Forward Earnings Are Bound To Get Much, Much Worse

Discussion in 'Economics' started by ByLoSellHi, Nov 30, 2008.

  1. Good luck to the perpetually bullish here.

    Last week's 17% gain was the best U.S. markets enjoyed since 1933 - a time period frequented by outlying bear market rallies.

    Some say that markets are efficient 'forward looking' mechanisms. If that's true, forward is likely to get much worse.

    Job Cuts, Factory Slump Probably Worsened: U.S. Economy Preview

    By Bob Willis

    Nov. 30 (Bloomberg) --
    The recession engulfing the U.S. economy deepened this month as employers slashed more jobs and manufacturing contracted at the fastest pace in a quarter century, economists said before reports this week.

    Payrolls shrank by 320,000 workers in November, the biggest one-month drop since the 2001 terrorist attacks, according to the median estimate of economists surveyed by Bloomberg News before the Labor Department’s Dec. 5 report. The jobless rate may have jumped to 6.8 percent, the highest level since 1993.

    Employment may keep deteriorating as the credit crunch continues to bite, with Goldman Sachs Group Inc. analysts forecasting a 9 percent unemployment rate by late 2009. The worsening outlook prompted President-elect Barack Obama to craft a plan to save or create 2.5 million jobs in two years to stave off what he called a “crisis of historic proportions.”

    “All signals point to a very weak labor market and further weakening,” said Dean Maki, co-head of U.S. economic research at Barclays Capital Inc. in New York. “We should expect a large stimulus program shortly after Obama takes office.”

    The 11th consecutive drop in payrolls would follow a 240,000 decline in October and bring the total number of jobs eliminated so far this year to 1.5 million. Factories probably reduced staff by 80,000 workers, according to the survey median.

    The jobless rate was 6.5 percent in October.

    The employment report, the second issued since Obama was elected president on Nov. 4, is likely to intensify pressure on policy makers to come up with additional stimulus plans.

    Cutting Forecasts

    As economic data deteriorated and financial markets slid, economists at Goldman last week were among those marking down their estimates for gross domestic product. The economy will shrink at a 5 percent annual rate this quarter and decline at a 3 percent pace in the first three months of 2009, Goldman’s chief U.S. economist Jan Hatzius said in a note.

    The world’s largest economy contracted at a 0.5 percent pace in the third quarter and consumer spending fell at 3.7 percent rate, the biggest tumble since 1980, the government said last week.

    Obama has named an economic team that includes New York Federal Reserve Bank President Timothy Geithner as Treasury Secretary-designate and former Fed Chairman Paul Volcker as head of a new White House economic panel aimed at reviving the economy.

    “My first priority and my first job is to get us on the path to economic recovery,” Obama, 47, said Nov. 25 as he announced his team.

    Factory Slump

    Manufacturing, which accounts for about 12 percent of the economy, shrank in November for a fourth consecutive month, a report from the Institute for Supply Management may show tomorrow. The group’s factory index probably fell to 37, the lowest level since July 1980, from 38.9 the prior month, according to economists polled. A reading of less than 50 signals a contraction.

    U.S. automakers have been particularly hard hit as sales dropped to the lowest level in almost two decades. General Motors Corp., under pressure after Congress delayed action this month on aid to the industry, said it will idle plants in Michigan, Ohio, Kansas and Missouri for an extra week in January.

    “We are all expecting the year 2009 to be a very low year in terms of demand, not only in the United States, but globally,” Carlos Ghosn, chief executive officer of Nissan Motor Co., said in a Nov. 19 interview on Bloomberg Television. “We may be facing a couple of difficult years, with very low demand.”

    Services Decline

    Service industries, which account for almost 90 percent of the economy and range from mortgage lending to retailing and restaurants, also contracted in November, economists forecast another report from the ISM will show on Dec. 3.

    The group’s non-manufacturing index fell to 42 last month, the lowest reading since records began in 1997, according to the survey median.

    Financial firms are at the forefront of the slump in services. Citigroup Inc., the U.S. bank with the most employees, said this month it plans to eliminate more than 50,000 jobs and cut expenses as the global economy contracts. Chief Executive Officer Vikram Pandit has already cut 23,000 positions.

    Bloomberg Survey

    Release Period Prior Median
    Indicator Date Value Forecast
    ISM Manu Index 12/1 Nov. 38.9 37.0
    ISM Prices Index 12/1 Nov. 37.0 32.0
    Construct Spending MOM% 12/1 Oct. -0.3% -1.0%
    Productivity QOQ% 12/3 3Q 1.1% 0.9%
    Labor Costs QOQ% 12/3 3Q F 3.6% 3.6%
    ISM NonManu Index 12/3 Nov. 44.4 42.0
    Initial Claims ,000’s 12/4 Nov. 29 529 540
    Cont. Claims ,000’s 12/4 Nov. 22 3962 4025
    Factory Orders MOM% 12/4 Jan. -2.5% -4.3%
    Nonfarm Payrolls ,000’s 12/5 Nov. -240 -320
    Unemploy Rate % 12/5 Nov. 6.5% 6.8%
    Manu Payrolls ,000’s 12/5 Nov. -90 -80
  2. Earnings will be down from here? Unemployment on the rise? Unfortunately, I think there is very little "edge" coming with that information. At some point (in 6 months or in 6 years or in 16 years) the market will start a new bull market, way before all the bad news is out:

    Earnings growth during during the first stage of historic bull markets

    Unemployment rose during the first stage of historic bull markets
  3. makloda, if you are of the conviction that this will be a short and shallow recession then recent historical metrics and time frames have relevance.

