Commentary on Economics - Markets - Politics by Sean Lannan 9-18-09

8/14/2019 Commentary on Economics - Markets - Politics by Sean Lannan 9-18-09

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Commentary onEconomics, Markets

and Politics to HelpBusiness LeadersMake Good Decisions

September 18, 2009 – UpdateSean Lannan

www.linkedin/in/SeanLannan



Commentary on Economics, Markets and Politics forGood Business and Investor Decision Making

• The financial markets have rallied for five months and are 56%above the March lows, manufacturing is showing early growth,the employment picture is still bad and commercial real estatemarket is deteriorating.

• Economic commentators expect 2 – 4% annualized GDP growthin the second half of 2009 and 2+% growth in 2010, modestgrowth but growth none the less.

• Consumer spending will not be a near-term engine for growth – In 2010, the unemployment rate is expected to rise above the current

9.7%. – Household savings rates are rising as spending falls. – Defaults on mortgages and consumer credit will continue to rise for the rest

of 2009.

• Now is a good time to access longer term credit and equityfinancing. – High-yield debt spreads continue to narrow vs. treasuries. – IPO market is reopening for select companies.

About the author:

Sean Lannan is a CFO for a high technology company. He has abackground in corporate finance, treasury, investor relations,



Politics and the Economy

• The Washington debate over health care reform isdistracting law makers from an important job of reformingthe financial industry and managing systemic risk. – The debates on how to reform health care and its costs are important

to the health of individuals and America business and will take a longtime to work out.

• Risks of trade disputes are growing. – Washington just placed 35% duties on the import of Chinese-made

vehicle tires.

– Beginning of a trade war with China or the first efforts to reform theexport-driven Chinese industrial policy model?

• It is hard to judge how strong the private sector economy isin the U.S. with high levels of government intervention,easy monetary policy and stimulus spending. – Look for positive surprises from economic numbers during the stimulus

spending through 2010.

– Risk to growth if easy monetary policy and stimulus spending stops too

soon.



Four Bad Bear Markets – ‘29-’32, ‘73-’74, ‘00-’02,‘07-’09

• The current bearmarket lookedDepression-likethrough lossesas of 3/6/09(57% decline).

• The market hasrebounded 56%

from the Marchlows on thelargest injectionof liquidity isU.S. economichistory(equivalent to

29% of GDP) andgovernmentintervention on alarge scale.

4

Doug Short at

http://dshort.com/charts/bear-mark

, 9/18/09

http://dshort.com/charts/bear-markets.html?four-bears

http://dshort.com/charts/bear-markets.html?four-bears



High-Yield Debt Markets Have Re-Openedas a Source of Capital for Companies in

2009

• The high-yield bond markethas come back to life in firstfive months of 2009.

• High-yield risk premiumsdeclined 22% in late 2008

to 9% in August.• Investors are taking more

risk in their search foryields.

• Companies, again, haveaccess to credit outside of the bank loan market.

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6

Deterioration of the Labor Markets hasSlowed Since the First-Half of 2009

July: 9.7%

• The U.S. economy is shedding

jobs very rapidly and createsa negative feedback loopssince consumers drive 70% of U.S. GDP.

• In August unemployment hit9.7%, the highest since 983,26 years ago. 14.9 million are

out of work.• The comprehensive

unemployment rate of marginally attached andinvoluntary part-time workers(called U-6 by the Dept. of Labor) hit 16.8% in August,26.3 million people.

• The U.S. economy has lost 7.4million jobs since the start of the recession in Dec ‘07.

• More jobs have been lost inthis recession than werecreated in the previousexpansion – a first.

• Lack of job openings will keepconsumer spending and

8/6/09

9/9/09



U.S. Household Debts Shrink and Savings Rise

• Household debt has been

contracting since themiddle of 2008. Thedecrease either voluntaryor forced by credittightness by lenders willpush down consumerpurchasing.

• Household savings ratehas increased to 6.9% of after-tax income in May.Increased savings is dragon economic activity.

