Doctor, Doctor, Gimme the News (Double Dose of What's Bad for You?)

By Jim Lacamp

SUMMARY:

-Europe not solved.
-Europe not priced in.
-US Economy better than expected.
-Markets in turmoil.
-Caution still in order.


So, what's the damage? Isn't that the real question here?

It's no longer a question of whether there will be defaults in Europe, the question really is the same question you'd ask your doctor, or mechanic for that matter. We can talk about our economy, the Fed, Washington, earnings, China or whatever you want, but at the end of the day, the question everyone wants to know, but no one seems to really know, is how painful and contagious will a Greek default be? How bad is it doctor? We are getting closer to finding out, but still and until, no one really knows.

Yes everyone seems to know there will be a Greek default, but pardon me for laughing when people say that the market has already priced it in. Oh REALLY? On which day, or week was it appropriately priced in? The reason I ask is that the market is going through extraordinarily high volatility. And since it is very volatile, obviously the market is pricing in massive uncertainty. In other words, just because we think we do know that Greece will default, we don't know what the damage will be, who will be next, how quickly money may leave banking systems, what the ultimate tab may be, who's going to pick it up and how exactly will they pick it up.

Looking at our economy and stock market in a vacuum could give investors reason for optimism, but probably not enthusiasm. High frequency data that includes shipping, retail sales and hotel occupancies show an economy that is still expanding. ISM numbers on both service and manufacturing echo the high frequency data. This past week's jobs data, while not robust, did show very mild improvement. Interest rates remain ultra low and inflation is starting to moderate, which could also ultimately translate to input prices. Corporate earnings season is about to begin with Q3 expected to show north of 13% growth. Valuations are not daunting at these levels, with stocks now selling at 12 x earnings.

The pessimists have plenty of bad diagnostics to counter with. Leading indicators are at their worst level in a year, and the Economic Cycle Research Institute has called for a recession. Why does that matter? So far they have not been wrong when making that call. The jobs number included the return of striking Verizon workers, and U-6 measures, (which include those working part-time instead of full time, and those who have given up looking for work) remain doggedly high. Consumer incomes have not kept up with retail sales, indicating consumers are double dipping themselves, into savings. Home prices are still falling. The last four quarters show GDP at stall speed(less than 2% growth) something that has always led to recession. Confidence remains very low, both for consumers and small businesses. Bank stocks remain in their own Dante-esque levels.

Finally, earnings revisions fell at their fastest rate on record since July 1, with 3rdQ expectations slipping from 17%, to 13% over three months. And while 13% growth is just dandy, it's not candy if you priced in 17%. One should be reminded as well that 2nd Q earnings reporting season was met with a sharp sell-off on Wall Street. The congressional "Stupor" Committee so far has not indicated that it's close to an agreement on anything.

Globally, German industrial production and factory orders both slipped. Japan's economy is at risk, China is now having to deal with a lending system run amok with a build rate that is five times their occupancy rates as well. Brazilian inflation is stoking too hot. It's not all bad though as data here has been surprising to the upside, Euro zone trade came in better than expected and even Italian factory output rose 4.3%

Pretty confusing isn't it? Oh, I forgot to mention one thing...the EURO-MESS! Over the weekend German Chancellor Merkel and French President Sarkozy met again, and again said that a solution and support were in the offing. Again. Details were sketchy, again.

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Jim Lacamp is a Senior Vice President and Portfolio Manager with MacroPortfolio Wealth Management with over $400 million under management. He also co-hosts the Money-Sense at the Opening Bell Radio show, Dallas-Fort Worth's longest running financial talkshow.

 

 

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