Politicians can always be expected to do the right thing…after all other options have been exhausted! –Winston Churchill
That is one of my favorite historical quotes, albeit altered slightly. How true it seems. Democracy can be surly at times. The good news is that the debt crisis debate is forcing us to address some of the nation’s long term problems.
However, once a deal is done, and worry not, there will be one, the market will celebrate the great earnings we’ve seen from most companies. As I have expected, earnings have been great and are now at record highs, yet stock prices are still trading some 15% below old 2007 highs. That fact, along with the intense bearishness among investors, will support the market even in the face of a weakening economy.
Much of the growth in our economy is coming from an expansion of inventories rather than from demand. Domestic final sales which remove inventories, exports and imports, rose at an annualized pace of just ½% in April-June. However, business inventories climbed 1 percent in both April and May, according to Commerce Department figures released on July 14th. The rise brought the stockpile-to-sales ratio to 1.28 months, the most this year, from 1.27 months in April. To make matters worse, manufacturing companies reported that their stocks of unsold goods expanded further in June. Its inventories index came in at 54.1 last month, up from 48.7 in May. Readings over 42.7 show stockpiles are increasing. Given that demographic trends and an over tapped consumer cannot possibly create meaningful demand, the economy has no chance of a sustainable recovery until the next generation of spenders comes along.
At some point, the worsening economy will intersect with earnings and stocks, but not yet. Until then, we will continue to see a continuation of QE-Mini-Me, which will keep the economy out of another recession.
In the big picture, the stimulus is wearing off and the economy is slowing. “Imagine that!” That’s me being facetious, as I have been saying this all along. It’s also exactly what I discuss, along with where our economy is headed in my exciting new book – Facing Goliath: How to Triumph in the Dangerous Market Ahead. Just this week Goldman Sachs, JPMorgan Chase & Co. and Bank of America- Merrill Lynch lowered their growth estimates to (NYSEMKT:GDP) 2.5%, down from earlier projections of as much as 3.25%. This will certainly keep pressure on Bernanke and the Federal Reserve to hold interest rates near zero and keep up QE Mini-me. As we go, the other stimulus measure will also fail too and they will come along with a QE3, especially as we get close to the election.
This doesn’t mean that there will not be good opportunities. There certainly will be, it’s just going to be very tricky and increasingly dangerous.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.