The Good News Is Washington Is Working On It, The Bad News Is Washington Is Working On It

Posted by: Howard Silverblatt on February 19, 2010

The 8.1% market decline from the Jan 19th Bull market high through the Feb 8th pullback low appears to have stabilized, at least for now, with the market gaining back about half of it’s loss, and holding onto a 63% gain, as the one-year anniversary of the Bull rally that started March 9th approaches. Of course, we still need another 41% to get back to the March 2007 high and even more depressing is that the hang over from the 1999 party remains (when the S&P 500 posted an annualized total return of 18.2% for the decade, or 433% in all), with long term investors down 33% from the turn of the century. Oh well, that was yesterday and today is now. And while today is still not clear, it is starting to take shape with familiar issues and arguments. The current debate is between the higher Bank rate by the Fed which could push rates up versa the January Core consumer rate which was down -0.1%, the first negative since 1982; the political debate is over the impact of the stimulus spending on jobs – both prior and the expected new one.

The market has had low volume for several months now, which includes the mini-pullback, and while there have been numerous opportunities inspired by economic, fiscal and issue data to trade, many investors are standing pat, with a sizable amount of cash on the side line. Overall, this lack of commitment is viewed as a sign of uncertainty and to some degree a lack of faith in global leadership to make things better – which in itself is a sad commentary.

Earnings were very good for Q4, and Q1 is also expected to show a nice increase, with a notable increase in Energy mostly due to a devastating Q1,’09 comparative. But sales remain the true issue, and they haven’t increased that much, and future sales growth is expected to be slow. Margins for Q4 were very high due to cost cutting, and that is expected to continue throughout 2010. We have already seen several issues announce additional layoffs, with some being minor when compared to their last year’s move. Humana and Boston Scientific will layoff 2,700 employees, but Merck will cut 15% of their newly acquired Schering-Plough division, Xerox is letting 5% go, and Verizon is targeting 13,000 employees for 2010. Those should help corporate earnings, but they can’t be good for those let go, the economy or municipalities, and they defiantly won’t inspire consumers to go out and spend more, which in the end can’t be good for long term profits.

Balance sheets are looking good. While cash appears to have dropped from its Q3 all time high, it remains very high at 72 weeks of expected 2010 operating income, giving company’s many options, including more aggressive M&A to increase sales. Buybacks are now back in style, at least in the announcements. The actual market buybacks, while up from the lows, remains well off the peak, and I expect that they will stay off their peak, but still outpace dividends, as companies buyback enough shares to prevent dilution, but not enough to improve EPS through share count reduction. The dividend news is all good with more issues increasing, fewer decreasing and coverage ratios for the top payer being at a more comfortable level. I believe the full year will produce a 5.6% dividend gain, with the second half being better than the first, if the economy cooperates.

The bottom line however is that a good deal of the markets fate lies in Washington. Companies can position themselves, develop product, form alliance and trim down, but if the overall economy doesn’t continue to improve, or if consumers and companies don’t believe that it will improve, then it won’t. And the bottom line to that item is jobs. The good news is Washington is working on it, the bad news is Washington is working on it.

Reader Comments

Strategery

February 19, 2010 10:32 PM

Dumb article. To suggest it is the government's job to fix unemployment is absurd. Unemployment is high because of fraud on Wall Street and companies outsourcing jobs to save a buck. In addition, those with jobs are seeing their real wages fall while executives continue to receive record salaries and bonuses. So, the real fix is business ethics. We all know that will not happen. The only thing the government could do to help unemployment is to regulate the financial markets and to develop a protectionist stance on trade; and the lobbyists will buy congressional votes to ensure neither happens. I think the author is hinting the government should spend money, but the ROI for job creation is terrible. Spending $100,000 to create or save one job doesn't make sense. In addition, government stimulus spending has been full of fraud and no-bid contracts; and a substantial portion of the money goes towards buying imports, and paying executive bonuses and shareholder dividends.

norma r meader

February 21, 2010 6:55 PM

listening to bob brickman on chichago WLS he mentioned the u.s. govrnment offering an annunity to anyone with a million dollar ira or pension. i missed the first part, he said go to bussinessweek.com. i'm intested in reading the article, where do i find it?

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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