Commentary on

Economics, Markets
and Politics to Help
Business Leaders
Make Good Decisions

September 18, 2009 – Update

Sean Lannan
www.linkedin/in/SeanLannan
Commentary on Economics, Markets and Politics for
Good Business and Investor Decision Making
• The financial markets have rallied for five months and are 56%
above the March lows, manufacturing is showing early growth,
the employment picture is still bad and commercial real estate
market is deteriorating.
• Economic commentators expect 2 – 4% annualized GDP growth
in the second half of 2009 and 2+% growth in 2010, modest
growth but growth none the less.
• Consumer spending will not be a near-term engine for growth
– In 2010, the unemployment rate is expected to rise above the current
9.7%.
– Household savings rates are rising as spending falls.
– Defaults on mortgages and consumer credit will continue to rise for the rest
of 2009.
• Now is a good time to access longer term credit and equity
financing.
– High-yield debt spreads continue to narrow vs. treasuries.
– IPO market is reopening for select companies.

About the author:

Sean Lannan is a CFO for a high technology company. He has a
background in corporate finance, treasury, investor relations,
 Politics and the Economy

• The Washington debate over health care reform is

distracting law makers from an important job of reforming
the financial industry and managing systemic risk.
– The debates on how to reform health care and its costs are important
to the health of individuals and America business and will take a long
time to work out.
• Risks of trade disputes are growing.
– Washington just placed 35% duties on the import of Chinese-made
vehicle tires.
– Beginning of a trade war with China or the first efforts to reform the
export-driven Chinese industrial policy model?
• It is hard to judge how strong the private sector economy is
in the U.S. with high levels of government intervention,
easy monetary policy and stimulus spending.
– Look for positive surprises from economic numbers during the stimulus
spending through 2010.
– Risk to growth if easy monetary policy and stimulus spending stops too
soon.
Four Bad Bear Markets – ‘29-’32, ‘73-’74, ‘00-’02,
‘07-’09
• The current bear
market looked
Depression-like
through losses
as of 3/6/09
(57% decline).
• The market has
rebounded 56%
from the March
lows on the
largest injection
of liquidity is
U.S. economic
history
(equivalent to
29% of GDP) and
government
intervention on a
large scale.

Doug Short at
http://dshort.com/charts/bear-markets.html?four-bears
, 9/18/09
4
High-Yield Debt Markets Have Re-Opened
as a Source of Capital for Companies in
2009
• The high-yield bond market
has come back to life in first
five months of 2009.
• High-yield risk premiums
declined 22% in late 2008
to 9% in August.
• Investors are taking more
risk in their search for
yields.
• Companies, again, have
access to credit outside of
the bank loan market.

9/11/09

5
 Deterioration of the Labor Markets has
Slowed Since the First-Half of 2009
• The U.S. economy is shedding
jobs very rapidly and creates
a negative feedback loops
since consumers drive 70% of
U.S. GDP.
• In August unemployment hit
9.7%, the highest since 983,
26 years ago. 14.9 million are
out of work.
• The comprehensive
8/6/09 unemployment rate of
marginally attached and
involuntary part-time workers
(called U-6 by the Dept. of
Labor) hit 16.8% in August,
26.3 million people.
• The U.S. economy has lost 7.4
million jobs since the start of
July: 9.7% the recession in Dec ‘07.
• More jobs have been lost in
this recession than were
created in the previous
9/9/09 expansion – a first.
6 • Lack of job openings will keep
consumer spending and
U.S. Household Debts Shrink and Savings Rise
• Household debt has been
contracting since the
middle of 2008. The
decrease either voluntary
or forced by credit
tightness by lenders will
push down consumer
purchasing.
• Household savings rate
has increased to 6.9% of
after-tax income in May.
Increased savings is drag
on economic activity.
• Between 1970 and 2009
the average household
9/9/09 savings rate was 6.6%
broken down into two
distinct periods:1970 –
1985 it was in a range of 8
– 12% and 1985 – 2007 the
savings rate marched from
7/8/09 8% down to 0%.
• Household debt is near
7 record highs. It peaked at
133% of disposable
 Will the U.S. Recession End in Q3 2009?

