Investment Thoughts

June/26/2009 16:40PM
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A Kauffman foundation study shows a trend: risk-taking during bad times has a long history. Their study shows that more than 50% of Fortune 500 companies were started up during recessions or bear markets dating back to 1700. Without start- up job growth, net job creation has been flat or negative over the last 30 years. This adds concerns to public policies like card check(union program to grow union membership), health care, hiring of H-1B visa holders and corporate taxation, some or all of this could eliminate the start- ups during this recesson. So far, start-ups have been scarce for the past two years. This does not bode well for jobs. Only gains in the public sector seem likely.

The analysis of the consumer is key. With foreclosures, credit card losses, and weaker spending, it’s still a jump ball. But, it appears that retail spending has gone down again. We seem to mired where we were earlier this year. This means the stimulus program has failed miserably. The biggest failure in the history of stimulus packages.

Finally, corporate profits. Corporations have cut back labor costs to the bone. If a recovery starts, profits can jump. Assuming they can meet a demand jump with the current workforce, profits will jump too. But, the wild card is still consumer spending. Personal wealth losses and declining household income may curtail spending, thus holding corporate profits flat or down.

In my judgment, recovery will rest mainly on these issues. If risk takers step up to the plate and start new businesses, they will be the true green shoots that will create the jobs of the future. If this doesn’t happen, job losses in the private sector will continue. If card check, corporate tax increases, increased regulation and other ideas on the table happen, the risk takers will stay on the sidelines and start-ups won’t happen.

If consumers keep saving and don’t spend, the expense cuts in business will need to continue. If deleveraging by consumers continue, and it may, this will be the case. This would start another round of job cuts and spiral the unemployment numbers downward.

There is no crystal ball, but in my humble opinion, these are key areas to watch. Start-ups funded by government money have not historically had staying power. Start-ups with private capital are the ones to watch. The next round of googles, e-bays, Amazons, etc. If these come, so will the job growth. If not, no growth. No growth, no recovery.

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