Saturday, August 9, 2008

US in a Recession?

A Million Dollar Question Today is "Are We In A Recession"?

All of us have been grappling with this situation and are caught in the 'official definition' as opposed to 'what we feel is reality'. At the end of the day, I believe that we have sectors that are in full recession, others that are entering recession, and finally a third that are not in a recession. The government stats reports that the economy (US GDP) is expanding at a 1.9% average annual rate. And it takes the National Bureau of Economic Research–the official arbiter of when and if the U.S. economy is in recession–between 6 month to 18 months after a downturn begins to label it as a recession. So, no matter what, we are only going to find out (officially) recession or not, almost 'after the fact'. This has been the case, and will be the case for the foreseeable future when it comes to US Recessions. Other countries might look at it differently!

The market of jobs still has 94.5% people employed......By any measurement, that does not bode well to call this a doom and gloom, or call this an on-coming depression. When that number goes weaker, I will change views, but 94.5% people employed is a huge number. Of course, you may ask 94.5% of 'what total number'. People that are unemployed beyond 26 weeks are not even counted in this stat (I am pretty sure of this). People who move to open some consulting business, home-based-business, sell real-estate or candles or make-up product are not counted in that number, even though at one point in time they were part of the overall economy, overall employment-measurement and part of a healthy job market.

In reality, layoffs are hitting more industries than just home, construction and home-improvement. Home prices keep spiraling lower in certain areas, whilst in others they have stabilized. They have stabilized simply cause it is home-buying-season. As soon as we have Sep-Oct-Nov roll around, things will start slowing. Lawyers, Home Improvement Contractors and Home Inspectors have told me that there was a 40% cut in their business this summer, esp. when markets are supposed to be hot and demanding. The credit turmoil in the financial system has been spreading, most recently reaching the insurance and credit card market. Consumers are still strapped for cash due to the higher energy and food prices, and 'transportation costs' being slapped on the bottom line of every non-consumer purchase, which then gets eventually passed on to consumers. Of course, due to the weak dollar the one engine that keeps on humming is the Export market. This is almost a savior of our current economy.

The ironic part of everything when it comes to recessions is that government rushes to publish a GDP forecast, which then gets revised later, and even later, it gets revised again. With these 2-3 revisions, the fun-fare associated with the announcement is mainly there with the 1st number, with the other revisions pretty well ignored by Wall Street. That is true until some chief economist or fed-watcher starts publishing in a report that gets widely publicized by CNBC, CNN, FOX, BusinessWeek, Times or story.

Finally, if it smells like the bottom of the economy, then we will see Barrons, Times, Business Week, Wall Street Journal, Money, FT and other major publishers put out headlines......Once you see most of them with those headlines, we know it is the bottom.

At that point, what should we do? Capitalize on it and start doing ETF purchases, Dollar Cost Averaging into great funds and also pulling money from the sidelines and jumping into the 'fast moving sectors' . I am underlying here that I am not saying get into the dogs (worst performers). Washington Mutual is under $5, and has more value in the land of its bank locations (hot corner locations) than the goodwill in the business. But, how many cockroaches does it still have hidden in its closests is the biggest question that even the CEOs/CFOs/CIOs don't know......

So, until then......Stay safely on the sidelines, not investing any new money.


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