Rick’s Picks

Thursday, September 13, 2007

“Phenomenally accurate forecasts”

Here’s a name to remember six months from now: Joseph Carson. The economist works for a firm called Alliance Bernstein, and he thinks the odds of recession are no worse than five percent.  While conceding that the housing sector remains a risk, Joe says consumers have already scaled back to adjust. “Spending trends point to modest growth in the U.S., not a recession.”  Better tell that to some of the big retailers, Joe, since, if their forecasts get any darker, they’re going to need clowns and jugglers to warm up shareholders at the next round of corporate meetings.

Carson sounds like an acolyte of Treasury Secretary Paulson, who not long ago declared America’s economy “very, very healthy.”  The secretary didn’t quote odds like Carson, but we wonder if the latter understands that he is implicitly offering a 20-to-1 bet to anyone betting the “Don’t Pass” line.  When we checked with our Vegas bookie a week ago, the official recession odds were at around 60% and climbing – and that was before the recent drop in payrolls, the first in four years.

Party On…NOT!!

In fairness, it should be noted that few of Carson’s fellow economist were as giddy as he is. Out of the more than 50 who were surveyed recently by the Wall Street Journal, the consensus held that there is a 36 percent chance of recession, up from 28 percent a month earlier.  And one of Carson’s colleagues, Steve East, chief economist at Friedman Billings Ramsey, was verging on apostasy when he put the odds at 60 percent.  That may be a far cry from the 95 percent it would take to neutralize Carson’s whacky vote, but it’s still not too bad for a guy whose livelihood depends on sticking to the party line, with the emphasis, historically, on “party”.

Merrill Lynch economist David Rosenberg puts the odds of recession at greater than 70 percent (see graph), and we think that’s about right, since “greater than 70 percent” allows for wiggle room all the way up to brash certitude.  Of course, Rosenberg isn’t paid to make brash predictions, but it’s a credit to Merrill that they have allowed such a high-profile spokesman to tell it like it is. The 70 percent figure is empirically derived, based on a yield curve model that incorporates short-term commercial paper.

A Scary Turn?

Speaking of commercial paper, in the past we’ve featured the anomalously bullish observations of a subscriber, John D., who’s in the commercial construction business. His numbers so far have been holding up much better than in residential construction, but that may be changing. When the topic of commercial paper came up in the Rick’s Picks chat room yesterday, referring to some very bearish observations culled from the latest edition of The Privateer,  an Australia-based newsletter published by William Buckler, John had this to say:   “Your commercial paper post is scaring me. We used to rarely have invoices go over 30 days. Since March we have more and more people paying us in 60 to 90 days. We offer a quick pay discount. Last year 80 to 90% of our clients paid in 10 to 15 days to take advantage; now it is about 50%.”  John further noted:  “If I have a loan ‘funded’ to build a building for $1,000,000 and go to draw on that loan, I may wake up tomorrow and find that my $1,000,000 is not there? And the bank my decide it cannot fund the ‘draw’ for another 30 to 60 days or never?”

We anxiously await John’s further reports from the field  -- i.e., Southern California -- since his business was among the very few connected to real estate that seemed to be bucking the trend.

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2007, Rick Ackerman. All Rights Reserved. www.rickackerman.com