Download Gloom, despair and agony on me

October 10, 2011
Bill Hackney, CFA
(404) 876-9411
www.atlcap.com
gloom, Despair
and Agony on Me !
“Gloom, despair and agony on me
Deep, dark depression, excessive misery
If it weren’t for bad luck, I’d have no luck at all
Gloom, despair and agony on me.”
Song from the TV show “Hee Haw,” 1969-1992
After nine months of
contentious battles on
Capitol Hill, Americans
have reached a new level
of disgust toward congress
. . .Whether Republican,
Democrat or independent,
more Americans disapprove
of Congress than in more
than two decades of
Washington Post-ABC News
polling.
~ Washington Post, October 5, 2011
Attention shoppers! Are you worried about financial collapse, riots, earthquakes,
and other assorted forms of pestilence? Well, the retailer Costco has a deal for
you. For a limited time only, they are offering a 20% discount on “THRIVE
1 Year Food Supply.” According to the Costco website, for only $799 you will
receive 84 one gallon cans of grains, fruits, veggies, etc. which have a shelf
life of up to 25 years. Said one satisfied patron, “We purchased the supply as
a standby. There are too many possibilities of problems on the horizon, civil
unrest, inflation, strikes and shortages in food . . .”
The constant drumbeat of bad news has put many Americans in a deep funk.
Some are going into survival mode and stocking up on freeze-dried food.
Others are dumping their stocks in fear that another protracted bear market
and recession might be right around the corner. Most see no way out of the
intractable problems confronting the world economy.
Over the last three months: The US lost its AAA bond rating. Congress came
perilously close to causing a Treasury debt default. The US housing market
showed few signs of recovery despite herculean efforts by the government to
prop it up. Ditto for the labor market. The European sovereign debt crisis
worsened with rioting and strikes breaking out in several European capitals.
The emerging market economies of Asia and Latin America—heretofore the
engine of a global economic recovery—began to slow under the weight of
tighter monetary policy. Everywhere it seems nothing is headed in the right
direction.
Given all this bad economic news, the markets have acted in a traditional and
predictable fashion. Stock and commodity prices plunged. Even gold—often
touted as a hedge against both inflation and deflation—declined sharply in
price during September. A flight-to-quality took place in the bond market:
yields on lower grade bonds rose (bond prices declined) and the yields on
higher grade bonds declined (bond prices rose). Bond investors, however,
didn’t pay much attention to the Treasury debt downgrade. Treasury bonds
rallied during the quarter and were probably the best performing asset in most
portfolios.
OPINION AND ANALYSIS OF KEY ECONOMIC AND INVESTMENT ISSUES
Page One
At this juncture, the key question for investors is whether a recession is near or
the recent slowdown in growth is a transitory soft patch. If we’re going through
a temporary slowdown in growth, then the stock market has overshot to the
downside. The gloom and despair will dissipate and stocks will rally. If a
recession is right around the corner, then the market has got it right: things are
as bad as they seem. In this case, there is further downside risk to the stock
market.
We believe that the US and the emerging market economies will avoid recession
at least through 2012, so we expect the stock market to rally in the months
ahead. Europe, about 25% of the world economy, is likely to drift into recession,
but it shouldn’t be severe enough to drag down the rest of the world.
“Animal spirits” is the term
John Maynard Keynes
used in his 1936 book
The General Theory of
Employment, Interest
and Money to describe
emotions which influence
human behavior and can
be measured in terms of
consumer confidence.
~ Wikipedia, October 5, 2011
Pay attention to what people do, not what they say
It appears to us that what Americans are saying about our economy is out of sync
with prevailing reality. For example, recent surveys of consumer and business
confidence are at recession levels. Yet, the latest data on retail sales, industrial
production and capital spending portray an economy that’s experiencing
moderate growth. Noted market technician John Mendelson often points out
that, in trying to figure out the direction of the markets, he pays attention to
what people do, not what they say. Here’s what the American people are doing
about the economy.
They are spending money. Retail sales are currently growing about 7.2% yearover-year according to recent surveys by the Commerce Department and the
International Council of Shopping Centers. September auto sales were up 9.9%
from year ago levels. These numbers are not what you see in a recession. Luxury
retailers are growing sales about twice as fast as the discounters, but all major
categories are showing growth. In fact, the Victoria’s Secret chain just reported
a whopping 13% sales gain for September—apparently the “animal spirits” of
the economy are still alive and well in the consumer sector.
They are still producing. Manufacturing production in August rose a
respectable 3.8% over the prior year. The gains were led by autos and business
equipment. The value of manufacturers’ unfilled orders grew 8.2%, suggesting
that industrial production should continue to increase in the months ahead. The
biggest contributors to GDP growth during this anemic US recovery have been
capital equipment and exports. These are manufacturing intensive activities.
For example, 70% of what we export is manufactured goods. And exports now
represent almost 14% of US GDP, a record peacetime high. Donald Trump
frequently mouths the myth, “Everybody knows we don’t make things anymore.”
Nothing could be further from the truth.
They are investing for the future. Despite growing concerns about the
European debt crisis and a slowing world economy, American businesses are
still investing for the future. Non-defense capital goods orders for August (a
good leading indicator for capital investment in our economy) showed a healthy
OPINION AND ANALYSIS OF KEY ECONOMIC AND INVESTMENT ISSUES
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annual increase of 25%, thanks largely to Boeing aircraft. Even without the
volatile aircraft component, capital goods orders grew 11%. While some of
these capital goods orders are due to foreign demand, their recent strength
belies the gloomy business sentiment shown in the confidence surveys.
