Thursday, January 14, 2010

A Story, an Attitude Check, and a Warning

A Model “T” Allegory

Once there was a car that was travelling down the road very fast. Its maintenance staff kept it running with high-octane, but poor quality, fuel. As the quality of the fuel deteriorated, the engine started to sputter and smoke. The car began to shake so violently that it left the road and went down a large hill before coming to rest.

Two expert mechanics were called to repair the car and get it back running again. We will call the mechanics Ben and Timothy. They changed the fuel, made repairs to engine and then restarted the car. The engine ran, but it was apparent the car did not have enough power to make it up the hill and back on to the road. Let’s call the road “Recovery”.

So Ben and Tim decided to push the car up the hill with the engine running. They told the owner of the car, Barry, to get in the driver seat and steer the car back on to Recovery while they pushed.

Ben and Tim pushed the car harder than it had been pushed in a long time. The car started up the hill, but moved slower than expected due to several obstacles. Barry attributed some of the problems to the car’s previous owner, George, who he said did not maintain the car properly.

Because Ben and Tim were pushing so hard it was difficult to determine how much of the car’s power was being generated by the improving engine performance. Barry bragged about the gain in horsepower to onlookers, but could still be heard shouting, “Push Tim, Push Ben”.

But the car is not yet back on the road and Ben and Tim are getting tired. Soon they will no longer be able to push the car very hard. At that point the car will be reliant on the engine alone to make it the rest of the way.

There are three possible endings to the story:

1. The car keeps traveling at a good speed up the hill, gets back on to the road and then accelerates. Call it the Mazda ending, Zoom, Zoom, Zoom.

2. The car continues to climb the hill, but at a slower pace than when it was being pushed. It eventually gets back on to the road, but takes a long time to get there. Once back on the road, it may even take some more time to accelerate due to the energy exerted climbing the hill. Call it the grandma drives a Buick ending.

3. The car’s engine sputters, it loses power and starts to roll backward down the hill. It will not reach the previous low point due to Barry pushing the brake pedal through the floor and Ben and Tim throwing themselves under the car (if they fail to do this, they will end up thrown under the bus). Call it the clunker (hey somebody got cash for that!) ending.

Hope for number one, plan for number two and recognize that number three is possible.

Psychological Factor Update

Because psychology plays a significant role when entering and exiting a recession, it’s wise to keep track of the key consumer and business confidence surveys.

The University of Michigan Index of Consumer Sentiment
- Up 7.6% in December to 72.5. First increase after two months of decline, but still very low.

The Conference Board Consumer Confidence Index
- Up 2.3 points in December to 52.9. The second consecutive increase, but still very low.

ABC News Customer Comfort Index (weekly index)
- Down six points (big drop for this index) last week to -47 after significant gains the last few weeks.

Chief Executive Magazine CEO Confidence Index
- Surged 9.2 points in December, after two consecutive declines

What it means –

All three consumer indexes were reported to be influenced by the latest jobs data. The two monthly indexes by the positive November employment numbers and the ABC survey by last week’s disappointing December report.

It appears that consumer confidence is very fluid and dependant on the latest job news. This can be unsettling since unemployment is a lagging indicator and should increase some even as the economy improves. People were expecting a better employment report in December after November’s pleasant surprise. However, the economic recovery is not going to be a smooth one. Expect data on unemployment, retail sales, etc. to fluctuate in the short-term. The increase in CEO confidence is still a good sign.

Follow Up From Last Week’s Post

The Model “T” has written something on Don Ake’s Facebook Wall:

“Oh, so you think my forecast of a 48% drop in the stock market is too low? The current edition of the Economist says stocks are overvalued by 50%. I pity the fool who takes too much risk.”

Sounds more like Mr. Model “T” to me.

Disclaimer Statement

The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.

The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).

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