Monday, June 29, 2009
The stock markets and many other markets, as well, appear to be waiting for new news to give them direction. Most investors are now looking for a very gradual uptick in the economy in the third quarter, as well as modestly better housing news, and fewer nerve wrenching headlines from the banking sector. Yet, even though things are "less bad" now, few strategists are able to find many of the green shoots that Chairman Bernanke speaks of sprouting leaves. In our investment meeting this morning, we went over the news of the day and the most recent economic data, and we find that our views are essentially those of the consensus except in one area -- earnings. We believe corporate earnings in the second quarter will be better than expected. To you old pros that is like saying nothing because quarterly reported earnings are almost always better than expected. That is the game that corporate America plays: beat the consensus earnings estimates by a penny or so. However, we think this quarter may show more corporations beating earnings estimates more than usual. Three of our four portfolio managers have run large organizations in their previous careers. They all agree that the revolution in corporate management tools of the last 25 years has given top management a much wider field of vision in terms of input needs and utilization. Enterprise Resource Planning (ERP) software, Just-in-time inventory management processes, and new more flexible labor arrangements have all come together to enable the top management of most companies to "right size" employment and inventory. In our view, this right sizing translates into a much higher probability that companies can price right, and by extension price profitably. We believe these smarter and more flexible management tools will begin to reveal themselves in the upcoming second quarter earnings results. Having said this, strap yourselves in; even good earnings news will send stocks gyrating.