The issue facing investment managers is whether the economy is hitting what Dallas Fed President Richard Fisher calls "cruising altitude and speed" and we call The Glide Path (negatively cited by many as a "soft landing") or whether there is an imminent recession.
Those who hold a the former view should be expecting the Fed's target of below trend growth to be achieved. This means an ISM index in the mid to high forties, unemployment moving back up to 5%, and corporate profits growing at a healthy rate, but not the double-digit rates of the last three years. It means an acceptance of weakness in housing and autos, with the expectation that these impacts have some reasonable limit and other parts of the economy will pick up slack.
Data consistent with this view should be described as NORMAL. What else would we expect?
We can always count on Barry Ritholtz to summarize the economic data and add his comments. He clearly has the pulse of the market for this week, since economically sensitive stocks are being sold hard. Please take a look at his summary, which reflects what many are thinking.
His conclusion from today's data is as follows:
"Is this what a soft landing looks like? (We think not)
The slow motion slow down continues . . ."
On the contrary, we believe that this is EXACTLY what hitting the glide path looks like. I wonder what Barry sees as the distinction between a planned economic slow down and a "slow motion slow down." Readers may also wish to take a look at similar comments at The Learning Curve.
For a good contrast to the prevailing view, here is a quotation from David Malpass, Chief Global Economist at Bear Stearns. Regular readers of "A Dash" know that we respect Malpass as having had the best read on the economy for a multi-year period. Here is part of what he wrote tonight. (For the full report, see your Bear representative -- and you should have one.)
"We’re expecting 2.4% GDP growth for the fourth quarter. The bottom for the 2006 slowdown was probably the 2% growth in the third quarter. If so, we think it’s not weak enough to be called a “soft landing.” It’s a “slowdown related to housing and autos.” This leaves open whether there will be “no landing” (if growth remains solid in 2007) or a “late landing” in which growth slows substantially late in 2007 after the Fed takes the punch bowl away in response to another upturn in core inflation."
Malpass has earned some respect for his forecasts. So has the ECRI, which does not see a recession in the next year.
So what of today's data? If Barry were to do some of his trademark parsing of the numbers, he might have concluded the following:
- Company reports. Many of the reporting companies have current earnings that are solid. Their experience is a coincident indicator, not a leading indicator. Most of them say this, sometimes in response to questions, in the conference calls. In the Sarbannes-Oxley era companies do not hype forecasts the way they did in 1999. Many of their projections are drawn from reading the Wall Street Journal and following the general trend of stories on housing and autos. There is a negative cycle about this, because the market takes this conservatism as fresh information. The stocks sell off and then hedge fund managers and technicians read the "message of the market."
- Philly Fed. It was down a little, suggesting a weak ISM number on January 2nd. We have repeatedly warned that contraction in manufacturing is normal and consistent with GDP growth of 2% or higher. Meanwhile, there is a better way to look at the Philly Fed report, explained in the excellent Briefing.com service. You need the paid membership to see the entire analysis, but the point is that the headline number is based upon only one of several questions. If one looks at components, it is a better predictor of the ISM report and the overall trend. Taking this approach, what they call the "ISM basis" the data sequence for August through today's report is as follows: 56.4, 50.2 53.6, 50.9 and today's reading of 52.3. In short, it is actually a small uptick, and certainly not alarming.
- Housing and copper (which tracks housing and is affected by Chilean supply). Old news. While I prefer data to anecdotes, I might mention that a good local source tells me that his company, which does high-end residential construction in the Chicago suburbs, is hiring workers after a two-month pause. They are also seeking fresh building permits.
- Retail. Who knows? Surveys show positive results. Scott Rothbort's Seton Hall students did a NY area survey with positive findings. CNBC, which shamelessly ripped off the Seton Hall approach, has also reported a solid increase this year. Barry has some shopping anecdotes, and he carefully cautions that they are not a real sample. Meanwhile, my hair stylist said tonight that her customers tell her they have not even started shopping yet. Traffic around our mall was heavy. I start shopping this weekend. Let's wait for some real data!
This leaves us with an important question: How does one make money from this situation?
If we are in the 4th or 5th inning of an economic expansion, there are plenty of stocks that represent great value. Meanwhile, if traders and hedge fund managers holding the marginal dollar are going to sell any stock where the company does not give a rosy economic outlook, it may take some time to play out.