Financial Crisis Turning into a Real Economic Crisis
Economics / Credit Crisis 2008 Oct 06, 2008 - 07:41 AM
Mike Larson writes: Everyone has been acutely focused on Washington — specifically, if and how the financial industry will get bailed out. The Senate voted to approve a revised $700-billion bailout package, one that's packed with all kinds of fresh pork and new tax cuts. And it looks like the House may finally get on board, too.
But the real fireworks aren't in D.C. — they're in the REAL economy. It's looking like a total disaster in the making. Just consider what we learned this week:
- The research firm S&P/Case-Shiller reported that home prices in 20 top metropolitan areas dropped 16.3% from a year ago in July. That was worse than the prior month, when they fell 15.9%, and the biggest drop on record.
- Mortgage applications plunged in the week ended September 26, according to the Mortgage Bankers Association. The purchase index dropped 10.9% from the previous week, while the refinance index tanked 34.7%. At 304.8, the purchase index is the lowest since February 2002.
- The outplacement firm Challenger, Gray & Christmas counted 95,094 job cut announcements in September. That was up more than 7% from August and up 33% from a year earlier.
Auto sales are down sharply, and industry layoffs are rising ... - The layoffs aren't just concentrated at banks and brokers anymore, either. Computer industry players led the list of announced cuts (25,700). Automotive firms were next at just under 15,000, with apparel companies (8,350) and financials (8,244) right behind.
- Auto sales plunged 27% in September at the six largest automakers. Ford's sales were down a whopping 35%, while Chrysler sales dropped 33%. Car and truck sales have now fallen 11 months in a row, the worst stretch of declines in 17 years.
- The latest personal spending figures from the government showed zero growth in August. Besides this February, we haven't seen a monthly reading that pathetic since September 2006.
- The ISM manufacturing index plunged to 43.5 in September. That was down from 49.9 in August, well below the forecast for a reading of 49.5, and the worst reading since October 2001. Sub-indices that measure new orders, employment and production all tanked.
I could go on, but I think you get the picture ...
This is no longer just a housing crisis. It is no longer just a financial crisis. It's a full-scale economic crisis!
What's happening as a result? Earnings and sales problems, which were once concentrated in financial firms, are now spreading everywhere.
The same tech stocks Wall Street called "safe" (because they weren't in the finance sector) are starting to tank.
The big industrials are rolling over.
The transports are breaking down left and right.
And the bad corporate earnings news is piling up. A mere sampling:
Marriott International (MAR) , the largest hotel chain in the world, said third-quarter profits dropped 28% from a year earlier. The company forecast 2009 earnings per share between $1.48 to $1.60, far below the average analyst estimate of $1.83. Marriott said it "expects the business environment to remain unusually challenging."
Standard Microsystems (SMSC) makes semiconductors used in everything from automobiles to personal computers. The company missed earnings targets in the current quarter and forecast that third-quarter sales will miss the average forecast by as much as 15%. The company's CEO didn't have any cheery news to convey, either. His comments:
"The current financial market crisis has caused a sharp drop in visibility and uncertainty in demand planning for the second half of this fiscal year. The fiscal third quarter is usually our strongest quarter for PC products but, since late August and continuing still, we have seen a significant decline in third quarter demand for desktop and notebook PCs for commercial customers in particular."
Con-Way (CNW) is the second-largest trucking firm in the U.S. It just slashed its 2008 per-share profit target to a range of $2.60 to $2.80 from $3 to $3.40. Said CEO Douglas Stotlar,
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| Con-Way, the second-largest U.S. trucking company, just slashed its earnings forecast. |
"The economy has been battered by an unprecedented confluence of macroeconomic crises, curtailing demand for freight transportation services. Over the past several weeks we have seen volumes decline further, exacerbated by September's weather events, all of which continue to pressure yields. To date, the traditional peak seasonal uptick in demand has been muted so we expect the challenging business environment to continue through the 2008 fourth quarter."
These are far from the only examples. Indeed, just as Martin and I predicted in our Plague to Pandemic event a couple of weeks ago, the problem that started in the subprime mortgage industry has morphed into something much more dangerous — an all-out credit disaster that is hammering the real economy.
Yes, the various government programs to help refinance borrowers out of crummy mortgages — and the $700-billion bailout program — may help a subsector of consumers and banks out there.
But they are not a cure-all.
They could actually drive interest rates higher.
And even if they manage to forestall some credit market pain, or rescue a few banks from failure, they won't be able to offset the increasing economic pressures being brought to bear on mainstream America.
These Are Challenging Times ... What to Do?
I wish I could be more optimistic. But my job here is to tell it like it is, rather than sugarcoat things. And I think you still have to play defense with most of your investment money.
That means sticking with safe havens like short-term Treasuries or Treasury-only money funds.
It means getting the heck out of stocks in economically-sensitive sectors — like industrials, tech, and retail.
And if you're more aggressive, it also means going on the offense, by looking to generate profits with specialized investments that rise in value when vulnerable stocks fall.
Until next time,
Mike
P.S. We have a winner in our Money and Markets Editor-for-a-Day contest! It was a tough decision because we got LOTS of great submissions, but our panel ultimately selected Daniel Lindley from Naples, Florida. Look for his special column next Friday, October 10. Congratulations, Daniel, and thanks to everyone who shared their great stories with us.
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