- - Thursday, September 15, 2011

ANALYSIS/OPINION:

As if President Obama’s American Jobs Act, more correctly called a “third stimulus” in my view, weren’t a reminder of how fragile the economic recovery is, the global markets are under pressure once again from European sovereign debt concerns.

While a potential Greek default led the charge earlier this week, the fears quickly spread to Italy and France, the latter fueled by Moody’s downgrade of several French banks. All of this has weighed on the stock market, and while volatility has shot up, as evidenced by the spike in the number of trading days characterized by 100-point-plus swings, the net direction of the market month has been down. Adding the drop in the S&P 500 so far in September brings the year-to-date return for that index to -4.8 percent. More striking is the 12.2 percent fall in the S&P 500 since late April, when signs that the economic recovery was slowing if not failing began to take hold.

One of my concerns — a concern that has grown in recent weeks as analysts and economists have slashed gross-domestic-product expectations for the back half of 2011 and 2012 while simultaneously raising joblessness forecasts — has been the eventual follow-through by companies and corporations as they adjust their forecasts to the revised economic landscape. Companies such as Texas Instruments, Applied Materials, Netflix and Best Buy recently have either missed earnings expectations or adjusted their outlooks lower; odds are these moves signal the beginning, not the end, of such misses and revisions. Even technology bellwether Cisco Systems has reduced its long-term growth forecast and expects sales to grow 5 percent to 7 percent per year for the next three years, compared to the previous long-term target that called for annual revenue growth of 12 percent to 17 percent.

More worrisome, we continued to get data this week that confirm that the economy is not moving in the right direction. Citigroup economist Steven C. Wieting summed up this week’s data rather well, I thought: “The large CPI gain in the face of weakening confidence, slowing consumer spending and softening production provides a poor backdrop for expansion.”

Despite Mr. Obama’s jobs bill, we are once again seeing layoffs in large numbers from both Bank of America Corp. and the U.S. Postal Service. Layer in the uncertainties associated with European sovereign debt, the passage and funding of Mr. Obama’s package, potential tax reform and other initiatives to be spearheaded by the congressional supercommittee, and it becomes very difficult to see sustained progress in either the economy or the overall stock market in the near term.

Based on some of the latest findings from Gallup, it appears more challenges lie ahead:

• Upper-income Americans’ economic confidence was shaken in August, with 80 percent saying the economy was “getting worse,” up from 66 percent in July.

• Overall self-reported daily consumer spending in stores, restaurants, gas stations and online averaged $68 per day in August, dropping from $74 in July and driven down by lower spending across all income groups.

But even though the overall market is likely to be challenged, there remain bright spots in which prudent and patient investors can put their investing dollars to work for the long term while cherry-picking quality companies at prices with compelling reward-to-risk profiles. Some companies I think are well-positioned heading into the second half of this year include Hanesbrands Inc., Hershey Co., McCormick & Co. Inc. and Trinity Industries. The first three are poised to benefit from the combination of lower raw-material prices, prior price increases and seasonally stronger demand. Meanwhile, Trinity’s rail business continues to feel the benefit of growing rail traffic as domestic exports rise and gas prices remain meaningfully higher year over year.

Good hunting.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.