Sunday, December 7, 2008

Not your father's recession

Maybe I'm a total pessimist. Maybe. But I don't think so.

Last week I watched so much financial TV that my head came close to exploding. The message, repeated ad nauseum, was that it's time to buy because things are so cheap and the recession must be close to over. Okay. If you think so. But let me give you a few things to think about before you bet your entire retirement account on black.

Yes, the last two recessions have lasted about 8 months. And yes, we're already 12 months into this little piece of recessional happiness. So, that means we're almost done, right? Nope. Why not? Keep reading.

Most recessions come from inventory build-ups. Think back to the year 2000. What tanked technology? All the parts everyone needed to build out the internet were in short supply, so everyone double/triple/quadruple ordered. And then the factories were actually able to deliver what had been ordered... and those who had ordered only needed a fraction of the stuff the other companies were trying to deliver to them. In other words lots of inventory, few corporate buyers. This usual scenario then leads to companies cutting jobs because they have to make less stuff. At this point, the consumer starts feeling the pain and cutting back... and we're almost out of the woods.

This time it's different. Really. It is. Let's look at this recession. Corporate inventory levels haven't been an issue, at least until recently. We got here differently this time. This time what fell apart first? Homes. Who owns homes? Consumers. So, instead of starting with industry and then having the issues filter through to the consumers at the end, we're leading with the consumer.

Let's review what Joe and Jane Consumer have had to deal with over the past couple of years:

  • Their home has lost at least 15% of it's value... but more likely somewhere between 25-50% of it's value.
  • Their retirement accounts have lost 40% or more of their value.
  • The company holding their home equity loan has put the kibosh on further withdrawals.
  • Their credit card companies have cut their credit limits and/or raised their interest rates... unless the darn things just got canceled outright.
  • Gas and food prices went up astronomically. I'll give you that gas prices are now down at 5 year lows, but with their balance sheets evaporated and their credit essentially maxed out, low gas prices are nice but not enough to make much of a difference at all for the majority of U.S. consumers.
  • Oh yeah, and then there was the (un)employment report last Friday. Worst in 30-some-odd years. Sure, employment is a lagging indicator. But it's still falling. And more companies are laying people off.

So, while Black Friday sales were up nicely and Cyber Monday sales were up even better, my interviews with consumers ... and my common sense... tell me that they're buying on deep deep sales when they buy. Holiday sales (oh, heck, can we just call if Christmas please?) are probably going to fall this year. Fall. That's not good. And it will have ripple effects throughout the economy.

Hmmm. Then there's the problems in Detroit. And the still-mostly-frozen credit markets. I'm not very political. But I've been impressed by what Mr. Obama has been putting in place for the future... and by his pragmatic approach to this whole mess. But I have a very strong feeling that around March or so everyone is going to figure out that he doesn't have a magic wand, he can't make it all better quickly... and this market is going to take another dive for the floor.

Remember, stocks are only cheap on a Price/Earnings basis if you know what the earnings are going to be. Forward P/Es are based on someone's best guess of the future. But if that future isn't getting better, it's getting worse, are you really sure about that valuation?

Enjoy this Santa Claus rally. Play it if you want. But don't stay too long at the party, 'cause despite the hair of the dog that everyone seems to think is yummy right now, the hangover isn't anywhere near done.

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