By: Wanna Otelma on Venerdì 18 Ottobre 2002 15:13
Stock:
Telecom Italia Mobile
Seven Reasons for Optimism
17-Oct-02 10:44 ET
[BRIEFING.COM - Robert Walberg] After yesterday's sizable Intel-related decline, you could almost hear market bulls sighing, "not again." Such an outcry would be understandable given the numerous false starts and head fakes over the past three years. While Briefing.com isn't at all certain that the lows hit in early October are actually the lows, we do believe that there are several reasons for investors to start being more optimistic about the year ahead. Listed below are seven of these reasons:
Economic Gap: Briefing.com maintains that there is a significant gap between the economic reality and the market's perception. Seems like every time we get one or two pieces of softer-than-expected economic data, investors and the financial media start talking about a double-dip. But in totality the data continue to show an economy growing at a pedestrian, but relatively healthy, 2%-3%. Growth that a decade ago was considered normal to strong. Increased productivity, high levels of employment, rising personal income and low rates all point to continued growth. Until business investment begins to pick up that growth will also continue to be moderate in nature - at least when viewed against the late-90s.
Consumer Alive & Well: One reason Briefing.com remains relatively upbeat on the economy is that we see little change in consumer spending, which accounts for about 2/3 of GDP. There are many on Wall Street right now who believe that the consumer is tapped out and fearful. We don't see it. What we see is consumers taking advantage of historically low interest rates and incredible incentives to buy big ticket items like real estate and automobiles. As the buying binge in these areas dies down, which it is beginning to already, we should see buying on smaller ticket items increase. Given the low unemployment rate, upward trend in personal income and the recent surge in refinancings, there's just no reason to think that consumers will go into hibernation for any length of time.
Corporate Belt Tightening: It took a while for corporate America to understand the depth of the slowdown - particularly in business investment. However, over the past year businesses have been very aggressive in their cost cutting efforts. The end result is that corporate America is running very lean right now. Consequently, the magnitude of the eventual earnings recovery is likely to be much greater than most investors/analysts expect.
Earnings Rebound: If there is one thing that really disappointed investors earlier this year it was the lack of a meaningful earnings rebound. It seems like every quarter, the earnings recovery gets pushed out another six months. This quarter is likely to be no different, as most companies suggest limited visibility for the foreseeable future. However, it is important to note that much of the market's viewpoint in earnings is being colored by the miserable performance in the technology sector. While the struggles of the tech sector have grabbed the headlines over the past couple of years, the underlying truth is that corporate earnings are on the rise, albeit slowly. Corporate profits have risen for two straight quarters and it looks like we'll make it three in a row this quarter. Gains have been very small, but the trend is definitely up. Now with corporations working hard to improve operating margins, once demand truly begins to accelerate the growth in earnings will explode. We're not there yet, and probably won't see such a development until the middle of next year (at the earliest), but don't let the problems of one or two sectors overshadow the fact that the earnings picture is improving.
Bye Bye Saddam: Might not happen this month or next, but by the first quarter of next year the market will know the outcome of the crisis between the US and Iraq. Either the US will have carried out its threat to remove Saddam Hussein from power, or it will have succumbed to the pressure of world opinion. Considering President Bush's speech to the UN several weeks ago, we see little reason to think the Administration is going to back down. The questions then are how long will the military effort last, and what will be the human and economic cost of such an engagement. The market should have its answer to these questions within days of the conflict's start. And once the uncertainties have been replaced by answers, traders will breath a considerable sigh of relief as this barrier to higher equity prices is finally removed. Won't hurt domestic or world economy to see oil prices come down between $7-$10 per barrel as well.
Old Age: If you're sick and tired of the bear market it's understandable. At well over 900 days long, this is the longest bear market in history. Now it's possible that we will extend the record downturn for another 10, 30, or even 50 days, but given the duration and scope of the retreat Briefing.com contends that if we haven't bottomed already, the end is very nearby. Assuming we are correct, investors will also be pleased to know that the gains in the first year after a major bear market are traditionally very strong.
Back to the Average: At its most recent low, the divergence between the DJIA and its long-term 200-day moving average was the widest it had been in years. The same could be said about the gap between the 50- and 200-day moving averages. What this tells us is that the market is deeply oversold. In fact, the oversold technical tone is the biggest factor behind the market's recent push higher. Despite the gains, we have a long way to go to get back to the 200-day moving average. Simply by returning to its 200-day moving average - something which is common even during down markets - the DJIA would tack on another 1160 points, or 14%.