08 Feb 2008 Are We There Already? Part 2
Last week we posed the question as to whether recession had already begun. Today 62 economists polled by Bloomberg News make it an even bet that job losses and housing contraction will stall the longest-ever expansion in consumer spending. They predict that the economy will grow at .5% in the first quarter implying the slowest growth since the 2001 recession. A growing number of economists, bankers, and brokers are saying that recession may already be upon us.
The speed of the Federal Reserve and the government certainly give credence to those claims. The pace of their actions to counter the slump have been astonishing; the Fed has reduced rates faster than at any time since 1990, the Congress and President have enacted a stimulus package nearly four months sooner than the one following the shocks of September 11th.
If the government and the Fed believe, what more do some other major players need to make their decisions? Yesterday European Central Bank President Jean-Claude Trichet said “risks surrounding the outlook for economic activity lie on the downside” yet remarkably he elected to hold rates at 4%. The falling value of the euro relative to the dollar in recent trading indicates that traders believe the US economy may be in better position to recover faster than Europe. The Bank of England took a baby step in the right direction by lowering its benchmark by a quarter of a percent.
OPEC may be posturing to cut crude production as insiders say they want to support oil at $80.00 per barrel. Are they so drunk on the wealth pouring into their coiffeurs to care about basic economics – price it too high and sales decline? Unless they relent, expect the President to release oil from the strategic reserve perhaps by the late spring and further expect a new push for opening up drilling rights in US areas formerly restricted by states for environmental reasons.
The benefits of the stimulus package should begin taking effect in May according to Treasury Secretary Henry Paulson. Tax rebates of $300 will go to Social Security recipients and veterans who earned income of at least $3,000 last year. Those who earned enough to pay federal income taxes would receive more, with individuals eligible for as much as $600. Couples could receive $1,200 plus $300 for each child. Lawmakers agreed to phase out rebates for individuals earning more than $75,000 and couples earning more than $150,000. Lawmakers also amended the legislation to ensure that illegal immigrants couldn’t receive the checks.
The legislation doubles the amount of equipment costs a small business can expense in the first year to $250,000 and allows a 50% bonus depreciation for businesses that buy major equipment. Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies, will be allowed to buy loans worth as much as $729,750 between July 31, 2007, and Dec. 31, 2008, an increase over the current $417,000 loan limit. The move may help struggling homeowners refinance large mortgages at a lower interest rate. It will also allow the Federal Housing Administration to insure loans as high as $729,750 in expensive markets.
The Treasury market is a refuge for investors fleeing from the stock and corporate bond markets. But in a brief reversal Treasuries tumbled yesterday as the government sold $9 billion of the 30-year bonds at a yield of 4.449%, the lowest ever at a government auction. Traders drove two-year note yields 1.72% below 10-year rates, representing the widest gap since September 2004. The spread signals increasing demand for shorter-maturity debt in anticipation that interest rates will continue to fall. Longer-dated securities are more vulnerable to speculation that rate cuts will revive the economy, spurring inflation and eroding the bonds’ fixed payments. There you go, some are already worrying about and economic recovery.
Our portfolios are tactically allocated for recession with concentrations in US Treasuries, utilities, telecom, gold, and technology (we believe the stimulus package will boost earnings in tech). During several recent market dips we have begun to establish positions in high quality large banks as we believe the selling has climaxed. If we are early, their yields of 6-8% (assuming they maintain their dividends) will compensate for any remaining volatility. We also took a position in the Equity Residential, the nation’s largest apartment real estate trust. Demand for apartments rises during down cycles as credit restrictions for home mortgages tighten and chances for layoffs rise. Finally, our cash position in our three growth models averages about 16% as we reduce risk exposure. We expect to invest that surplus in the coming months as buy opportunities present themselves.
Have a good weekend.