Does Cisco Have It Right?

John Chambers, CEO of Cisco, is one of the most forthright executives in the business world. He tells it as it is and he believe the economy has bottomed and demand is picking up. Most people would agree the recession looks like it has seen the worst days and there is some positive momentum. The key is how strong of a recovery will we get. Mr. Chambers was clearly cautious about being too bold on the growth prospects other than to say the outlook is better but growth is likely to be slow. The stock market appears to believe the economy may have good growth in 2010.

Look at the productivity numbers. 9% improvement is unheard of but labor costs are dropping fast. A little bit of revenue growth is likely to produce strong earnings. There are still many caution flags to watch out for such as the weakened consumer, the limited small business lending, the dismal prospects for commercial real estate, and let's not forgot the unemployment picture.

Investors were happy to see stronger unemployment results but how happy can we be when 500,000 plus jobs are still being lost every week. We historically focused on continuing claims as the key indicator for the employment picture but as unemployment benefits are running out for many people, a drop in this number may not really be a good sign.

Tomorrow is likely the day when unemployment will hit 10%. If that happens and the markets continue to roar ahead, then perhaps we can rally to year end. We would remain very cautious as volatility is back and fear is rising. The stimulus package has propelled a big part of the GDP growth and the government is reinstating the new homes credit to keep that train chugging.

The White House boasts about the hundreds of thousands of jobs they created or saved with stimulus money, but is the cost to this country's future worth it? We may be too concerned about the dangers ahead and stocks may continue their rise but there will be a day of reckoning as the bloated balance sheet of the United States will need to be addressed. It is just another bubble waiting to pop. Enjoy the ride in the short-term but make sure you have some hedges along the way.