April 17, 2009 – Update
Sean Lannan
www.linkedin/in/SeanLannan

Commentary on Economics, Markets and Politics for Good
Decision Making
Purpose of this commentary: Use readily available and understandable
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economic, markets and political news and information to help business
leaders make good decisions.
Operational thoughts for business leaders
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– Access credit and raise equity when it is available to you in this environment. The cost of
credit and equity is important but secondary now.
– Watch corporate cash flow closely. Cash flow is a very big deal.
– Watch suppliers closely for delivery performance and financial health. Ask suppliers for
financials on a quarterly basis.
– Watch customers carefully for payment activity and financial health. Ask customer for
financials on a quarterly basis.
– Expect to share your own financials with vendors, customers and bankers more often.
– This is a good time to pursue acquisitions with good values available. Only motivated sellers
are in the market now and there is less competition on the buys-side.
About the author: Sean Lannan is a CFO for a high technology company. He
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has a background in corporate finance, treasury, investor relations, mergers &
acquisitions and fixed-income securities trading, an MBA in finance and BA in
economics and political science.

Politics and the Economy
Expect more friction between politicians and banks.
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– JPMorgan, Wells Fargo, Fannie Mae and Freddie Mac have increased foreclosure rates in
recent weeks on residential mortgages. All of these institutions have received federal
bailout dollars.
Financial institutions that appear relatively strong (Goldman Sachs, Wells
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Fargo and JPMorgan) want to repay TARP funds in the near-term and
Treasury and Federal Reserve officials are concerned that firms who keep
TARP funds will be labeled with a scarlet letter of weakness.
Watch for whom the politicians favor in the struggle between auto labor
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unions and retirees vs. the bond holders at GM and Chrysler.
– Bond holders should expect to take major losses as they get pulled down the seniority
ladder among creditors if GM and Chrysler file for bankruptcy.
Municipal and state bonds may be the next “sub-prime” crisis. 47 states
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are expected to run budget deficits of $350 billion over the next two years.
– Expect local tax hikes on everything: sales, real estate, corporate and personal income
– California and Barney Frank are asking for federal insurance behind municipal bonds

