A real estate slump, banks and savings and loans going bust, low consumer confidence, war in Iraq and the Fed lowering interest rates.
Sound familiar? It was also the scenario in late 1990 to 1992, notes Neil Hennessy, chief investment officer of Hennessy Funds. “History repeats,” he says.
Investors may hope he’s right: Despite the rocky start, the market ended the decade of the 1990s with an average annual return of 18.34 percent.
Automakers and jobs.
If the Big Three automakers were to fail, unemployment would spike to 8 percent or above, from a current rate of 6.5 percent, says Deutsche Bank economist Joseph A. LaVorgna. The output of all the nation’s goods and services, or GDP, could sink 4 percent based just on reduced auto production, but that estimate could be conservative, he adds.
“Suffice it to say, as bad as the economy is right now, it could get significantly worse,” writes LaVorg na in a note.
On a website created for public lobbying, , GM says: “What happens to the U.S. auto industry matters on Main Street.”
Oracle under pressure.
Given Warren Buffett’s penchant for long-term value investing, he may not be too bothered about Berkshire Hathaway stock being down about 40 percent this year.
But Jeff Matthews, founder of hedge fund Ram Partners LP and author of “Pilgrimage to Warren Buffett’s Omaha,” notes on his blog that other parties are very worried about Berkshire debt. He points out that the cost of insuring against a default on Berkshire bonds jumped recently.
As of Thursday, the cost of credit default swaps to insure $10 million of Berkshire bonds rose to $475,000 a year, according to Bespoke Investment Group, compared with about $100,000 at the beginning of September. Similar insurance on Morgan Stanley’s debt costs $456,000, “the highest of the big banks and brokers,” according to Bespoke.
Berkshire did not respond to a request for comment.
Tightfisted.
There’s money in the bank, but you can’t have it. Banks are hoarding cash, says economist Ed Yardeni. Cash assets at commercial banks, as measured by the Federal Reserve, spiked to a record high of $752.6 billion the week ending Nov. 5, from $296.9 billion in October 2007.
Banks are afraid to lend. The cash is a cushion in a time of economic turmoil.
In addition, since Oct. 6, banks have been earning interest on their deposits with the central bank, another reason for their stinginess, says Yardeni.
The Associated Press
