When Will The Economy Turn?

What direction is the economy going to take? We'll know the answer soon enough. I think we are in a critical transition period right now from an economy that has been in a free fall to one that is starting to stabilize. Earnings season has begun, and I expect the posted earnings to be bad, because as I just said, the economy has been in a free fall. If you are hoping to see good earnings as a sign that the economy has been improving, I doubt you will find it yet, as the economy is just now beginning to stabilize, so the past quarter has not been one where companies made money. Maybe next quarter, you will see improved earnings, but not this one. 

But there are two signs you should look out for. First, unemployment. If unemployment stops increasing so fast, you can take that as a great sign that the economy is turning. People will start spending more because they see that unemployment is not getting worse, and that they do not have to worry about losing their jobs. Now when I say unemployment is going to stop increasing so quickly, I do not mean we peaked at 8.5% unemployment. But I do mean, that instead of the amount of jobs we lose every month increasing, they will start decreasing. For example, lately we have seen unemployment numbers of 598,000 in January, 651,000 in February, and 663,000 in March. From now on, we will see jobs continue to be lost, but not more than 663,000 in a single month. So the rate of unemployment still has a ways higher to go, but the speed at which it increases should slow down, showing us that the economy is turning.

The next sign would be company forecasts. Transports, Oil, Tech, and Financials should be the companies you focus on because they are the ones that will see their business sharply increase as the economy begins to turn. Transports are important because in a healthy, flourishing economy, businesses are going to need to transport goods from one place to another. In a slow economy like today's, no firm can sell any goods so they are not transporting them across the country, and the transport business has seen its revenue drop significantly. If the transport industry gives a good guidance, then we can think that the economy is going to begin moving again.

Oil, is similar to Transport in that it really greases a healthy economy. A healthy economy demands oil for everything from fueling trucks, to making products. If an economy is at a standstill, oil demand falls. If oil companies increase their guidance, we will know the economy is starting to get better.

Financials are probably the most important companies to focus on. The economy simply cannot run if there is no credit. If firms can't borrow money, then they can't put in orders for large products, and then industrial companies have no one to supply their goods to, etc...  If they cannot start making large projects for future benefit, then their revenue won't increase and they will start laying off people. If financials give a strong guidance about an improvement in credit (and essentially and improvement in profits), then we know that soon enough, companies will begin to borrow money to invest it in a more productive future. Look for financials to be the first to turn, and the most important. Flowing credit will put an end to unemployment and start increasing jobs.

Lastly, tech is a high growth sector that lives off of a thriving economy. Consumers love to spend on technology because it is cool and useful. However, in a recession, that is the first place they cut down on. If tech makes a comeback, then we know that the consumer is not afraid to spend anymore, and consumer confidence is one of the most important barometers of a healthy economy. If tech gives good guidance, then consumer spending, which is 2/3 of the u.s economy, is likely to start increasing.

Testing The Lows

Pay attention folks. The next few days are going to give us a good tell on how the market is going to perform this year. The market hates what the government is doing and we are seeing that with the Dow Jones shedding hundreds of points every day. What is the government doing that investors hate so much? Two things: uncertainty and too little stimulus spending.  The market hates uncertainty and the fact is that Geithner has not shed light on the details of his plan to help banks. Without details, it is hard for people to invest when they do not know what is going to happen with the government's spending. Now, to be fair, fixing the banks has no easy solution and it is going to take time to come up with one. But as long as we don't have the details of the bad bank plan, don't expect the markets to have a sustained rally. The second thing scaring investors is the stimulus package. Investors are afraid it is too big and is going to sink the U.S in debt. And more importantly, there is not enough stimulus. Businesses don't like the idea of 40% tax cuts because people rarely spend that money, they save it. With only 60% of the spending going to stimulus, investors are losing faith that the package will actually stimulate the economy.

You hear analysts giving predictions on what they think the market low is going/has been. But you can decide that for yourself in the next few days.

Now, the reason I say that the next few days are going to give us a good tell on how the market is going to do is because we are testing the lows. If the lows hold, then you can rest assured that we have created a bottom and that the market is not going to go much lower. The market has had bad news before and still held the November low, we'll see if the lows hold one more time. This is some of the worst news the market is going to have thrown at it and if the lows hold, we can be optimistic about the future.  

