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Could the "Final Four" Be the Final Nail in the U.S. Economy's Coffin?

By , Executive Editor, Money Morning •

William Patalon IIIWilliam Patalon III

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

When you consider everything that American consumers have been through in the past year - the subprime mortgage crisis, the collapse of the housing market, the ensuing global credit crisis, soaring prices for oil, gold and such daily household staples as milk and dairy products - wouldn't it be the ultimate irony if it ended up being something as offbeat and insignificant as "March Madness" that tipped the U.S. economy into a recession?

Don't dismiss the theory out of hand.

According to a survey by the well-known consulting firm, Challenger, Gray & Christmas Inc., companies may lose up to $1.7 billion in productivity as more than 37 million U.S. workers - ranging from mail room employees to the executives who actually run the companies - will take part in NCAA "Final Four" basketball pools.

It's not like the old days when employees would slip away from their desks a few times each workday to watch snippets of the game on a single TV in the office, would take long, late lunches for the same reason, or would just plain phone in sick.

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Thanks to technology, times have changed. Now the games are being broadcast online, as well as on TV, so employees can be mentally "absent" even when they're physically present and sitting at their desks. By some estimates, as many as 1.5 million employees will be scoping out the games online [thank goodness for the Internet]. But even with the wonders of technology, staffing specialist Spherion Corp. (SFN) reports that 10% of workers still may be inclined to take a sick day [or two] to cheer for their favorite team in the comfort of their own living room.

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With an economy that's in as fragile a state as the United States is right now, it won't take much to tip it into a recession. To borrow from the bettor's lexicon, it's admittedly a long shot that this would be the final nail in the U.S. economy's coffin. In fact, let's all actually fervently hope this isn't that catalyst.

Last Week's Markets


Market/Index

Previous Week
(03/14/08)

Current Week
(03/20/08)

YTD Change

Dow Jones Industrial

11,951.09

12,361.32

-6.81%

NASDAQ

2,212.49

2,258.11

-14.86%

S&P 500

1,288.14

1,329.51

-9.46%

Russell 2000

662.90

681.42

-11.05%

Fed Funds

3.00%

2.25%

-200 bps

10 yr Treasury (Yield)

3.42%

3.33%

-71 bps

 

In reality, the NCAA tourney may be just the tonic needed to relieve some of the daily stress of the credit crisis.  About a year ago, few seemed overly concerned when subprime specialists like NovaStar Financial Inc. (OTC: NOVS), Accredited Mortgage Loan Real Estate Investment Trust (PINK: AHHAP) and others were making daily headlines with negative news reports about their financial woes.

However, when the fifth-largest U.S. investment bank - The Bear Stearns Cos. Inc. (BSC) - goes belly-up, investors surely must take notice.  Early last week, Bear Stearns was sold to JP Morgan Chase & Co. (JPM) in a deal that was arranged by the Federal Reserve and valued at $236.2 million, or just slightly less than Heather Mills' divorce settlement with her ex-husband, Paul McCartney [thanks Krueger Catalano Capital Partners for the comparative analysis].

More than most of its competitors, Bear had ridden the mortgage game to great profitability - before crashing in its wake as the market dramatically deteriorated.  The bargain-basement price JPMorgan paid represented about 1% of Bear's valuation from just two weeks before.  With other banks, investment houses, and hedge funds financially interconnected to the 80-year-old firm, U.S. Federal Reserve Chairman Ben S. Bernanke and his minions realized that its outright failure was not an option and that a "bailout" was in order.

The Fed also started a direct-lending program for investment banks, lowered the discount rate for commercial banks [and now investment banks], and then dropped the benchmark Federal Funds rate by three quarters of a percentage point for good measure.

What's essentially the downfall of Bear left many concerned about who may be next.  Rumors about Lehman Brothers Holdings Inc. (LEH) were most prominent, although the company's 57% decline in quarterly earnings was actually quite well-received by investors.  Likewise, the poor showings by Goldman Sachs Group Inc. (GS) (-53%) and Morgan Stanley (MS) (-42%) still beat the more pessimistic estimates. 

Oil, gold and other commodities tumbled late in the week, as "speculators" analyzed the lower-than-anticipated rate cut and realized that the Fed was serious about fighting inflation. Still, prices stand much higher than what the basic laws of supply and demand would otherwise dictate.  Equities suffered from immense volatility as investors could make neither heads nor tails about the Bear collapse, the Fed moves, and the implications for the global financial system.  By the end of the holiday-shortened trading week, investors were showing cautious optimism about Bernanke's creative intervention strategies and pushed stocks a bit higher.

A few courageous analysts even proclaimed the Bear transaction as a defining moment that marked the end of the crisis - but that's eternal optimism and is s subject for a discussion at a later time. A long holiday weekend gives folks an extra day to survey the times [or relieve stress by rooting on their favorite teams...]

Coming up this week:  Existing Home Sales (Today/Monday), Consumer Confidence (Tomorrow/Tuesday), New Home Sales (Wednesday), Durable Goods Orders (Wednesday), GDP (Thursday).

A Look at the Economy

With most economists expecting central bank policymakers to administer a full percentage point drop in Fed Funds rate at the Federal Open Market Committee (FOMC) meeting last week, Bernanke and friends pulled off a surprise move and only cut the benchmark interest rate by three quarters of a percentage point, taking it down to 2.25%.  In fact, two voting members believed that smaller amount to be too significant and "preferredless aggressive action at this meeting."

While the Fed has now cut its rate by a full three percentage points since the middle part of September, Bernanke keeps searching for creative actions that stoke the U.S. economy without fueling inflationary risks.

Bernanke is considered one of the country's foremost scholars of the Great Depression and is intent on doing everything in his power to prevent the current downturn from careening into anything nearly that disastrous.

The Treasury futures markets now predict that the Fed Fund rate will ultimately sink as low as 1.75% or even 1.5% by the end of the year. 

Last week's report did not reveal anything too surprising. Housing continues to struggle as residential building permits fell in February to the lowest level in 16 years.  Wholesale inflation (as measured by the Producer Price Index, or PPI) grew by 0.3%, though the less volatile core index (less food and energy) actually experienced its largest increase (+0.5%) since November 2006.  The report confirms that the Fed has been wise to keep inflation high on its radar screen and look to measures that will be considered less likely to raise price pressures.

Coming up this week:  Existing Home Sales (Today/Monday), Consumer Confidence (Tomorrow/Tuesday), New Home Sales (Wednesday), Durable Goods Orders (Wednesday), GDP (Thursday).

Weekly Economic Calendar


Date

Release

Comments

March 17

Industrial Production (02/08)

Worst showing since October 2007

March 18

PPI (02/08)

Largest increase in core inflation since November 2006

 

Housing Starts (02/08)

Building permits fell to lowest level in 16 years

 

Fed Policy Meeting Statement

¾ point cut in Fed Funds

March 20

Initial Jobless Claims (03/15/08)

Highest level of claims in almost 2 months

 

Leading Eco. Indicators (02/08)

5th consecutive monthly decline

March 21

Good Friday

Markets closed (thankfully?)

The Week Ahead

 

 

March 24

Existing Home Sales (02/08)

 

March 25

Consumer Confidence (03/08)

 

March 26

New Home Sales (02/08)

 

 

Durable Goods Orders (02/08)

 

March 27

Initial Jobless Claims (03/22/08)

 

 

GDP (4th qtr)

 

 

Personal Income/Spending (02/08)

 

 

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About the Author

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Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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