When you get beyond the rhetoric of despair found in the confidence surveys,
the popular media and in Washington, what you see is a US economy that is
growing steadily and does not appear poised to fall into recession.
US economy not solely dependent on Washington
Women’s Wear Daily
reports that Mary Kate and
Ashley Olsen are struggling
to meet demand for a
$39,000 alligator backpack
from their luxury line, The
Row. The outrageously
expensive backpack was “the
first thing that sold off the
shelf,” Ashley said at the
Paris launch of the twins’
new handbag collection on
September 30.
~ The Marquee Blog — CNN.com
October 6, 2011
We believe that much of the angst that Americans are feeling reflects their
disappointment with the way government is functioning. The bearish view
is that the US government is out of monetary and fiscal options to stimulate
the economy. It can’t increase spending or cut taxes because of debt and
deficits. It can’t lower interest rates much further because they are so low
already. Moreover, if government could come up with a plan to stimulate
growth, gridlock among the Democrats and the Republicans would prevent its
implementation. In short, there’s “no way out.” A recession and financial crisis,
just like 2008, must be right around the corner.
While events could play out this way, we would assign a 70% probability that
they won’t. Fortunately, our relatively free-market US economy—operating
in a global financial and economic system—is not solely dependent on what
happens in Washington. Neither is our stock market or bond market. The US
government played a crucial role in preventing a complete financial meltdown
in 2008 and 2009, but the influence of the US government in promoting
economic growth in 2010 and 2011 has been marginal at best. Other powerful
and global forces are at work on our economy.
One such force is the value of the dollar on world currency markets. This is the
stimulus that nobody talks about. Over the last decade, the dollar has dropped
over 30% in value. A weaker currency has made US goods more competitive
on world markets and is one reason exports are at record highs.
Another force is technological innovation. The US is a world leader in computer
hardware, software and Internet applications. You won’t find too many Steve
Jobs and Bill Gates abroad because most other countries don’t have the critical
combination of venture capital, higher education, regulatory infrastructure
and entrepreneurial spirit that we do. Technology has driven big increases in
manufacturing productivity over the years. That’s why foreign auto makers
have located their production facilities in the US. In the case of BMW, they
make all their X3 SUVs at their Greenville, SC plant and export 70% of the
output to the rest of the world. Listen up, Mr. Trump!
Still another force is the global commodity markets. The broad-based CRB
commodity index is now off about 17% from its high in May, reflecting the
slowdown in global economic growth. Lower gasoline, heating oil, copper and
corn prices give a much needed boost to consumer purchasing power.
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Atlanta Capital Management Co., LLC
1075 Peachtree Street NE
Suite 2100
Atlanta, GA 30309
Another scary bit of news
out of the United Kingdom,
which has been overtaken by
riots in the past three days:
The sale of baseball bats via
the UK branch of online
marketplace Amazon has
risen over 5000 percent in the
last 24 hours.
~ The Huffington Post, August 9, 2011
The real lesson from Europe
is actually the opposite of
what conservatives claim:
Europe is an economic
success, and that success
shows that social democracy
still works.
~ Paul Krugman, Nobel Prize winner
in Economics, January 2010
The last force is foreign central banks. While the Fed doesn’t have much room
to lower interest rates, many foreign central banks do. Most emerging market
countries began to raise interest rates in 2010 as inflation pressures began to
build following their rapid recovery from the 2008-2009 global recession. Now,
with commodity prices weaker and growth slowing, these central banks are in
a position to begin lowering their interest rates. When they do, it should have
a salutary effect on both the US economy and stock market. (Recently the Fed
announced Operation Twist which is a plan to lower longer term US interest
rates. This should have a beneficial effect as well.)
The positive impact of these four forces should help keep the US out of recession
for the next year or so. We expect a moderate acceleration in US GDP growth
in the final half of 2011 to about 2.0 % from the 0.9% “stall-speed” growth rate
of the first half.
Europe is key to avoiding global recession
The wildcard in the global economic outlook is Europe. It is also the key to
whether or not the rest of the world can avoid recession. The economies of
Portugal, Italy, Ireland, Greece and Spain are at or near recession. Their GDPs
total about 7% of global GDP. Greece will probably default on its sovereign debt
any day now. The fear is that the others will follow suit and a rash of defaults will
bring down the European banking system and eventually the global economy.
The US banking system is much better capitalized than the European system
and has limited exposure to troubled European sovereign debt. But we estimate
that about 15 – 20% of S&P 500 revenues come from Europe, so trouble there
will adversely impact the earnings of many US multinational companies.
The European situation is difficult to handicap. Our view is that the European
Central Bank will ease monetary policy and euro zone leaders will create a bank
bailout plan akin to our TARP program. These measures are unlikely to prevent
a recession in Europe, but they should reduce its severity and alleviate concerns
about the stability of the European banking system. Any signs of progress in
Europe should lift the spirits of US equity investors.
All this, however, will require some political skill as well as luck. To paraphrase
the singing hillbillies on Hee Haw, “if we have anymore bad luck in Europe, we’ll
have no luck at all.”
This information is not intended as investment advice or a recommendation to purchase or sell specific securities.
The opinions expressed herein are those of the author and do not necessarily reflect the views of other employees
at Atlanta Capital Management. These opinions may change at anytime without prior notice, there is no guarantee
that any forecasts or opinions expressed in this material will be realized. While every effort has been made to verify
the information contained herein, we make no representation as to its accuracy. Company names are used for
illustrative purposes only and should not be construed as a recommendation to buy or sell any financial securities.
Index and commodity changes are based on price-only percentage change. It is not possible to directly invest in an
index. Past performance does not predict future results.
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