Four Bad Bear Markets – ‘29-’32, ‘73-’74, ‘00-’02, ‘07-’09
Lehman Brothers collapse and AIG bailout
Doug Short at
http://dshort.com/charts/bear-
markets.html?four-bears, 4/16/09
The current bear market took Depression-like losses after the collapse of Lehman Brothers and the AIG bailout in
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September 2008. The current bear market has fallen as far and as fast as the Depression bear market since the
beginning of the bear market.
The 57% loss as of 3/6/09 (which has since rebound by 10%) was the largest percentage bear market decline since
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the decline between 1929-31. In the Depression the markets decline another 32% into the fall of 1932 for a top-
to-bottom loss of 89%.
The similarities of chart patterns contains no predictive power. The most you can read from this is this bear
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market is unusual in the size of the losses and swiftness of decline. 5-week rally: bear bounce or new bull mkt?
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Credit Markets are Still Choppy Long After the Collapse of
Lehman in Sep. 2008
Govt. programs have helped stabilize
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short-term debt markets.
There has been a surge of high-grade
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corporate bond issuance in Q1 2009 by
non-financial companies (sold $212B in
debt, highest in seven yrs). But rates are
still high.
Junk bond issuers raised only $10B in
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debt in Q1 2009, less than half the
average before the crisis. Junk bond
yields are high with spreads averaging
17% over treasuries compared to 4%
before the crisis.
4/1/09
Banks and financial institutions can raise
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debt only with the help of govt.
programs.
Markets for securitized debt are still
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frozen.
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State of the Banking Industry
Banks have started lending more freely to each
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other since the acute financial seize-up around
the time of Lehman’s bankruptcy. See the
decline in Libor (London Interbank Offer Rate)
Lehman failure
from 5% to 1.25%.
Banks’ basic lending business is very profitable
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($200 billion earnings/year).
21 largest banks receiving TARP funds have
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decreased their commercial and consumer
lending in Q1 2009.
Banks with trading and investment banking
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operations are performing better than those that
have a heavy emphasis on lending.
Banks with large credit card operations will
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struggles as credit card delinquency rates rise.
U.S. banks reported losses of $52 billion in Q4
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2008 and are expected to post losses of about
$34 billion in Q1 2009.
4/10/09
Do not expect fundamental improvement in the
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health of banks until loan loss reserves grow
substantially.
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Labor Markets are Deteriorating Badly – May Prolong
and Deepen the Recession
The U.S. economy is shedding jobs very rapidly and
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could extend the length and depth of the recession via
negative feedback loops since consumers drive 70% of
U.S. GDP.
Over 5 million jobs have been lost during the current
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recession.
In March unemployment hit 8.5%, the highest since
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November 1983.
The comprehensive unemployment rate of marginally
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attached and involuntary part-time workers (called U-6
by the Dept. of Labor) hit 15.6% in March, 6% higher
than a year ago.
Job losses accelerated in the first quarter of 2009. On
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an annualized basis non-farm payrolls dropped 4.8% in
Q4 2008 and the decline accelerated to 6.1% in Q1
2009.
Look for consumer spending to drop in Q2 2009.
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March: 8.5%
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Manufacturing Continues to Contract – 18 Months and
Counting
March: 36.5 March: - 1.5%
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Consumer Spending Declined Badly at the End of 2008
But Has Stabilized Around 0% Growth
February: 0.2% February: $344.4 billion
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Housing Transactions and Supply Appear to Be Stabilizing But
It Is Unclear if This is a Pause in Declines are the Beginning of
Stabilization
February: 510,000
February: 4.72 million
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Banks Ramp Up Foreclosures as Delinquencies Climb
4/15/09
8.5% of mortgage are delinquent with the greatest increase coming in the 120+ day category that
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are at the highest risk of foreclosure
Only about 10% of delinquent mortgages are eligible for federal assistance programs that have been
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announced.
Foreclosure shares will put more downward pressure on home prices.
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Foreclosure actions by banks with taxpayer bailout dollars will be targets of angry politicians.
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Inflation Pressures Have Faded Near-Term, Some Concerns
about the Risk of Deflation
March: - 3.5% March: -0.1%
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Watch US Dollar, Gold and Oil for Inflation and Health of
the Global Economy
4/1/09
3/25/09
Gold, oil and the U.S. dollar are metrics to watch for inflation and the health of the world economy as the
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U.S., UK, Japan and, maybe, EU embark on quantitative easing programs and other countries enact stimulus
and bailout plans.
Gold is in the top half of a 1.5 year range at $866/oz (4/17/09). Gold had an up-trend in place after the
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collapse of Lehman Brothers and growing fears about the markets and economy. Recent moves in Q1 2009
by the Bank of England and the U.S. Treasury and U.S. Federal Reserve appeared to reduce fear in the
markets and the appeal of gold has declined slightly.
Oil price collapsed in 2008 after hitting a record high in the summer. Oil prices appears to have found a
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bottom as oil demand stops falling rapidly ($51/barrel on 4/17/09).
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The Global Economy is in Recession in 2009, First Time Since
End of World War II
The OECD expects global GDP to
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drop by 2.7% in 2009 compared to
the World Bank’s forecast of a drip
of 1.7%.
There has not been a contraction
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in global GDP year-over-year since
1946.
The OECD expects a 12%
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contraction in global trade in 2009
compared to the World Bank’s
estimate of a 6% contraction.
A shrinking global economy and
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reduced trade hurts all countries.
Be on the lookout for political
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pressure to raise trade barriers
which would worsen the global
recession.
4/1/09
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Downturns Following Major Financial Crises Can Be Long
and Deep Even in Developed Economies
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Signs of Hope for a Bottom in the Housing and Financial
Crises
Home ownership in the U.S. is on
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average more affordable than
renting for the first time since 2001
according to the S&P/Case-Shiller
index
Stock market volatility has declined
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4/2/09
into the mid-30%’s.
This shows diminished short-term
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concern about large potential
moves in the stock market.
4/10/09
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