One of the keys to investing is maintaining intellectual flexibility. It tends to be a money losing strategy to marry any one idea or philosophy. As market forecasters, it’s our goal to remain “ideologically agnostic.” That doesn’t mean we are neutral or lacking in viewpoints; Long time readers know that we are all too opinionated. Rather, it is a recognition that we should be ready to toss aside any of our beliefs — when the evidence warrants.
What point of views are we waiting to be proven wrong on?
1. Retail Sales: Our expectations were for a holiday season that would be a modest improvement over last year, with high-end luxury goods sellers doing extremely well, while discounters such as Wal-Mart and Target muddled by. E-tailing continues to grow at a double digit pace.
This dichotomy primarily reflects the way the benefits of 2003’s tax cut fell, as well as the energy cost squeeze on consumers. Into 2005, we are concerned that Real Estate’s macro stimulus – including home purchases, refinancings, renovations and durable goods – is starting to show signs of fatigue. That’s been a terrific spur to consumer spending.
2. Earnings: Reporting season starts in earnest this week, and we will be listening closely to what CEOs say. It’s been our belief that earnings gains have come not from an uptick in end user demand, but rather from everything else: Productivity improvements, debt refinancing, accelerated depreciation benefits, tax cuts, layoffs, currency rates.
We will be listening to what executives will be saying about Hiring and Capex. It bodes well for the economy’s continued expansion if we hear of plans for increased hiring, wages, or capital expenditures. The biggest risk to the recovery, in our view, has been the lack of organic job and wage growth.
3. Margin Squeeze: Commodity prices have been rising steadily for the past 24 months, yet many manufacturers find themselves unable to pass along these price increases. This is especially true if they have a price sensitive consumer base already squeezed by increased energy costs. This will start biting into earnings.
4. Market Internals: Despite all of these economic boogiemen, we remain upbeat on equities, at least for the first half of ’05. That’s primarily due to the healthy market internals and overall uptrend stocks have enjoyed since March 2003.
We remain short term Bullish (i.e., mid -2005), until the data reveals its time to start aiming in the opposite direction.