Thursday, September 11, 2008

Out of the woods? Not yet!

David Rosenberg, an economist at Merrill Lynch who called a U.S. recession early now says low crude prices need not trend towards accelerated growth or profitability across the board. It could just mean the reverse.

In support, Rosenberg brings out an intriguing “four horsemen” theory. To quote The Economist-
“He says the recent decline in energy prices is a “symptom of demand destruction” that has dire implications for overall profitability. Mr. Rosenberg has just written a gloomy report identifying “four horsemen” that will do their worst to American corporate profits: thinner profit margins; paying down debt as tighter financial conditions take their toll; lower energy prices; and a combination of slowing growth outside America and a stronger dollar. He predicts 7% falls in profits for firms in the S&P 500 both this year and next.

The list of troubled firms has now extended far beyond the housebuilders and building-supplies firms that were the first casualties of the subprime-mortgage crisis to include retailers, casinos, publishers and cable-TV companies, points out Martin Fridson, a veteran observer of corporate bonds. Companies with distressed debt now include such household names as Delta Air Lines, Clear Channel, Toys “R” Us and Reader’s Digest. There would already have been more high-profile bankruptcies, points out Mr Fridson, except that at the peak of the credit bubble some of today’s more troubled firms managed to borrow “covenant lite” debt that makes it harder for creditors to demand their money back. But that seems likely to delay only briefly the arrival of the Grim Reaper.

All right guys… So are we in Sir John Templeton’s “moment of maximum pessimism”? Are we finally out of the woods yet? Nobody seem to have an answer, at least not for now !

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