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Merrill: Fed must cut more than 75 bps, but hard landing already here

Analysis

While most of the market fusses about whether the odds of a recession hitting the US economy are 30%, 40% or 50%, Merrill Lynch isn’t wasting much time with that. That’s because the firm’s North American economist David Rosenberg is convinced the hard landing has already arrived.

And why does he think the consumer recession is here?
Last Wednesday, the Beige Book showed that seven of 12 US Federal Reserve districts reported slower growth, up from five in October, four in September, two in July, and zero in June and April, he told clients in a note. The Beige Book also contained some derivative of the word „weak” or „slow” 132 times – the highest level since January 2003 when the economy was on the verge of returning back into recession.

Rosenberg says another indication that a recession is looming is how much easing is needed from the Fed. He says it is clear that the Fed „is going to have to do way more than 75 basis points, and when it has been forced to go beyond that in the past, recessions almost always followed suit.” Among the other factors on his top ten list of reasons a recession may have arrived is weakness in the Chicago National Activity index, plunging new home sales and falling home prices, declining corporate profits, momentum being lost in the labor market, plunging consumer confidence, weaker spending trends, and finally, GDP that is expected to grow only 0.4% in the Q4.

As a result, Merrill now expects 2008 operating earnings per share for the S&P 500 will come in at $83, down 7.5% year-over-year and from $89 previously. On a reported basis and including writedowns, they are forecast to fall 12% to $68, compared with the consensus at $96. „We did some sector work and found that if we are anywhere close to being on the mark, then the areas of the market with the greatest downside risk next year from an earnings surprise standpoint are consumer discretionary, financials and tech,” Rosenberg said. „In contrast, the areas where we see the least downside risk (or the greatest safety) would be in telecom, health care, and utilities.” (nationalpost.com)

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