- - Thursday, August 11, 2011


As second quarter corporate earnings peaked and crested, we have been hit with one crisis after another — from one debt crisis to another and the near shutdown of our federal government. To say the last month has been a challenging one following a 192-point drop in the S&P 500 from its July peak (down 14 percent) amid fresh headlines warning of yet another financial crisis is an understatement.

It seems that no matter where a person turns there has been a crisis in confidence or leadership in one form or another, which has fanned the flames of uncertainty both in the U.S. and abroad. Driving this home was the latest take on the domestic economy offered by the Federal Reserve on Tuesday — “economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.”

While not really new news, the Feds statement went on to say, “The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased,” which added another layer of unease and uncertainty.

Hitching itself to our domestic funk was renewed debt concerns in Europe, initially with Italy and then with France. You may be saying to yourself: “I know its not good out there but how bad can it really be?”

For the answer, lets look at some of the recent Gallup polls, which reveal that 80 percent of respondents feel the economy is getting worse and 55 percent see the economy as poor. Delving deeper into Gallups findings show Americans’ economic confidence plunged to -53 in the week ending Aug. 7, down sharply from -43 two weeks ago and -34 a month ago to a level not seen since the recession days of March 2009.

In other words, it is bad out there. What makes matters worse in my view is not only the ripple effect to be had should European debt concerns go from bad to worse, but also the lack of visibility and leadership when it comes to solving our domestic economic issues.

As I have stated on several occasions herein, it is the uncertainty and the lack of visibility that leads to worry, which leads to restrained spending from businesses and consumers that results in slowing economic activity. Based on the recent Gallup data, it would appear we are set to enter that vortex once again.

I continue to think economic expectations for the second half of 2011 and into 2012 will need to be reset and forecasts revised lower. That will result in adjusted profit expectations for companies and valuation parameters used to assign values to stocks will be revised as a result.

Perhaps the striking pain of that process will be less than it could have be given the sharp market move since early August, but as that process of readjustment unfolds the proactive investor will be building his or her shopping list. Much the way serious shoppers keep their eyes open for bargains as they arise, serious investors also keep such a list for well-positioned companies to buy at what some consider fire sale prices.

While each investor has his or her wish list, I will be eyeing those companies poised to benefit from long-term demographic, psychographic and secular shifts where consumers and businesses will continue to spend that have a favorable reward-to-risk profile in their shares.

Stay tuned.

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 [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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