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VERSACE: Recovery may be W-shaped
The last few days have been interesting to watch in the stock market. On the one hand, several companies are issuing positive commentaries about their outlooks, but at the same time some fresh economic data have dashed hopes of any pronounced pickup in the recovery. As suspected, it appears we are in for a slow rebound in the near term, but concerns remain about another leg down that would make this a W-shaped recovery.
Earlier this week, the management of Caterpillar, the maker of bulldozers and excavators, shared its belief that the September quarter was “the low point for Caterpillar sales and revenues in what has been the toughest recession since the 1930s.”
Even though the company narrowed its 2009 earnings guidance to $1.85 to $2.05 a share, from $1.15 to $2.25, the narrower range was still better than the $1.48 per share that Wall Street was anticipating. At the same time, Caterpillar narrowed its revenue forecast for the year to $32 billion to $33 billion from the prior $32 billion to $36 billion. The low end of its revised forecast implies 2.8 percent growth in overall revenue in the current quarter, ending in December, over the quarter ending in September. While it does not seem like much, such figures translate into the first sequential-quarter growth in several quarters.
A similar story happened at Parker Hannifin Corp., which makes motion-control technology for manufacturing and aerospace markets. The company not only reported better-than-expected results earlier this week but also raised its full-year forecast, as management is “cautiously optimistic that it had reached the bottom of the economic cycle.” That optimism reflects improved order rates for its products and solutions compared with the prior quarter.
Further supporting evidence that the economy is stabilizing can be found in the Federal Reserve’s latest Beige Book, which was released early this week.
The Beige Book is published eight times a year and is a summary of economic conditions in the central bank’s 12 districts. Per the report, housing and manufacturing have shown signs of improvement and we can chalk up the comments from Caterpillar and Parker Hannifin as confirming data. On the other hand, all 12 districts reported weak or deteriorating conditions in the commercial real-estate market, and in aggregate the labor market was characterized as “weak or mixed.” In a nutshell, the Beige Book was a mixed bag with some things better and some worse, another signal to me that the economic recovery is likely to be a slow one.
Concurrent with the Beige Book, we also received some fresh economic data that suggest the economy may not be out of the woods just yet. According to the Mortgage Bankers Association, mortgage applications fell 13.7 percent in the week ending Oct. 16 from the prior week as the 30-year fixed mortgage rate climbed to 5.07 percent from 5.02 percent. Another factor said to be driving the decline is uncertainty over extending the tax credit for first-time homebuyers. The current tax credit of $8,000 that can be claimed by anyone buying a home who has not owned one for three years is set to expire Nov. 30.
Thursday, we got our weekly look at the job market and this reversed the “positive” trend that started to take shape over the previous two weeks. Per data from the Labor Department, there were 531,000 initial jobless claims filed in the week ending Oct. 17, up 11,000 from an upwardly revised 520,000 the prior week. Meanwhile, the number of continuing jobless claims fell to 5,923,000 from the preceding week’s revised level of 6,021,000. That represents the lowest figure since March 28.
At issue, however, with the continuing claims data is the number of people whose benefits have expired. According to the National Employment Law Project, roughly 1.3 million people are set to lose their benefits. Currently lawmakers are deciding whether or not to extend unemployment benefits again after having twice lengthened the time in which people can receive checks to as much as 79 weeks, depending on the state.
Any extension of those benefits is likely to reignite what we would call “P& L concerns” - how will this be accounted and where will the money be coming from to fund it? It also causes many to wonder how stabile the underlying economy is if we exclude government job creation and stimulus benefits.
We’re not out of the woods yet, Toto.
• Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at firstname.lastname@example.org. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
By Donald Lambro
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