What Do Apple, Google, Walmart, and Amazon Have In Common?

The consumer is a dominant factor in GDP growth. The U.S. economy has avoided the Great Depression II and seems to be ending the Great Recession. However, we aren't convinced good times are coming. The consumer is saving and not spending. Small businesses are cautious with their hiring and can't get credit to grow. Bankruptcies continue to rise and the commercial real estate collapse is in progress. Of course, the Stimulus plan has helped create short-term spurts in housing and autos while piling more debt onto the United States balance sheet. Does this sound like good times are coming?

There are some bright spots as the stock market's huge leap from the March lows has given most people a feeling that better times may be ahead. That may be true but unemployment continues to grow and high leverage still remains with consumers, businesses, and the government. We are now in an economy where spending is picking up a little but only for bargains. Of course, consumers will also pick up the hottest new item if there is value to be had.

Apple, Google, Walmart, and Amazon have all announced good earnings and growth. Why is that? In an environment where consumers use caution, they will buy what they need at the lowest price. If there are any discretionary funds, they will buy the products which have the best value. Apple has the hottest products with great value; Walmart and Amazon are large supermarkets of goods sold at the most competitive prices; and Google is the vehicle to search for the best value at the cheapest price. Until we have an economic environment where the future becomes more certain, the consumer will continue to migrate to those companies that lead in value.

Earnings and Liquidity Drive the Market Higher

A majority of companies reporting third quarter earnings have beaten expectations. Apple once again crushed their numbers today and the stock soared. Technology remains a good sector to focus on as Google and Intel proved last week. Not all earnings reports will be good but many will be. During the past year, most companies drastically cut costs and when revenues pick up a little bit, earnings can soar.

We haven't turned bullish but continue to have investments in the market because the negativeness by investors and the plethora of cash on the sidelines keeps driving the markets higher. We believe there will be a day of reckoning and we will cautiously invest accordingly. With the U.S. deficit reaching 10% of GDP and the government debt growing by the trillions, we need to be concerned. The recession may be over but many problems still loom.

Perhaps we will be wrong and the global economy will pull the U.S. into a growth mode but a falling dollar, rising oil prices, a looming commercial real estate problem, and rising unemployment makes it hard for seasoned investors to think we are back to normal. Companies are acting responsibly by slashing costs and minimizing inventories while reducing employment. The result has been better than expected earnings. However, the economy got a big boost from the stimulus plan when it comes to auto sales and housing. The government grew its debt for the sake of moving home and car inventories but that stimulus is over. Manufacturers are rebuilding inventory but the consumer is still constrained and may not be there to buy again.

The consumer must pay back its debts and that is why savings rates are rising. Companies must pay back their debts and that is why we are seeing many refinancings, exchange offers, and bankruptcies. This trend will continue well into 2010. Finally, the government must pay back its debts and that is why we expect interest rates to eventually rise significantly. This coupled with a continual drop in the value of the dollar should lead to rampant inflation. This scenario will put a crimp in stock prices at some point but for now liquidity and earnings may drive the equity markets higher. Be cautious and careful and buy large, liquid stocks with strong growth characteristics. Alternatively, buy distressed securities or real estate.

The Economic Clunkers of Autumn

Back-to School sales weren't so good. Factory Orders were weak. Auto sales plummeted. Non-Farm Payrolls were much worse than expected. We have been concerned for months that investors were too bullish with the signs of green shoots. The economy almost fell off a cliff a year ago and stocks were plunging in the spring so it was not a huge surprise to see the stock market rally when the economy showed some signs of a slowdown in the economic decline. The rally persisted as business seemed to not be getting worse but stocks may have over shot on the upside as they did on the downside.

It is only in the last two weeks where stocks have taken a little breather as the green shoots are starting to look like weeds. It is not really a surprise to see auto sales fall last month as the cash for clunker program ended. The stimulus plan gave a shot in the arm to the auto industry by creating bargains for consumers to trade in their old cars. With those bargains gone, there aren't many buyers of new cars. The same result is likely to happen to housing next month as the governments subsidies for first time buyers go away. Anyone looking to buy a house surely took advantage of the stimulus plan but once that ends so will aggressive buying of new homes. We expect the government to extend the housing stimulus or creat another boost for housing. However, a continuation of the plan will unlikely produce the same jolt to housing sales as anyone who wanted to take advantage of a subsidy likely did already.

The consumer is still weak and appears to only be looking for bargains. Debt remains high in all sectors of the economy with the commercial real estate troubles just getting started. Financial institutions still are not lending to small businesses, a primary source of economic growth and new job creation. The recession may be over but economic prosperity is a long way away. As such, stocks will likely begin to recognize this reality.