Stock Option Advisory

Recession Recovery Track: U or V?

With the recent financial bailout of major banks and their owners, there is no doubt the US is headed into a recession, or already in a recession. The only questions that remain is how the economy will be able to recover and turn itself around and how long it will take to do so.

In 2001, after the tech bubble burst and recession loomed, the salvation came from homeowners who tapped into their home equity, thusly easing the financial burden and keeping the economy afloat and credit lines healthy. This put the country on a V-shaped, fast road to recovery by re-energizing the market and keeping values of the dollar high. After 8-months it was all over, and the economy was well on it’s way to a healthy state. However, with the recent downfall in the housing market and no light at the end of the financial tunnel, it appears more likely that the recovery time from this recession will be lengthy, and U-shaped.

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In April 2008, the US hit an all time low, experiencing the worst housing recession since the Great Depression, and moving into Q1 of 2009, it still doesn’t seem to be bottoming out. This recession will most probably extend through the middle, if not the end of 2009 for numerous reasons.

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New home sales have fallen more than 60% across the nation, which, in turn has negatively affected the pre-owned market, and pushed all home prices down sharply. When the price of homes goes down, so does their value. What used to be instant equity in a home has turned into negative equity across the nation. With the decrease in home prices over 16 million American households may find themselves plagued with negative equity, and possibly forced to walk away from their homes. Even after the bailout, it’s estimated that by 2010 credit losses from individuals forced to walk away from their home will reach the trillion-dollar mark.

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Because of the housing slump, corporation layoffs have increased. Contractors, trades, vendors, loan officers and banks are continuing to have to reduce their staff. This negative layoff trend shows no sign of slowing down in the near future, and affects many other areas. Even companies not directly involved in homes and home sales don’t have the revenue available to pay additional employees due to increase costs and less money flowing through for goods and services. Although less of an issue lately, rising gas prices have cause shipping costs to skyrocket, bringing the prices for good and services up as well. This has resulted in higher expenses and less profit for businesses across the nation, and could result in sever hardship for many small businesses around the country.

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The financial crisis we are currently experiencing is the worst this county has endured since the Great Depression. This has not been a just subprime meltdown, the financial bubble has burst and spread resulting in losses in unsecured consumer credit, and even industrial and commercial loans. The government stepped in, offering these banks a way out, that taxpayers will ultimately have to pick up the bill for. While the government makes attempts in turning the economy around, even our leaders admit the situation is dire.

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With a housing market holding on for dear life in a dangerous economic climate, a US consumer on the ropes and unemployed and the government forced to raise taxes to keep the country afloat, this is a recession that shows no signs of ending soon. While stock prices are low, and housing prices continue to bottom out, it doesn’t appear like anyone is willing to part with hard earned dollars any time soon either.

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This combination could spur a recession that isn’t your run of the mill downturn. This could be the worst financial crisis that the US has experienced in decades, and the conditions and valuations in US equity could continue to anemic for the next 12 to 18 months. With no end in sight, it looks like the light at the end of the proverbial tunnel for most American’s has turned out to be a train, not a way out. The bad news is that economic recovery may be prolonged, however we can rest soundly in knowing recovery will eventually occur.

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[tags] covered call investment strategy, investment strategy, iron condor, poweroptions, stock option trading, stock options [/tags]

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