Friday, August 13, 2010

Equity Market & Economic Analyses This Morning On CNBC

There was a fascinating series of exchanges on CNBC this morning concerning reading current economic tea leaves. Initially, former Merrill Lynch economist David Rosenberg faced off against Mellon Bank's Dick Hoey (with whom I had some contact early in my career at EF Hutton). Later, British ad exec Sir Martin Sorrell appeared briefly as a guest and addressed the same issue.

The exchanges put me in mind of this post from last November, which I reread due to a reader comment.

I won't go into a blow-by-blow account of the Rosenberg-Hoey interchanges. Suffice to say, they divide along this fault line: are we in an atypical political-economic era, relative to post-WWII experience, or not?

Hoey, several of the panel of guest commenters on the exchange with Rosenberg, and Cooperman, in the linked post, all essentially say "no."

Rosenberg and Sorrell say "definitely yes."

Hoey et al simply observe corporate balance sheets and various prior recession/recovery statistics and forecast an inevitable return to normalcy for the US economy.

Rosenberg focuses on consumer debt/net worth levels now and on average. Citing mean-reversion, he insists that the prior high for that measure of 23, now fallen to 20, will continue downward, non-monotonically, toward the long run average of 12.3.

Thus, Rosenberg sees continuing economic slowing due to deleveraging. Something with which I agree.

Rosenberg and Sorrell, the latter more explicitly, decried current federal government interventions, which have increased uncertainty, halted job creation, increased deficits and debt, and prevented a natural economic cycle in which the recession would hit a natural bottom and rebound.

One of the two, probably Rosenberg, contended that the government cut the bottoming process short, thus leading to an anemic, deficit-spending fueled temporary, but unsustainable 'pop' in economic activity. But he thinks it will lead to economic slowing for quite some time.

Where Hoey & Co. saw corporate cash as ready to fuel an expansion, Rosenberg and Sorrell see it as evidence of fear and uncertainty.

It was a very stark contrast in views. Hoey, as did Cooperman in November, merely projects various trends mechanically according to prior recession/recovery patterns.

Rosenberg explicitly rejected any comparisons with other post-WWII recoveries, noting the atypical secular deleveraging and record unemployment levels. He sees continued economic weakness, and worse, with continued federal attempts to 'help' the economy.

As I noted earlier in the post, upon hearing (and reading) the cases from both camps, I lean distinctly toward Rosenberg's view, and away from Hoey's.

Ed Whitacre's Surprise Resignation Announcement

Yesterday's big news was GM Chairman Ed Whitacre's announcement that he'll be retiring in less than a month.

Timed to be on the day of GM's big earnings announcement, the best in years, I'm sure Whitacre is trying to continue his smoke-and-mirrors act of a few months ago, on which Paul Ingrassia, the Wall Street Journal's legendary auto sector reporter/executive, also commented at the time.

If you ask me, Whitacre knows this latest earnings pop is the best GM's going to see for a while. And Ed should know.

Having arranged the faux-debt repayment stunt in April, and seemingly presided over this past quarter's recent record earnings, Ed can make a quick exit, stage left, a la SnagglePuss, leaving his replacement holding a very large, public bag.

This was the subject of a couple of hot and heavy debates on CNBC yesterday morning and afternoon. The network trotted out its biased new contributor, Bob Lutz, who promptly gushed over everything Whitacre has done or said. Ironically, Lutz gave accolades to Whitacre for being a telephone guy, but turning around the failed auto maker, when auto execs could not.

Pardon me, Bob, but, uh, weren't YOU one of those inept auto execs? After all, you worked at every one of the Big Three.

This set Lutz up to crow about Whitacre's replacement being a non-car guy. In fact, he's another telephone veteran. No surprise there. And he's a former US Navy nuclear submarine officer. Lutz is a former fighter pilot, so he stressed the military connection. I'm not saying it's not something that is often helpful. But surely there have been inept corporate executives who were in the service.

Tom Labrecque of Chase Manhattan Bank comes to mind...... what a loser. See my point?

Anyway, Jeff Sonnenfeld of Yale's Management School concurred that Ed is running off the field and into the clubhouse before the game is over and the clock has run out.

As I surmised earlier in this post, one has to ask why a chairman would do this? Certainly not because things are about to get better. No, it's more likely that this is a lucky confluence of events.

If Art Laffer is right about the US economy collapsing next January, Whitacre's exit is nearly perfectly timed. By the way, unemployment claims were up by a surprising amount this morning.

GM isn't fixed. It's not an attractive investment. It's still an aged, ailing auto designer and assembler which was forced by the government to hand over large amounts of asset value to its unions. There's no way it's an attractive investment in an attractive sector.

I neither like nor respect Ed Whitacre. But give him credit for having a good sense of timing. Watch him prepare for the next act in his career.

The "it was doing fine when I left" phase.

Thursday, August 12, 2010

Economic Observations From The Road

In prior years, I've written posts describing economic activity and summer holiday traffic in Pennsylvania, Maryland and West Virginia. This year, I traveled north to Georgian Bay, about two hours north of Toronto.

We drove up a few Sundays ago on New York's Taconic Parkway amidst almost no cars. At the time, I thought little of it. Even after we exited to the NY Thruway and points north, traffic on a summer Sunday afternoon was fairly light. So were the roads through the Adirondacks the next day, as we headed west, then north, again, to cross the border at Thousand Islands bridge.

But the real shock was our return this past Tuesday. Traffic between Toronto and the border at Niagara Falls was, as usual, heavy on a weekday morning. But as soon as we entered the NY Thruway heading east, things changed dramatically.

Stopping at the Pembroke service center, we were stunned by the lack of cars at 12:30PM on an August weekday. The food kiosks inside, as well as the tables, were deserted. This was typically prime lunch time, when such a service center would be crammed with people using all the building's services.

The traffic on 90 East for the remainder of the afternoon was very light. There may well have been as many trucks as cars. These were both true for the oncoming direction, as well. It was painfully obvious that, this August, Americans were staying home in numbers.

As the afternoon wore on into evening, we turned south in continued sparse traffic. Once again taking the Taconic south from Albany to Connecticut, we drove among very few cars, and noticed equally few in the oncoming direction.

I've driven the Interstate portions of this trip for many summers, but I cannot recall ever seeing so few vacationers or such ultra-light traffic. Traffic so sparse as to make you think you are driving at 6AM on a weekend morning.

Add to other macroeconomic signals of US economic condition this empirical, anecdotal evidence that US consumer vacation travel and, thus, spending, is extremely weak this summer, adding further to already weak discretionary spending and the revenues of vendors serving those needs.