Thursday, January 17, 2008


During the recessions of 1982 and 1990-91 I did a routine seminar titled RECESSION: CRISIS OR OPPORTUNITY? Those who responded made a lot of money in the BULL markets that followed. If I were doing the seminar today, I would title it RECESSION? CRISIS AND OPPORTUNITY.

The big difference is that there were real recessions in 1982 and in 1990 but there is not one now. Did you see the drop in unemployment claims this morning? As the Carpe Diem web site shows, the average unemployment rate over the last 50 years has been about 5.6%. The current rate is only 5%. The average peak unemployment rate during the recessions of the past 50 years has been 7.63%. The big drop in claims this morning makes it likely that our unemployment rate has already peaked at .6 below the average rate in good times and bad. No recession in these numbers. The numbers that have been keeping the "outsiders" on edge have been the write offs at the big games such as Merrill and CitiBank. These companies are writing down pools of mortgages to a few cents on the dollar because a few of the mortgages are not good. They generally are not willing to sell these pools but instead are willing to make deals with the Kings of the Middle East and others to take a passive stake of preferred stock. They are paying these Kings a nice price but nowhere near the discounts at which they are carrying the mortgages. In other words, the great bulk of these losses will show up as gains after the public has been scared out of the market.


CAL made a lot of money in 2007. Revenues were up 8.4% over 2006 while pretax profits were up 78%! Even in the tough 4th quarter with fuel prices as high as ever, the company went from a loss in 2006 to a profit in 2007. WHAT RECESSION? While the pundits say things like "the consumer is tapped out" the numbers show the consumer is still buying (as he always does) but more importantly, businesses are spending. Business travelers are taking trips so CAL has been able to raise seat prices to off set higher fuel costs. Some say that CAL should do more to hedge fuel costs but CAL has the best fuel hedging program of all the carriers, it buys fuel efficient planes! With the most fuel efficient planes (of all the big US carriers) it is able to make money when other carriers raise prices enough just to recover costs.

Right now the pressure is on NWA. DAL has said it will merge with UAUA if it cannot strike a good deal with NWA. NWA has the option to nix any deal CAL makes up until the time that NWA makes a deal. DAL is tired of waiting for NWA to play its trump card. DAL would like to merge with NWA but it will take on the monster UAUA if necessary.

The key point is that when the consolidation comes, if permitted by congress, the airlines will be able to reduce over-lapping competitive flights. The two sides of the argument here are 1) the duplication of services leads to wasteful empty seats on flights, which is bad for profits but also bad for the environment 2) the elimination of competition will mean the consumer will have to pay more. Both arguments are true. Merger or no merger the airlines must continue to reduce waste and they will increase ticket prices because business demand will be strong for the next several years.


The pundits keep talking about consumer spending as the reason a recession is near. This is as phony as the write downs at CitiBank. Personal income is being lifted by a constant stream of new jobs. Saying that the consumer is going to stop spending in mass is like saying that a national diet craze is going to take hold and the average person is going to lose 30 pounds. During the last recession (which was mild), industrial production fell by almost 6%. The most recent figures show that industrial production grew last quarter by about 2%. THERE IS NO RECESSION! POINT # 2, THE AVERAGE STOCK HAS GONE UP 3% DURING THE RECESSIONS OF THE PAST 50 YEARS. That 3 percent gain was typically composed of an 11% loss during the first few months and then a 25% gain during the last half of the recession. Put another way, the market turns during a slow down or recession. We are seeing the turn. The hot markets of the past, such as China and oil have cooled. Business cycle companies, such as airlines, have been making money even at the beginning of the business "prosperity" cycle. Good news ahead!