• This is the first time since

quarterly record keeping
started in 1947 that GDP
contracted for four quarters
in a row (3Q08 – 2Q09).
• August capacity utilization
was 67%.

Q2: -1.0%
9/21/09

8
Business Will Not Kick-Start a Strong Recovery

• Business will need to lead the U.S. economic

recovery since households are burdened with
debt, diminished retirement savings, and fears
of job losses.
• Business investment in software and equipment
is close to levels as high during the tech boom.
• Manufacturing capacity is running at only 67%.
• Business-led growth will be weak.

8/25/09

9
 Manufacturing Has Started to Grow

Aug: 52.9 Aug: +0.8%

Expanding for the first Production has been
time since 2007 growing for the last two
months
10
 Housing Unit Sales Appear to Be Stabilizing But
Price Declines Continue to Grind Onward

6/22/09

July: 5.2 million Aug: 598,000 More upscale homes

are going into
foreclosure, prices
continue to fall
11
 Commercial Real Estate Is/Will Accumulate Large
Losses

8/31/09

• There are $700B of commercial mortgage-backed securities (CMBS) in the U.S.

• $153B of CMBS loans are coming due between now and 2012. Two-thirds will likely
not qualify for refinancing.
• Deliquency rates were 3.1% in July, six times the levels of a year ago. Default rates
could hit 30% ($210B) with loss rates hitting 13%, worse than the last serious collapse
in commercial real estate in the early 1990’s.
12
Commercial Real Estate is Struggling Badly

• The market for U.S.

commercial real estate is
$6.5 trillion.
• Commercial property prices
are down 35% from the
2007 peak and are at levels
last seen in 2004.
• Public REITs are starting to
make selective acquisitions
of properties.
• $150 billion of commercial
mortgage-backed securities
will come due between
2009 and 2012.
Refinancing will be a
challenge which will raise
the risk of default.
8/25/09 9/15/09 • There has been an 8X
increase to 4% in
delinquent loans since
2007.
• Treasury issued new
13
guidance that loan
 Inflation Pressures Have Faded Near-Term

Aug: - 4.3% Aug: - 1.5%

14
 Watch US Dollar, Gold and Oil for Inflation and
Health of the Global Economy
Oil (WTI futures) Gold (Comex futures)

9/15/09 9/16/09
9/16/09

• Oil, gold and the U.S. dollar are metrics to watch for inflation and the health of the world
economy.
• Oil prices collapsed in 2008 after hitting a record high in the summer. Oil prices are
trading sideways after finding a bottom at $40 - $45 per barrel and has rallied $30 as the
world economy stabilized.
• Gold started climbing after the collapse of Lehman Brothers and the Fed and Treasury
established credit and liquidity facilities to flood the credit channel. Inflation concerns
are growing over the next several years.
• Dollar has weakened vs. the major currencies as investors and traders believe non-U.S.
15
economies will grow more quickly than the U.S. and will raise interest rates sooner than
Weakness in the Banking Sector Continues to
Hurt the Economy

• Banking industry will

be a drag on the U.S.
economy until capital
reserves are rebuilt in
the next 2 – 3 years.
• The FDIC insurance
fund has shrunk to
$10.4B, the lowest
since mid-1993, which
insures $6.2T in U.S.
bank deposits.
• The FDIC will need and
injection of new capital
through higher
premiums to banks
(drag on banks) or
taxpayer dollars.
8/28/09 8/28/09

16
Global Trade Is Not On Firm Footing Yet

• 90% of the
world’s physical
trading of goods
is on ships and
the Baltic Dry
Index (BDIY) is a
good indicator of
trade.
• Shipping rates
fell 85% in the
second-half of
2008.
• Rates recovered
one-half the
losses in the first-
half of 2009.
• But rates have
lost on-half of the
8/28/09 rebound in the
last three
months.

17