Revenue Growth: The Market's Next Catalyst 12 comments
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While I am calling for a short-term pullback, I am a long-term bull in equity markets globally and believe that we will not retest the lows in March.
To reiterate my case, I believe that:
- Emerging markets especially China, India and Brazil will fuel global recover in demand, they are still in "secular" (not cyclical) bull markets;
- We were pricing in a depression scenario at the March levels, and a depression is now out of the question; and
- Massive and concerted global stimulus efforts.
Of course, everybody is worrying about what exit strategy central banks like the US Fed will have to take with the massive amount of money-printing they have implemented. That is a valid concern, but when we are at the bottom of the cycle wherein interest rates are close to zero and economies are still fragile, I wouldn't worry too much about that.
So what will be the catalyst to fuel the next leg of the rally after the short-term correction? 2Q09 earnings were mostly positive (about 75% of companies beat estimates) since we were coming from a low base and through cost-cutting efforts. There was nothing to show in terms of revenue growth; in fact, overall sales growth was negative. But I believe that revenue growth, maybe by 4Q09 or early 2010, will be the catalyst for the "real bull move".
Below you see the inventory/sales ratio forecast provided by Financial Forecast Center (FFC). They actually provide free forecasts of various economic indicators and asset values for six months. Their latest update of the inventory/sales ratio was in April 2009. The ratio speaks for itself... it shows how much inventory businesses have to work off in this recession cycle.
As you see, FFC expected the ratio to peak at 1.47 and fall to about 1.3 by November, which should be the "lean" inventory level.
Below is the actual figures for inventory/sales ratio as of June 2009 (from census.gov), and you see that the actual figures are falling faster than expectations. The June ratio is already at 1.38 versus the expectations of 1.45.
Thus businesses might reach lean inventory levels sooner rather than later.
The sequential increase in retail and wholesale sales the past two months have been helping in lowering this ratio, with the manufacturing level sales still lagging but bottoming (+1.4% in June versus -0.8% in May. Click below image to enlarge.
What does this all mean? If inventories get down to a lean enough level soon, it will only take a small uptick in demand to get a recovery in orders across the supply chain. We could thus see revenue growth fueling earnings going forward, as opposed to cost-cutting measures only.
This revenue growth may come in 4Q09 or early 1H10. I believe this will fuel the next leg of the market rally.
Disclosure: Author has no long positions
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Out of whose question?
And I agree wholeheartedly. But be prepared to get slammed by the uber bears today.
Stand your ground and stick by your case. Its a good one.
Balance Sheets are so lean now a small uptick in demand will cause a small increase in revenue to explode to the bottom line. The hiring will come later and coupled with a housing comeback and loan ignition . . . the domino effect begins. Consumption gains speed. Inventories need to be replenished. Mfg jiggers back up. More hiring. All leads to more revenues. And so the upturn begins and hindsight is 20/20.
the inventory/sales ratio is computed by the census unadjusted for prices but adjusted for seasonality. please go to census.gov and read up on it. you are analyzing based on prices which is an entirely different thing that is not addressed by this data. if inventories (no of units, not prices) are lean then it will only take a small uptick in demand for them to place new orders. that was my main point:)
The charts and statistics you use are all over the internet and not new. What you don't tell us is where, specifically you see the rise in demand (don't say pent up) coming from.
Current spending is fueled by Govt stimulus, and can't be maintained in perpetuity. It needs to be replaced by other sectors. Tell us which these are and were the spending power is going to come from.
I await your reply.
thanks for your comment. I do agree with your points. I'm not saying it's a v-shaped recovery for the US... there will be a lot of headwinds. the consumer won't recover that easily. but you're seeing a lot of data starting to bottom like auto sales and housing starts. yes it will be choppy recovery, but the stock markets are forward looking and by the time you get all the data confirming that consumer spending has recovered, etc, bull markets are usually close to a year old. who knows where it will come from, more stimulus or simply people just getting "tired" of this recession. remember, savings rates are up and there are a lot of cash in the sidelines. the exact number is 25% are still in money market funds. i still think it will be a wall of worry for the us markets, but for the emerging markets I believe it's a secular bull. maybe this external demand will fuel manufacturing activity in the States. the reason why a lot of money managers and investors have been left behind in this rally because they wait for the tangible data to come out... but the market never waits... :)
2. The consumer in the US is still extremely brittle and gunshy. Unemployment is going to stay elevated for quite a while. Our incomes have stayed level for 20 years now. First the wife went to work to buy all our crap. Then our credit cards were maxed out to buy all our crap. Then our houses were overleveraged to buy all our crap. Now, the gov't is trying to deficit spend so we will buy more crap. Savings rates will stay high for quite awhile, and they should.
