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How Bad Will It Get? Some Numbers...

February 04, 2009 | About:
Some more thoughts on the economy....

Yesterday Dow Chemical (DOW) reported and there were two numbers related that have thus far, been ignored as to their greater effect aside from Dow.

Some background. Dow makes the "stuff" and is used to produce the items that go into almost everything we used. So, if they are not selling their products, it is because end users, (you and me) are not buying cars, houses, anything made of plastic or this that need to get shipped. Without going into a chemistry lesson, they are a "building blocks" manufacturer in short.

Yesterday Dow said that Q4 production ran at 65%, a low number not seen in over 25 years. Here is the worse number. December, was 44%......44%!! That means that until December Dow was running approx. 75% in both October and November. Essentially in December international manufacturing activity fell to a bare subsistence level (Dow does business in over 160 nations).

Dow also said it has seen "December trends continue through January". From this we can see that Q4 US GDP does not accurately reflect the current world economy its direction and. A 3.8% fall does not reflect the condition we are seeing now in 2009 Q1. Simply put, erase Q4 from your mind and concentrate on just December, that is the trend going forward.

Here is the current employment picture:

bls.png


The blue dots are ADP numbers and the red "x" are the acual BLS numbers (Bureau of Labor Statistics).

Not good and getting worse.

What is the point? Folks keep asking me what I am buying. Answer? Not stocks. Not now. I think Q1 numbers are going to be really bad (yes, worse than Q4 2008) and lower prices will be had. I do not think the current "stimulus" plan as it is currently proposed will do anything in the short term (6 months) and most likely longer as most direct job creation spending there actually is in it (very little) does not occur until the end of 2009 and 2010. There is virtually nothing coming soon.

Are we doomed? No. Are we going to loose are international standing? No. The world itself cannot recover unless we do. I do not see any significant recovery until the end of 2009 which means low equity prices are in order through this summer. Even if you are "long term", I would advice waiting. There are scores of quality companies that may be cutting dividends (Dow, GE (GE) to name just two) and that would cause additional price fluctuations and for those who may be buying them for income, dramatic reductions there would be in store.

In short, most investors today have never really seen a hard recession. If we are headed, and based on Dow's numbers we are, for a year not seen in 25 years, that would put us back to the 1980-81 recession. Now, I was only 12 then and most of today's investors do not know what it was like. I do remember gas lines and am not saying we are heading back there but most folks today have only really experienced economic bumps in their adult lifetime, not a huge pothole and that is where we are headed. How they will react is really an unknown.

They could continue to spend and make their individual situations even more tenuous OR they could retrench spending and make saving a priority. The former is better for the economy for now but the latter is better for long term prospects.

Am I going to panic and sell everything? No. I'll continue to collect my dividends and wait. But I do have new money to invest that is sitting OR going into oil (USO), (DXO) and Gold (GLD) for reasons discussed in previous posts (there are more but those are just two examples).

All this means that in order to make "market comparisons" one has to go back to the 1970's and early to mid 1980's and ignore recent history as we really have not seen the same economic conditions since then. To compare market behavior since then in recent economic dips and draw conclusions to today is meaningless to an certain extent.

Just hunker down and don't panic, this to will pass. Just do not get fooled by the occasional market jump...

Todd Sullivan

valueplays.blogspot.com

About the author:

Todd Sullivan
Ravi Nagarajan is a private investor and Editor of The Rational Walk website. Ravi focuses on applying value investing techniques to find securities trading well below intrinsic business value. Ravi has over 15 years of experience in the financial markets and started investing on a full time basis in 2009. From 1996 to 2009, Ravi held a number of technical and executive level positions in the commercial software industry. Ravi graduated Summa Cum Laude from Santa Clara University with a degree in finance. Visit his website The Rational Walk

Visit Todd Sullivan's Website


Rating: 3.1/5 (9 votes)

Comments

rozer
Rozer - 5 years ago
Everything mentioned is accurate and a fair point. However, everyone shares that same opinion. The problem with market noise is that most want to forecast and prognosticate. I'm not sure where the market will head over the next six months (no one does), but I do know the market's returned a negative absolute return of almost -40% for the past decade. This doesn't mean it can't go lower, but it does mean that everyone in the free world has positioned themselves according to those views. It reminds me of '99 when everyone knew "it was different this time". Markets often change, people rarely do.
Sivaram
Sivaram - 5 years ago
ROZER: "This doesn't mean it can't go lower, but it does mean that everyone in the free world has positioned themselves according to those views. It reminds me of '99 when everyone knew "it was different this time". "


The difference is that stocks are nowhere near as cheap as during any of the major corrections in the past (say 1982, 1974, 1943, 1932, etc). Valuations are better than at any point in the last few years but we are facing a huge credit bust, with several trillion in losses (private equity, commercial real estate, etc) still not accounted for.

I wasn't investing at that time but the market was wildly overvalued in 2000, so it would have been easy to go contrarian and bet against that. Right now, it's more difficult. Remember, Buffett called the bottom in 1974 but unless you invested near the bottom in 1974 or was a good stockpicker, you suffered until the early 80's.
rozer
Rozer - 5 years ago
Sivaram,

Some correction- First valuations are currently below historic norms going back to the 30's (again doesn't mean it can't get cheaper)- but to say that we are still over vauled relative to history is untrue.

Second- investors DID make money in the 70's even though the market went nowhere. It's true that you must be a good stock picker to make money- but that shouldn't surprise anyone.
Sivaram
Sivaram - 5 years ago
Rozer,

I'm not saying the market is overvalued but it is definitely not "cheap." I would consider it close to average value. If you are interested, you can check out my blog where I briefly looked at (a month ago) valuations based on 10-year P/E as well as on short-term P/E. The Big Picture blog also today refers to a Fortune article looking at valuations based on one of Buffett's favourite metrics, market cap to GNP. None of these figures imply that the market is anywhere near what can be considered cheap.

If you are arguing that the market is attractive in the sense of yielding average returns, I would agree with you. But if you are saying that the market is really cheap and will produce high returns, I don't share that view.

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