Ok we’ve been in a heated debate here at Fox Business over the government stimulus plan and whether we’re headed into a recession or not. We’ve been kicking these issues around on Money for Breakfast, myself, Alexis Glick, Peter Barnes, Charles Payne and Jenna Lee.
Alexis just got back from the World Economic Forum in Davos, Switzerland where she made a valiant effort trying to pin down executives to get candid, straight answers for you on all of these problems.
Yes Davos sounds sweet, but it isn't Hawaii. It's a pain in the neck to get to, the security clearances can drive you batty, and covering it can be grinding work. Pinning executives down for interviews is as easy as trying to chase a gnat in a hurricane. It's one reason why I chew Tums round the clock.
But Alexis, God Bless her, delivers a fresh look on these important issues you’ll get no where else, to get the full story, go to Alexis’s blog, it’s worth reading.
Peter and Charles have been doing a smart job going toe to toe with our crew of financial experts, we’re trying to get a clearer read on the picture, with Jenna telling us when our reality check has bounced with breaking news. God Bless her too (can you tell by now I’m a Catholic girl? Yup, Elizabeth Mary Regina, I still say the Rosary, God Bless me, 12 years of Catholic school plus 12 years of therapy).
I don’t know about you, but my head is spinning. Tax rebates, good idea or no? More government debt-funded stimulus, good or bad? More debt for our children and grandchildren to deal with? Inflation or no? Recession or no? Yikety yikes!
I have something to say. Not because I am a t.v. gasbag doing my part to add to global warming (there should be a new Kyoto treaty covering t.v. gasbags).
But tell me if I’m wrong here. I want to hear what you have to say. Do we really think tossing money at the problem is going to fix what’s wrong? Do we really think a $150 billion dollar stimulus package loaded with tax rebate checks will fix the problems? Aren’t the rebate checks just a quick steroid boost so consumers can go out and help out, well, the retail stocks I guess, as well as China, which makes most of those goods?
Then there’s more talk of yet another Fed rate cut. Do we think a rate cut can stop a recession, can it prevent the economy and the markets from going south faster than geese fly in winter? Shouldn’t we just let the free market fix the mess? What do you think?
I get it, a Fed rate cut plus pumping liquidity via term auctions could help thaw out a frozen solid bank sector, as banks hoard cash to deal with potential writedowns and won’t use it to lend. We need banks to lend to small businesses so they can hire workers who will spend, that’s understood.
But is tossing money at the problem by, well, printing money really the way to fix the current mess we’re in? Won’t it simply create inflation (too much money chasing too few good assets)? Is printing money really the way to prosperity? “Printing money cannot create wealth if it could counterfeiting would be legal,” economist Brian Wesbury has rightfully said.
As I’ve noted in prior blogs, this is far from over. Alexis, Peter, Charles, Jenna and I have all been talking about how the financials still face massive write-downs, beyond the $107 billion already reported. Especially with the bond insurers in trouble—they’re the backstop to the financials, having guaranteed payment on the debt instruments the financials sell in the event of defaults (I kind of think the bond insurers have no reason to exist, really—sort of like the credit rating agencies. They sell big promises but in reality deliver a whole lot of nothing.)
Some bond insurers may go bellyup, which means deeper write downs at the financials. Royal Bank of Scotland esimates that the bond insurers have guaranteed $305 billion of these collateralized debt obligations at U.S. banks, and $88 billion overseas. Again, yikety yikes!
But recession? Yes, profit results are backward looking, but still it’s worth noting that earnings are coming in ok. Of the 160 companies in the S&P 500 that have reported, 59% beat estimates (vs. the usual 60%), about 14% matched and about 28% missed forecasts (vs. the usual 20%).
As you know I’m an accounting geek. I’ve covered accounting, quality of earnings and taxes for the two decades I’ve been a business journalist (yes 20 years, I’m dating myself, but that’s okay because, as Dick Cavett once joked, I can date whomever I want ha).
I like to closely eyeball companies' balance sheets to see if they are drunk on debt and whether the credit crunch will hurt them more, whether they’ll need to hoard a lot of cash to pay down debt in future periods. Which means they can’t use the money to grow their businesses, profits and your stock portfolios.
So which sectors to avoid? Financial information firm Sageworks of Research Triangle Park, N.C., has crunched the numbers from more than 6,000 publicly traded, nonfinancial U.S. companies. Sageworks found that, outside banking, real estate, and retail, most sectors are pretty ok with their debt levels. Reuters looked at the same data and arrived at the same conclusion.
Sageworks found that the ratio between short-term assets and short-term liabilities of U.S. companies was 1.8-to-1. Banks, real estate and retailers ended 2007 with ratios well below 1-to-1. A ratio above 1-to-1 is considered healthy.
The high ratio for many companies may help explain why, when the National Association for Business Economics recently surveyed U.S. businesses, two-thirds of respondents said tightening credit conditions had not affected them, Reuters says.
And research company Credit Sights found that Cummins, Deere & Co and CNH Global NV have improved their credit profile, while Eaton Corp, Brunswick Corp and Ingersoll-Rand Co Ltd for having gone the opposite direction, Reuters found.
I’ve got some defensive stocks for you to consider if we do face a downturn—these companies have not gotten drunk on debt, a rarity in these times, so they’re pretty decently positioned. And I’ve got the debtaholics to avoid. Stay tuned.
753 views