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Unformatted text preview: Assignment #2 - Stock Valuation By Ricky Lam , Priscella Theppanya and Becky Tam Recommendation: HOLD Section I The U.S. will experience its most severe recession since WWII, much worse and longer and deeper than even the 1974-75 and 1980-82 recessions. The recession will continue until at least the end of 2009 for a cumulative GDP drop of over 4%. 1 The US consumer is shopped out saving less and debt burdened and now faltering: this will be the worst consumer recession in decades. The world economy will also experience a severe recession: output will sharply contract in the Eurozone, UK and the rest of Europe, in Canada, Japan, and Australia/New Zealand; there is also a risk of a hard landing in emerging market economies. The global recession will continue through most of 2009. Growth forecast further lowered to 1.4% in 2008, -0.7% in 2009 as households face depreciating real and financial assets and tighter financial conditions; need 1 Roubini, Nouriel <http://www.rgemonitor.com/roubini- monitor/254354/the_dismal_outlook_for_the_us_and_global_economy_and_the_financial_markets> substantially large recapitalization of the financial system to resume lending. 2 Growth will remain very weak in 2009 due to credit market strains, adjustments in the housing sector, weak fundamentals for household and business spending and substantial rise in unemployment rate with a slow pace of recovery. The unemployment rate rose from 6.1% to 6.5% (highest since 1994). According to the RGE Monitor, the unemployment rate forecast - Fed: 6.3-6.5% in 2008 and 7.1- 7.6% in 2009; Goldman: 9% by end-2009; Merrill: 8.6% by 2010; NABE: 7.5% by 2009- end; Bloomberg: 7.7% by 2009-end; Morgan Stanley: over 7% by mid-2009. 3 Intensifying job losses will put further pressure on consumer spending, raise mortgage, credit card and other debt defaults as households already face wealth loss from falling home values and volatile stock market. The advanced economies will face stag-deflation (stagnation/recession and deflation) rather than stagflation as slack in goods markets, slack in labor markets and slack in commodity markets will lead advanced economies inflation rates to become below 1% by 2009. According to Roubini, following a US hard landing and a global economic slowdown, the risks of outright deflation would be lower than in the 2001- 2003 episode because of various factors: US inflation starts higher than in 2001; the Fed needs to worry about a disorderly fall of the US dollar that may increase inflationary pressures; the rise and persistence of growth rates in Chindia and other emerging market economies implies that even if such economies likely recouple to the US hard landing 2 International Monetary Fund <http://www.iht.com/articles/2008/06/20/business/20imf.php> 3 Center for Economic and Policy Research (CEPR) < http://www.cepr.net/index.php/publications/reports/what-were-in-for-projected-economic-impact-of-the-next- recession/> a global growth slowdown will not turn into an outright global recession that would be...
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