Monday, March 16, 2009

And The Beat Goes On

It is at times like these that we need to be reminded of what Alexander Pope once wrote:"Hope springs eternal in the human breast". As difficult as it might be we need to know that adversity carries within it the seeds of an equal or greater benefit. It all depends on how we react to the challenges that are facing us.

Unfortunately most observers think that the current economic crisis has not hit bottom yet. Whether it is the stock market or whether it is the real economy the daily deluge of news point to some more rough times ahead.

What does the future hold?
It is difficult to see any uplifting indicators besides the "leak" that both Citi and Bank of America have had two profitable months so far in2009 , on an operating basis. Besides that our only hope is that the stimulus will kick in within the next few months and that its effects will be sustainable. But realism demands that we take a look at the real financial and macro economic indicators. Once we do that then what do we find:

(1) The over 600,000 monthly job loses will not come to a sudden halt. They would continue for some time to come. Unemployment rate is already at 8.1%

(2) The factory capacity utilization for the month of February was at a historical low of 67.4%. This simply means that we have 1/3 of our factories mothballed.

(3)Home prices have fallen a lot so far but they have not hit bottom yet. That carries negative connotations for both consumers and the balance sheets of the large banks.

(4) Many on Wall Street are raising the argument that the current Price to Earnings ratio has not fallen as much as it usually does in major crisis , such as the 1981 recession or obviously the great Depression. Is there a 500 Dow Jones Industrial average in our future?

(5) And last but not least China is already voicing its serious concerns about the value of the dollar. A loss of confidence in the greenback will be disastrous.