- - Thursday, October 27, 2011


With a number of countries involved in the process, I continue to expect some horse trading as the negotiations heat up and not all will get exactly what they hope for. The real question is whether the proposed solution will be sufficient. On the one hand, that would mean a significantly large figure in either dollar or euro terms. On the other, we have to factor in recent data that shows demand in Europe continues to worsen.

Early this week we learned the European Purchasing Manager’s Index (PMI) continued to contract and, at 47.2 in October, marked the lowest reading for the index since July 2009. More troubling, a reading below 50 indicates a contraction and October was the second consecutive month below that expansion-contraction line.

A number of companies, including 3M Co., diversified industrial products manufacturer Illinois Tool Work, heavy truck manufacturer Paccar Inc. and others described weakening demand in Europe and the potential impact on their respective businesses. For some companies, such as diesel engine manufacturer Cummings Inc., September quarter results were better than expected, but a number of companies, Cummins included, reduced their forecasts for the current quarter in the face of headwinds in Europe.

The question to ponder is whether the demand slowdown in Europe is due to a worsening economic situation or short-term spending restraint associated with eurozone debt uncertainties. While there will likely be reduced spending and other austerity targets put in place as a result of the bailout, we will have to wait and see exactly how steep those cuts wind up being. It’s possible that the expectation is far worse than the reality, as was the case with our own domestic economy not too long ago. Several months back there was widespread concern of a double-dip recession amid conflicting economic data, but so far the economy seems to be growing — far more slowly than many would like — so while it may feel like a recession that does not mean the economy is in one.

In times such as these I find it helpful to look at indicators other than just the official government statistics to measure the health of U.S. economy. Generally speaking the government data tends to reflect an economic environment that was several weeks to a month or so ago. I have and will continue to argue that a savvy investor combines data from several perspectives, including government data, company commentary and other third party data.

One of the economic indicators I have been watching to gauge the health of the domestic economy is freight traffic. More specifically, combined U.S. freight carload volume for the first 41 weeks of 2011 was up 1.7 percent compared with the same point last year. Good but not great. Also, this week United Parcel Service Inc. CEO Scott Davis told investors he thinks the U.S. economy has stabilized and 3M Chief Financial Officer David Meline said he did not expect a double-dip recession.

Tying these and other snippets together, we find the domestic economy continues to grow albeit it slower than most would like. Cross your fingers and hope the same turns out to be true for Europe. If not, it might have to repeat the series of bailouts attempted in the U.S., which I would argue have shown little meaningful results.

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.



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