3. The emerging markets may increase demand for products, but what do we have to offer besides tech? Our manufacturing industries can't compete internationally anymore b/c of increased regulation and pay requirements.
4. It still has yet to be seen what our anti-business gov't is going to do. Taxes will have to increase next year with our incredible, mind boggling deficits.
5. Real estate hasn't bottomed. We still have the CRE, Alt-A, and ARM resets to go through.
You may be right with the emerging markets increasing demand, but it won't be anywhere near the amount of ridiculous spending that we as a nation have done over the last 20 years. Still a LOT of deleveraging to do, and our gov't is still trying to reinflate popped bubbles. Scary stuff!
On Aug 26 10:51 AM Terence Chan wrote:
> Alex,
>
> thanks for your comment. I do agree with your points. I'm not saying
> it's a v-shaped recovery for the US... there will be a lot of headwinds.
> the consumer won't recover that easily. but you're seeing a lot of
> data starting to bottom like auto sales and housing starts. yes it
> will be choppy recovery, but the stock markets are forward looking
> and by the time you get all the data confirming that consumer spending
> has recovered, etc, bull markets are usually close to a year old.
> who knows where it will come from, more stimulus or simply people
> just getting "tired" of this recession. remember, savings rates are
> up and there are a lot of cash in the sidelines. the exact number
> is 25% are still in money market funds. i still think it will be
> a wall of worry for the us markets, but for the emerging markets
> I believe it's a secular bull. maybe this external demand will fuel
> manufacturing activity in the States. the reason why a lot of money
> managers and investors have been left behind in this rally because
> they wait for the tangible data to come out... but the market never
> waits... :)
BTW, the high yield market is a better indicator of economic activity, and while it has come back from Armageddon levels, it is still telling us that we are in a recessionary environment and future growth of 0-1%.
On Aug 26 10:51 AM Terence Chan wrote:
> Alex,
>
> thanks for your comment. I do agree with your points. I'm not saying
> it's a v-shaped recovery for the US... there will be a lot of headwinds.
> the consumer won't recover that easily. but you're seeing a lot
> of data starting to bottom like auto sales and housing starts. yes
> it will be choppy recovery, but the stock markets are forward looking
> and by the time you get all the data confirming that consumer spending
> has recovered, etc, bull markets are usually close to a year old.
> who knows where it will come from, more stimulus or simply people
> just getting "tired" of this recession. remember, savings rates
> are up and there are a lot of cash in the sidelines. the exact number
> is 25% are still in money market funds. i still think it will be
> a wall of worry for the us markets, but for the emerging markets
> I believe it's a secular bull. maybe this external demand will fuel
> manufacturing activity in the States. the reason why a lot of money
> managers and investors have been left behind in this rally because
> they wait for the tangible data to come out... but the market never
> waits... :)
I don't want to give the impression that the recovery will be consumer-driven. In past expansions, the us economy was 70% consumer-driven, this number should be whittled down in the next cycle. the pressures on the consumer are many and long-drawn, but it still doesn't mean we aren't gonna get contribution from the consumer. According to BCA Research, there are 2 phases of consumer deleveraging that lead to recovery based on studies of past US and Europe boom/bust cycles. The first phase is where consumers cut back and boost savings rate by slashing spending. That is the recession phase. The second phase is when the consumer spending growth turns positive, albeit a bit below income growth. So the economic recovery will feel sub-par, but still a recovery. The jump in savings rate to 7% from 0% last year indicates that the consumer is in the transition to the second phase. The consumer recovery may be subdued or not feel much at all, but I think there are more surprises that people are not yet anticipating, given the number of bears here at Seeking Alpha. Anyways, let us let the stock market eventually tell us who is correct:) Remember that the stock market always moves before the concrete data. I respect your being an equity bear Alex!