Where are we in the cycle?

So where are we in the cycle? The latest hotel and airline numbers upto the end of June have reflected a fairly robust turnup from last years lows. The most recent hotel occupancy figures reinforce this view. After tumbling for eight straight quarters hotel occupancy rates finally bottomed out at the end of Q4 2009. Since then they've been rising at a fairly brisk pace and are now 6% above the lows recorded last year. However,they are still 5% below the 1997-2007 decade median for before the crisis erupted. So there you have it. After a trillion dollars of stimulus we are a little more than halfway back to where we were.

As we enter the summer season hotel rooms in the major global centers are scarce and prices are non-discountable. Much to every hoteliers relief the Americans are back en masse and spending . Chinese and Indian travel flows are also up strongly . No sign here of a double dip although we'll have to wait until after the summer tourism and leisure boost to see how corporate spending is holding up.

This probably indicates that equities, at current valuations, are discounting in a continuation and possible acceleration of the Q1 and Q2 uptrend. With government expenditures set to be cutback, in some cases sharply, the posited continuation of bullish consumer sentiment maybe overly optimistic. I'm still happy to be long quality corporate bonds until this jobless recovery morphs into something sustainable. Compeling value still doesn't seem to exist in the equity universe. At current rates of job creation it's going to take another 5 or so years for employment levels to get back to where they were. The same for the banks holdings of real estate. Let's hope a double dip doesn't come along ( or a separate downturn is say 2014) to compound matters.

Running out of steam ?

Ages since I last posted but Q4 seemed to have been dominated by the markets love affair with risk. With so much bullishness around what new was there for me to say? "If you rest you rust" as the old saying goes.

Is it my imagination or does the 'risk-on' rally finally seem to be losing steam ? Maybe it's Citibanks difficulties with getting away its $20 billion capital increase, or maybe it's the end of the Dollar Goes Down Forever (DGDF) trade, or maybe simply year end torpor that have unsettled market sentiment over the last few days. Of course it could be the awful recognition that Greece is sleep walking to default or a growing understanding of the scale of Dubai's continuing problems.

As we enter 2010 I can't but help feel that the stimuli packages entered into around the world have kept the banks solvent ( that's a real result) but have done little else to stem declining fundamentals in the broader economy. Certainly the consumer doesn't seem to be riding to the rescue and the corporate sector is going to find accessing capital difficult as 2010 wears on. Calls in the US and the UK for an immediate end to both loose fiscal and monetary policy are growing - if they are followed through are we prepared for unemployment of 10% in both countries with an even larger number of underemployed? What does that mean for tax rates and GDP growth?

At one stage in November I was lulled into believing that the threat of a double dip had passed but horrid hotel occupancy numbers and the continued weak level of demand for airline business class seats still point to a 50% chance of one occuring. In 2009 mid-week business travel has been much weaker than weekend leisure travel so that we are now at the lowest hotel occupancy rates in the US since the 1930's depression. In the Emerging Market space the scope for another spat between Russia and Ukraine over gas is firming up for early January, while the PRC's non-performing loan book (and associated fraud) hovers over Beijings banking sector like a wraith.

I guess quality corporate bonds are as good a place as any to park as we enter the New Year while I try to work out whether we're headed for inflation or deflation. For the time being I guess we should be preparing for the fact that we are experiencing a recessionary environment within a longer term depression. The emphasis on cash rich , blue chip, well managed companies seems to be coming right at last.

From the weekend press.

Bradford and Bingley, the British mortgage bank, reported that at the end of June 40% of its mortgage book was in negative equity . This number was up from 30% recorded at the end of 2008. Customers who were more than 3 months behind in payments rose to 5.88% of the book from 4.6% at year end.

15.2 million US mortgages (32.2% of all mortgaged properties) were in negative equity as of June 30th. In Nevada 2/3rds of all home owners are in negative equity.

Hotels have enjoyed a summer surge in occupancy rates- they rose as high as 67% in late July. Now the peak summer travel season is ending a bleak Fall season beckons. Revenue per available room in the US is running at a level some 16% below last years already weak levels. Business travel is down much more sharply than leisure travel which doesn't auger well.The 3rd and 4th quarter numbers are likely to be pretty dire.

Some good news. Capacity utilization rates for US industry rose 0.5% in July to 68.5% a level nearly 12.5% below the 1972-2008 average.