A weak economy destroys commodity businesses like iron ore and steel. Last quarter, iron-ore production fell 18% at Rio Tinto, the world's third-largest mining company. The company sidelined an iron-ore expansion in Brazil, and steelmakers are pushing to squeeze a 40% cut in iron-ore prices out of Rio Tinto and BHP Billiton, the world's largest mining company.
Meanwhile, metal supplies on the London Metal Exchange are piling up to their highest levels in five years. Rising supply... falling demand... this can't be good for mining companies.
What business doesn't get destroyed in a deep recession? How about Extreme Value pick Procter & Gamble (PG), the largest consumer-products company in the world. It never cuts ad spending during recessions. That goes back to the Great Depression, when it created the soap opera (on radio) as a way to sell its products.
P&G has also raised its dividend every single year for 52 years straight. The company's first priority for free cash flow is paying and raising the dividend, and executive bonuses are tied to free cash flow. In the last 12 months, P&G did $16.5 billion in free cash flow. The whole company sells today for about $170 billion, just over 10 times free cash flow. That's a world-dominating franchise at a huge discount. I can't believe Warren Buffett isn't buying this stock hand over fist.
More layoffs... Athletic apparel maker Reebok is slashing around 310 jobs. Search-engine powerhouse Google will close three engineering plants and lay off 100 recruiters.
Delta Air Lines, the world's largest carrier, wants to cut 2,000 more jobs – most through buyouts and early retirements. That's in addition to the 4,000 cuts it made last year.
Motorola is cutting 4,000 more jobs as consumers continue to struggle – the company shipped half as many phones in the fourth quarter as a year earlier. Motorola has now reduced its workforce by 16,000 since the start of 2007.
Even the world's largest software company, Microsoft, said it is "seriously" considering job cuts, which could be announced as early as next week. Microsoft isn't talking numbers yet, but insiders say it'll probably be far less than the rumored 15,000 positions – which equals more than 16% of its workforce.
Gannett, publisher of USA Today, isn't laying off again, but it will make most workers take a week off without pay – including top executives – sometime in the first quarter. This move is on top of thousands of job cuts earlier this year.
What happens when people lose their jobs? They stop making their mortgage payments...
U.S. foreclosure filings jumped 81% last year... More than 2.3 million properties received a default or auction notice. That's the highest number default-data tracker RealtyTrac has documented in its four years of recordkeeping. One in 54 housing units, or 1.8% of homes, received at least one foreclosure filing in 2008.
Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California Berkeley, believes we need a new, national policy to solve the problem. "If we don't adopt a comprehensive national policy, we'll have 5 million to 8 million new foreclosures in the next three years. The single most important thing is making credit available for the average person."
I don't know any average people, but I know banks already tried modifying foreclosed mortgages to help "average" borrowers last year... And 55% of the modified loans were 30 days or more delinquent six months later.
I know an "average" guy who made a little over $20,000 last year... and has a $1,500 a month mortgage, or $18,000 worth of house payments per year. I wonder how many loan officers and bank managers looked at that loan before it was funded?
Bank managers are busy processing new applications these days. Refinancing applications rose by 25.6% last week, to their highest level since June 2003, according to the latest weekly survey by the Mortgage Bankers Association. Refinancing applications made up more than 85% of all mortgage applications last week, up from 79.8% the previous week. The average interest rate on 30-year mortgages was the lowest ever in the MBA survey, at 4.89%.
Bankers are notoriously in love with government regulation, which generally helps them keep their advantages, making it more expensive and difficult for new competition. I relished a recent interview in American Banker with BB&T Corp chairman John Allison, in which he said, "TARP wasn't necessary except that the government created a panic and they probably had to do something about it. But they didn't need to create the panic to begin with."
Allison named four causes for the current mess: (1) The Federal Reserve for keeping interest rates too low. (2) The FDIC for allowing bad banks like IndyMac to raise money they wouldn't have been able to raise in a truly free market. (3) Fannie and Freddie for shoving homeownership down American throats. And (4) the SEC for shoving fair value accounting down the financial industry's throat.
New highs: none.
In the mailbag: How to tell your wife she's right. Also, if you want to cozy up to the herd and complain, we're listening: feedback@stansberryresearch.com.
"I just wanted to express how pleasantly surprised I was at the over all quality of the day's presentations last December in Hong Kong. For starters you held it in a world class five star hotel, the Four Seasons. I had expected the usual continental breakfast but was treated to great meals and cocktail hour from start to finish. That was a class act and you are to be congratulated. It was refreshing to hear with my own ears the individual presentations by the authors who otherwise would be just by-lines on an email. They also showed me that the Stansberry group is no monolithic block in lock step to a common theme. Every speaker was unabashedly allowed to say exactly what they thought without the blink of an eye and they were all over the place. The live presentation is richer for being more extemporaneous than the written word. I would highly recommend to any member who has not yet attended these presentati
ons to take advantage the next time the opportunity comes their way. I was prompted to write after reading the mail that took you to task for your attitudes on recession. Its interesting to see revealed how little many people today really understand about the economic system in which they live their whole lives. Hopefully they will continue to read the letters, write back and then come away a little wiser. It was nice to get to talk with all of you." – Paid-up subscriber Michael
"Yesterday, I was trying to explain to my wife of the oncoming super inflation. I explained that the government can't just create 100s of $billions out of thin air without creating inflation. She responded with; 'Well didn't the big investment banks just wipe out 100s of $billlions out of thin air? And what about the $trillions wiped out of thin air in the stock market collapse?' I didn't know how to respond. Maybe you could help with the explanation." – Paid-up subscriber G. Eshelman
Ferris comment: As for what's been destroyed, $30 trillion is the number I hear bandied about. And to an extent that will frustrate inflation watchers, your wife is right. Even when you're the Fed, it takes a while to plug a $30 trillion hole. Once the government does that, the tub starts filling up again. Sooner or later, it'll overflow. Inflation is the action of government. That's already here. The effects, the symptoms... we're still waiting on those.
"All these people complaining about your attitude to the recession is pointless. How is your attitude going to change anything? People make the mistake of thinking that the hard world that they watch on National Geographic is only for wild animals, it isn't. We are in that world because we are all speculators whether we like it or not and those of us that can successfully second guess our fellow man (or future events in general) will come out on top and those that won't or can't will likely get eaten. It's a competition and you get winners and losers. Some people get dealt a subpar hand i.e. without education or intelligence or get born a Zebra, the trick is to play the hand as well as possible. If, heaven forbid, one day the world turns out to be so tightly regulated that it is a fair place then I expect an impressive suicide rate or something worse." – Paid-up subscriber Humphry Hamilton
Ferris comment: I agree complaining is often pointless, but not always. People are scared right now and becoming more scared by the day. Naturally, they want to huddle up with the rest of the herd and feel safer. So they complain. That shows the herd the complainer is vulnerable and wants to be friends.
As for what they're complaining about, it's very real, and it ain't half over yet. When you have a huge, leveraged speculative runup, you must have a huge, sharp recession to correct the excesses. Those who misallocated capital get wiped out, and those who allocated properly survive for another day.
That's the theory, anyway. In our country, the reality is quite different. Plenty of incompetents and criminals will keep their jobs and not lose a wink of sleep or too much net worth. And plenty of good people will go broke because their business suddenly evaporated.
Regards,
Dan Ferris
Medford, Oregon
January 15, 2009