However, if we break the previous low, we could be in some trouble. It shows that the market has not priced in the worst of the news. I would not invest for the short term because no one knows how low the market could end up going. It could be a rough year if the market has not bottomed yet.

So make sure you pay attention to how the stock indexes are doing over the next few days, it will give you a good insight on what kind of investment to make. 

*Well on a funny note… while I was writing this the market finally got some details about the treasury plan and boy did we see a quick rally, I think the market just went up 200 points in 30 minutes all because we got DETAILS on what the government is doing! Be cautious though, quick movements in the market like this almost always overshoot and we see the repercussions the next day.*

What To Invest In If The Economy Gets Worse

What companies should you be investing in if you think the economy is only going to get worse? Well you might think that's a stupid question, why would you want to invest in companies when they economy is going sour? Well believe it or not, there are some companies that might actually fair well. When investing, you can take two strategies. First, look at companies that will do well during the recession. Some of my favorites are Altria, Kroger, American Public Education Incorporated, and Advanced Auto Parts.  

How did I pick these companies? Well you want a company that has a product that people are not going to drop during a recession. That's where Altria comes into play. Altria Group owns Phillip Morris USA and John Middleton, amongst other cigarette manufacturers. Cigarettes are one of the things that most people will not stop buying when they look to cut down costs. Altria should be able to post steady revenue, which is so rare in a recession that people will be willing to pay more for the earnings (P/E ratio) which will send the stock price higher. They also have a nice dividend (more about this later). So pick a company that has a product people are not going to cut back spending on during a recession.

Kroger is another stock that will perform well. Kroger is a grocery store and when people cut back on spending, they stop going out to eat and start going to the grocery store. But there's another reason Kroger and other grocery stores make a good buy. You might buy Kraft or PepsiCo because, well if people are cutting back on eating out, they will buy Kraft/PepsiCo's products so they can eat at home. But that's not the case. These companies are brand names, which are more expensive. Often grocery stores offer their own brands, which are generic and therefore much cheaper. That's why I would buy a grocery store over Kraft. Because not only is Kroger going to see increased revenue just from the fact that people are flocking to the grocery store, but when people go to buy macaroni, they aren't going to reach for Kraft, they will go for the cheaper store brand. 

I talked about why I like American Public Education Incorporated in an earlier post, but just in case you missed it, I'll explain it again. As more and more unemployment occurs, people are going to be left trying to find out what to do with their time. One of the best ways to allocate your time is to further your education so you have a better resume for employers. But most the people who are being laid off have families and thus going to a college campus somewhere is not an option. But online school is. That's why I like American Public Education Incorporated, because they are in the online education business and their revenue is going to increase as more and more people become unemployed and enroll into online school.  So investing in online colleges might be a good idea.

I also talked about car repair companies in the same post, but I'll also mention them again. Advanced Auto Parts fits the idea that since people are cutting down on spending, they will not buy new things, but then they have to get things repaired instead- cars, for example. You may not be able to afford a new car right now, but you still need one. As less people buy new cars, the car fleet in America is getting older, and since most Americans need cars, they will have to get them repaired. Companies like Advanced Auto Parts and other car parts/repair companies will see their business revenue increase as more and more people bring their car in for repairs and new parts instead of buying new cars.

These are all companies that will play off the poor economy. You also have the option of investing in solid companies that have high dividends. Like General Electric, Johnson & Johnson, Bristol Myers, and AT&T. These companies all provide high dividend yields. The idea behind this strategy is that these companies are solid, well-run companies. In a bad economy, their share prices won't go up, but at least you can still make money off of the high dividends until the economy improves and their stock prices recover. But make sure the dividend is safe, if a company has loads of debt, no cash, and is paying a 20% dividend, obviously something is not right and they will end up cutting their dividend. Companies like Bristol Myers and GE have enough cash to pay off their dividend, so they make for a good investment.

I am not saying you HAVE to invest in these companies, but it is the strategy behind how I chose these companies that you should look at if you think the economy is not recovering anytime soon.

