The Economy - Update

Factory output was up but so were business inventories. Retail sales for January were better than expected but this may be little more than consumers taking advantage of good sales. Auto sales were lower offsetting much of the gains elsewhere in retail.

Refinancing of existing mortgages is down even with the record low rates although existing home sales are still strong. Will spending by consumer continue at a pace to sustain the economy without investment spending and additional hiring?

Seems unlikely while the controversy about the war with Iraq continues. The impact on the price of oil is beginning to be felt by all industries but the struggling airline industry, the chemical industry as well as others are especially hard hit. The cost of home heating fuel and gasoline will begin to impact consumer spending elsewhere if the war effort is not brought to a swift conclusion.

Alan Greenspan’s testimony before Congress was not exactly an endorsement on the state of the economy. Both Greenspan and Nobel laureate economists have panned the Administrations tax cut proposals as bad long-term policy. The concern generally centers on inflation--that financing a war effort and continuing domestic programs at the same time as reducing taxes will result in much higher inflation. Another possibility is that deficit financing will drive up interest rates cutting off the anemic recovery.

The Stock Market

The war concerns are also blamed for the problems in the stock market, ignoring the problems with stock fundamentals. On a historic basis the market is high relative to almost any ratio over the past fifty years whether it is the stock price to earnings, stock price to sales, or the dividend rate. It seems for every company that raises dividends another drops dividends. While profits are estimated to be up eleven percent in the latest quarter, over last years low numbers, for the market to make a sustained move upward a twenty percent per year increase in profits for several years is needed. A questionable scenario given our problems. Rather with all the uncertainty surrounding the economy and the market I expect to see the market reach new lows this year.

Patience is still the watchword. Look for companies in solid industries with good long-term prospects and a price earnings ratio below fifteen and dividends at least three percent, preferably higher. Even then you must have a three-year or longer outlook, as even good stocks will lose value if the war effort goes badly or a terrorist attack should occur in the US.