Wednesday, August 01, 2007
Don't Panic But Don't Drink The Chablis
Ford Motor Co. said U.S. sales plunged 19 percent in July, the company's worst monthly results this year, and DaimlerChrysler AG reported its volume fell 9.1 percent.OK, the sifuation is not good, and consumer spending is going to be severely impacted. It is true that the credit markets are in deep trouble; liquidity is vanishing as we speak. But nonetheless, what is happening in the world of high finance is a deeply needed correction, a restoration of accountability and rationality, and in the end it will force a return of investment into productive avenues.
Ford sold 195,245 vehicles, down from 241,339 a year earlier for a ninth consecutive monthly decline. Chrysler's July sales dropped 8.4 percent to 137,728 vehicles, while Mercedes- Benz sales were down 14 percent to 18,586. Nissan Motor Co. said sales rose 1.7 percent to 87,877.
The problems that we are seeing all stem from a pattern of malinvestment based on financial arbitrage. So we have had companies (such as homebuilders) borrowing money to buy back their own stock when they knew they would be facing a severe cash shortage quite soon, and other companies lending them the money to do so, and yet other companies making similarly silly economic decisions about everything from car loans to commercial loans secured by skyscrapers. It's exceedingly accurate to describe the world of leveraged finance of the past few years as executives pissing in bottles and selling it to other executives as chablis and champagne, who then turned around and used it as security for other highly questionable investments. But they really knew what they were doing, and the last thing they ever planned on doing was drinking that stuff themselves. The entire system was based on always being able to unload the stuff in some way upon someone else. Now everyone's going to turn to the small guy and try to sell them the chablis and the champagne. Because no one wanted to keep this stuff, the lack of a willing buyer is causing a sui generis shock in the world of high finance.
Needless to say, the average individual needs to be very careful about his or her own finances. Don't buy stock in companies that are grossly mismanaging their finances, and don't buy lovely funds backed by second liens, or Alt-A pie-in-the-sky loans. But don't panic either. In part because of demographics, there is plenty of money in the hands of millions of private citizens which can be used to invest at the ground level. It really doesn't matter if all of these idiots lose their shirts, as long as that is not allowed to propagate into the economy on the ground. The smaller banks haven't indulged for the most part.
It is true that the evaporation of the froth is going to cause a temporary ground-level impact, but as long as money keeps circulating and being invested, the financial shock can be weathered without too much pain. We won't escape a recession. For example, the NACM indexes are running below last year's levels,
as are trucking,
The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index decreased 0.1 percent in June, marking the third consecutive month-to-month drop. Tonnage fell 1.3 percent in May and has dropped 3.5 percent since March. The not seasonally adjusted index dropped 3.3 percent from May to 114.1.and rail.
On a seasonally adjusted basis, the tonnage index declined to a seven-month low of 110.5 (2000 = 100) in June from 110.6 the previous month. Compared with a year earlier, tonnage was down 3.4 percent in June, which is just a slight improvement from the 3.6 percent year-over-year decrease in May.
Cumulative volume for the first 29 weeks of 2007 totaled 9,346,283 carloads, down 4.1 percent from 2006; 6,622,802 trailers or containers, off 1.4 percent; and total volume of an estimated 953.4 billion ton-miles, down 2.8 percent from last year.Consumer spending on non-durable goods was down 0.8 percent in the second quarter advance GDP, which only ratifies what everyone who has been watching the retail reports already knew. Things are tightening, and consumers are less able to borrow to finance their lifestyles.
But there are countervailing trends as well. Manufacturing isn't as strong as the talking heads are claiming, but in general it is being helped by a weaker dollar. This isn't going to be much of an initial uplift for the economy, because too much of manufacturing continues to be shifted overseas, but it will eventually force more domestic investment. The trend of a long, slow slide this year is continuing without break, and long and slow is the way we want to keep it. The slower it is the more time there is for countereffects to form and provide ground-level support.
Right now the breathless chronicles of fund problems continue, and they are at least as bad overseas as domestically. Everyone should keep in mind, however, that this is just a return to reality and not some sort of sharp break in economic activity.
"Consumer confidence hit a six-year high in July, a widely watched gauge of sentiment showed on Tuesday, as Americans shrugged off falling home prices to focus on a healthy jobs market, instead."
That is the reality on the ground. Advance GDP for 2nd quarter showed an outright pull back on nondurable sales, and preliminary manufacturing orders showed once again that YTD shipments continued to be less than in 2006. All the baseline indicators show that we are in a slow, creeping recession.
Btw, the rate of truck sales alone is a very powerful indicator of recession. The guys on the Street are just trying to make sure that they don't participate, but a hefty one is already happening on the ground.