Short or long? – Weekly Blog #742
A short or long recession seems to be the critical question on the minds of most economically oriented people. As is often the case with a popular question, this is the easy but wrong question. The right question is what impact will the next statement have? the recession have on our economy, our society and our future investments?
Historians usually find a primary cause for the period between expansions. The declines that have the greatest impact on future expansions are not primarily aimed at resetting price levels, but at addressing economic imbalances in society and focusing on the critical forces shaping the future.
When most people discuss the future, they focus on the factors that produce an outcome they like. Currently, the popular opinion is that the recession will be short and shallow. Well, that may be the case, but it is appropriate for thinking people to consider at least two major outcomes, and others.
I have no special skill in guessing the future, but I feel compelled to think about alternatives for our clients and our family.
A market analysis tool that has been around for over a hundred years requires that two Dow Jones stock averages point in the same direction.
The question is whether not only have we already entered an economic recession, but whether we are showing signs of bottoming out.
The chart setup for the transportation average is showing early signs of a market bottom, with the industrial average lagging even further behind in its chart development.
For me, the transportation average is a more reliable indicator of what’s going on, with the industrial average an indication of what investors think about the future.
I wonder if the current administration, like past presidents, will declare the operation of the railroads essential to national defense and intervene in what looks like an impending national strike.
Industrial prices are higher than wholesale, retail and consumer prices. The JOC-ECRI industrial price index fell -3.14% this week and is down -9.29% year-on-year, with oil, copper and wheat among the drivers .
Overall, I’m more impressed with the trading skills of those using NASDAQ stocks than those largely limited to NYSE stocks. Over the past week, more NASDAQ-listed stocks have risen than fallen, 11.4 million versus 10.2 million respectively. The reverse was the case on the NYSE, with 8.3 million up and 11.2 million down.
Traders show better timing than investors but do not earn as much.
The sloppy analysis uses stock prices – being historically attractive – with current prices and the last reported earnings or estimates. The P/E ratio on this basis has fallen into the long-term average range. Usually a sign of value is when the P/Es are significantly below average.
Many recently reported incomes were significantly lower than previous estimates. As bad as these reports are, I wonder if they have reported on the deterioration of their businesses. I haven’t seen any depreciation in the value of their inventory due to cheaper raw materials, shifting customer buying practices to more essential goods, or slower accounts payable payments.
As a publishing entrepreneur, I’ve had to deal with some of the largest financial institutions in the world. They were slow payers. In the meantime, I had to pay our people on time, as well as our rent. I didn’t “factor” or borrow against our receivables because the lenders would have written them down even though they eventually paid.
When we investigated investing in distressed or bankrupt businesses for clients, we discounted receivables and wrote down inventories of raw materials and finished goods, while questioning the value of fixed assets. If we could find a working buyer for whom we attributed value to absent leads, we tried to attribute value to their hardworking, highly skilled workforce and good customer relations.
A recent FinancialTimes article heralded the end of the era of easy-to-borrow money, making acquisitions more expensive and difficult to make. Additionally, there will be fewer opportunities for mergers and acquisitions and IPOs.
Every week, The Wall Street Journal lists the prices of 72 security and commodity indices, as well as currencies. Over the past week, 75% has gone down.
The betting odds appear to be against a quick and short slump, but it could happen. If that happens, I don’t think we will address the serious issues that are holding us back from reaching our optimal potential.
Chances are that if we have a short, shallow recession, it will be followed over time by a longer, deeper recession that will solve some of our problems.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.