When we said that the stock market was turning in mid March of this year, cries of "pollyanna" rang out. When we said that second quarter earnings were going to be better than expected --much better--cries of "you've got to be kidding me" landed all around us. It is now clear that the naysayers were wrong on both counts. I believe they were wrong because most people in and out of the investment business believe that whatever happens today is destined to happen forever. There are economic principles, however, that tell us that this linear thinking does not and has never worked. Investors simply mistake the power of the Federal Reserve over and over. If anyone doubts what I am saying all you have to do is to look at the Tech boom of the late 1990s to see the evidence of the Fed's power. Booms and bubbles do carry the seeds of their own destruction, but the Tech bubble was popped by the Fed and any serious student of the markets and the economy knows it. They popped the Tech bubble by slowly raising interest rates until the overall economy slowed. This ultimately took the wind out of the Tech stocks' sails as their quarter-over-quarter earnings growth stopped and their stock prices collapsed. The consensus of pundits are now saying that for a variety of reasons the economy and stock prices in 2010 and beyond will be sub-par. The biggest argument for this belief is that the US consumer is tapped out and are being forced to become savers instead of spenders. This may or may not be true, but I have learned over the years that the consensus is almost always wrong. Thus, in my mind that means that either there will be no growth in 2010 and beyond, or growth will be much higher than most investors now are thinking. Of these two scenarios, I land on the higher-than-average growth view. That would mean that economic growth in 2010 will exceed the 80-year average of 3% . If that is the case, stocks will grow much faster than the 10% estimates that I regularly see for the year ahead. But that's not all. We Americans have a lot of trouble understanding that we now represent only about a third of world GDP growth. Europe, on a GDP basis, is slightly greater in economic size than we are. Surprisingly several countries in Europe are reporting positive growth for this quarter, again, much better than expected. The other third of the world's economic growth comes from China, India and the other developing nations. The key thing here is China and India have cruised through this deep recession without ever reporting a negative quarter. S&P stated a few weeks ago that international sales of S&P 500 companies are now greater than 50% of total sales. The percentage of foreign earnings is even higher. Too many people have written off the US economy. I think they are wrong, and even if they are correct, foreign economies could lift S&P 500 company earnings to levels much higher than are now being forecast. My bottom line is that 2010 will be a much better year than most people think. There are many fundamental reaons for this belief, but the main reason I believe we are in for a surprise is because so many people are sure the economy will be lukewarm.
Friday, August 14, 2009
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2 comments:
If anyone was linear on earnings for 2qtr, it was the analysts. However, we are still talking about the "better than expected" game. I hate the game, not the player. If we simply look at the earnings, maybe operating were "b.t.e.",but GAAP were not. Revenues stunk up the joint. Financials made their nut on trading, not core business--or by selling their Visa or Mastercard shares...
Regardless, from a behavioral standpoint, the market went up because we wanted the remedy the Fed and Treasury offered to work. We always want things to work--and more rapidly than they actually do. So we push things along and hope the economy eventually catches up with where the markets already it... When it doesn't, disappointment sets in and readjusts the market. This is simplistic psychology--it works whether we are talking about a market crisis/remedy or whether we are talking about a cancer/chemo remedy... The common denominator is the human reaction.
Now the reality--are you really standing there in Evansville and saying that the banks are well on their way to be ok? Haven't we just slapped some lipstick on those pigs and called them pretty? Really...
Cash for Clunkers is creating sales from atypical auto buyers and simply robbing future sales and book them now while using taxpayers dollars. A true inventory clearing event in autos can not happen because the government intervened in the natural course of bankruptcy...
There are many ingredients that are not in place for this to be a true recovery from recession. I highly suggest finding the Gluskin Scheff website and reading some Rosenberg economic insight. I would rather direct you there than to misquote.
If things were truly so good right now, why are foreclosures posted record numbers still (despite slowing somewhat in the "hot" states, they are now expanding in the "stable" states...) If things were so good, where is the consumer? If things were so good, why are there more and more banks with 5% or more of their loans non-performing? If things were so good, wouldn't banks be increasing their lending rather than constricting it for 5 months consecutively?
Some light will be shed when the Fed removes the patient from life support by October...a lot of their support programs will have tapered off. Will the market function without the artificial buyer of last resort?
It may just be me, but this seems like we were in a position where some tough and painful decisions had to be made, and instead we chose to not make them. We're curing the drunk with a drink in the morning...
Can the US market (the DOW) diverge from the US economy?
In looking back, in spite of many erudite tresties, the DOW and the GDP have had an excellent correlation over the years except in two periods when inflation was rampant.
The DOW and the GDP are in many ways in lockstep and it makes sense that they would be. Companies that are growing and selling goods and making money are the same companies that make up the DOW.
But can a market diverge from the underlying economy of home country and do well inspite of a deteriorating or stagnant economy?
In this case I would guess that if a company has a significant part of its sales and growth in a foreign country and if many companies also have a major portion of growth and sales in foreign markets then the DOW could reflect the success of these companies irregardless of the staus of the economy in the host country.
So in many respects I would have to agree with the author of the original post.
The earnings of the DOW companies could continue to accelerate due to foreign sales while the local economy remains far from robust.
With the current thinking in Washington and the growing concern for the dollar and all of the societal issues that are being surfaced and the failing infrastructure, the American consumer may be out of sorts at this time but will be increasingly replaced by others in the world. The companies, now mainly multinationals will still do well and as long as they remain DOW companies the market and the valuations should move higher.
Unfortunately many of these companies may already be looking overseas due to more lenient taxes, less intrusive government or many other reasons. When the markets move the companies generally follow.
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