Some thoughts to start the week with
Vincent Farrell | Nov 23 2008 08:35PM
Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.
1) Last Friday, Goldman Sachs said they estimate that Q4 GDP will be off 5%. That’s the most pessimistic I have seen and would rank as one of the worst quarters since World War II. There have been some 250 or so quarters since the end of the War, and only 11 of them have been a negative 4% or lower. The all-time baddie was Q1 in 1958 when the GDP fell 10.4%. To support the dire outlook was a report on Friday from the Bureau of Labor Statistics stating that 12 states reported a rise of at least 2% in unemployment the past year.
The situation is no better in Europe. The Euro-zone’s Purchasing Managers Index dropped on Friday to the lowest level in 10 years. That indicates Q4 GDP will be negative. That would be on top of two consecutive negative quarters and keep Europe firmly in recession. Claude Trichet, the head of the European Central Bank, sounded disconnected when he said the data came as no surprise. Lower rates are badly needed, and I’m hoping the ECB responds quickly. The central rate in Europe is still 3.25% against 1% in the U.S. And it looks like we will lower that soon.
2) The savings rate in the U.S averaged 9% from 1950 to 1985 when it began a steady decline. Last year it was essentially 0. The economists at J.P.Morgan figure it to go to 4.5% by the end of next year. I’ll bet it goes higher sooner. The price of gas nationwide is now around $2.00 a gallon after having been over $4.00 earlier this year. I have seen different estimates but most cluster around the American economy saving $1.3 to $1.4 billion for every penny decline in gas. That would approach a savings of $300 billion. Since retail sales have been terrible and retail companies are all guiding projections lower, it would make sense that the consumer is saving the “windfall” and not spending it. I would expect the savings rate to soar. Since consumer and mortgage debts are now 127% of disposable income (The Economist Magazine) versus 77% in 1990, it is long past the time to start saving again.
3) Friday was the first day banks could offer debt guaranteed by the Federal Government under the “Temporary Liquidity Guaranty Program.” Goldman is ready to issue some debt, and J.P.Morgan filed the initial paperwork. Hopefully this indicates they have demand for the money and the proceeds of the debt offerings will be loaned out, hopefully. Oddly, and encouragingly, Fannie Mae and Freddie Mac debt traded better on Friday even though they have only an “implicit” guarantee, not “explicit” as this new bank paper will. Fannie Mae paper traded 158 basis points over Treasuries, which was a bit better than the day before but still way off the 45-basis-point average of 2007.
Also, the FDIC approved the first “conditional bank charter” to a group headed interestingly by a guy named Gerald Ford. Recipients of these charters will be allowed to buy failed or troubled banks. This one has flown under the ra