Wall Street Still Doesn't Get It

|
 |  Includes: DIA, IVV, SPY
by: Michael Panzner

It's ironic. In a week where Wall Street finally figured out that something is wrong, they still haven't gotten it right.

Following the recent run-up in long-term interest rates, many so-called professionals are now saying that the problem is too much growth. Hogwash. In reality, it's the fact that formerly limitless liquidity, which has driven a vast array of asset markets to unsustainably bubble-esque heights, is starting to dry up. Among the factors: an apparent buyer's strike by foreign investors in U.S. bonds, tightening lending standards in the wake of the U.S. subprime finance sector meltdown -- I thought that little hiccup was supposed to be "contained"? -- and firmer monetary policies in nations around the world.

The U.S. economy, on the other hand, is actually decelerating, as recent gross domestic product, housing, retail sales, and other data seem to indicate. And once again, it is the group of numerate individuals who don't usually have their heads buried in the sand (or somewhere else), poring over hard numbers gathered at the economic front-lines, who see the harsh reality of what is really going on, as this report from Reuters, "CFOs Turn Pessimistic on US Economy: Survey," makes clear.

Chief financial officers at American companies have turned pessimistic on US economic prospects, a survey released Thursday showed.

The survey, compiled by Duke University, the Netherlands' Erasmus University, the CFO Business Outlook found US finance executives see "slow growth" in corporate earnings and are "very concerned" about rising labor costs and weak consumer demand.

A majority of finance heads who responded to the poll said they expect merger-and-acquisition dealmaking to remain robust for the next year, but that such deals will then slow as private equity groups will have pushed the price of acquisition targets up too high.

"With pessimists outnumbering optimists, the prospects for the US economy are poor," said John Graham, the survey director and a Duke finance professor.

The survey was released after the world's largest economy slowed to a crawl during the first quarter, or a 0.6 percent annualized pace amid a lingering housing market downturn.

The poll found that only 26 percent of CFOs are more optimistic about the US economy than they were in the first quarter, down from 35 percent in the prior March survey. Thirty percent are more pessimistic.

The survey's CFO optimism index meanwhile neared a five-year low.

"The main reason that CFOs cite for their reduced economic optimism are increased fuel inflation and slowing consumer demand, driven in part by a weak housing market," Graham said of the survey's US results.

Hard-pressed homeowners are also being buffeted by spiking gasoline prices with economists keeping a close watch on retail sales to see if consumer spending takes a hit.

The outlook across the Atlantic was more upbeat among European chief financial officers.

Forty-one percent of European CFOs were optimistic about their countries economic fortunes compared with 48 percent in the prior quarter.

American finance chiefs said mergers and acquisition activity would likely remain hot in the service, healthcare and technology industries for some time to come.

Corporate earnings are predicted to remain modest.

"The CFOs see a toxic cocktail that includes slashed advertising spending, a sharp slowdown in tech spending and the most lethargic growth in employment in four years," added Duke professor Campbell Harvey, who founded the survey.

Hmm. Rising interest rates, a slowing economy, and a pessimistic outlook by many in corporate America. I'm willing to wager that some bullish equity traders will soon be saying: "What the @#$#& was I thinking?"