“As Goes General Motors So Goes America”

For years investors took comfort in the statement above.  Contemporary investors, including this one, took comfort on Tuesday when the automotive giant affirmed its third-quarter profit outlook and production for the year, four days after rival Ford Motor Co. lowered its earnings forecast.  That prediction shocked investors who had been reassured by stronger-than-expected first-half U.S. auto sales as the economy slowed.  GM’s confidence on Tuesday gave investors a glimmer of hope that the economy‘s trend might be improving. 

Yesterday afternoon brought further good news as Cisco’s Chief Executive John Chambers said in a statement yesterday that orders in the “first weeks of this quarter,” which began July 29, are meeting Cisco’s forecast, and “we are beginning to see signs that our business is stabilizing.”  Cisco’s shares rose as much as 7% in after-hours trading.  Further good news came at a luncheon hosted by the Lucent for investors and analysts, when it said it expects to return to profitability and positive cash flow sometime in fiscal year 2002.  The company further said that they expect growth to return to the 35% range in fiscal 2003.

Today’s markets opened with a little strength as investors considered the possibility that economic recovery might be coming sooner rather than later.  Communications and electronics companies led the S&P 500 and the NASDAQ averages higher.  These stocks are higher on Cisco’s and Lucent’s announcements and are probably bouncing a little in reaction to the past weeks of relentless selling pressure.  No one expects any meaningful recovery to occur in communications for the next couple of quarters, but it’s probably not too early to begin accumulating the stronger companies in these industries.

For the seventh time the Fed has lowered the benchmark U.S. interest rate (.25%) and signaled that further cuts are possible.  He noted that business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy.  He went on to say that “we aren’t free of the risk that economic weakness will be greater than currently greater than anticipated, and require further policy response.”  This economic slowdown is caused by the dramatic slowing of business spending.  We haven’t; seen three straight quarterly declines since 1982-1983.  The declines have been particularly hard on telecommunications, computer, and software companies, but most companies are affected.  Still, Fed policy makers have been publicly optimistic, expecting a rebound late this year and early next.  The strength of retail and housing and the slowing pace of firings give the Fed some reason for optimism.

General Motors, Lucent, and Cisco are making the kinds of statements investors are looking for as they begin to anticipate an inflection point in the economy.  September and October will provide a clearer picture as companies release advance looks at their third quarter results.   There are several issues floating around in the media that will keep a lid on an overly enthusiastic market.  The Democrats are talking about re-visiting the tax cut package.  This is a bad idea anytime, but certainly in the middle of an economic slowdown/recession.  The dollar’s strength is falling.  It’s good for our multinational companies when the dollar falls as their products become more price competitive abroad.  But, the strength of the dollar is also a reflection the relative attractiveness of U.S. assets (stocks, bonds, and real estate) to foreign investors.  A quick exit by foreigners could put further pressure on already weak markets.  However, a dramatic drop in the dollar is unlikely for several reasons.  The most important is that the U.S. remains a safe have for foreign investors in light of heightening tensions in the Middle East and Macedonia.  And the U.S. economy is more likely closer to recovery than Europe and certainly Japan’s economies.

Are we close to a turn in the economy?  The Fed says we are.  Many economists say we are.  General Motors and Cisco say their businesses are settling down and becoming more predictable.  Is there a faint light ahead?

We’ll stay focused . . .

Economic Releases

New U.S. orders for durable goods fell in July to the lowest level in three years, led by decreases for computers and semiconductors.

The 0.6% decline last month followed a 2.6% decrease in June that was larger than previously reported, the Commerce Department said. Analysts had expected a 0.6% decrease for July to $183.7 billion, according to a Bloomberg News survey of analysts.

Orders for computers and related products fell 4.1% last month after falling 4.9% in June and were down 28% from July 2000.

Construction of new homes rose 2.8% in July to the fastest pace in 17 months.

The number of fired workers has been below 400,000 for four straight weeks, the first time that has happened since mid-April, suggesting the pace of firings is slowing.

The Philadelphia Fed report showed economists expect the unemployment rate to average 4.6% this year, higher than the previous projection of 4.5%.  The monthly rate has been either 4.5% or 4.4% since April. The rate will climb to 4.9% next year, the economists say.

The Labor Department also said that 17 states and territories reported an increase in new claims during the week ended Aug. 11,while 35 states and territories reported a decline. One reported no change.