Some extremely encouraging news just came across my Reuters wire this morning:
Revised GDP figures show less severe first-quarter contraction
Now that sounds like some pretty good news to me. Especially when paired with the increase in durable goods orders and uptick in existing home sales in April. However, like in the movies, “All is not good my friend”. I've been listening to this Anthony Robbins 5 Steps to Positive Thinking audio book so will try to spin the positive the best I can. The article goes on to reveal the truth of the matter:
Business investment declined at a record rate during the quarter. Investments in housing fell at the fastest pace in 29 years. Domestic demand fell at the fastest rate in 29 years. Exports fell at the fastest pace in 38 years. . .Economists surveyed by MarketWatch were forecasting that the revision would be to a negative 5.5%. They expect the economy to contract 2% this quarter and grow 1.5% next. . .The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace to bring down production and stockpiles to match the lower demand from U.S. and foreign markets. The massive pullback reaped benefits for the owners. Corporate profits from current production rose 3.4%, or $42.6 billion, compared with the fourth quarter when they fell by $250 billion, or 16.5%.
It's a short article, so I don't want to quote the whole thing. However, let's take a closer look to see what this number really means to the economy as a whole and alternative investments specifically.
Firstly, I'll be the first to cheer a downward revision to a less severe contraction. (Say that three times fast.) That is indeed good news. I'll overlook the fact that the revision is in fact less positive than economist had expected. I generally take their estimates and what they say with a grain of salt and my blood pressure has increased significantly of late. I will also leave alone the idea of an 'expected revision'. Perhaps they should wait until these numbers are confirmed in the future since they impact consumer confidence and economic sentiment so significantly. Still, at the end of the day, -5.7% is a really huge number. This is what it is even with all the stimulus that's being pumped through the system.
More important for us to look at is the 'big story' in the business sector the article highlights. This is really what will impact private equity portfolio companies significantly and even certain hedge fund strategies in the following quarters. So businesses "halted new investments, and shed workers and inventories" to get in line with the new demand curve. It doesn't take an MBA, not that it really matters anyway, to see that none of those activities involved growth. Where is the growth going to come from? Companies can’t continue to increase profits by cutting and pulling back from investments. At some point there will be nothing left to cut and no innovation to sell. If companies are realigning their inventories and workforces to for decreased demand over the long-term what does that mean for company valuations in the short term? At some point there may have to be a more significant fallout in the private equity world. Firms will not be able to hide behind the 'j curve' forever. These firms are really hoping the fundamentals of our economy improve before they have to look for exits. They are getting a lot of help from the numbers and the continued rise in Consumer Sentiment. The only problem is the sentiment seems to be rising because things do not seem to be getting worse and consumers have become (begrudgingly) content with the state of affairs. They're still scared and definitely not spending and investing like they used to. As a true ContracapitalistTM knows, there are always opportunities, and these days opportunities abound for those looking in the right direction.
Revised GDP figures show less severe first-quarter contraction
Now that sounds like some pretty good news to me. Especially when paired with the increase in durable goods orders and uptick in existing home sales in April. However, like in the movies, “All is not good my friend”. I've been listening to this Anthony Robbins 5 Steps to Positive Thinking audio book so will try to spin the positive the best I can. The article goes on to reveal the truth of the matter:
Business investment declined at a record rate during the quarter. Investments in housing fell at the fastest pace in 29 years. Domestic demand fell at the fastest rate in 29 years. Exports fell at the fastest pace in 38 years. . .Economists surveyed by MarketWatch were forecasting that the revision would be to a negative 5.5%. They expect the economy to contract 2% this quarter and grow 1.5% next. . .The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace to bring down production and stockpiles to match the lower demand from U.S. and foreign markets. The massive pullback reaped benefits for the owners. Corporate profits from current production rose 3.4%, or $42.6 billion, compared with the fourth quarter when they fell by $250 billion, or 16.5%.
It's a short article, so I don't want to quote the whole thing. However, let's take a closer look to see what this number really means to the economy as a whole and alternative investments specifically.
Firstly, I'll be the first to cheer a downward revision to a less severe contraction. (Say that three times fast.) That is indeed good news. I'll overlook the fact that the revision is in fact less positive than economist had expected. I generally take their estimates and what they say with a grain of salt and my blood pressure has increased significantly of late. I will also leave alone the idea of an 'expected revision'. Perhaps they should wait until these numbers are confirmed in the future since they impact consumer confidence and economic sentiment so significantly. Still, at the end of the day, -5.7% is a really huge number. This is what it is even with all the stimulus that's being pumped through the system.
More important for us to look at is the 'big story' in the business sector the article highlights. This is really what will impact private equity portfolio companies significantly and even certain hedge fund strategies in the following quarters. So businesses "halted new investments, and shed workers and inventories" to get in line with the new demand curve. It doesn't take an MBA, not that it really matters anyway, to see that none of those activities involved growth. Where is the growth going to come from? Companies can’t continue to increase profits by cutting and pulling back from investments. At some point there will be nothing left to cut and no innovation to sell. If companies are realigning their inventories and workforces to for decreased demand over the long-term what does that mean for company valuations in the short term? At some point there may have to be a more significant fallout in the private equity world. Firms will not be able to hide behind the 'j curve' forever. These firms are really hoping the fundamentals of our economy improve before they have to look for exits. They are getting a lot of help from the numbers and the continued rise in Consumer Sentiment. The only problem is the sentiment seems to be rising because things do not seem to be getting worse and consumers have become (begrudgingly) content with the state of affairs. They're still scared and definitely not spending and investing like they used to. As a true ContracapitalistTM knows, there are always opportunities, and these days opportunities abound for those looking in the right direction.
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