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The Federal Reserve's Beige Book delivered another moderately sobering report, summarizing the current situation as one in which " economic conditions have weakened since the last report."
Citing weakness in nine of out its twelve districts, the Fed added that the other three characterized activity as "mixed or steady."
Tourism remained "strong," which is not surprising, given the weak dollar, while consumer spending "was characterized as softening across most of the country, with some Districts reporting year-over-year declines in retail and/or auto sales."
Aside from the expected weakness in housing and a slowing in commercial construction, the central bank noted inceasing problems in banking where there was "widespread slowing in the consumer segment but some stabilization, at low levels, in residential mortgage activity."
Of increasing concern, though, was this: "Credit quality was reported to have deteriorated, on balance, since the last report. Increased delinquency rates were noted by New York, Philadelphia, and Cleveland, while Kansas City reported that loan quality remained lower than a year ago."
In its prior Beige Book, March 5, the Fed noted "Boston and New York mentioned that some manufacturers are experiencing slower payments from their customers." This is of concern since it could mean that the chances of default in business transactions could be on the rise. The Fed did not mention this in its summary on its latest book.
We looked carefully through the New York and Boston Fed reports and found no direct mention of this situation. The Boston report seemed more upbeat than the New York report, wich noted "Respondents indicate increased delinquency rates in all loan categories; overall, reported increases are now more widespread than at any time in at least 13 years of this survey."
New York also noted "A major shipping terminal at the Port of New York reports that import volume has slowed noticeably in early 2008: after 6-7 percent gains in 2007, the volume of incoming containers is running flat in early 2008, compared with a year earlier," while adding that a major employment agency reported "some slowing in hiring activity since the last report."
The Beige Book's summarizes a mostly tepid economic picture accross the country with some variation in different areas, but at the center of the situation remains liquidity.
According to the Wall Street Journal "More companies than ever are in the weakest of liquidity positions and struggling to cover their bills, according to a Moody's Investors Service Inc. report on public debt," adding that "There are now 47 companies with public debt that Moody's rates as having the weakest of liquidity levels, a number that has more than doubled since June. These 47 companies have combined rated debt of $34.7 billion."
This takes us back to the March 5 Beige Book where the Fed noted that manufacturers were noticing a slowing in payments from some of their customers.
Among the most affected companies at this point, according to The Journal are Six Flags Inc. and Linens 'n Things, with the latter delaying a bond payment in order to attempt to "stave off bankruptcy."
According to the Journal, citing Moody's data, some 20% of companies with liquidity problems will likely default on the debt, with restaurant companies being the highest risk sector at this point.
Conclusion
The ability of a company to pay its debt is the most important measure of its potential for success. If the company can't cover its expenses it's a sign that its business model is not working, because even if their debt is very high, being able to stay in business means that they have enough cash flow.
When debt exceeds cash flow, it's a sign of bad management, a bad business, or both.
In the current cycle, we're watching for rising signs of companies that can't pay their bills. So far, no really big player in retailing or manufacturing has succumbed. But, it's still early. As the Fed's Beige Book continues to note, lending standards are tightening and loand demand continues to remain soft.
That means that we are now in that part of the cycle where companies are starting to pinch pennies, reduce their work force, cut back on capital spending, and generally hunkering down to withstand a potentially long business drought.
And that means that the Federal Reserve is chained to a policy of lowering interest rates, or at least not raising them in the near future.
For the stock market, that's mostly good news, as long as the recent lows in the major indexed hold up. That means that the S & P 1260 or so area is hallowed ground at the moment.
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Goldman Sachs (NYSE: GS) looks to be forming a base.
Chart Courtesy of StockCharts.com
The good news is that Goldman Sachs shares seem to have stopped falling. The bad news is that they're not rallying aggressively, which means that uncertainty is still present in the minds of those who bet on Goldman as the bellwether for the overall market.
Goldman remains the bellwether for the market, given the fact that Merrill Lynch seems to have significant issues still pending.
It was Goldman who made money by shorting the subprime market. And it was Goldman who made zillions financing and underwriting the big deals during the private equity boom over the last few years.
So, by default, it's Goldman whom we watch for signs of returning confidence with regard to the financial sector. And for now, it seems as if investors are starting to think that maybe the worst is over, but that the good times are not ready to roll yet. |
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