SEATTLE/ Conservative Monitor -- What are the economic data reports telling us? Have we reached a business cycle bottom or are we just in the early phase of a protracted downturn? Investors quickly change investment decisions based on this “latest data”. Its not clear that they believe the data but rather hope other investors will respond by buying (or selling) stocks on the basis of this economic data so they can make a quick profit. Speculation in the market is not a good sign for a long-term recovery.

Investors read too much into the latest “economic indicators”. It takes more than one report, good or bad, to determine a trend. The last quarter's GDP numbers were seen as positive even though they were revised downward. Would it have been positive if the methodology for measuring inflation had not been revised in the 1990’s? Will the latest manufacturing report be revised? How reliable are current data?

Rather than use the R word directly it is now referred to as a growth recession. A growth recession is growth below the hypothetical growth rate potential. Regardless of how the current economy is described it doesn’t look good and is not likely to improve soon. For every positive report there is a negative report. Banks appear to be tightening up standards for small business loans and housing. Auto sales appear to be weakening and the housing market may have peaked.

The prospects for improvement in earnings for most companies, especially the tech sector, does not appear likely this year and next year is no sure thing, regardless of what the analysts are saying. Finance may be the next industry to report disappointing earnings as poor performing loans are recognized.

There seems to be the expectation that stocks will rebound as investors return from a prolonged summer vacation. Could it be that investors will be sellers rather than buyers? Patience will be required to be successful in the stock market over the next several quarters. Until we see more positive reports it may be prudent to be cautious.

Inflation

It appears that consumer and investor confidence is based at least partly on low inflation. Low inflation is not always positive for the economy. It certainly has not helped the Japanese economy as the Japanese stock market hit 17-year lows this week. With low inflation there is less incentive to buy, especially if the consumer thinks prices may go lower. If consumers slow their purchases, and it appears that may be happening, lower interest rates may be slow in turning the economy around.

Microsoft

Will Microsoft’s XP operating system be the success that will rejuvenate the tech sector and the economy? There just doesn’t seem to be much benefit to business to upgrade to this new system with the questionable profit outlook and the uncertainty about the court case.

Microsoft investors may have been better off if the decision to breakup the company had been upheld? The downside for investors is that Microsoft would have lost the cash cow that is funding its other ventures. This would not have been a problem if Microsoft were able to win these markets by providing a better product than its competitor. It seems Microsoft can only be successful in these other markets by tying its products to the operating system.

The risk is that a final ruling will prevent Microsoft from tying new products to the operating system. It would appear that the computer manufacturers would then have the option of selling space on the compute screen to competitors? Will Microsoft be forced to compete and also lose revenue that could have come to an independent company selling the operating system?