Be sure to check back tomorrow if you want to know what to strategies to take when investing if you think the economy has already bottomed. The next few days I will continue to give different investing options for different economic forecasts.

A Surprising Gain

Housing posted a surprising gain in December. Today existing home sales figures came out and they posted a 6.5% gain from November to December. Housing sales were up because prices of houses have been slashed so much that people are going out to get them at bargains. Is this a sign that housing has bottomed?

Maybe. But be aware, that this does not mean the housing crisis is definitely over. Unemployment numbers are still rising. As unemployment continues to increase, people will become more frightened of losing their jobs. When people are scared that they might lose their job, they are not going to go out and make big purchases, such as buying a new house. So we may see a drop when January home sale figures are released.

I'm not saying that it will drop for sure, just be aware that this trend may not continue.

Look For The Stimulus Bill To Get Bigger

Just some news about the stimulus bill from the weekend:

• Nancy Pelosi said she is still against nationalizing any banks, but is seeking more money to buy up more toxic assets from banks.
  
  
• Home builders and other industries are lobbying congress to add more incentives for themselves in the bill.
  
  
• John McCain said earlier today on "Fox News Sunday" that he wants a re-write of the bill and would not support the bill the way it is right now. On the flipside, Nancy Pelosi said she is willing to consider GOP ideas, but is unlikely to add the larger tax cuts the GOP wants. 
  
  
• House Minority Leader John Boehner stated he is voting against the bill if it is not changed.

From the Wall Street Journal

Housing Has Bottomed? Doubtful

I said in an earlier post that the economy is not getting better anytime soon. There have been many people saying housing has bottomed, the economy has bottomed, and that the credit markets have improved as banks have started lending again. I do not want to seem like a pessimist, but it is important for investors and those whose jobs are at risk to know the health of the economy.

A recent post at nakedcapitalism blog provided a few articles showing how banks have now stopped lending to home builders. This is important for you to be aware of because if banks have just now stopped lending, clearly housing has not bottomed. Also, the credit markets have not thawed yet, there are still shutting down lending. With credit markets still frozen, the economy will not be growing anytime soon because no business can get the money they need in order to grow. With home builders now unable to get loans, you should see a large wave of bankruptcies.

If you are looking to invest in companies tied into home building because you think the housing sector has bottomed, steer away. These companies will only see their problems amplified, not only can they not sell homes, they cannot get the funds to keep themselves alive. This will also, without a doubt, increase unemployment numbers as builders look to layoffs in order to cut costs. There is still a lot of time before housing picks up.

Do You Know Where the Money Is Going?

You may know that Obama is calling for a new stimulus plan. But do you know how the money is actually being divvied out?

• $58 billion - Energy
  
  
  
  • $32 billion – towards funding a smart electricity grid
    
  • $20 billion+ -Tax credits and cuts related to renewable energy and research for clean/efficient energy
    
  • $6 billion - Weatherize modest-income homes
    
  
  
• $275 billion - Tax cuts:
  
  
  
  • Tax credit of $500 a person/ $1,000 for married couples, targeting payroll taxes
    
  • $2,500 tax credit for of higher education, up to 4 years
    
  • $7,500 first-time home buyer's credit, does not have to be repaid
    
  
  
• $141.6 billion - Education
  
  
  
  • $62 billion - School districts, modernizing schools
    
  • $39 billion – Aid to school districts/public colleges to prevent cuts in services
    
  • $15.6 billion - Reward states reaching performance standards
    
  • $25 billion - Prevent layoffs
    
  
  
• $90 billion - Infrastructure:
  
  
  
  • $30 billion - Highways
    
  • $10 billion - Rail/transit
    
  • $31 billion – Making public buildings energy efficient (saves money in the long run)
    
  • $19 billion - Water projects
    
  
  
• $102 billion - Aid to the poor and unemployed
  
  
  
  • $43 billion – Unemployment and job training
    
  • $39 billion – Unemployment health insurance
    
  • $20 billion - Food stamp benefits increased b y 13%
    
  
  
• $111.1 billion - Health care
  
  
  
  • $87 billion – Aid for Medicaid
    
  • $20 billion – Computerization of health records
    
  • $4.1 billion – Making sure patients are getting the best treatment and preventing health problems
    

The infractructure program in particular sounds like a good plan since it will create many new jobs. I suggest you read the USA Today article since it gives a good description of how the money will help the different areas the money is being relegated to.

