Mr. Bearbull
Greenspan predicts long recession
By Ron Nathan
Philippine Daily Inquirer
First Posted 02:43:00 05/13/2008
I have been writing jokes for eight years and I am beginning to run out of ideas, so now I scour the international papers for interesting stories. I found one that will appeal to all women and to men with a romantic disposition. In fact, the end of the story will leave you with a happy glow. It is taken from an article in the Boston Gazette and concerns an elderly couple who were married, but not to each other. The man was 65 and the woman a few years younger, but for true love, age is not a barrier.
The couple went to a nearby small town named Oakridge and visited the only psychiatrist. By the very nature of their profession, psychiatrists hear extraordinary statements, but the psychiatrist was surprised when the couple asked him to watch them make love and comment on their technique. He agreed, and the couple undressed slowly, kissed and cuddled for about 10 minutes before getting onto his couch. There, after another 10 minutes of foreplay, they made love gently and with much affection before satisfying each other.
When asked for his opinion, the psychiatrist said, “It was beautiful to watch and your technique is flawless. I hope I will be like that in 30 years’ time.” “Can we come back again next week?” asked the couple, and he agreed. This went on for 10 weeks until the psychiatrist became curious. “Why do you always come here when it is unnecessary?” “Well,” said the man, “if we go to a motel, it is likely we will be seen and it costs $75. If we come here, we are safe, it costs only $50 and I get $40 back from Medicare.”
* * *
Despite setbacks in the past few days, the US stock market’s three major indices are within striking distance of crossing the 200-day moving average on the upside. Personally, I don’t think that is important, but many technical analysts do. The main index crossed the 50-day average about two months ago but it is backing away from a slowly declining 200-day moving average. Almost all the second-quarter results are known and non-financials have done better than financial analysts had expected.
Financials, however, are still producing poor results so there are plenty of write-offs still to come. UBS might cut another 8,000 jobs after it wrote down an $11.4-billion loss in the first quarter. It raised $15 billion to restore its capital but many more jobs might be at risk, as it still employs 75,000 people. Fannie Mae, a government-sponsored mortgage lender, reported a worse-than-expected loss, cut its dividend, and is raising $6 billion in new capital through a share sale. Commerzbank, Germany’s second-biggest bank, has dropped 54 percent on writedowns totaling $1.3 billion. Net income declined from $920 million to $434 million.
AIG reported a massive loss of $7.8 billion, surpassing its previous loss of $5.3 billion. The company needs to raise $12.5 billion to strengthen its balance sheet and the shares fell another 8 percent. So far, companies have written off $320 billion and raised $200 billion in fresh capital. Citigroup aims to shed $500 billion of its assets from $2.2 trillion to $1.7 trillion. These are not being written off but are now known as “legacy assets” to be sold as and when possible. Although Citigroup has already written off $38 billion, further losses are expected.
Alan Greenspan said the US slipped into “an awfully pale recession, and might continue to languish for the rest of the year. We are clearly receding with economic growth at 0 percent. It is too soon to call an end to the credit crisis stemming from the collapse of the subprime-mortgage market. The economy is returning to a more inflation-prone period. Import prices are rising, as are wages overseas, adding to pressures already caused by soaring cost of food, energy and commodities.”
He portrayed the economy as being caught in a tug-of-war between cash-rich businesses on the one hand and money-losing institutions on the other.”
Greenspan said continued stagnation for the rest of the year might be the best the United States could hope for and was the most likely outcome. “That is certainly the most benevolent and probable scenario. We are in a recession but the declines in unemployment have not been as big as we would expect to see. A recovery won’t begin until home prices show some sign of stabilizing, relieving pressure on financial companies to write off mortgage-related losses. I think they have a good way to fall so you still have prospective losses for financial companies and investors. It is possible, but not probable, that prices could bottom out by the end of the year.”
He saw inflation as more of a threat and said, “We are now back where we were before the end of the Cold War.”
This is very bearish and many players agree with him because there has been a record number of put options for the next three months. Obviously this would only be done on the expectation that the market would fall substantially. Bankruptcies have risen 47 percent since a year ago and with oil hitting a new high of $126.20 a barrel, consumer spending is going to be under pressure. The rise in food prices is even worse and the checks of $600 being sent out to taxpayers will not go far.
The next disaster looming on the horizon is credit cards. Unable to pay their mortgages, people have been using several credit cards to help them through but now they cannot pay off the interest on the credit cards, which amounts to $880 billion. Target is selling half of its credit card receivables to JP Morgan for $3.6 billion as a means of raising cash. You can be sure that these receivables were sold at a discount.
In Europe, the economy is slowing, house prices are falling and inflation is increasing but so far, the European central bank has held its rate steady at 4 percent. The Bank of England faces similar problems but still has a rate of 5 percent.
The Philippine Stock Exchange index (PSEi) has dissociated itself from the rest of the planet. Last Friday, Wall Street, all Asian stock markets and Europe were weak, yet the PSEi has broken out of a base that has been forming over the last two weeks despite renewed foreign selling. Clients have lost interest in the market so it looks as if the pension funds are actively supporting it. An exception is Atlas, which will open a new mine in mid-June, ahead of schedule.
Manganese prices in the world market have been rising sharply this year and have increased by 10 percent in the past two weeks. This bodes well for ATN, the only listed company that I know that currently produces manganese ore. This must be one of the reasons why ATN stocks continue to perform so well and is at its year’s high. ATN has been included in the PSE holdings sector index of the PSE.
TBGI, in which ATN has a 35-percent stake, was also included in the services sector and has also been performing well in the market recently.
Previous columns:
Stock index awaits inflation figures – 2008/05/06
Stock index sinks to new low – 2008/4/29
PSE index languishes as Wall St rises – 2008/04/22
Bearbull finds religion – 2008/04/14
Massive rice in food prices – 2008/04/08
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