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Tuesday, June 09, 2009

Some Thoughts

Wholesale inventories and sales for April (pdf). Get Excel files here. Sales dropped only 0.4% and inventories dropped 1.4%, bringing the inventory sales ratio to 1.31. A year ago it was 1.12, so we have quite a way to go unless sales start to revive. In March it was 1.32.

From April 08 to April 09, inventories have dropped 6.2%, but sales have dropped 19.5%.

Unless sales pick up decently, this could take until the end of the year to get back to a reasonable range. I suppose that is not good news if you are hoping for the economy to return to growth this summer, but at least this ratio is dropping. The magic number here is going to be about 1.20.

Brazil's YoY GDP growth for the first quarter was reported at -1.8%.

Germany's industrial production fell 1.9% from March to April. Foreign sales fell 4.8% from March to April, which is certainly not going to be good for business projections:
“The world is still adjusting to the burst of the credit boom and this kind of hangover won’t be gone in a couple of months,” said Thorsten Polleit, chief German economist at Barclays Capital in Frankfurt. “The global economy is still lackluster.”
Lackluster is an interesting word. May revenues to Egypt from traffic through the Suez Canal was down 29% YoY. In April it was down 22.7%. This confused me, because I had been reading that some of the sidelined ships had been restarted. According to this Logistics Management article, some of the ships are using roundabout routes and avoiding both the Panama and Suez Canals. Air cargo is really suffering.

When the transportation conferences are desperately talking about green madness, you know change is in the works. Since March, IATA has changed its 09 global air traffic estimate from 4.7 billion to 9 billion:
“There is no modern precedent for today’s economic meltdown,” said Giovanni Bisignani, IATA’s director general and CEO. “State of the Industry” address to 500 of the industry’s top leaders gathered in Kuala Lumpur for the 65th IATA Annual General Meeting and World Air Transport Summit, Bisignani painted a bleak picture.

Recession is the most significant factor on the industry’s bottom line, said association analysts. IATA’s revised forecast sees revenues declining an unprecedented 15 percent ($80 billion) from $528 billion in 2008 to $448 billion in 2009.

Air cargo demand is expected to decline by 17 percent. In 2009, airlines are forecast to carry 33.3 million tons of freight, compared to 40.1 million tons in 2008. Passenger demand is expected to contract by 8 percent to 2.06 billion travelers compared to 2.24 billion in 2008. The revenue impact of falling demand will be further exaggerated by large falls in yields—11 percent for cargo.
This is not just meaningless detail. The implication is that there will be a 4-5 year recovery process which will impact the makers of aircraft considerably. The global scope and depth of this downturn makes it particularly hard to assess. We are probably seeing and going to see more derivative effects that are most unusual and have not been felt globally since the WWII era.

On the oil front, Total SA is looking for givebacks in costs:
Total SA, Europe’s third-largest oil producer, is seeking to cut equipment and services costs by between 20 and 30 percent as the global recession lowers energy demand, an official said.
The company wants bigger than targeted reductions in costs for deepwater equipment, rentals of which have surged 300 percent in the last few years, Guillermou said. Contractors should reduce costs if they want to maintain demand for rigs, he said.

“If they want the backlog to continue they have to bring cost of services and equipment back to the environment which prevailed in 2005, 2006,” he said.
Recent oil price rises have changed matters in India:
Prime Minister Manmohan Singh’s government was expected to lift a 5 1/2 year cap on pump prices of automobile fuels after his re-election last month. Oil Minister Murli Deora said May 29 he planned to seek cabinet approval to free up fuel prices from state control within six weeks. Removing the curbs will enable refiners to profit from crude’s 54 percent advance this year.

“Petrol and diesel margins have turned negative at these oil prices, which affect the companies’ earnings and cash flows,” said Vishwas Katela, an analyst at Mumbai-based Anand Rathi Financial Services Ltd. “We don’t know what the government will do, but the chances of complete de-regulation are slim.”
Most of their companies haven't even made back the prior losses. The way India has been funding this is through oil bonds, which are an off-balance sheet item.

The depth and global extent of this recession are unique since the 50s, so in a way one can understand the deep underestimation of its severity involved in this graph from the Obama administration's pitch for the stimulus bill (from the Innocent Bystanders blog)

It was a little stupid to do this in the first place, because it was always likely to be one of those things that can be used against you. One can understand and forgive that. It is hard to forgive the lack of attention since to situation. The official pundits do seem a bit slow.

I'm still amazed to the point of stammering incoherence by the concept of trying to push through major healthcare reform in this environment without a careful economic projection and an assessment of costs.

Several fed governors have raised the suggestion that the US will have to raise rates late in 2009. I agree - I think the bond market is already signalling that. It's clear that it will take years to absorb the excess capacity in the system, and growth will be quite anemic until that happens. Thus, flooding the market with money will not create new investment, but instead speculation as people bid for and hold options on or actual natural resources. That would create a very negative environment for growth.

I would like to see the US administration do some analysis similar to the Deutsche Bundesbank effort here, and then have the CBO analyze various legislative initiatives under some reasonable assumptions.

What's weird is that where I work, it's as if someone flipped a magic "buy" switch on at the beginning of June. Suddenly customers are ordering and inquiring. I think they've come to a conclusion as to how much worse it's going to get and so justified projects that were on hold are now going ahead.

I hope that spreads.
John - let's hope so. That's how this will end.

I just can't wait for it to be over. Every month that passes increases the dangers of a double-dip, so I am pretty anxious.

You're food processing, right?
The groceries inventory/sales ratio is currently at .64 and has only risen from .61 over the last year.

It ought to be one of the better areas.
I would like to see the administration do *anything* that implies that they have a clue about this economy. So far, they are no better than Bush

my latest. Hope you like it.

I know that you maintain that deregulationism was a bipartisan sin, but I still maintain the BushCo were really very special - particularly the Bush SEC.
This comment has been removed by the author.
One trillion dollars of consumer credit card debt might actually be the equivalent to four times the trillion dollars debt.

Money that should have been circulating within local economies has been rerouted directly to the banks by massive credit card interest rates.

It is mind numbingly stupid to charge 30% interest and revolve it year after year on the same old debt when the original transaction that actually involved the purchase of a service or product, might have had less of a profit margin.

If I sell a product for a hundred dollars to someone using a credit card, and my profit margin is 25%, should the banks be collecting 30% interest year after year because the consumer cannot pay it down? It is just nuts to reward the electronic transmission of funds with higher profit margins than the entities actually creating the goods and services that are being purchased on credit.

I got an idea, lets nobody make anything and we all just get into the credit card business instead.

The 2008 economic collapse could have been lessened by simply waiving all interest charges on consumer credit card debt after the debt becomes three years old.

Capping interest rate profits at a certain percentage of the original purchase will become a necessary way of doing business when we realize that these never ending credit card debts create more use of non renewable resources as consumers try to pay off their old debts by working more and more hours.

MoM - I'm in industrial food-processing equipment manufacture. Generally speaking, the food made by equipment we build ends up on grocery shelves or in grocery freezer cases. This business tends to be steadier than the usual capital-equipment business in a downturn; processors are always introducing new products or responding to market changes or replacing worn-out equipment. People gotta eat. In the 2001 recession I might well have asked you "what recession" as I was busy working overtime a lot. This recession, not so much.
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