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Turning Point
New York: March 16, 2009
By John Stephenson

The last week was a breath of fresh air for beleaguered investors around the globe. The week got off to a good start. First, there was Vikram Pandit, the Chief Executive Officer of Citigroup Inc., stating that the firm was profitable for the first two months of 2009 and he was confident about the firm's capital strength. This good news was followed up a few days later when the U.S. retail sales number came out showing that the sharp slowdown of the last few months appeared to have leveled off. The U.S. consumer is the largest economy in the world — accounting for 16.4 percent of the global economy last year.

While the worst may be over for the American consumer, the reality is that the U.S. economy is mired in what may well be the worst economic slump since World War II. With inventories building, weak demand abroad and the leading economic indicators plumbing unforeseen depths, the likelihood of a quick recovery is looking increasingly remote.

In America , one in ten residential mortgages is now in foreclosure or arrears and mortgage lending standards are the tightest on record. The leading economic indicators are at levels not seen since the early 1960s and American household net worth has declined at a record rate. Globally, the story is much the same as the pain has spread rapidly around the globe. According to Stephen Schwarzman, CEO of Blackstone Group, a private equity company, some 45 percent of global wealth has been destroyed in the global credit crisis.

Forbes reported that the world is going to have to get by with fewer and poorer billionaires in 2009 and beyond. The annual list of the who's who of big money shrank from a 2008 total of 1,125 billionaires to a paltry 793 billionaires in 2009, with an average decline in their wealth of about one-third. The aggregate wealth controlled by the world's super rich has declined by a surprising $2 trillion from $4.4 trillion to $2.4 trillion.

The impact of the slowdown is being felt worldwide with The World Bank warning that the global economy would shrink in 2009 for the first time since World War II. Adding to their already glum forecast, the World Bank went on to predict that global trade would contract for the first time since 1982 and the decline in trade would be the biggest since the 1930s. So far, they seem to be on target as global trade has fallen off a cliff. In Japan , exports are down 35 percent from the previous year and in Taiwan , exports are down a stunning 44.1 percent.

Globally, demand is weak for computers to planes and everything in between. The market for PCs has evaporated with shipments expected to plunge 260 million units over the course of the year — a level that is triple the decline experienced during the dot-com crash. Industrial companies are struggling and many technology companies have been announcing profit warnings as the fundamentals continue to deteriorate.

American consumers are scrambling to pay down their debts as fast as they can. Merrill Lynch estimates that the U.S. Debt-to-income ratio rose as much in the last seven years as it did in the prior 39 years, suggesting that the American consumer is maxed out. Homebuilders are taking a record amount of time to find buyers for newly constructed homes with the average time a new home sits on the market soaring to 9.3 months. U.S. unemployment currently stands at 8.1 percent and Merrill Lynch is forecasting that by the end of 2009, the official rate will top 10 percent.

Unlike the past, this recession has impacted the finances of consumers and businesses alike. There is no major country globally that has been left untouched by this recession, suggesting that a recovery will be a long time in coming. Consumers and businesses will be forced to sell assets, pay down debt and increase savings to put their houses in order. This will be a long, drawn-out process. Merrill Lynch is currently forecasting that this recession will drag on for a staggering 45 months or just shy of four years. If these estimates are to be believed, we will be facing tough times for years to come.

Figure 3: The Good Times Are Gone for Quite Some Time

(Quarters Needed For GDP to Recover)

Source: Merrill Lynch

Investors should batten down the hatches and be prepared to wait out what could be a long recession. Successful investors should focus on income growth, safety and balance sheet quality in any company in which they invest. Regulated utilities are a smart way to earn a decent dividend yield while, at the same time, offering potential upside through capital gains.

While there will be some tough sledding in the months and years ahead, savvy investors should recognize that some of the greatest investment opportunities have presented themselves when times were tough. As the old saying goes, it is always darkest before the dawn.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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