We’ve all heard the old adage, “it’s always darkest before dawn.” But exactly when can we expect things to lighten up? There is so much paranoia and mistrust with a stock market in the tank and so many companies already filing for bankruptcy or preparing to file for bankruptcy, that as we stare in the dark, we see less than promising news for the first quarter of 2009.
Retailers will continue to scavenge through the rubble of a disastrous holiday season. Some experts predict that we will witness the most retail store bankruptcies in 35 years, from small stores to entire malls, and from electronics to clothing. Many predict that the future retail industry will be streamlined with fewer outlets, brands, and even lower profits.
More banks will fail, as they won’t be able to absorb large write-downs for business loan losses and credit card defaults. This will affect the entire system of the banking industry and more regional banks will collapse. This is despite the fact that banks are hoarding cash in order to have a buffer against their own potential losses. Citigroup has already received a cash injection from the Fed of $25 billion and is expecting another $20 billion, but I don’t think it will be enough to get them out of the woods. So watch out for Citigroup and at least one other major bank to be further nationalized.
It’s obvious the auto industry won’t have stellar earnings news to report. Despite the $6 billion in government aid, it remains to be seen whether or not GM and Chrysler will be able to stand up. Even with a $5 billion stake in the automaker’s financial arm, GMAC, I’m not holding my breath that this will alleviate the credit crunch anytime soon.
With consumption and demand low, I don’t expect oil and other commodities to recover in the first quarter. Crude oil prices, which experienced wide fluctuations in 2008, are likely to remain volatile in 2009. According to forecasts from oil traders, economists and the International Energy Agency, oil is expected to trade in the $40 range. at $65 per barrel. Prices hit a record high of $147.27 in July 2008, but the global credit freeze and recession pushed prices below $50. The price changes may continue, but are expected to be less dramatic in 2009. We can expect poor earnings reports for most corporations in the fourth quarter of 2008 and I expect further reduction of capital expenditures in others. industries. In fact, look for record bankruptcies to decimate many industry sectors besides construction, finance, and retail. Reports began to emerge last week that the world’s third-largest chemical company, LyondellBasell Industries, is considering filing for bankruptcy. Despite the dismal corporate earnings, I think we can see the market get a boost from Obama’s inauguration on January 20, but it will be short-lived. Consider the mess you’ve inherited: rising unemployment, declining house prices, and GDP is expected to contract by 6% in the fourth quarter, though the exact numbers aren’t yet known, as are estimates for the first quarter of 2009. Industrial production will most likely continue to fall and while the Obama administration represents hope and change, it may take until late second or third quarter before consumer confidence shows signs of improvement.
The recession will continue not only in the US, but will spread to other major and developing countries, leading to further stagnation of the world economy. Expect to see more trade divisions like the current one between the Chinese and the US and the Mexican blockade of US meat. This will result in short-term protectionism rather than open trade, a condition that could prevail until the economy recovers around 2010.
Despite all the pessimism and predictions of a prolonged recession, the Marist Institute for Public Opinion in Poughkeepsie, New York conducted a survey and found some surprising results: Most Americans are optimistic about what awaits them in 2009. Granted, those with the highest expectations for a brighter future were under 45 and probably hadn’t lost much of their retirement savings. Sixty-four percent of those under 45 had an optimistic view compared to 52 percent of those over 45.