bizzXceleration: Performance, Value and Profit

General & Special

Peter Bernstein Doesn't Like What He Sees Peter Bernstein has witnessed just about every financial crisis of the past century. As a boy, he watched his father, a money manager, navigate the Depression. As a financial manager, consultant and financial historian, he personally dealt with the recession of 1958, the bear markets of the 1970s, the 1987 crash, the savings-and-loan crisis of the late 1980s and the 2000-2002 bear market that followed the tech-stock bubble. Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect. Mr. Bernstein sees two culprits. One is the abuse of securitization -- the trend for banks to hold fewer loans on their books and instead turn them into securities that were sold to other investors. The other is simply years of overborrowing by financial institutions and consumers alike. When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That's part of the problem going forward. You don't have a high-growth exit from this, as you've had from other kinds of crises. We won't have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up. Or like a U, a flat U. The reason for that is that people aren't going to get caught in this bind again. They will tell themselves, "I'm too smart to do that again." And everyone else is going to be saying the same thing. It is, in fact, going to be a wonderful environment in which to take risk, because there aren't going to be any excesses.

• Byron Wien’s Ten Surprises of 2008

The Velocity of Money and Inflation Now, why is the velocity of money slowing down? Notice the real rise in V from 1990 through about 1997. Growth in M2 (see the above chart) was falling during most of that period, yet the economy was growing. That means that velocity had to rise faster than normal. Why? Primarily because of the financial innovations introduced in the early 90's like securitizations, CDOs, etc. It is financial innovation that spurs above trend growth in velocity. And now we are watching the Great Unwind of financial innovations, as they went to excess and caused a credit crisis. In principle, a CDO or subprime asset backed security should be a good thing. And in the beginning they were. But then standards got loose, greed kicked in and Wall Street began to game the system. End of game. What drove velocity to new highs is no longer part of the equation. Its absence is slowing things down. If the money supply did not rise significantly to offset that slowdown in velocity the economy would already be in a much deeper recession.

	QtQ%	Annual
GDP	0.15%	.60%
Consumption	0.24%	.96%
Investment	-1.18%	-4.64%
Capex	-0.64%	-2.53%
Res. Invest	-7.45%	-26.63%

Economy

 

Buffett says recession may be worse than feared Warren Buffett, the world's richest person, said on Monday the U.S. economy is in a recession that will be more severe than most people expect. Buffett made his comments on CNBC television after his Berkshire Hathaway Inc (BRKa.N) (BRKb.N) agreed to invest $6.5 billion in the takeover of chewing gum maker Wm Wrigley Jr Co (WWY.N) by Mars Inc in a $23 billion transaction. "This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow. "I think consumers are feeling gas and food prices," he added, "and not feeling they've got a lot of money for other things."

Rebates: Too little, too late? Tax rebates are starting to arrive in bank accounts. But many economists doubt that they  will keep the economy from recession. The stimulus package, passed with overwhelming bipartisan support earlier this year, will give rebates to about 130 million Americans, costing the U.S. Treasury more than $110 billion. Married taxpayers earning $150,000 or less will get up to $1200 while single taxpayers earning $75,000 will receive up to $600. But since the measure passed Congress, there have been growing signs that the U.S. economy has already fallen into recession. "This is will not avert a recession, because it is too late," said Lakshman Achuthan, the managing director of the Economic Cycle Research Institute. "For this to have kept us out of what was an avoidable recession, it needed to happen a couple of months ago, in January or February." In the past three months, employers have cut 232,000 jobs from their payrolls. The unemployment rate has climbed to 5.1% from 4.7% as recently as November.

Be in better shape	30%
Be in worse shape	50%
Won’t change one bit	20%

Dude, Where's My Recession? Out: Recession. In: Expansion. That's my quick take on today's first-quarter gross domestic product number, which showed that the economy grew 0.6 percent in the first quarter. Now that's not a robust number by any means, but it's not so bad given all the worry out there that the economy is headed off a cliff. Before you declare a recession, as many economic pundits have, shouldn't the economy, well, actually recess a bit—if only for a quarter? As a movie buff, I keep looking for the right cinematic analogy for the American economy. Try this one: It's like the Terminator. Not the Schwarzenegger one—the other one, the Terminator from the second film. You could empty a shotgun—or in this case, an imploding housing market, credit crunch, and high oil prices—into that morphing metal dude, and before you know it, the thing's all healed and chasing you again.

Low Spending Is Taking Toll on Economy For months, beleaguered American consumers have defied expert forecasts that they would soon succumb to the pressures of falling home prices, fewer jobs and shrinking paychecks. Now, they appear to have given in. On Wednesday, the Commerce Department reported that the economy continued to stagnate during the first three months of the year, with a sharp pullback in consumer spending the primary factor at play. With the overall economy growing at a mere 0.6 percent annual rate for the second quarter in a row, consumer spending advanced by only 1 percent, the government estimated. That was down sharply from the 2.9 percent gain for all of 2007 and the 3.1 percent gain for 2006. It was the weakest showing since 2001, the last time the economy was ensnared in a recession.Even more ominously, Americans cut back on a wide variety of discretionary purchases, conserving their cash for necessary spending. In the dip, economists saw evidence that the basic laws of arithmetic are now impinging on millions of households. As real estate prices plunge, so does the ability of homeowners to borrow against the value of their homes, crimping a major artery of spending. As banks grow tighter with their dollars in a period of uncertainty, families are running up against credit limits, forcing many to live within their incomes. And as companies lay off employees and cut working hours, paychecks are effectively shrinking. The only factors preventing the economy from sliding backward were the growth of American exports — aided by a weakening dollar — and a swing in business inventories from shrinking to swelling. Putting exports and inventories aside, the final sales of goods and services produced domestically dipped at a 0.4 percent annual rate in inflation-adjusted terms, the first such decline since the end of 1991. Personal income slips, but spending jumps, Manufacturing in U.S. Shrank a Third Month in April as Companies Cut Jobs

