Durable goods orders surged 5.2% in December. While this economic release is notoriously volatile on a month to month basis, the magnitude of the current results supports the view that the recession in the housing and financial services industries hasn’t spread to the economy at large.
We are also entering the thick of earnings season, with this week and next week representing the peak periods. With the exception of financial, results have continued to be on the positive side and like the durable goods report, are not indicative of an economy in recession. Burlington Northern, a railroad company, reported results this morning that were ahead of expectations both on the top line and bottom line. Their guidance, like most companies, was for moderating growth, but not of the recession variety.
Like Apple last week, VMWare’s stock is getting hit today not because they’re seeing a recessionary environment, but because their first forecast as a public company wasn’t as rosy as the street had been modeling. After reporting year over year earnings gains of 80-90%, the company provided an initial 2008 growth forecast of 50%, which was a tad shy of the 57% consensus analysts had been modeling of their own accord. Again, there is nothing in this guidance that suggests an economy in a recession or a company in fundamental trouble, but expectations that were merely ahead of themselves. (As an aside, we believe it is important that investors not summarily dismiss some of the most promising growth companies from their portfolios on the valuation argument alone, but manage their exposures by paying attention to their portfolio as a whole. Those that want proof that “cheap” stocks can get cheaper, need only look at what’s happened to the stocks of many in the banking and housing sectors in recent quarters.)
The Fed’s decision tomorrow about additional rate cuts will likely be a short term trend changer for the markets, just as it has been with each of their decisions since August. While we believe the Fed should cut 50 basis points, there is the possibility – given more favorable earnings reports, today’s durable goods statistics and recent unemployment claims – that they only do 25 basis points. Anything less than 50 would likely be a major disappointment to the market, while 50 would be met with further encouragement that the Fed remains aware of the market’s fragile situation. At this stage, 50 basis points may not be necessary given the aforementioned fundamentals, but would represent a well spent insurance policy against any additional unforeseen weaknesses in the credit markets.
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