Market Hazards on the Horizon

by: Barry Ritholtz

It invariably happens that after the linkfest goes up, I discover a killer article that would have been perfect. This piece from the L.A. Times' Tom Petruno is just such a column.

Petruno identifies three potential issues the markets may have to surpass in the next few quarters: Consumer Spending, Corporate Earnings, and the Declining Dollar.

Here's a quick look at the big three threats:

U.S. consumer spending dives. Perhaps the surest ticket to a bear market in stocks would be for Americans to close their wallets — either because they're spent out or because they're nervous about their finances or their job outlook.

This is so obvious that it might well be overlooked as a risk. Investors have no recent experience with a consumer-led recession. The last one was 17 years ago, in 1990. The 2001 recession, by contrast, was led by a plunge in business outlays.

Corporate earnings shrink. Wall Street is fully expecting a slowdown in profit growth this year with a weaker domestic economy. But an outright decline in earnings might be a shock investors couldn't handle.

Bad news: The margin of safety is dwindling. Total operating earnings of the Standard & Poor's 500 companies are expected to rise a mere 4.3% this quarter from a year earlier, according to analyst estimates tracked by Thomson Financial. That would be less than half the pace of the fourth quarter and the slowest growth in nearly five years.

The dollar's value tanks. The U.S. economy has been built on foreign money over the last two decades. Massive inflows of capital from overseas have been needed to cover the nation's trade and budget deficits. Other countries' saving underwrites our spending.

What would happen if foreigners lost their appetite for U.S. assets? Granted, that question has been asked so many times since 1990 that Wall Street is downright bored with it. Which means that a dollar crisis would be exactly the kind of thing to catch most investors by surprise. A fast slide in the buck could be a sign that the allure of U.S. investments is fading with foreigners.

That's the overview; the whole column is definitely worth a read . . .

Graphic courtesy of LATimes

Hazards ahead as a new quarter starts
Investors seem to have gotten over the mortgage scare, but more challenges loom.
Tom Petruno:
L.A. Times, Market Beat
March 25 2007,1,624538,full.column?