• Between 1970 and 2009the average household

savings rate was 6.6%broken down into twodistinct periods:1970 –1985 it was in a range of 8– 12% and 1985 – 2007 thesavings rate marched from8% down to 0%.

• Household debt is near

record highs. It peaked at133% of disposable

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9/9/09

7/8/09



Will the U.S. Recession End in Q3 2009?

• This is the first time sincequarterly record keepingstarted in 1947 that GDPcontracted for four quartersin a row (3Q08 – 2Q09).

• August capacity utilizationwas 67%.

8

Q2: -1.0%

9/21/09



Business Will Not Kick-Start a Strong Recovery

• Business will need to lead the U.S. economicrecovery since households are burdened withdebt, diminished retirement savings, and fearsof job losses.

• Business investment in software and equipmentis close to levels as high during the tech boom.

•Manufacturing capacity is running at only 67%.• Business-led growth will be weak.

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8/25/09



10

Manufacturing Has Started to Grow

Aug: +0.8%

Production has been

growing for the last two

months

Aug: 52.9

Expanding for the first

time since 2007



11

Housing Unit Sales Appear to Be Stabilizing ButPrice Declines Continue to Grind Onward

Aug: 598,000 July: 5.2 million

6/22/09

More upscale homes

are going into

foreclosure, prices

continue to fall



Commercial Real Estate Is/Will Accumulate LargeLosses

• There are $700B of commercial mortgage-backed securities (CMBS) in the U.S.

• $153B of CMBS loans are coming due between now and 2012. Two-thirds will likelynot qualify for refinancing.

• Deliquency rates were 3.1% in July, six times the levels of a year ago. Default ratescould hit 30% ($210B) with loss rates hitting 13%, worse than the last serious collapse

in commercial real estate in the early 1990’s.12

8/31/09



Commercial Real Estate is Struggling Badly

• The market for U.S.commercial real estate is$6.5 trillion.

• Commercial property pricesare down 35% from the2007 peak and are at levelslast seen in 2004.

• Public REITs are starting tomake selective acquisitionsof properties.

• $150 billion of commercialmortgage-backed securitieswill come due between2009 and 2012.

Refinancing will be achallenge which will raisethe risk of default.

• There has been an 8Xincrease to 4% indelinquent loans since2007.

• Treasury issued newguidance that loan

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Inflation Pressures Have Faded Near-Term

Aug: - 4.3% Aug: - 1.5%



Watch US Dollar, Gold and Oil for Inflation andHealth of the Global Economy

• Oil, gold and the U.S. dollar are metrics to watch for inflation and the health of the world

economy.• Oil prices collapsed in 2008 after hitting a record high in the summer. Oil prices are

trading sideways after finding a bottom at $40 - $45 per barrel and has rallied $30 as theworld economy stabilized.

• Gold started climbing after the collapse of Lehman Brothers and the Fed and Treasuryestablished credit and liquidity facilities to flood the credit channel. Inflation concernsare growing over the next several years.

• Dollar has weakened vs. the major currencies as investors and traders believe non-U.S.economies will grow more quickly than the U.S. and will raise interest rates sooner than

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9/16/09

Oil (WTI futures) Gold (Comex futures)



Weakness in the Banking Sector Continues toHurt the Economy

• Banking industry willbe a drag on the U.S.economy until capitalreserves are rebuilt inthe next 2 – 3 years.

• The FDIC insurancefund has shrunk to

$10.4B, the lowestsince mid-1993, whichinsures $6.2T in U.S.bank deposits.

• The FDIC will need andinjection of new capitalthrough higher

premiums to banks(drag on banks) ortaxpayer dollars.

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Global Trade Is Not On Firm Footing Yet

• 90% of theworld’s physicaltrading of goodsis on ships andthe Baltic DryIndex (BDIY) is agood indicator of

trade.• Shipping rates

fell 85% in thesecond-half of 2008.

• Rates recoveredone-half the

losses in the first-half of 2009.

• But rates havelost on-half of therebound in thelast threemonths.

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Commentary on Economics - Markets - Politics by Sean Lannan 9-18-09