Wednesday, May 23, 2007

Signs of Recession?

The economy is growing the slowest it has grown in 4 years. Most economists expect continued deceleration in the 2nd quarter but then a pick up later in the year. This sounds great, but the present environment reminds us a bit of the 2000-2001 period in the sense that there is considerable hope that this happens but it is backed more by enthusiastic finger-crossing than it is by hard data. We recall companies, and Corning Glass (GLW) comes first to mind, that one month were saying everything was rosy and a short 2 months later were projecting huge (40-50%) declines in revenues.

Consider now that retail sales abruptly halted in April, housing construction plunged, the government raised more in revenues (big capital gains haul) than it spent, business spending was sluggish, semiconductor memory prices are dropping double-digit rates monthly, mortgage cash-outs have ground to a halt, auto sales have been tepid with even Toyota and Honda reporting slow sales, housing and semiconductor inventories are soaring, and new federal rules for 2007 limiting diesel emissions probably front-end loaded heavy truck sales in 2006. In addition, much of the rebound case rests on exports - yet many European and Asian central banks are raising their interest rates.

Fred Hickey points out in his recent issue of The High-Tech Strategist (PO Box 3133, Nashua NH 03061-3133 $140), "in this manic, seemingly one-way market, all problems are overlooked by investors as long as there is something, anything, positive to grasp onto; whether it is an upbeat second half outlook from Intel or Texas Instruments, a debt-driven buyback announcement from IBM or Linear Tech, or a rumor of a merger or private-equity buyout (and nearly every stock has been the subject of at least one of these types of rumors). I don't know when this insanity will end, but I do know that it well end very badly. Every day that goes by, the U.S. Economy sinks further into recession. At some point, investors will wake up to that reality. maybe an external event will blow it all up - such as a collapse in the insanely overpriced Chinese stock market, or a break in the sinking U.S. dollar, or a messy unwinding of the yen-carry trade. Maybe the incredibly over-levered debt market will blow up or maybe one of the gigantic private equity deals will implode. There are innumerable potential catalysts."


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