Economic Data: Something Positive - For a Change

I am not sure the rhetoric surrounding the economy and financial markets can get any more negative than they are at the moment. It seems as though every talking head is piling on about the negative reverberations impacting markets and the economy. Even Jack Welch told the World Business Forum,

I now believe we are in for one hell of a deep downturn" and also stating the first quarter of 2009 will likely be brutal. (courtesy of Reuters).

Historically the news gets the most negative at market bottoms.

As I noted in a post on The DIV-Net site titled, Should You Stick With Stocks, Warren Buffett has an investment saying:

I will tell you how to become rich. … Be fearful when others are greedy. Be greedy when others are fearful.

So what do we hear Warren Buffett did? He invested $5 billion in Goldman Sachs (GS).

There are some positive economic data points in place at the moment. The Philadelphia Fed's Business Outlook Survey for September notes:

• The region’s manufacturing sector showed some signs of improvement this month, according to firms polled for the September Business Outlook Survey.
• The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from ‐12.7 in August to 3.8 this month (see chart below). This is the first positive reading for the index since last November.
• Demand for manufactured goods, as represented by the survey’s new orders index, improved significantly, increasing 18 points, to a positive reading of 5.6.

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 Source: Business Outlook Survey, Federal Reserve Bank of Philadelphia (PDF)

Additionally, the latest inventory to sales data (July 2008) notes historically low inventory levels relative to sales. When the economy picks up, the low level of inventory will necessitate a fairly quick increase in manufacturing in order to fill sales orders.

 

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Source: Federal Reserve Bank of St. Louis

Certainly, the Wall Street financial stress is problematic. I will be the first to admit, I wish the government did not need to provide a financial backstop to clear the current credit mess. However, I do not think we have a choice, and Congress knows it, so some plan will likely be passed. Let's only hope the government does not overplay its hand in gaining control of companies; thus, inhibiting the free market capitalistic system. Sure, regularity oversight, or lack there of, needs to be evaluated. Keep in mind it was the government that had sole oversight over Fannie and Freddie and what a mess that turned out to be.

There are some positive economic factors in place that could allow for a reasonable recovery with the passage of the bailout plan. Warren Buffett certainly sees there is a very high likelihood that a plan will be passed soon. And, what is Mr. Buffett doing? He is investing in this market.

Comments

[Pretzel Logic:]

"Historically the news gets the most negative at market bottoms."

Here's the problem with that statement: MOST is a relative term, and can only be judged in hindsight. The news was pretty negative earlier this year, but that wasn't bottom. It could get quite a bit more negative from here -- this may just be "more" negative than last month, but less negative than next month. In which case, next month would be the "most" negative so far. It's really hard to say when the news in this cycle will be the MOST negative; that point may be yet to come. Or... it may not. We won't know until we're a ways past this.

2008 Sep 25 05:37 AM

[Steven Hansen:]

if you offered me the same GS deal as warren buffett i would take it. because of the incentives offered it is not an endorsement of GS or the financial situation in general.

however, the philadelphia fed's business outlook survey for september shows surprising improvement. it is regional based and i hope the results are reflected throughout the usa.

2008 Sep 25 05:47 AM

[madasiwannabe:]

Buffett took advantage of a cash strapped, publicity ravaged company. Before the ink even dried, he already made 20% on his investment. I'm sure everyone wishes they had a couple billion handy to make that kind of return even once.

Even if this is the bottom, it's going to take a while to get nervous investors to put their money back in the pot, and it's going to take even longer for that investment to have any effect on Main St. We are looking at another year minimum before Joe six pack can start smiling again.

2008 Sep 25 07:07 AM