V is for Victory, Not Recoveries ~ Steve Blitz Morning Notes
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Wednesday, September 23, 2009

V is for Victory, Not Recoveries

As we wait for the Fed to hint to us their plan for scaling back their security holdings (they are already talking with broker/dealers regarding reverse repos) there has been a rising chorus of economists, analysts, and pundits singing that not only is the recession declared to be over but that the shape of the recovery will be a V -- a sharp upturn with inflation risk is on the rise. The Treasury market doesn't appear as worried.

Considering the track record of this chorus during the past several years why would anyone would believe they've got it right now. Bernanke's assertion that the recession is over must be taken in context with his proclamations that the sub-prime housing collapse was not going to effect the broader economy. Better that the Fed Chairman is a cheerleader than a doomsayer but that is beside the point. There is no question that the current quarter will be positive, probably to the tune of a real 2.0% SAAR. This is just the math that comes off of increased auto spending and a decreased pace of inventory de-stocking. The fourth quarter is likely to be negative.

The recovery will come but only grow slowly. The economy is still sitting with capacity utilization below the lows of the past two recessions, job losses are continuing, and remember that the recovery of the past decade, one of the more anemic ones on record, was built around getting overleveraged to buy a house. Where exactly is this V coming from?

As to the fourth quarter, this is the headline in today's WSJ -- "Holiday Jobs Look Scarce as Pessimism Grips Retail"

Nearly half the nation's 25 biggest retail chains expect to hire fewer holiday workers this season than they did last year, another sign that retailers aren't counting on recession-strained shoppers to relax the tight grip on their pocketbooks this year.

About 40% of stores surveyed across a broad swath of retailing, including consumer-electronic chain Best Buy Inc., teen-retailer American Eagle Outfitters Inc., and luxury-goods seller Saks Inc., told the Hay Group, a human resources consulting firm, that they expect to hire between 5% and 25% fewer temporary workers this year than last, when the recession forced many retailers to trim staff in response to falling sales.

That's a grimmer outlook than the Hay survey found a year ago, when 29% of retailers said they would be slashing their holiday workforce. . . .

. . . . A third of retailers in the survey said they expect sales during Christmas to decline 5% to 25% this year. Another third expect sales to remain the same as last year. Researcher Retail Forward estimates last year was the worst selling season in 42 years with sales declining 4.5% in the fourth quarter. It also issued a forecast predicting sales will be flat with last year's weak numbers.

"Retailers are not planning inventory or staffing for any sales growth this holiday," said Craig Rowley, vice president of the global retail sector for Hay Group.

Fewer holiday jobs will only make retail sales worse, said Mr. Katz, the Harvard labor economist. "It is what we call the multiplier effect -- consumers are pessimistic about the jobs market, so they are not shopping as robustly, and as firms continue to not hire or lay off workers, consumers get more pessimistic," he said.

Bit since this is a banking day, the accompanying chart points up why the banks aren't going to be opening their pocketbooks to lend. In every cycle banks repair by boosting securities holdings relative to loans and leases. The current one is no different and it has only really begun. Further, so much of the loan growth has been centered in real estate, commercial and residential. Who are they going to lend to next to rebuild their books?

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