According to an ominous story on Bloomberg.com this morning, the recession is already here. It makes the argument that in many sectors of the economy, corporate profits were severely depressed in the third quarter.
In order to protect the bottom line, many companies have announced wholesale lay-offs in the tens of thousands. They are looking to every department to cut expenses and staff and often just eliminate entire departments. There is no doubt that this shake-out is happening because a day has not gone by in the past six months that we have not read about the falling dominoes of the economy.
The housing market, which was ripe with speculators and dreamers (of home ownership or huge profits) fueled by cheap financing which has disappeared, is now in full retreat. The depressed housing and credit markets were the first to show signs of weakness, followed by mortgage lenders who did not have to announce lay-offs, they just closed their doors. The home builders are not building, and the suppliers like Lowe's Co. (NYSE: LOW) and Home Depot (NYSE: HD) on the retail end and Caterpillar (NYSE: CAT) and USG Corp (NYSE: USG) on the wholesale end are feeling it.
But everything may not necessarily be as bad as it first seems. For example, the Bloomberg report states that, "Corporate profits, as measured by the Commerce Department, fell at an annual rate of $19.3 billion in the third quarter from the second, as domestic earnings dropped by $41.2 billion." They use these figure to support the case for recession. I wonder how bad that really is. I do not profess to be an expert on the subject but Berkshire Hathaway (NYSE: BRK.A) has that much in cash on hand, and Microsoft (NASDAQ: MSFT) is not far behind. What is the real impact of those figures in a multi-trillion dollar economy?
Should we just sell everything, convert our assets to gold and find a cave to hide in until the whole thing blows over? Of course not. I would not for one moment suggest that an economic slowdown is not upon us. However, I would suggest that this swinging of the economic pendulum will not be universal and will not hit every industry equally.
I made the mistake of favoring financial stocks way too early and paid a heavy price -- and it is still too early. The banking industry itself does not know how bad things are yet and may not for a year. So where to put your money? The sectors of the economy that will stay afloat in the economic storm -- no secret here -- are the same as always: health care, consumer staples, utilities, defense and perhaps insurance companies that receive regular premiums and have not dabbled in the credit markets too heavily. Of course BRK.A and MSFT will be able to ride out any storm because they were built for that purpose.
To find potential opportunities and verify my track record, read Chasing Value or Serious Money.
DISCLOSURE: I currently own shares of BRK.B, and USG.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
Reader Comments (Page 1 of 1)
12-03-2007 @ 5:34PM
william lindblad said...
Sheldon, I don't know either but I am pessimistic. While my views are empirical, it is an empiricism based on observation and Plato's deductive reasoning. First, who told you that the builders are stopped? On 20.00 bucks worth of gas I can take pictures of at least 50 on-going projects from surveyed ground to completed (and un-occupied) buildings. True, the builders may have stopped purchasing land and seeking new permits, but they have a massive amount that is still in progress. Hey, these are not all condo's and housing, some are shopping centers. Everybody that got their nose in here has a problem and it is called "under contract". In other words, there is no exit unless you care to get sued. As to the Bloomberg figures, as good as any since this is a total unknown and the guessing has a wide spread (so far they are at the bottom and most optimistic) from the billions to the trillions.
Outcome? Depends on the bankers, government, business and the long suffering consumer. The bankers and government may be able to declare a moratorium of sort on interest rate hikes and at least mitigate defaults. Business on the other hand is worried about the bottom line and lay-offs and downsizing are always a good answer - or so they think. My common sense tells me that when you stop someones paycheck, paying bills becomes difficult. Layoffs have been one of the underlying reasons behind the housing mess and more will not improve things.
You, nor I can change anything. We must just sit and wait and hope for the best.
12-03-2007 @ 5:46PM
Sheldon L said...
WL,
Thanks for taking the time to comment. As an architect and someone who is invested 5 to 1 in real estate vs stocks and the like, I can tell you residential construction has slowed drastically. I heard of one case recently where a major homebuilder could not sell their home pads so they were building the homes on spec and selling them at cost as their exit strategy.
I share some of your pessimism although I have found myself to be more optimistic by nature than most people and sometimes to much so.
One area I feel optimistic about is that I do not expect oil to be higher in 12 months than it is today and I am sure that is a minority opinion.
This may come as a result of so many sluggish economies, conservation and contimuing development of alternatives. If that happens, then inflation will be less of a concern to the Fed and perhaps they will ease interst rates enough to prevent negative economic growth.
Stay diversified, increase liquidity, and keep up the dialogue.
Peace, Sheldon
12-05-2007 @ 12:48PM
Drs. R. Venema said...
One might wonder how bad the situation really is, well I did some calculations with some facts as I found them on the website of the US Federal Reserve. Furthermore I emailed Standard & Poors chief economist David Wyss and he confirmed that total US debt on the economy was 46 to 47 trillion US$.
From that you can de the easy to understand calculation yourself:
Last week I had an email exchange with Standard & Poors chief economist David Wyss and I asked him to confirm some easy to understand calculations I had done on the total debt on the US economy.
Davis was so pleasent as to confirm my starting point of easy calculations.
If you go to the Federal Reserve 'flow of funds' (the so called Z1 release) and you add up the relevant totals you arrive at a total debt on the US economy of 46 to 47 trillion US$.
Here is the link:
http://www.federalreserve.gov/releases/z1/current/accessible/d3.htm
Furthermore take a reasonable amount of interest, say 5% and calculate 5% of 46 trillion and you get 2.4 trillion US$.
This 2.4 trillion is about 16 to 17% of the US gross domestic product and is above the total profits in the US economy, that means a default of the economy because the yearly needed interest is above total profits.
Hence there has to be a lot of selling US assets to repair the debt problem, I am very soryy but I cannot make it any better than it is. US government bonds will loose their AAA rating, the DOW Jones index will fall below 7000 & a whole lot more unpleasant things...
12-12-2007 @ 12:31PM
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