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We get back to the reliability of government data. The government tells us the economy is expanding, but it is hard to find a sector of the economy where output is expanding. The once-strong consumer spending, which buoyed the economy, seems to be weakening. Retail sales are flat or declining. Home sales appear to be slowing. New home starts (applications) are up but are they actually building?
In addition, state and local governments are struggling to find ways to cut spending or raise taxes, which has not impacted the economy yet but will going forward. Either or both state and local spending cuts or tax increases will be a drag on the economy. Add the tax effect of the high price of oil as a result of the war talks and its impact on the economy and our economic troubles appear far from over. I expect when the US government benchmarks the data for the past quarter that it will show the economy in a slight recession.
I keep hearing the argument that a war is good for the economy. That war with Iraq will give a boost to the economy. I’m told it has always happened before, remember WWI and WWII. The argument seems to be that increased government spending on the war effort will inject money into the economy thereby causing a surge in economic activity.
Even if the war is over quickly, which seems doubtful, it is expected we will be in Iraq for many years trying to rebuild their economy. We will spend billions of dollars on their economy, which will be a drag on the US economy. If it isn’t over quickly, then to support the war the government will have to cut back on other programs or face a problem of inflation; remember Viet Nam. So far I see no plans to cut non-defense programs. Somehow this war has the feeling of another Viet Nam.
The Stock Market
It’s not over until it’s over. The rally in the stock market should not be viewed as a return to sizeable returns in stocks. Prices of stocks were just approaching a reasonable value before this last move upward. I expect the indexes to test the lows once this rally is over. The nearly 1000-point increase in the Dow and comparable increases in the S&P 500 and the Nasdeq have been a refreshing change but should be looked at as an opportunity to clean out questionable stocks from your portfolio.
Stocks in the News
Is nothing safe? Texas Utilities (TXU) was repeatly recommended as an excellent investment. A strong company with an excellent dividend. One wonders if the Federal Energy Regulatory Commission (FERC) is over reacting (referred to as CYA) after ignoring the request to cap prices for the California energy markets. Its one thing to manipulate prices, as was done by ENRON. It may be good business to take advantage of these markets.
If prices are being bid up, it could be good business to hold your product from the market to realize a higher price. This involves risk. Unless the company was directly involved in the market manipulation, should they be penalized? FERC may be setting the stage for energy problems in the future as companies cut back their capital investments as a result of the uncertainty created by FERC.
Investors appear to be expecting a recovery in the tech sector. Better than expected profits reported by IBM and Microsoft were enough to spur increases in the tech sector. Look behind the numbers. What is expected going forward raises questions about any sustained recovery.
Microsoft has reported a 26% increase in profits and sales, but they still seem over priced behind the numbers. My lack of enthusiasm for Microsoft at current prices has nothing to do with its involvement in the many court cases but on the fundamentals of the company. The latest reported earnings appear to be a result of firms upgrading their systems before Microsoft institutes it’s new pricing formula. It is rare for a company the size of Microsoft to continually realize percentage increases in sales and profits over the long term, yet their price-earnings ratio suggest a continued high teens percentage increase in profits. A good investment long-term at $40, less so at current prices.
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