Streetwise for Sunday Feb 22, 2009

Streetwise

Lauren Rudd

Sunday, February 22, 2009

Life Is Not Good, But It Is Not All That Bad

A year ago, I wrote that the world economy was slowing rapidly, stock indexes were down 20 percent and that the loan and bond markets were in disarray.

"The tax rebates will nicely complement the cuts the Federal Reserve has made in the benchmark federal funds rate. It should enable us to get through the correction," Secretary of Commerce Carlos Gutierrez predicted back then. Well, we know how that movie ended.

The Treasury recently had to borrow $67 billion, issuing 3 and 10 year notes and 30 year bonds in what was the largest one week borrowing event ever. At the same time, foreclosures in 2008 stood at 850,000 homes, with 1.2 million expected in 2009. For comparison purposes there are 76 million owner occupied homes in the United States. Furthermore, the greed on Wall Street resulted in 90 percent of those troublesome subprime mortgages being packaged into bonds and sold to unsuspecting investors.

On a more positive note, the publicity surrounding potential bank failures is overblown. In 2008, only 25 banks out of 8,384 actually failed; or about 1 in every 335. During the 3.5 years following the Crash of 1929, 217 banks per month failed, equivalent to 7 per day.

Putting more people back to work is crucial to any economic recovery program. While I still believe we face a possible double digit rate of unemployment in 2009, given that 3.4 million people lost their jobs in 2008, the good news is that 526,000 jobs were created in education and health services. Both of those areas are destined to receive additional funding from the various stimulus programs that will soon be underway.

Unfortunately, for many in Congress the realization that a resurrection of the patently unsuccessful economic policies of the past makes no sense continues to escape them. Instead of engaging in intelligent bipartisanship activities, they resort to acrimonious outbursts and childish behavior, such as dropping legislative documents on the floor in feigned disgust. Immature conduct of that nature only serves to reflect poorly on the electorate.

To the country’s credit, we now have a new quarterback, playbook and offensive economic team. However, it took eight years to create the current financial quagmire and the resurgence of economic activity will not occur overnight. Rather, we should not expect to see tangible results until the first quarter of 2010.

However, a well thought out investment strategy will enable you to take advantage of the subsequent sharp rise in the equity markets that is likely to occur as the various stimulus packages take hold.

One example of a company that may well add benefit to your portfolio as the economy improves is Sherwin Williams (SHW). With many companies cutting their dividend, Sherwin Williams recently announced an increase in their quarterly dividend from $0.35 per common share to $0.355. Although the increase was small, it added another notch to the company’s 30 consecutive years of dividend increases.

For 2008, Sherwin Williams’ consolidated net sales were down 0.3 percent to $7.98 billion, resulting in a 14.9 percent reduction in net income to $4.00 per share. Included in that income number were asset impairment charges of $.31 per share. Net operating cash for 2008 was $864.4 million, or 10.8 percent of sales. At the same time the company issued 2009 earnings guidance of $3.00 to $4.00 per share.