Friday, October 26, 2007

The Way I See It

This week the trading swings have been crazy. It is mostly due to mixed earnings. Finanical names have give reason for a sell off, while tech names have come in strong. Microsoft (MSFT) earnings are leading the way today. This provides some optimism for the future, as there are some high quality tech names that are consistently growing earnings. Microsoft has become a good value play at this point, as the stock has been relatively flat the past few years while earnings have increased.

We are experiencing record commodity prices. This to me is going to be a driver for inflation. I know that inflation statistics have come in at a reasonable level, but I believe that they can and do manipulate those numbers. I mean, what good is an index that doesn't include food and energy prices? Those are the two things consumers spend most on. The bottom line is that the stock market isn't necessarily trading relative to the state of the economy in the US. There is too much international influence in US corporations, which is allowing them to continue to earn. There is nothing wrong with this, and it is positive that corporations have adapted in a changing economy.

But it now means that we will have to start disconnecting the state of our economy with the state of the stock market, as crazy as that sounds. This is the mistake that I think most of the financial media is making. They are talking about the poor housing market, and trying to relate that to a coming recession. While this could happen, it also might not. The ability of US companies to create earnings through other means than US growth is the reason why the stock market has performed well. They are increasing their earnings through 3 key ways:

1) Borrowing money at a cheap rate to buy back their own stock;
2)Borrowing money at a cheap rate to buy out or merge with a competitor; and
3)Increasing their exposure to growing international markets.

This has all taken place because of low interest rates. This is why if the economy needs more help, which it appears to, then the Fed will cut rates, which I see happening again.

No comments: