No replies to this topic

[TTHQ Staff]

BEING STREET SMART
____________________

Sy Harding

CONFUSION REIGNS. May 13, 2005.

Feeling confused about the economy going forward, the stock market, interest rates? Apparently so are economists, money managers, and corporations.

Three weeks ago a well known investment bank optimistically projected the economy (Gross Domestic Product, or GDP), which grew 4.4% in 2004, would grow at an annualized rate of 4.3% in the current (2nd) quarter of this year. Two weeks ago, after a few weak economic numbers were released, the same investment bank dropped its projection to a measly 3.2% growth rate. This week, after strong jobs and retail sales reports, the same investment bank raised its forecast back up to 3.8%. Skittish? Confused?

Corporations seem just as confused about their own business areas.

In the tech sector, IBM disappointed investors with 1st quarter earnings that fell short of estimates, and an announcement that it would lay off up to 13,000 employees. Sun Microsystems, and Unisys, which also make and service large computer systems, reported disappointing earnings and softening sales. Software giants Siebel Systems, BMC Software, and Borland Software, reported disappointing 1st quarters, and said they are also finding it increasingly difficult to sell their products and services to their corporate customers.

On the bright side, Apple Computer reported record 1st quarter earnings, but then even it said its revenue growth going forward is likely to slow, a warning that caused its stock to plunge 9% the following day, and carried the rest of the market, particularly the tech sector, down with it.

Yet Microsoft and Cisco Systems issued upbeat forecasts this week. And after the close on Thursday of this week, Dell Computer reported its earnings soared 28% in the first quarter, and it issued an optimistic outlook, saying the PC market “is not as robust as last year, but is still very, very healthy.”

If corporations can’t agree on whether their business sector is heading up or down, how can investors not be confused?

In the retail sector, WalMart, the world’s largest retailer, reported disappointing earnings for the 1st quarter, and issued a warning that the current quarter will also probably fall short of expectations. The following day the Commerce Department reported retail sales rose 1.4% in April, versus forecasts that they would rise only 0.8%. Conflicting signals?

A couple of weeks ago the price of crude oil reached $58 a barrel. Crude oil analysts at investment banks and commodity trading firms were quick to predict that the trend was obviously to the upside. One prominent investment bank issued a widely publicized forecast that crude would reach $105 a barrel. Instead, crude immediately headed lower, and broke below $50, prompting the consensus projection to reverse and call for $40 oil.

Short-term traders, and the large program-trading firms, jump in trying to make a quick profit on each announcement as it is released. The result is that the market continues its day-to-day whipsawing ways, producing triple-digit plunges when a high-profile company issues a disappointing report or forecast, and triple-digit one-day gains in response to the more optimistic reports. However, with bad news outweighing good news, the overall trend has been down. The S&P 500 is now 6% below its March peak, and the Nasdaq now down more than 9% for the year so far.



Meanwhile, it seemed that a warning bell was rung this week regarding credit-risk, with Standard & Poor’s down-grade of General Motors, Ford, and Honeywell debt to “junk” status. Especially so, with consumers head over heels in debt in the form of credit-card and variable-rate mortgages, and bonds and other interest rate sensitive investments still attracting a lot of new money.

Yet, in spite of that bell being rung, and growing inflationary pressures that have the Fed likely to become more aggressive rather than less aggressive, in raising interest rates, still more money flowed into bonds, pushing long-term rates down. Confusing? Even the Federal Reserve thinks so.

In a May survey of economists conducted by the Wall Street Journal, the consensus was that the economy entered a “soft patch” early this year that will continue to mid-year. A third of those surveyed said that rising inflation poses the greatest peril to the economy.

That assessment is difficult to dispute.

Inflation is out of the bottle. Even that most benign of inflation measurements, the Consumer Price Index, which showed inflation to be rising at just a 1.6% rate in 2001, rose to 2.4% in 2002, and by 2004 had more than doubled to 3.3%. That was enough to prompt the Federal Reserve to begin raising interest rates last June (2004), in an effort to bring inflationary pressures back under control. However, its series of eight rate hikes so far have not even made a dent. CPI spiked up to a 4.4% annualized rate in the first quarter of this year.

So, there may be confusion in the day-to-day reports, and even in the outlook of corporations. But the overall trend of rising inflation and rising interest rates seems unconfused and relentless, as are the signs that the Fed is behind the curve and becoming more so.

Meanwhile, the stock market is now in its unfavorable seasonal period. ‘nuff said.



Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.