Green Shoots

The following is taken from a recent letter to my limited partners:


The stock market and financial media has been obsessed with ‘green shoots’ for several months.
This obnoxious term can be traced back to Abby Cohen on CNBC Squawk Box one morning, I
believe. Then Ben picked it up in a testimony to Congress; and we have been cursed with it from
then on. Anyway, I thought it would be helpful to look for some actual green shoots since what
passes for green shoots in the media is a monthly statistic compared to the previous month that
was heavily revised lower, or earnings that beat downwardly revised guidance from 2 weeks
ago.

A very good coincident indicator of the economy which one can look at on a high frequency basis
are the transport companies and sector. The airlines are reporting twice the decline in traffic that they experienced after 9/11. The Association of American Railroads (AAR) reports: “U.S. rail carload traffic in May 2009 fell 24.7 percent”, the worst y/y % decline of the recession.
Bloomberg recently reported that diesel supplies, “the fuel that powers heavy trucks used to
move goods across the U.S., rose to the highest in at least 16 years this month, as manufacturing
inventories climbed, signaling a need for fewer deliveries.”

U.S. diesel stockpiles rose 28 percent in the past six months, tracking an increase in the ratio of
manufacturers’ inventories to sales. “Inventories are bloated,” said Tavio Headley, an economist with the American Truckers Association in Arlington, Virginia. “Businesses are not taking many new deliveries, and that has a huge effect on tonnage volumes. The significant drop in tonnage volumes is also having a huge impact on domestic diesel demand.”

Diesel supplies rose 2.18 million barrels, or 2 percent, to 111.6 million barrels in the week ended
June 19, according to the Energy Department. That’s the highest level in data going back to 1993.

Manufacturers’ inventory-to-sales ratio rose to 1.45 in April from 1.21 in July 2008, according to the U.S. Census Bereau The ATA’s For-Hire Truck Tonnage Index contracted 11 percent in May from a year earlier.

That’s a “historically large” decline, according to a report last week from the group, the largest
U.S. trade association for the trucking industry.” Bob Costello, the American Truckers Association chief economist reports, ““While most key economic indicators are decreasing at a slower rate, the year-over-year contractions in truck tonnage accelerated because businesses are right-sizing their inventories, which means fewer truck shipments…The absolute dollar value of inventories has fallen, but sales have decreased as much or more, which means that inventories are still too high for the current level of sales. Until this correction is complete, freight will be tough for motor carriers”.

Maersk Line Shipping, which moves about 20% of China’s container goods, has reduced its head
count by 24% and will be cutting more soon. The shipping company says rates are at 1990 levels
and the oversupply of container ship capacity won’t level out until 2015. Their volumes fell 14%
year over year in the first quarter.

The amount of excess capacity in the economy is absolutely huge and is not decreasing (which
would be occurring if there were ‘green shoots’). The rate of capacity utilization for total industry
declined in June to 68.0 percent, a level 12.9 percentage points below its average for 1972-2008.
Prior to the current recession, the low over the history of this series, which begins in 1967, was
70.9 percent in December 1982. It will take years to work this capacity off.

Japan’s exports were off 41% year over year in May.

Reported revenues for many companies reporting in the second quarter are coming in below
estimates and are running 20%, 30%, even 40% off year over year.

Hours worked in May fell 6.9% from a year earlier, dropping to 33 hours a week. This is the
antithesis of a green shoot!

Unemployment is usually considered a lagging indicator. But with the structural issue of debt
and debt servicing that we currently have in place, there are many analyst who feel that it may
not be so lagging this time around. The unemployment rate is already higher than the worst case
scenario presented to banks in the laughable ‘stress test’ of a few months ago. David Rosenberg
writes, "At no time in the 1990 or 2001 recessions did we ever come close to seeing such a
detonating jobs figure. We have lost a record nine million full-time jobs this cycle."

The overwhelming evidence continues to suggest this is not a typical post WWII recession.

Beware those promoting ‘green shoots.’