Wednesday, September 24, 2008

Positive Economic Data For A Change

I am not sure the rhetoric surrounding the economy and financial markets can get any more negative than they are at the moment. It seems as though every talking head is piling on about the negative reverberations impacting markets and the economy. Even Jack Welch told the World Business Forum, "I now believe we are in for one hell of a deep downturn" and also stating the first quarter of 2009 will likely be "brutal." (courtesy of Reuters). Historically the news gets the most negative at market bottoms.

As I noted in a post on The DIV-Net site titled, Should You Stick With Stocks, Warren Buffett has an investment saying:
"I will tell you how to become rich. … Be fearful when others are greedy. Be greedy when others are fearful."
So what do we hear Warren Buffett did last night/today: invested $5 billion in Goldman Sachs.

There are some positive economic data points in place at the moment. The Philadelphia Fed's Business Outlook Survey for September notes:
  • The region’s manufacturing sector showed some signs of improvement this month, according to firms polled for the September Business Outlook Survey.
  • The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from ‐12.7 in August to 3.8 this month (see chart below). This is the first positive reading for the index since last November.
  • Demand for manufactured goods, as represented by the survey’s new orders index, improved significantly, increasing 18 points, to a positive reading of 5.6.
(click on chart for larger image)

Additionally, the latest inventory to sales data (July 2008) notes historically low inventory levels relative to sales. When the economy picks up, the low level of inventory will necessitate a fairly quick increase in manufacturing in order to fill sales orders.

(click on chart for larger image)

Certainly, the Wall Street financial stress is problematic. I will be the first to admit, I wish the government did not need to provide a financial backstop to clear the current credit mess. However, I do not think we have a choice, and Congress knows it, so some plan will likely be passed. Let's only hope the government does not overplay its hand in gaining control of companies; thus, inhibiting the free market capitalistic system. Sure, regularity oversight, or lack there of, needs to be evaluated. Keep in mind it was the government that had sole oversight over Fannie and Freddie and what a mess that turned out to be.

In the end, there are some positive economic factors in place that could allow for a reasonable recovery with the passage of the bailout plan. Warren Buffett certainly sees there is a very high likelihood a plan gets passed soon. And what is Mr. Buffett doing? He is investing in this market.

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