A Voice to Shake Wall Street

If you ever turn on CNBC or read any financial websites/newspapers you will see a hoard of so called financial "experts" giving their take on what is going to happen with the economy and where you should be investing. After you survey all their opinions in order to gain some direction on what you should be investing in or where the economy seems to be going, you will end up where you started. Half of them say the economy is going to get better, half say it's going into a depression. But one of these analysts has stood out. That's Meredith Whitney, an analyst at Oppenheimer & Co.; she has been dead right on calling the mortgage meltdown and predicting the need for capital by banks. The market has fallen in love with her because of her accurate predictions, and thus she has earned their trust. CNBC took a poll in December asking who the most important person to the stock market was. Meredith Whitney won easily. Her voice is so strong that when she predicted banks would need to raise more capital, bank stocks plummeted. I have attached a few of her predictions for the future state of the economy. Just because she has been right in the past does not mean she will be right in the future. I am not suggesting you should do whatever she says, but it is certainly worth taking her opinion into consideration.

The woman who called Wall Street's meltdown

8 really, really scary predictions

Banks may need to raise fresh capital in '09: Whitney

So what is the government doing to help?

The state of economy significantly impacts your life.  You've probably have to make some kind of change in your life because of the current deteriorating economy, so it is important to know how the government plans on fixing it.  The government has two methods of stimulating the economy: monetary and fiscal policy.

Fiscal policy, in short, are those policies that involve taxes and government spending.  The "bailout" programs you have heard about fall under this category.

Monetary policy, in short, is the lowering and increasing of the Federal Reserve's interest rates.

So how do you set these policies to help our economy?  Well for fiscal policy, lowering taxes means people have more money to spend, which stimulates the economy. The second part of fiscal policy is spending money.  The government spends money by setting up projects for America.  For example, the government might decide to pay to have new roads put up all over America.  First, you need people to build those roads, thus government spending creates jobs.  More jobs are always better for the economy because it gives people money to spend.  Additionally, the government will need to get the tar, trucks, and various other supplies for building those roads.  These supplies will need to be bought from businesses throughout America, which helps out America's lagging businesses.  President-elect Obama plans on spending hundreds of billions of dollars on infrastructure (building roads, electrical grids, new water supplies), which will help out the economy.

The second policy is monetary policy.  Monetary policy is controlled by the central bank, which in our case is the Federal Reserve.  The Federal Reserve's most important job right now is the lowering the interest rates.  When the Federal Reserve lowers interest rates, local banks lower the interest rates they give out on their loans (more about why Fed rates dictate bank rates).  When interest rates are low, businesses can afford to take out loans and can use the money to expand and grow their business.  When businesses are growing, they create more employment and when they are able to access the money they need, they can prevent from bankrupting.  Small businesses are able to start up because they can acquire loans, which create even more jobs.  Also, when interest rates are lowered by the Fed, banks lower the rate they are willing to give people for investing their money into the bank.  For example if Bank of America offered 4% interest for anyone putting money into their savings account, and the Fed lowered interest rates, Bank of America might only now give a 2% interest rate for the savings account.  The lower interest rates are, the less incentive people have for putting money into banks and more incentive they have for spending it. As consumer spending comes back, so will the economy.

So that is what the government is doing to help the economy recover.  I will be talking more about the Troubled Assets Relief Program (TARP), which is all the "bailout” talk you hear, in an upcoming post!

The Economy is a Mess... But Why?

You know the economy is in a recession, but do you know why? You hear different “experts” pointing fingers at housing, some at Wall Street, others at banks, but no one REALLY explains what is going on and how we got here. In case you guys wanted to fully understand what has conspired to get us into this economic mess I have provided a radio cast, The Giant Pool of Money, from Chicago Public Radio's show, This American Life. The radio cast is long but it does a phenomenal job explaining the events that conspired that lead us to the mess we face today and why. The first few minutes are a little boring, but do not let that deter you. Let me know if you need clarification on anything or have any questions!

The Giant Pool of Money