    If you believe that it's more likely that we are experiencing and will continue to experience a fundamental change in consumer and business behavior, and that much more adverse and potent forces are in play now than in your garden variety cyclical downturns as experienced in the last 30 years or so, I don't believe it's likely those metrics will be of much guidance or predictive value.

    We will all bet with our money and through our actions, and some will win while others will lose.

    What makes me particularly glum is that I see massive and incredibly infusions of fiat currency being proposed as the Keynesian model to temper this downturn, and I am not so sure this approach won't merely delay what would have been, while causing other incredibly adverse side effects, making matters far worse than they ordinarily would have been had regulators and central banks simply let free market forces be the medicine.

    One thing I've noticed during the last week is that Chinese autocrats are speaking loudly and ominously about the state of their manufacturing sector. They are scared and want to ring the alarm bell now in the event their fears materialize (IMO).
  4. Makloda presumes the bottom is in. Meanwhile, everyday, earnings estimates are being cut and and guidance remains murky if at all.

    Support becomes resistance. Obama has a plan! A retrace does not a bull market make.
  5. ByLo, I have no idea how this turns out. A deep recession a la 1980/82 or a depression with GDP falling 15%? The thing is: How does knowing if it's either alternative help me today make money today?

    My "gut feeling" was completely wrong all the way down (and you were right with your calls) and I was lucky to be disciplined enough to stay agnostic and unemotional in my trading all the way. Best thing for me to do now is stay completely agnostic and mechanical all the way out. I'd never let headlines mess with my trading; headlines sometimes suggest this time is different and the market has become "untradable". It hasn't (maybe uninvestable, but that's something different IMO).

    It takes strong nerves sometimes, but I prefer being fully invested in my (long/short) trading strategies at all times - the good and the best.

    The only point I was trying to make was that both earnings and unemployment will keep going down even after the market (eventually, whenever that is) goes for a bull move. Waiting for rising earnings and rising employment will be a lagging indicator to price.

    Seriously, what are you doing with your cash over the next 2+ years? Long bonds (which would have been a phenomenal trade, in hindsight!), but now, after the 10y yields 3%? All our short stocks, now? Average long into stocks 25% every quarter? Buy a bunch of failing restaurant franchises in forced sales? Buy foreclosure real estate? 100% cash and wait things out - which also isn't failsafe when banks go bust?

    What have you been doing with your cash and what macro news would make you change your mind?
  6. Where did I say that?
  7. If you didn't PRESUME the bottom is in, why would you mount a defense based on first stages of bull market historics, complete with supporting graphs?
  8. I am stating there is no historical evidence that supports arguing against a market bottom based on lower earnings and rising unemployment.

    I don't presume a bottom is in. Looking at historical evidence, I'd just be careful saying a bottom is impossible (=0.00% probability). Big difference. If a bottom is impossible, why don't we all just go 200% short and collect risk free money?

    BuyLo is saying this time is different and our typical recession stats are a bad guide here. So far, he's been right.
  9. The bigger the retrace the better. :D
  10. makloda, I am in cash and thinking deeply about committing to muni bonds right now.

    When I ask myself what asset classes are investable now, I struggle mightily. That either portends a basic common sense or a unwarranted risk-aversion.

    I have never been more confident that things will get much worse long term.

    I see it in every aspect of everyday life, from what I observe with my own eyes, to comments made by people who I think know best.

    Whenever I am tempted to become less pessimistic by the more persuasive members of what I like to call 'the 12-24 month recession crowd,' I think about the most basic leading economic indicator of all, where most relevant data begins and ends: JOBS.

    I see no stabilization in the firmly entrenched rising unemployment rate, and I don't dare become constructive on our economy until we at least quit shedding jobs.

    A fundamental strengthening of our economy would necessitate job growth at least commensurate with population growth (about 160k jobs per month). We are in reverse now.

    When I look to the question of whether export-dependent nations can prop up the global economy, their low levels of domestic consumption does not make me feel anymore hopeful.

    A small but symbolic fact that demonstrates my perspective is when I recently read that both Toyota Motor and Hyundai Motors are laying off employees - not here, but in Japan and Korea, respectively (I have never heard of or read about Toyota laying off Japanese Auto Workers before).

    A larger symbol is the talk of Chinese officials urging the need for their own domestic stimulus plans.
    #10     Nov 30, 2008