commentary on economics - markets - politics by sean lannan 11-20-09

8/14/2019 Commentary on Economics - Markets - Politics by Sean Lannan 11-20-09

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Commentary on

Economics, Marketsand Politics to HelpBusiness LeadersMake Good Decisions

November 20, 2009 UpdateSean Lannanwww.linkedin/in/SeanLannan

About the author:

Sean Lannan is a CFO for a high technology company. He has a background in

corporate finance, treasury, investor relations, mergers & acquisitions and fixed-income

securities trading, and has an MBA in finance and BA in economics and political

science.


2/18

Commentary on Economics, Markets and Politics forGood Business and Investor Decision Making

The financial markets have rallied for seven months and are 61% above theMarch lows. Manufacturing looks shaky. Unemployment picture is stillworsening. Commercial real estate market is deteriorating and looks like itcould be the next major problem for financial institutions.

Consumer spending will not be a near-term engine for growth

In 2010, the unemployment rate is expected to rise above the current 10.2%.

Household savings rates are rising as spending falls. Defaults on mortgages and consumer credit continue to rise.

Potential catalysts for sustained growth will be exports and business capitalspending.

Banks maintain tight lending policies which are harming small and medium-size businesses.

Large multi-national companies are taking advantage of the reinvigoration ofthe corporate bond market.

Now is a good time to issue corporate bonds or raise equity financing.

High-yield debt spreads continue to narrow vs. treasuries.

IPO market is reopening for select companies.


3/18

Politics and the Economy

The Washington debate over health care reform isdistracting law makers from an important job of reformingthe financial industry and managing systemic risk. The debates on how to reform health care and its costs are important

to the health of individuals and America business and will take a longtime to work out.

It is hard to judge how strong the private sector economy isin the U.S. with high levels of government intervention,easy monetary policy and stimulus spending. Look for positive surprises from economic numbers during the stimulus

spending through 2010.

Risk to growth if easy monetary policy and stimulus spending stops toosoon.


4/18

Four Bad Bear Markets 29-32, 73-74, 00-02,07-09

The market lookedDepression-likethrough losses of3/6/09 (57% decline)but looks verydifferent in thesubsequent rally.

The market hasrebounded 61% fromthe March lows onthe largest injectionof liquidity is U.S.economic history(equivalent to 29% ofGDP) andgovernmentintervention on alarge scale.

The intervention isworking and stimulusspending is less thanhalf over.

4

Doug Short at

http://dshort.com/charts/bear-markets.html?four-bears

, 11/20/09
http://dshort.com/charts/bear-markets.html?four-bearshttp://dshort.com/charts/bear-markets.html?four-bears


5/18

Investor Appetite for Corporate Bonds Is Up

Corporations are findingfinancial markets arehospitable to fund raising.

Year-to-date mid-November,businesses globally haveraised $2.7 trillion ofcorporate debt vs. $1.7trillion for all of 2008.

Corporate bond debt is moreappealing for businessissuers than bank loans sincebonds tend to have longermaturities and lessrestrictive covenants.

This is significant for allowingcompanies to refinance debtthat is maturing and borrowadditional funds forinvestment in businessoperations.

5

10/1/09


6/18

Investment in U.S. Economy is Lowest in 60Years

Lack of investmentby the privatesector drawsquestions about thedurability andstrength of therecovery.

The recent upturn inprofits was drivenmainly by costcutting, notimprovement indemand.

6

10/12/09


7/18

The U.S. Recession Appears to Be Over with Q3Growth The Focus Will Be Strength of the

Recovery

This is the first time sincequarterly record keepingstarted in 1947 that GDPcontracted for four quarters

in a row (3Q08 2Q09).

7

Q3: +3.5%


8/18

8

PMI is Showing Expansion in Manufacturing butProduction Numbers Are Flattening Rebound

or Grind Sideways?

Oct: +0.1%Oct: 55.7


9/18

Manufacturing Looks Shaky

Manufacturing production rose 0.1% in October after climbing 0.9% in the prior three months.The recovery looks weak.

Core producer price increases are lessening.

Capacity utilization is flat at 67.6%.

