Auto-Pilot: Getting Nowhere Fast

One slip, and down the hole we fall
It seems to take no time at all
A momentary lapse of reason

- Pink Floyd

The momentary lapses of reason seem to be piling up in Washington. One commentator recently spoke of corporate America's obsession with achieving earnings in the short run, even to the detriment of long-term success. It seems, according to this commentator, that Washington has followed suit and our elected leaders are now managing towards weekly poll figures rather than long-term economic recovery.

As one example, I now know more about GM and the rest of the auto industry than ever before. It's a wonder there would be any uncertainty regarding yesterday's bankruptcy filing given the incessant media coverage along with countless hours of our government representatives' time. Perhaps the drama that has unfolded is the true cause of CBS' cancellation of Guiding Light after 72 years and some 16,000 episodes. Who wants to watch fake drama when they can get the real thing?

Unfortunately, all of this time has been wasted. It was a waste for Congress to investigate the auto companies and chide them for flying to Washington on private jets. Not because there weren't problems to be fixed, but because the priorities of our government should not have put this single industry first. At a final tally likely to be in the low 100-billion-dollar range but including several hundred hours of research (we hope!) and analysis within the Beltway, the move toward bankruptcy this late in the game underscores the distraction this topic has been.

As corporations with large cash balances, many of our clients have investment policies in place which clearly lay out the objectives to be kept in mind when considering investment alternatives. First, preserve capital. Second, provide liquidity. And third, achieve acceptable return.

Even with these clearly stated priorities, some companies placed number three ahead of the first two and ended up with such "wonderful" investments as auction rate securities or even mortgage-backed securities. The result of this swapping of priorities has been painful.

Today, Congress and the remainder of our federal government continues to focus on lower priority but more popular initiatives, instead of bigger issues that will help the overall economy recover. These issues are obvious and center on improving investor and consumer confidence.

Instead, the government continues attack confidence levels by shifting rules and guidelines with the latest polls. A recent example includes the government's disallowing the use of future earnings to count as capital in order to satisfy capital raises mandated by the stress tests. Though this is not an extremely significant hurdle, it is simply one more example of changing the rules as the game is played.

These rule changes go to the heart of confidence in the system. How can market participants have confidence in their consumption or investment choices if they know tax, compensation, or capital requirements are likely to change over time?

Instead of focusing on small potatoes such as the auto industry problems (affecting only hundreds of thousands of jobs as opposed to the 5.7 million and counting lost nationwide), why not develop a long-range plan that will move the entire economy toward recovery? Without such a vision, politicians will continue to waffle in their actions and potential consumers/investors will remain on the sidelines waiting for the next set of rules.

Ford's overriding slogan for years has been "Quality is job one." Agree with their success or not, but it's true they've at least identified their priority. Perhaps the government could take a cue from them and figure out what should be their "job one."

Key Developments

May's consumer confidence measure jumped 14.1 points to 54.9, its highest level since September 2008 when the crisis shifted into high gear. (A reading of 100 reflects 1985 confidence when GDP was 4.2 percent.) Typically, this measure troughs very late in a recession and February's 25.3 measure will likely be this cycle's low print. However, this does not mean growth is around the corner. Instead, it is quite possible the speed of the downturn drove consumers quickly to their low point and will now languish until true fundamental signs of recovery occur.

The Mortgage Banker's Association (MBA) quarterly report on the state of the market revealed a solid jump in delinquencies and foreclosures. The percentage of all loans past due jumped from 7.9 percent in the fourth quarter to 9.1 percent in the first. Foreclosures rose from 1.0 percent to 1.3 percent, although they were muted by Fannie and Freddie's moratorium on foreclosures, which has recently ended. With some 2.7 million people and counting out of work thus far in 2009, expect these numbers to rise in the second and third quarters.

First quarter's GDP estimate increased from minus 6.1 percent to minus 5.7 percent as more data has been gathered and analyzed. The 0.4 percent increase is nice; however, few "green shoots" can be identified. On the contrary, consumer activity was revised significantly lower, particularly for non-durable goods.