From: Asset Management Research Corp.
BEING STREET SMART
by Sy Harding
MY DOUBLE-DIP THEORY. Jan. 11, 2002.
In its current rally the stock market is anticipating economic recovery in the first or second quarter. I think that recovery is taking place and justifies the rally.
But the market may soon realize that it’s gone about as far as it can with this rally, perhaps too far, since the first stage of the economic recovery will likely result in only a fractional up-tick for a couple of quarters, followed by a second dip.
I warn of a double-dip because of the degree to which economic activity is being pulled from the future into the present to pull the country out of recession.
For instance, the government paid consumers an unprecedented tax rebate last summer, accompanied by encouragement that it be spent, presumably on items that would not ordinarily have been purchased until later. The Federal Reserve, in its efforts to halt the economic slowdown, has been encouraging a further debt binge by consumers to finance heavier spending, by lowering interest rates eleven times in 12 months, to levels not seen since the 1960s. In its stepped up concern about the economy since the events of September 11, the Bush Administration has taken steps to alleviate consumer guilt over piling on still more debt, by claiming it is our patriotic duty to spend.
Coupled with rebates and 0% financing, it’s not too surprising then that retail sales, auto sales, home sales, all came in far higher than estimates in October, November, and December. Consumers have indeed been doing some heavy lifting to bring the economy off its knees.
But being ignored are numbers like this week’s Consumer Credit Report, which showed consumer debt rose by a staggering 14.6% in November. Already at a record level, it was the biggest monthly rise since the Federal Reserve began tracking the data in 1943. And it came after debt levels posted a similar shocking rise in October.
The problem for the economy is if consumers are spending their borrowed future earnings now to such an unprecedented extent, where will the buying power come from later this year to even keep retail, auto, and home sales at current levels, let alone produce more growth. For example, I was planning on buying a digital camcorder and a new car later this year. But with the enticements, no doubt subconsciously also including the call for patriotic buying, I made the purchases in November. Multiply that by the millions who were obviously motivated to do the same and it’s easy enough to see why the economic slowdown showed signs of bottoming last quarter, and will probably have an uptick off that bottom this quarter.
But obviously, having already made the purchases I won’t be making them this summer as originally planned. Also multiply that by millions and you can see at least one reason why I expect a double-dip for the economy later this year.
Big-three automaker Ford seems to see it the same way, that current sales are being robbed from what would have been sales later in the year. It announced on Friday the need to cut its auto production from the current 5.7 million vehicles to just 4.8 million. It will close five plants, significantly downsize eleven others, and lay off 35,000 employees to accomplish that goal.
Another reason to expect only a brief, artificially boosted, economic recovery centers on worldwide economies, which are also in recession. Foreign governments have not taken unusual measures to bring quick resolutions, but seem more willing to let the cycle take its course. So international economies are almost sure to lag the initial recovery in the U.S. Why does that matter? For starters, foreign sales account for roughly 25% of the total sales of S&P 500 companies.
Meanwhile, corporate America is not going to pick up the slack if consumer spending falls off a cliff. The corporate world is burdened with its own record debt, as well as a huge overcapacity of tech equipment and idle factories. While consumers can be enticed to buy shiny new cars they may not need, corporations will not spend for more plant and equipment, no matter how low interest rates, or how patriotic it would be, when it already has so much idled. In fact their momentum is in the other direction, still closing plants and laying off workers.
What does it all mean for the stock market?
The S&P 500 is selling at a record 41 times its earnings, a Price/Earnings ratio that’s sure to worsen when 4th quarter earnings, expected to be down substantially, are reported over coming weeks. So the stock market is priced for perfection, for a return to sustained earnings growth, while the economy later this year quite likely will not allow that to happen.
In my forecast last year I told you the bear market that began in 2000 had unfinished business on the downside, to expect volatility in 2001 that would produce several opportunities for profits from both directions, and a new bear market low in the Oct-Nov time frame, which would be followed by a buy signal and significant rally off that low to end the year. Pretty close.
Given the odds the first uptick in economic activity will give way to a double dip, I expect 2002 will be yet another year of volatility in both directions, again culminating in a new bear market low, this time the final low, again in the Oct-Nov time frame, and again followed by a substantial rally to finish out the year.
Sy Harding is president of Asset Management Research Corp., 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.
streetsmartreport.com |
