Putting the Um in Glum.

June 27, 2011

Economics. Investment analysis. Market prognosticating. These are not exact sciences. In fact, they do not qualify as science.
Physics. Chemistry. Biology. Sciences, each. They are exact. Theories and hypotheses can be postulated and proven. Beyond denial. Not so with economics and markets.
Perhaps this is why there are entire networks focused on nothing but the sport of economic and market prognostication. The lack of precision leads to copious amounts of opinions. These opinions, wielded like cudgels by reasonably bright, impassioned professionals, make for riveting broadcasts ('riveting' being a subjective description, of course).
You will not find organic chemists verbally sparring with one another on the Organic Chemistry Network. Nor will you see scientists locked in mental jiu jitsu matches, interpolating the merits of String Theory.
Once proven, sciences are generally beyond the pall of debate. They are precise. Known quantities. Proven.
So when the average viewer sees two talking heads debate the relative value of the markets, each being well dressed, articulate and credible, and each speculating antithetical future outcomes, it is no wonder our sentiments change like a newborn's diaper. At one moment, fresh and clean. The next? Not so much.
And being optimistic, while appealing, is not always the sexiest vantage point. In fact, those dark, brooding figures capable of hypothesizing on the connection between monthly labor data and Armageddon remain the most sought after on-air personalties. Imminently quotable. Enigmatic. Smart.
Cottage industries have sprung up around the dark views held by these proselytizers of economic doomsday.
As with all opinions, however, the uncertainty abounds. For all of the 'glum' on which these individuals opine, there remains so much 'um' within their reasoning.
Nouriel Roubini, who's dire forecasts earned him the moniker "Dr. Doom," spent years forecasting cataclysmic scenarios before his accurate call on the residential credit markets gave his opinions the credibility of CNBC, Bloomberg and late night talk shows.
Each end-of-the-world-as-we-know-it scenario is born of partial ignorance and guesswork.
"Um, I can see how that might occur." Not exactly applied mathematics.
So, when I see the doomsday soothsayers grab their briefcases and sandwich boards, and the media fixated public begin to echo their calls for chaos, I know that, counter intuitively, all is good with the world.
Yes, a few prognosticators will correctly speculate on each economic disaster to come. But, not my buddy Bob. When Bob explains that the global economy is on the fast track to hell, then I will go long the global economy. Every time.
And while each week provides much to mull over, I remain a contrarian.
After two years of moon-shot returns, with the S&P 500 up 88% since the March '09 lows, this market is due for a slowdown. That said, their remains much about which to be optimistic.
S&P 500 companies will earn 18 % more this year than last. And with the recent 6.8 % decline, valuations have fallen to the cheapest levels in 26 years. Bloomberg states that, even if companies post no growth, price-earnings ratios will be lower than on 96 percent of days these past two decades.
The last month's losses have pushed the equity index to 14.5 times the past year's earnings. That compares with a twenty-year average of 20.5.
And the economy?
Bank lending to small and medium-sized businesses just expanded for the seventh straight month in May. These loans, so central to the health of the U.S. economy, are up a 12.2% annualized rate the past three months.
And if you're willing to read between the lines, there's more:
· Tax receipts were up 19.2% year over year in May.
· Net individual income tax payments were up 55% versus May last year.
· Exports hit a record high in April, up 19% versus a year ago.
· Commercial construction just expanded for the third consecutive month.
· Leading economic indicators rose 0.8% in May after falling 0.4% in April.
When one lifts up the hood on this economy, there remains plenty of horsepower.
Following the recent natural disasters in Japan, and violent storms throughout the Midwest, a temporary slowdown was expected. When the slowdown begins to appear more systemic, we will then join that chorus. If the data percolate upwards in the third quarter, we will hum that tune.
For now, we will call this game as it should be. Objectively. Right down the middle. With opportunities in every direction. Stay tuned.

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