Market Commentary for the week of September 8, 2008

Sometimes, euphemisms can be a clever way of delivering bad news if done with such gravitas that the listener thinks he’s hearing something important. Last week the market sunk dramatically, not fooled by reports that global productivity kicked up a notch. In my book, productivity is a catch-phrase for “you’re fired”. To be sure, unemployment spiked to a 5 year high last week.

I may catch flack from other economists and political scientists, some younger than me, who buy into the technological revolution and the advances made in manufacturing and business services by computers, structured work forces, and human resources management.

But let’s face facts. Getting people to produce more (output) while their contemporaries are being laid-off or while cost-cutting (wages) reduces overhead is the most inefficient way of boosting inventories, or profits, without having the company succumb to pressures later on to ameliorate its inefficiencies.

When is “profit” a dirty word?
Wall Street analysts know this. If, in fact, earnings are the barometer of a company’s health, then creating earnings off the backs of fewer laborers without increasing sales volume or piquing demand is a recipe for disaster in the capital markets.

Can fewer workers and cost controls produce greater efficiency? Absolutely. But the current data doesn’t support the enthusiasm about productivity increases as it should, definitionally. Labor rolls and wages are decreasing, and have been for at least half a decade.

Unit labor costs, while declining, have not shown a commensurate decline in inflation or prices. Therefore, fewer workers are working, but paying more for the goods they produce, in real currency terms.

Thus, the markets fell dramatically last week because earnings projections weakened in the face of rising costs. Broad indices worldwide contracted because in spite of all the “gains” in output, the economic data is moving in the opposite direction.

Consumer demand is stagnating significantly. Industrial producers, as well as consumer cyclicals, basic materials and technology companies are finding shallower markets to sell into.

Hold on a little longer.
The decline in global demand/consumption is taking its toll on the equities markets. Most strategists just simply chose to take money off the table last week, rather than to sit with depreciating assets. Declining issues outnumbered advances significantly.

Investors are paying the toll for this uncertainty. The bear persists and is dragging all sectors in its wake. The prevailing attitude amongst clients is to hunker down against the headwind and not to play the risk game for the time being.

Because the decline transcends regional/national boundaries, the concept of global bailout through commercial exchange has also been put to rest. Exports are limited by low demand and the vectors are not strong enough to support one region pulling all the others along for the ride.

I have said that we must weather through weeks like the one we just had. I hope that impatience doesn’t grow as quickly as, say, inflation.