The Financial Analysis Guy

This is a wonderful post by our good friends over at GenXFinance.  I highly recommend reading it.

JPMorgan Chase Buys Bear Stearns for $2 per Share and the Fed Cuts the Discount Rate

Jeremy hits on a few topics in this post and it is all good information.

1. The idea of JPMorgan buying Bear Stearns absolutely crushes some Wall Street historians.  These companies are bitter rivals, regardless of what they say, just like all the other investment banks on the Street.  Then put into place the fact they are buying them for $2 per share!  You’ve gotta be kidding me.  In Jeremy’s post, it states they were at $150 per share just last year.  Welcome to the world of recession folks.  Absolutely amazing.
2. The FED cutting the discount window rate to 3.25% from 3.50% is just so typical from our good friend Uncle Ben Bernanke.  The economy is shot and bleeding on the side of the road and he is trying to figure out where to go on vacation next year.  Again, way late and now it is merely a slap in the face.  He needs to go to 1% on the Federal Funds Rate and 1.5% on the Discount Window rate.  COME ON already.  We are on the eve of financial armageddon and he and our “good friend” President Bush are still claiming the economy is strong.  Where is the leadership???
3. The S&P 500 is down 12% this year, but if you are heavily invested in good, growth companies with excellent earnings potential and not a ton of earnings history (like I am), you are down 40%.  Seriously, I have a large position in Crocs (symbol: CROX) and smaller positions in Google (symbol: GOOG), Goldman Sachs (symbol: GS) and Apple Computer (symbol: AAPL).  I am ready to go all Zed and the Spider to anyone at the FED who does not help this market since it is headed down further.  Seriously…

Jeremy has timely stuff and great material.  I love to read him and several others out there.  Don’t forget to check out my blogroll to see who else I read on regular basis.

This question seems to be at every single person’s forefront of discussion.  Whether or not we are presently in a recession or are we heading for one.  There are so many indicators that show us that we are not in a recession presently, so how can anyone be asking if we are in a recession.  AND, more importantly, why do we care?   Well, lets break this down into some real simple analysis. 

Indicators

Many of the widely used indicators used by the Federal Reserve Board and Chairman Ben Bernanke (and everyone else for that matter) are backward looking.  This is very important to folks who want to turn the TV channel everytime someone brings this topic up.  These folks are using data that have happened in months or even quarters passed.  How can anyone possibly say we are in a recession just by looking at data from the past?  They can’t.

All anyone can do is prognosticate and try to predict what is happening today by trying to predict the future indicators.  Not a very good way of doing it.  However, these folks are doing their best with what they have.

There is a saying that I can use to help sum up this prognostication effort, “You don’t know you are in a recession until it is over.”  This is the best way to sum up the effort of trying to determine if we are in a recession.

Why do we care?

That is the real question.  But really the best question to be answered is “How does it affect me?”  The truth of the matter is that a recession affects all of us - in one way or another.  It just affects us in very different ways.  “How?” you ask.  Great question…

If you are working at government institution or a quasi-government institution (e.g. a larger US corporation) you are most likely not too affected.  Your income will not suffer too much so long as you don’t get downsized or “rightsized”.   Recessions typically mean prices come down on commodities such as gas and food, so that helps you out a little as well.  The main pain you will feel is in your 401k or other investment vehicles that are tied to anything equity related.  Stocks and other equities always get killed in recessions - especially if they are tied to higher growth.

And that is really the key.  Anything tied to higher growth gets crushed in recessionary times.  The definition of a recession is 2 consecutive quarters of negative GDP (Gross Domestic Product) growth - simple as that.  Not flat, not slightly better…negative.  Also, the GDP indicators are backward looking.  The indicators usually don’t stay negative very long, so when they are officially telling us we saw declining growth, it usually means we are already starting to pull out of it.

Conclusion

We normal folks care about recessions only in the manner it affects us personally at the time.  Some it affects more than others, but we usually don’t care much about the general economy.  We care about how it affects if we can go out to eat this month or how much it costs to fill up the gas tank.  Don’t worry too much about what the guys on the TV say.  Seriously, they know as much as you know about the answer to this question.  Matter of fact, you probably know more since you are on the battlefield.  If you see people pulling back on spending (not as many folks at your favorite restaurant during dinner time or smaller crowds on Saturday at your favorite retailer), then we are probably seeing some indications of slower growth.