Not a Time To Be Sanguine About The Economy (copied)
Market Not Discounting Bad News
Today’s market setback was probably a result of some natural profit taking abetted by Senator Jefford’s likely departure from the Republicans and the continuing weakness in the semiconductor industry. While the Sen. Jeffords switch does not effect the final floor vote it does change the committee chairmanships, and depending on the timing, could change the complexion of the Senate’s representation on the House-Senate conference committee deciding the income tax bill. Nevertheless we believe that the economy is still the key, and that it is deteriorating more rapidly than the consensus thinks.
A number of recent developments appear to be confirming our negative view of the economy. 1) Business confidence in Germany contracted sharply in April, falling to its lowest level in two years. Production is falling and consumers are feeling the impact of high energy prices and a weak Euro. Germany accounts for about one-third of the GDP of the ECU. 2) In the U.S., the Manpower Employment Index fell five points to +13, its weakest level since early 1994, and 12 points below last year’s record high. The survey found that employers are being very cautious about future hiring, indicating that the employment slowdown will continue with potential negative impact on consumer spending. 3) Chartered Semiconductor Manufacturing, a Singapore-based firm that is the world’s third largest chip manufacturer, slashed its revenue and earnings forecasts, blaming falling demand from its customers. They are now looking for second quarter sales to decline 48% from the first quarter, far worse than the earlier prediction of a 25% drop. 4) Industry-wide chip orders fell 41% from the previous month, and were 74% below the orders posted a year ago. The book-to-bill ratio plunged to 0.42, the lowest in 10 years. It’s true that things cannot get much worse, but that is not saying much. 5) U.S. auto sales are estimated to fall 6.8% this month with sales to business dropping while consumers are more constrained as a result of the weakening labor sector. The annual selling rate is estimated to fall to 15.7 million vehicles from 17.1 in May 2000. 6) The Mortgage Bankers Association mortgage application index fell 15% in the week ended May 18. The four-week moving index has now declined for five consecutive weeks. In addition the important refinancing (REFI) index dropped 20%, and has now declined in seven of the past eight weeks. 7) According to First Call second quarter earnings warnings are running 18% ahead of the first quarter at an equivalent date, while the increase for S&P 500 companies is 43%. Estimates overall continue to fall. 8) In its latest monthly report, the Bank of Japan said that industrial production was declining sharply, and they further lowered expectations for capital spending, corporate profits and household income.
We believe the above list paints a far more negative picture of the world economy than the stock market expects, and that the eventual impact will be severe.
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