Tuesday, September 15, 2009

A Light at the End of the Tunnel.........?

Long time readers know I have expected a retest of the March lows. While the stock market has remained strong during the traditional September/October correction . . . so far, . . . I’m still worried. The Great Recession did a great deal of damage, unemployment will come down very slowly, and the economy must become more export oriented and less consumption oriented. That takes time. The lows of the Great Depression came about fifteen months after the Crash of ’29.

Now, it could be the lows of the Great Recession came in March of 2009, only six months after the crash in September of 2008. I hope so . . .

Another factor arguing that the worst is past us is the inventory cycle. Inventory levels have fallen a record eleven straight months. At some point, inventories must be rebuilt. At that point, the economic recovery will begin. I hope so . . .

Lastly, the continuing decline in the dollar will accelerate our transition from a consumption oriented economy to a more export oriented one. I hope so . . .

Tuesday, September 8, 2009

Take a side!

Economists and securities analysts usually work together well. Sometimes, when they do disagree, it is more apparent than real. The current disagreement is such a case. Economists remain glum, while analysts are giddy. Why? Because U.S. economists have a consensus forecast of a 2.4% growth rate next year, while analysts expect earnings of the S&P 500 to increase 25%. How can there be such a difference? Two reasons: First, the S&P contains the 500 largest U.S. companies, and they disproportionately benefit from international growth. Their growth is not limited to the U.S. Second, the earnings growth we have seen this year has been from cutting expenses, not revenue growth in a shrinking economy. That means their earnings per share are “spring-loaded” to jump as soon as revenue increases drop straight to the bottom.

So, who’s right? I hope they both are!