Inventories

One of the key questions with regard to economic activity is the extent to which it is being driven by inventory replacement. As seen in the CalculatedRisk blog of March 12, "the contribution to GDP in Q4 from 'Change in private inventories' was 3.88 of the 5.9 percent annualized increase in GDP."

Here are two charts that give a historical perspective...

This one is from the aforementioned CalculatedRisk post of March 12, in which he states: "...clearly most of the inventory adjustment is over." :



Here is another look at inventories, from ContraryInvestor.com of April 15, 2010, in which it says "...clearly most of the inventory adjustment is over.":




Another key question is whether current inventory levels are appropriate given the future sales environment.


SPX at 1192.38 as this post is written

"The Greater The Economic Weakness, The Stronger The Recovery"

Recently there has been a thought circulating that the worse the recession (or economic weakness) the stronger the following economic rebound. This refrain has been heard from various quarters.

This belief does appear to be historically accurate, at least to some degree.

However, there are three aspects of this belief that I want to elaborate upon. The first is that even if one believes "the deeper the recession, the stronger the recovery" theory, there is a question of timing. If the period of economic weakness is long, mistaking the timing and making investments or other financial commitments too early in the cycle, before the recovery has begun, can be a costly and painful mistake.

Second, even if one has complete faith in this belief, this has to be viewed as a historical fact. Is this time "different?" It certainly appears to be, as I have extensively commented upon. Perhaps the operative phrase should be "Past performance is no guarantee of future results."

Third, this belief seems related to one that I commented on in a June 5 blog post - with the same implications.

SPX at 1061.05 as this post is written

What Is The Stock Market "Telling" Us?

With the stock market (as seen in the S&P500) recently near the 1020 level, there is no debating that the rally since the early March lows of 666 has been a very strong one. Also, there have been very strong rallies in other markets as well (Nasdaq, Emerging Markets, Debt Markets, etc.)

Given this strong rally, one is led to wonder as to what the stock market is "telling" us. Such a strong rally in the face of pervasive economic weakness seems contradictory.

The stock market seems to be indicating that we will have a strong and quick economic recovery (likely a "V" recovery). This can be inferred in a variety of ways. One way would be to assess the S&P500's current price level of 1000, in which we can see that it is pricing in a market PE of 20 to a 2009 operating earnings estimate of $50. As well, this would equate to about 13x a 2010 operating earnings estimate of $75. Of course, one can argue whether the "As Reported" figures should be used, which would generate an even greater earnings multiple.

As I have indicated previously, I believe this market rally off the March lows of 666 is a Bear Market Rally - meaning by definition that a low below 666 will be forthcoming. I'll be further addressing this issue shortly.

The stock (and other markets) rally since mid-March appears to me to be very "speculative" in a variety of ways. One need not look too far to see many disconcerting aspects of this rally.

Since the stock market seems to be "pricing in" a very significant, and lasting, economic recovery, there will likely be significant repercussions should one not materialize. These repercussions would likely entail a significant decline.

Perhaps the main question should be whether a strong economic recovery is fundamentally assured to the extent the stock market seems to be indicating.

SPX at 982.3 as this post is written