Thursday, May 1, 2008

Beware Of Over-Optimism

Risks Of A False Bottom
The New York Times, with its story Optimism Begins to Ease Onto Wall St, is touting a possible bottom to our current economic malaise:

“For the first time in months, analysts and executives sound upbeat again. Many of them see a broad, sustained recovery in both the economy and the financial markets coming in second half of this year, a prediction some market strategists call hopeful at best.”

The New York Times story is for those who desperately want to believe that the worst is over. Don’t fall for this trap. There are many economic signs out there all indicating that the current economic slow down is still at its initial stages: job loss figures, further reduction in housing prices, slowing consumer spending, tight credit market, and uncertainty around the value of the financial guaranties and bond ratings.

Hank Paulson Taking A Line From Yogi Berra
Hank Paulson must have been reading Yogi Berra’s encyclopedia on economic[i] because in a Bloomberg interview, he is quoted as saying: “We are closer to the end of this problem than we are to the beginning.'' Wow this is really profound. What worries me is that Hank, before joining the Bush Administration, was highly regarded Goldman Sachs banker. So, what happened? It’s anyone’s guess but I hope his symptoms would go away and soon.

GDP Grew?
The media was a buzz yesterday about the U.S. GDP. While many economists were expecting a decline, the GDP number showed a surprising 0.6% growth. Economists often say that statistics lie but in this case, it is the calculation of the GDP’s growth that is mendacious. This “growth” was due to 0.8% increase in inventories. Wall Street Journal got it right when it wrote: “But underlying data -- on consumer spending, business investment and construction -- paint a picture of a deteriorating economy, one that expanded only because of a rise in exports and a buildup of inventories.”

The Truth: “Excluding inventories, GDP shrank at a 0.2% pace, the first contraction in more than 16 years. Excluding inventories and exports, the economy contracted at a 0.4% rate after increasing 1.3% in the fourth quarter.”

Much like the ‘goodwill’ on a balance sheet, this ‘growth’ of inventories will come back to haunt the market as the value of the inventories will have to be marked down.

Analogies For The Current Economic Condition
I have heard and read so many different analogies about the economy. Choose your favorite among the finalists that I like:

1) It is like a major hurricane; we went through the front end of the hurricane and are now experiencing the calm before the back end comes.

2) It is like a man who is “doing well” while in mid-fall off a tall building.

3) It is like whole bunch of high-tech hamsters spinning in a whole bunch of high-tech wheels.

4) It is like the second Terminator, the one that can morph into different shapes.

5) It is like an 8.0-plus earthquake waiting to happen

I leave you with this one from BTO (Bachman Turner Overdrive): You ain't seen nothing yet (Note: this will open up a YouTube video)

May Your Trades Be Profitable!
Ed Kim
[i] Yogi Berra is famous for piety sayings such as:
“This is like deja vu all over again.”
“You can observe a lot just by watching.”
“A nickel ain't worth a dime anymore.”
“It ain't over till it's over.”

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