Friday, June 18, 2010

A "Funny" Thing Happened On the Way to the Recovery

A few people are beginning to notice that we are not experiencing a typical recovery.
1. Job growth will be anemic at best. Given the layoffs necessitated by the dire straits of the State government finances, the completion of census work, and the lack of confidence in the small business community; I believe we will have a negative monthly jobs print by the end of the third quarter and very poor job growth into 2011

2. Taxes, user fees, license costs, and a variety of other costs will be increasing at the state level for consumers and businesses as legislatures throw everything but the kitchen sink (other than renegotiating pension, salary, more flexible work rules, and/or retiree health benefits with their unionized, overpaid and bloated public workforces that is) to try to balance their budgets.

3. The slowdown in Europe caused by the debt crisis will easily knock 25 basis points of projected domestic growth in the second half of the year

4. The fallout from the oil spill in the gulf will be felt by the Gulf states throughout the summer and will have an uncertain but negative impact on growth

5. The housing market will not recover in the second half in the year. Given recent reports and surveys it seems certain to stay dismal for the foreseeable future

6. A significant slowdown in China is likely in second half for a variety of reasons
a. Measures the government is taking to curb the bubble in the property market
b. Rising interest rates are likely to battle increasing inflation
c. Worker riots/strikes/increased wage demands are likely to squeeze margins and/or reduce productivity
d. Slowdown in Europe will impact growth at it accounts for 22% of Chinese exports
7. Corporations are likely to continue to hoard cash. They currently have 1.84T in cash on their balance sheets, a record. Concern about a slow and uncertain economy as well as an administration/congress that is anti-business, pro-union and increasing regulations by the day, will not do anything to facilitate deploying that capital into the economy

8. Taxes are going up for consumers and businesses at the Federal level starting Jan 1st, 2011. Income taxes on top earners, dividend and capital gains taxes in particular will increase significantly

9. Earnings comparisons are going to get much tougher in the second half of the year. The 1st and 2nd Quarters of 2009 were horrendously bad and beating them was akin to stepping over an ant. 3rd and 4th quarter comparisons will be more difficult to beat to the same degree

10. For a variety of reasons including new regulations, a steep yield curve that provides banks a massive incentive to invest in Treasuries instead of making new loans, still high delinquency and write off rates, lack of recovery in the securization markets, etc….lending will not recover in the near future and provide the fuel for economic growth to the extent that it has in past recoveries.

...The market has basically gone nowhere since the first of the year with the S&P 500 currently within basis points of where it started 2010. Given growth in the second half is likely to be even weaker, and the substantial risks that either did not exist (Oil Spill) or were not readily apparent (Sovereign debt crisis, Chinese property bubble); the outlook for the market for the next six months does not look good. I believe the market has seen its highs for the year. In this environment it pays to be small, stay in the defensive sectors (Healthcare, Telecom, Consumer Staples,Utilities) that have not participated fully in the rally since the March 2009 nadir and have good balance sheets, solid dividend yields and reasonable valuations. It also is prudent to keep a substantial portion of your portfolio in cash as we should have lower entry points later in the year. Be careful out there. _SeekingAlpha

In the opinion of my uncle Al Fin, the author of the piece above is being inordinately optimistic. He is clearly underestimating the stupidity of the Obama Pelosi regime. That is not surprising, since the world has never seen such stupidity on a grand scale in its many-storied past.

Try to clear your own balance sheets, make preparations for an extended dry spell, and hold on.

More: How to plan for a double dip "recession" (with a "d")

Instructive slide show

10 things that are hard to live without

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