9

11/18/09


10/18

Debt Levels are Very High - Will Be EconomicDrag

Financial institutions reducedborrowing at a 12% rate in Q2 09,still close to a record high.Financial debt leverage is stillmore than twice what it was 15years ago.

Households reduced borrowing ata 1.7% rate in Q2 09, at 125% itis still close to a record high.Household debt is 50% higherthan it was 15 years ago.

The federal government is theonly borrower that has grown itsdebt borrowing substantially (28%annual growth rate in Q2 09).

High debt levels at financialinstitutions and households willhold back a robust economicrebound.

10

10/1/09


11/18

Shrinking Consumer Credit Will Retard Growth

U.S. consumer credit shrankfor the seventh month in arow in August.

This is the first seven-monthshrinking trend in consumercredit since 1991.

This trend is more severethan in 1991. Credit hasshrunk 4% compared to only1.2% in 1991.

Job losses and shrinking bankloan portfolios indicate thatconsumer credit will continueto shrink in September. This

would be the first time thatconsumer credit will decline.

There has never been eightmonth contraction sincerecords started in 1943.

11

10/7/09 10/7/09


12/18

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Deterioration of the Labor Markets hasSlowed Since the First-Half of 2009

October: 10.2%

The U.S. economy is shedding

jobs more slowly than beforebut the labor market is stillcontracting. This is sustaininga negative feedback loopssince consumers drive 70% ofU.S. GDP.

The comprehensiveunemployment rate ofmarginally attached andinvoluntary part-time workers(called U-6 by the Dept. ofLabor) hit 17.5% in October.

More jobs have been lost inthis recession than werecreated in the previous

expansion a first.

Lack of job openings will keepconsumer spending andeconomic growth surpressed.


13/18

Job Losses and Unemployment Burden aRecovery

The number of jobopenings picked up inSeptember.

The rate of joblessnesscontinues to rise.

The number of jobseekers per jobopenings is rising.

More jobs have beeneliminated in the last20 months than in anypoint since the end ofthe Depression.

The ultimate shape ofthe recovery will bedetermined by howwell the economycreates new jobs in thefuture.

13

11/10/09


14/18

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Consumer Spending Fell After Cash FlowClunkers Stimulus Program Expired

Oct: $347.5 billionSep: - 0.5%


15/18

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Existing Home Sales Are Improving But PriceDeclines Continue and New-Home Starts are

Weak

Oct: 529,000Sep: 5.57 million

10/28/09

The index has moved

higher for four

months. Prices down

11.3% from a year

ago.

New home sales are

down 10.6% in Oct.

vs. last year. Good

leading indicator for

housing market

11/20/09


16/18

16

No Near-Term Inflation Pressures With HighUnemployment

Oct: - 1.9% Oct: - 0.2%


17/18

U.S. Dollar has Weakened in the Last 8 Years

The real traded-weighted valueof the U.S. dollar has declined21% from its high earlier thisdecade.

This decline is not larger thanthe decline seen in previous

cycles and the decline has beenorderly.

The decline in the value of thedollar has put upward pressureon the U.S. price ofcommodities which is feedingconcerns about U.S. inflation.

A weaker dollar is making U.S.exports more competitive.

European exporters have beenhurt more than others since theeuro has strengthened 19% vs.the U.S. dollars since March 09.

17

-21%

10/21/09


18/18

Watch US Dollar, Gold and Oil for Inflation andHealth of the Global Economy

Oil price collapsed in 2008 after hitting a record high in the summer. Oil rallied off early 2009 lows on belief

that worst of financial crisis is over and world economies will go back to growing. Oil is waiting to see if therecovery will be strong enough to lift demand.

Gold hit $1,141/oz in November. Its inflation-adjusted record is $2,290/oz from Jan. 1980. Gold benefits fromanything negative about the U.S. dollar and a growing unease about paper currency around the world. Thecontinued 0% interest rate campaign by the U.S. Fed and quantitative easing are raising inflation concerns.

Dollar has weakened vs. the major currencies as investors and traders believe non-U.S. economies will improvemore quickly than the U.S. and will raise interest rates sooner than the U.S.

18

11/19/09

11/19/09

11/19/09

Oil (WTI futures) Gold US Dollar Trade-Weighted Index

(DXY)

commentary on economics - markets - politics by sean lannan 11-20-09

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