovel and mallet.

After the 1990 recession ended, we saw an upswing in manufacturing and industrial production. When that softened a few years later, there were numerous other economic sectors to pick up the slack:

- The wireless build-out was accelerating;
- The internet expansion was still very early stages;
- The PC upgrade cycle was in full swing (286/386/486/586);
- Windows 95 was a big economic event;
- Markets were in the middle of an 18 year bull run.

The question at present is simply this: What will step up to replace Housing as the prime economic driver?  So far, there is little on the horizon to act as the wireless/internet/pc build out of the 1990s. 

Recent macro reports confirm what we have been calling the slow motion slow down; Yesterday, we saw the worst Philly Fed report since the 2001 recession:

"The pace of activity in the region’s manufacturing sector slowed in September, according to firms polled for this month’s survey.  Indicators for general activity, new orders, and shipments fell substantially from their readings in August and suggest no growth this month. Overall employment, however, was slightly higher. Firms continued to report a rise in prices for inputs, although these cost increases were less widespread than in previous surveys. The region’s manufacturing executives were significantly less optimistic about future activity, with most indicators dipping to their lowest readings in six years." (emphasis added)

Even the deservedly disparaged re-jiggered Leading Economic Indicators -- gamed by its cheerleading creators to be overly bullish -- has been down 5 of the past 8 months. Jeez, the folks at the Conference Board have to be wondering what the hell they must do to make these LEIs positive -- if you can't win even by cheating, it should make you at least wonder WTF is up.

Let's consider specific sector evidence:

• Housing, the prime driver of the lion's share of economic growth over the past 5 years, is contracting rapidly.

• Sectors directly related to Real Estate are showing stresses; Washington Mutual, the nations largest mortgage writer, said the current environment in the banking industry is "difficult" and is expected to remain "very difficult" on the revenue side for some time. Masco, one of Home Depot's largest suppliers, cut their outlook for 2006 profitibility due to "the severity and rapidity of the current housing decline;"

• Advertising is the canary in the coal mine. Yahoo, magazines, upfront TV sales, newspapers are all showing signs of sales stress. Niche targeting is gaining versus broad advertising campaigns -- a clear sign that advertisers are pulling in their dollars;

• Revolving credit has replaced mortgage/HELOC as the consumer's last option for spending cash;   

• The hottest market sector recently has been semiconductors; Yet the book to bill ratio has slipped to "parity" -- meaning little or no additional growth is expected; Both Japan and Germany semi sales are down on either a month-to-month or year-over-year basis;

• Transports have been notably mixed; For each Fed Ex, there's been a UPS, for every CSX there has been a Norfolk Southern; A robust economy does not typically see such disappointing numbers or lowered guidance from the Trannies;

Earnings ex-expenses? One final note: I have not been a believer that Labor costs are rising terribly; However, I took notice when Federal Express announced a 20 cent per share hit to their 2007 earnings, which was then dutifully reported ex labor costs; Are we now going to report profits ex-expenses?

The issue isn't soft landing or not; It is between whether we have a hard landing or a recession -- with all that it means for profits, and equity prices . . .


Business Outlook Survey
Federal Reserve Bank of Philadelphia
September 2006

The Conference Board U.S. Business Cycle Indicators

Friday, September 22, 2006 | 06:42 AM | Permalink | Comments (36) | TrackBack (1)
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Tracked on Sep 26, 2006 3:00:00 PM


It seems to me that things have moved from a possibility of a hard landing, to just about a sure thing. The builders are only just now really slowing construction and the effects of this are only beginning to be felt by the resty of the economy.

Now the question is, what are the chances for a really hard landing. A while ago, Barry and others spoke of the debt bubble. Each player in the financial markets seem to think they have off-loaded the risks from mortgage defaults onto others.

Who is holding the first loss positions in all these CDOs/CMOs? I'm sure the mortgage lenders are holding some, but how much? How many pension funds are invested in these?

There was a story in the WSJ the other day on the use of exotic mortgages that "found that 9% of recent home buyers obtained a payment option mortgage, compared with 4% in a survey conducted last year. "

The really interesting figure was the number of people who didn't know what typew of mortgage they had: 41%

Posted by: Bob_in_ma | Sep 22, 2006 8:52:08 AM

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