Economic Mulligan!

Shanked one, hard left, into the bunker. Awful shot, simply embarrassing. Did anyone see? Does it matter? . . . Do over!

At least, that’s the message Mr. Market has told investors about the economy the past few weeks. What’s that you say? People didn’t shop, firms didn’t hire or buy capital goods during the war? Hey, I have an idea . . . Mulligan!

It now appears that the economy is getting a free pass, as the parade of mixed to poor economic numbers continues (Good GDP, bad Jobs). This raises some very interesting possibilities going forward:

First, the market may now be looking through the economic weakness, caused in some small part by pre-war jitters, and the war itself. If bottoms are made when the economic news is at its worst, than a recovery may be on its way. Hardly empirical evidence, but . . .

Second, there is a silver lining in that corporate earnings have, for the most part, beaten expectations. Yes, these were significantly lowered expectations, and yes, it’s noteworthy that increased cost cutting, rather than better revenues, deserves the credit. But Mr. Market will take good news when it can get it.

That still leaves the $64,000 question: When will corporate spending and hiring resume? A secondary issue remains: Will the consumer maintain their pace of consumption, or are they on the verge of a bout of “buyer’s fatigue”?

Without continued Consumer Spending AND an uptick in Corporate Spending & Hiring, there is no economic recovery. Period.

Which leads us back to where we began – the economy: It has less than 6 months to prove its mettle. How many years in a row can the forsooths erroneously predict a second half recovery? Will we still be hearing the same prattle 5 years from now? I half expect to read the following sentence in April 2008: “We are factoring in an uptick in corporate IT spending in Q4 ‘08”.

If the economic numbers fail to dramatically improve towards Summer’s end, there will be big, big trouble: The double dip theorists will come out in full force; October 03 earnings season threatens to be a fright; This will embolden valuation Bears, and allow Shorts to get more aggressive. This culminates in the Elliot-Wavers confidently predicting (again) the end of the world.

I give this scenario a 30% possibility. If it does play out, I suspect the Bulls will be in for some very nasty selling, as no one will want to hold equities heading into yet another ugly October. Forget the Hamptons, we will be soending this Summer cautiously watching for signs of economic improvement.

As for now, the market is consolidating its gains, and is overbought after the NDX and Nazz hit YTD highs. Expect any under-invested fund managers to put money to work on pullbacks, as we back and fill. As mentioned Monday, the path of least resistance remains upwards – for now.

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Quote: “If you have a garden and a library, you have everything you need.
Marcus Tullius Cicero, 106 – 43 BC

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