By STEPHEN MARRIOTT 26/02/2008
I recently travelled to New York to attend an
investment conference. Topics that cropped up often in conversation included the
Sub-prime crisis, Citigroup, Recession, the US Primaries and the oil price –
Americans do like to talk!
Although the various fund manager meetings
were illuminating (more of this to come) one could also pick up a thing or two
from hitting town. My first bit of insight was when I first had my chance to nip
away from meetings and hit the shops, keen to see if the US consumer really had
retrenched (consumer confidence numbers are at 16 year lows according to the
Michigan survey). I was sure Manhattan store winter bargains would be kind to my
credit card (all in the name of research of course).
The streets were buzzing, the sale signs hung
proudly in the famous department stores, and on this Friday afternoon the
consumer was out in force. There were bargains galore in Maceys and
Bloomingdales, and the camera store that I visited attracted customers like it
was the first day of the January sales. Certainly the prices of goods were
extremely compelling – $7.50 for a 2GB memory card was just one example!
However, if one was to take a closer look or
listen to the customers in these stores they appeared to be remarkably British
and European – let’s not forget the ‘greenback’ has fallen by 14% against
Sterling during the last two years.
But even taking account of currency differences it was pretty clear that most
things were cheaper in these Manhattan stores.
But I still wasn’t convinced that everything
in the US was as cheap as people thought, fancy restaurant dining - once state
and federal taxes were added was not as economical as I’d expected and taxis
seemed as expensive as in London. I had a feeling that for those with an
addiction in America – that is for caffeine, fine dining and real estate – life
was getting a bit tougher, and in fact was no cheaper than the UK. Certainly US
inflation figures suggest this to be the case if one ignores the core rate
(currently 2.4%) and looks at CPI categories for Food away from home; Alcoholic
beverages and Owners equivalent rent , which are currently running at 4%, 3.8%
and 3.1% respectively annually.
Comparing coffee prices would be easy –
Starbucks may not have taken over the world yet but it appeared to have at least
taken over America. There was no getting away from this ubiquitous coffee chain,
it was everywhere – concessions in department stores, hotels and on every street
corner, in fact there are some 200 branches in Manhattan alone. A cup of
‘grande’ (medium) sets one back almost $3.50 once taxes are added, compared to
£2.29 in the UK or $4.46 equivalent.
But what about the cost of buying a home? My
research into this area came from talking to a cabbie. A Vietnam veteran, this man had
clearly been around a bit and not only shared his views on real estate with me
but also his thoughts on Obama and Clinton as well as the stockmarket. He said
that house prices in the Big Apple hadn’t really fallen, which is why he was
looking to retire in Arizona where prices had become much more affordable. The
stats show that New York housing prices fell by 4.8%* on average in the year to
November 2007 whereas in Arizona they’ve fallen by 13%*. This compares to the
rest of the States which has fallen by 7.1%* over the same period. With luxury
condominium prices averaging close to $3,000 a square foot
in New York, it was easy to understand why my taxi driver was looking to buy in
the south. But what does this all mean? Some things are cheap, some things are
not – perhaps this means that markets were adjusting in the areas where they
needed to and that a recession wouldn’t really affect you if you were already
rich.
How did my finding compare to the experts on Wall Street? The consensus view was
that the US is already in recession and this would soon be borne out by the
numbers but the economy was already working its way through the problems. For
example a number felt that January’s fall in employment was actually a positive
sign as it suggests that Corporate US is already reacting to the problem. And
some of the money managers I met were taking the view that this would be the
shortest of the US recessions. This is because the Federal Reserve is finally
reacting to the problem, the dramatic cuts in Fed Rates to 3% with the
likelihood of further cuts to come and there was a view that US recessions are
becoming shorter. Also the US is becoming a truly modern economy in this new era
of globalisation. The average length of a recession since 1957 is 10 months and
some of the fund managers (UBS and BlackRock) I talked to for example were
predicting a short sharp recession of between 6-9 months.
And the implications for markets? The view from the experts was that current
share prices were already factoring in a recession. The Dow Jones is currently
trading on P/E multiple of 14.7x, which is cheap by historical standards.
Interestingly, the value style managers that I met were getting very excited
about their area of the market. In fact a couple stated that some of their
favoured stocks were the cheapest they’ve seen them in ten years.
One must not forget though that markets can stay cheap for a long time, just as
they can stay expensive for a long time – a catalyst is normally needed to
change things. The sub-prime crisis was the catalyst that brought down markets
last summer. This begs the question: What could be the catalyst to turn around
markets now? The experts I spoke to suggested that there is a wall of money
waiting to hit markets, all that is needed is a realisation that the US
recession will be over and done with more quickly than people realise. Is this
possible? Well in reality no-one really knows, but certainly from what I saw
things were adjusting on the streets, my cabbie was intending to spend money in
a cheaper area of the real estate market and the foreign money was finding its
way into US tills – all good for the current account deficit. And was there
evidence of a wall of money? Lawrence Firk, the Chairman & CEO of BlackRock (who
is also an adviser to the Federal Reserve) ultimately responsible for the groups
$1.3 trillion of assets under management, said that within the space of January
alone more money has been invested into their Money Market funds than the total
into their Money Market funds for the last ten years.
And finally the effect of the 2008 Presidential election – most managers were in
agreement, it would have no significant consequence on the direction of markets.
*S&P/Case-Shiller® Home Price Indices