What has changed fundamentally about the economy and prospects for growth in the last few weeks? NOTHING! The only thing that has changed is people are more optimistic and therefore bidding up stock prices. Just two months ago people were predicting Armageddon, and now everyone is ignoring all the negativity that is still out there. We went from too pessimistic two months ago to too optimistic.
Once again, all the early cyclical stocks (the growth stocks that thrive during economic expansion) were the leaders – technology, energy, commodities, and materials. The safe, defensive stocks (the ones that fare well during slowdowns) were the laggards – Coca Cola, McDonald’s, Altria, Pfizer, Proctor & Gamble, AT&T, and Wal-Mart. The market has this one wrong. I’m a buyer of these strong names on any further pullback.
Reality check – the worst is not behind us…
1) Alcoa: After hours the company announced it will lay off 13,500 workers (about 13%), reduce capital expenditures by 50%, cut metal production by 18%, and incur a $950 million restructuring charge.
2) Bank of America: Ken Lewis, the CEO, announced his company will not meet its 2008 profit forecast. Currently, the average estimate is 15 cents per share. This number is down from 69 cents per share just three months ago. Look for more loan loss provisions. BAC reports quarterly results January 20th.
3) Even Ben Bernanke and Co. believe the economy will sputter for some time. According to the FOMC minutes from Dec. 15-16, “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial.” Some Fed officials saw “the distinct possibility of a prolonged contraction.”
4) Mosaic, a fertilizer company and one of the hottest growth stocks in 2007 and early 2008, provided a pretty dismal outlook. Here’s a comment from the CEO:
“Toward the end of the quarter…worldwide crop nutrient sales activity dropped sharply, and it is expected to remain weak through at least the third quarter. Because of these conditions, we are reducing our production to manage excess inventories, reducing capital expenditures, and working to maintain financial strength and flexibility.”
Just like yesterday, the economic data was dismal, but nothing too surprising to move the markets significantly. The market mover will be Friday’s unemployment data, which is expected to be very poor.
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