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So you think the worst is over? I’m suspicious that there is yet at least another shoe to drop. There are more mortgages that haven’t yet hit their reset date that will be a wave of much larger homes, bought by people with good incomes that just over reached and/or are losing those good jobs they had.
Earnings for the first quarter are very questionable in my eyes, and I think this recession will deepen and last through most, if not all of 2009. Interest rates will remain low, bad news for those who are savers and those who are living off the interest income of savings. It would be good news for those who need to borrow except for the credit problems that are restricting credit to the most credit worthy borrowers but at unusually high rates. We have gone from a nominal risk premium to a severe risk premium. Together these will create a bad year ahead for most everyone. It will take Congress a while to act on health care and even longer to get any broad based coverage into place, meanwhile as people get pink slips they will be losing their health care so even Doctors (MD’s, Optometrists/Ophthalmologists, Chiropractors, Dentists) and other health care professionals will see a decline in income and/or a rise in uncollectable receivables.
Auto sales will remain soft if the credit crunch stays with us. Those 3 million jobs that were so central to the need for a governmental bailout are not very secure bailout or no. Plant closings, temporary and relatively short term, will likely be prevalent over the next year. If the Gov’t. has any money on the table and the work bank is abolished, then those workers affected will be spending less prolonging and deepening the recession.
New housing construction is already at the lowest level since 1959. The future will surely see this grow but not in the near term. The second wave of mortgage foreclosures is still in the wings and that will increase housing inventory. Housing permits are down, so even when permits go up, houses will take 6 to 9 months to be completed and sales closed, assuming the builders can get money to fund construction costs until closing. The amount of funding available will have a major impact on the speed of the housing recovery when it comes. Don’t look for any major recovery in the housing market for at least another year.
A rate drop by the FED. (anticipated at this writing) will do little to loosen the credit markets. It may improve the profitability of the banks a bit, but their lending levels are such that even more margin on the deal will not make up for the smaller number of deals they are doing and their earnings will likely remain weak.
All of that said, I believe there are opportunities out there for the patient investor. There are always solid well managed companies mixed in with the others in each market category. Finding them and buying them slowly over time even while there maybe a continuing slide will be, I judge, amply rewarding over the next five years.
