I have been blogging a little less frequently in recent weeks. Things have been busy (in a good way) and I simply haven’t had the time to comment as often as I’d like or as I’ve done in the past. If my blogs are a bit longer than usual, it’s because I may be trying to digest and relay my thoughts on a weeks worth of news.
Now that there is an absence of earnings announcements, macroeconomic data has come front and center as the driving short term influencer of stock markets around the world. On this front, the news continues to be both good and not as good, but on balance, much better than it had been a year ago. Shanghai’s 20% stock price decline into bear market territory has increased everyone’s anxiety levels this week, but perhaps it would also make sense to point out that their primary index had more than doubled off its November lows.
Bears point to the death of the consumer and low quality earnings gains driven by unsustainable cost cutting as reasons to remain negative and to expect a double dip. While both of these concerns are valid in the short run, I would also point out that most economic recoveries begin in this fashion. In fact, a rebound in consumer spending often lags an uptick in corporate and government expenditures, which often recover first. On the earnings comments, bears are also likely missing the point that the path of lower costs naturally precedes a turn in revenues and so far we’ve had just that, a superb job in expense management efforts. Productivity growth has been stellar in recent government reports, suggesting that the cost cuts may prove more than temporary, providing greater operating leverage in the future even if there is only a small uptick in demand. This pattern of improving productivity growth is, once again, common in recoveries.
Most folks views of the world are colored by personal experience. If you don’t have health care and want it, you might like the idea of a government run plan. If you do have a health plan and like it, you might look at a larger role for government with suspicious eyes. A few business owners I talk to remain very bearish about trends in their own industries, while others are seeing signs of life. I sense that their personal views of the economy at large are often colored by what they are seeing in their own businesses. This is, no doubt, natural, but might not always provide a good picture of the broader investment environment.
On balance, I’m still hearing more folks talk more optimistically about the future than they were in the recent past. One business owner has been asked by his customers whether he will be capable of meeting a significant up tick in orders. My neighbor who is a trucker of sorts (he drives large cargo vans) had no business six months ago, but now he and his coworkers are having a hard time keeping up with demand. “If what we’re seeing is an indication of the future, than maybe it’s not so bad,” he told my wife. Another business owner is far less optimistic, having seen no change in demand, with no bottom in sight. Again, there are stories on both sides, but as I balance them out personally, my bet is that the future for the economy as a whole gets brighter from here rather than worse.
On the credit side, banks are still slow to extend new loans even though refinancings are up considerably. On the other hand, the corporate debt market has been extraordinarily strong in recent months, both from an investor demand side and a corporate supply side. As we know from most earnings reports, many companies are generating strong free cash flow – often greater than reported earnings – as they’ve reduced inventories and other working capital. As these cash balances improve and as corporate debt offerings flourish, liquidity improves in the economy. Eventually the banks will heal and make more loans, but in the meantime, alternative sources of debt financing appear to be picking up some of the slack.
I haven’t been quite as worried or alarmist about what is happening in Washington as many of my conservative friends have been, simply because history has taught me not to have too much faith in what government can do or hope to do, especially for controversial issues. Our Constitution was superbly written with so many checks and balances that progress (or those who see the same issues as regress) rarely moves very fast. I think it is far more important to watch what our leaders actually do rather than what they say. Oddly enough, for all the talk about the stimulus plans of the last year, I’ve heard that perhaps as little as 10% of it has actually been spent.
From my vantage point, there seems to be two kinds of investors these days. One sees an S&P 500 that is up 50% from its March lows as a reason to be very concerned. The other sees an S&P 500 that is up 10% year to date – an average year by historical standards – and thinks there could be more to come – especially in an economic recovery. Like many things, both see the same truth, but through different colored lenses.
Where do you stand?