GDP Expands Slightly, But Gloomy Signs Persist The economy expanded slightly in the first quarter, but its faint pulse didn't allay concerns the U.S. is in or headed toward recession. The gross domestic product -- the nation's total output of goods and services -- increased at a 0.6% annual rate, the same as in the fourth quarter of 2007. But underlying data -- on consumer spending, business investment and construction -- paint a picture of a deteriorating economy, one that expanded only because of a rise in exports and a buildup of inventories. Excluding inventories, GDP shrank at a 0.2% pace, the first contraction in more than 16 years. Excluding inventories and exports, the economy contracted at a 0.4% rate after increasing 1.3% in the fourth quarter. "It would be a grave mistake to interpret [the GDP] number as even suggesting the economic and financial crisis is over," said Bernard Baumohl, managing director of the Economic Outlook Group LLC. "Clearly, this economy will remain in a recessionary environment for the rest of the year." Many economists said the economy is likely to contract this quarter. Morgan Stanley economists predict GDP will decline 2%.

Employers Cut Fewer Jobs in April, Jobless Rate Falls The economy showed off unexpected signs of resilience Friday as job losses slowed, the dollar gained a bit of muscle for a change and there were even indications that food prices may be easing. The unemployment rate dipped, though that may not last. The latest barometers flashed encouraging signs that the economic slowdown may not be as pronounced as some had feared. Still, there's much caution -- about housing, credit and other problems. Employers eliminated 20,000 jobs in April -- not nearly as many as the 81,000 in March, and the fewest monthly losses so far this year, the Labor Department reported. The unemployment rate dropped to 5 percent, from 5.1 percent. Stresses were still evident. It was the fourth straight month that employers cut jobs -- bringing total losses to 260,000.

• Analysis from theBigPicture: Job Loss Trend Dismal (Job Trend Comparison Chart), NFP Minus Birth Death Adjustments
• April 2008 Employment Situation:  Details More Pessimistic Than Headlines (Northern Trust Daily Commentary) [a thorough, short, readable dissection including taking out the B/D adjustments]

Housing

 

KB Home Co-Founder Eli Broad Says Home Prices in U.S. May Drop Another 20% Eli Broad, a philanthropist and co- founder of KB Home, the fifth-largest U.S. homebuilder by revenue, said he expects home prices to drop another 20 percent. ``I don't think we're anywhere near a bottom in housing,'' Broad told Bloomberg TV at the Milken Institute Conference in Beverly Hills, California. ``We're going to have a big inventory of unsold, unoccupied homes that's going to take three or four years to clear out.'' Homebuilders, hurt by banks' stricter requirements for granting home loans and concern over the rising number of homeowners failing to pay their mortgages, have begun work on the fewest number of houses since 1991, according to the U.S. Department of Commerce. Home Prices in U.S. Fall 12.7%, Most Since 2001, Case-Shiller Survey Says, S&P price index and outlook (vidclip), Orange County, CA Prices: From Front Page to Short Sale (this has a great chart which puts the REQUIRED future price declines in inflation-adjusted context).

• Housing Bust Duration: Update The peak and trough for the Los Angeles bubble are marked on the graph. Prices are falling faster this time, probably because the bubble was larger. It might be reasonable to expect that the dynamics of the current bust will be similar to the previous bust. After another year (or two) of rapidly falling prices, it's very likely that real prices will continue to fall - but at a slower pace. During the last few years of the bust, real prices will be flat or decline slowly - and the conventional wisdom will be that homes are a poor investment. The Los Angeles bust took 86 months in real terms from peak to trough (about 7 years) using the Case-Shiller index. If the Composite 20 bust takes a similar amount of time, the real price bottom will happen in early 2013 or so. (But prices would be close in 2010).

Foreclosures spike 112%, no end in sight One out of every 194 U.S. households received a foreclosure filing in the first three months of 2008, according to the latest figures released Tuesday by RealtyTrac. There were nearly 650,000 foreclosure filings - which include notices of default, auction sales and bank repossessions - issued during the first quarter of 2008. That's up 23% from the last quarter of 2007, and up a staggering 112% from the same period a year ago. So far this year 156,463 families have lost their homes to bank repossessions. "Foreclosure activity hasn't slowed down yet," said Rick Sharga, spokesman for RealtyTrac, "but I was a little surprised that foreclosure filings more than doubled since last year."

US Home Vacancies Rise to Record on Foreclosures  A record 18.6 million U.S. homes stood empty in the first quarter as lenders took possession of a growing number of properties in foreclosure. The figure is 5.7 percent higher than a year ago, when 17.6 million properties were vacant, the U.S. Census Bureau said in a report today. The vacancy rate, the share of homes empty and for sale, rose to 2.9 percent, the highest since the bureau started keeping count in 1956. About 2.3 million empty homes were for sale, compared with 2.2 million a year earlier, the report said. The worst U.S. housing slump in more than a quarter century is deepening as falling values encourage buyers to delay purchases in hopes of getting a better deal. The median U.S. home sale price may drop 5.8 percent in 2008, the most on record, followed by another 4.7 percent decline next year, Fannie Mae, the world's largest mortgage buyer, said April 7.