Don’t Expect a V-Shaped Economic Recovery, Maybe a W or L

The current Administration has thrown everything but the kitchen sink at the markets and based upon the recovery that we have seen over the past 2 trading sessions, something has worked.

The most powerful of which is probably the Securities and Exchange Commission’s temporary ban on short selling and the hope that Paulson and Bernanke will deliver a new groundbreaking rescue plan that will include a bail-out fund that sops up all of the troubled paper.

The main take away from the recent developments is that we will not see a V shaped economic recovery.

• According to the data released this past week, the housing market and the manufacturing sector are still in trouble.
• Durable goods, the final numbers for second quarter GDP, new and existing home sales are due for release in this coming week and we expect the data to confirm the weakness of the US economy.
• Layoffs will rise, consumer spending will slow and corporate profitability will decline for at least the next 3 to 6 months.
• A recovery usually comes in one of four forms – U, V, W or L. We believe that in the current case of the US economy, we will probably see a recovery that looks more like a W or an L.
• Of the top 5 investments banks on Wall Street, 3 have disappeared this year – Merrill Lynch, Lehman Brothers and Bear Stearns. The last ones standing are Morgan Stanley and Goldman Sachs (Citigroup and JPMorgan are considered universal banks since they have commercial banking divisions).
• With Morgan in merger talks, there could end up only being one independent player Goldman Sachs left in the market. For banks to consolidate is not a surprise but their consolidation now is more of an act of desperation than anything else.
• However the pain is probably not over with more write-downs expected over the next few months. Barrons estimates that there will be another $150B of write-downs before we are done. This will stress the markets as well as central bankers and put a full fledged recovery in both the economy and financial markets at risk.

-HBJ Capital Team