Investing in Profitable European Companies

Commentators are tripping over one another to declare this country or that country’s stimulus package as a primary reason to pour money into its stock market. Yet if you look at the highly damaging long-term effects of such loose monetary and fiscal policies, an investor can come to only one conclusion: You should invest in the country with the smallest stimulus package.

Stimulus packages are all the rage right now. President-elect Barack Obama has promised an $800 billion package for the United States , which equates to nearly 7% of U.S. gross domestic product (GDP). And there are plenty of others:

* Japan has a stimulus package of $720 billion – roughly 14% of GDP.

* South Korea plans two stimulus packages – the larger of them “green” – totaling about $50 billion, or about 6% of GDP.

* Great Britain is expected to inject about $177 billion into its economy, the equivalent of 8% of GDP.

* France has a modest $40 billion stimulus package in place but that’s on top of a $300 billion European Union (EU) stimulus package, so the total’s about 3% of GDP.

* China has announced a $586 billion stimulus – almost 20% of GDP – and now appears to have decided even that is too little.

Then there’s Germany. When the British stimulus was announced, Germany’s finance minister, Peer Steinbruck , described it as “crass Keynesianism .” Since then, he’s been forced to back off that stance a bit: On Jan. 12, Germany announced a stimulus plan totaling $70 billion over two years.

Still, even that is only is a relatively modest 2% of GDP, and Germany’s 2009 budget deficit – even with the stimulus – is projected to come in at less than 3% of GDP. That’s far less of a deficit than the country faced during the 2001-2003 recession, and means that Germany enjoys one of the soundest fiscal positions of any country in the world.

Germany’s short-term economic outlook is unexciting, as is currently the case for most countries. According to The Economist , the country’s GDP is forecast to shrink by 1.4% in 2009, after actually advancing 1.0% in 2008. That’s equal to the Euro zone average and equal to Japan, a bit less than the United States (projected at minus 1.2%), but better than Britain (minus 1.7%). But at a projected 1.0%, at least inflation at 1% is expected to be satisfactorily low.

Where Germany stands out, however, is when you look at its balance of payments, which is in surplus by $265 billion in the year to November 2008 – the equivalent of 6.6% of GDP. That immediately distinguishes it from the finance-based economies of the United States and Britain, both of which have perennial balance-of-payment deficits.

The most impressive thing about the German payments surplus is that it is achieved against a background of some of the highest wage rates in the world, very heavy tax and Social Security costs and a strong euro exchange rate. Even though it has among the world’s highest labor costs, Germany also has among the world’s highest labor skill levels, and those are more concentrated in manufacturing than in finance or business services, making the German economy less vulnerable to this finance-based recession or to erosion through globalization.

Like other countries, Germany will see its exports hit by this global recession, but it has the ability to grow domestic demand to compensate without affecting its budget or payments position.

For a decade and a half, the German economy and its budget were bedeviled by the huge costs of integrating the former communist East Germany into the West. However, that was a one-off cost; anyone who graduated high school in East Germany under Communism before 1989 is now nearing 40, so younger workers have been given the education and training common to their splendidly productive West German counterparts. From about 2005 on, the drag on the budget and on productivity from East German integration costs has begun to decline, and it will continue declining in the years ahead.

With its low budget deficit and large payments surplus, Germany is the strongest economy in the EU. It is potentially the strongest economy in the world; while the United States, Japan and Britain will struggle for years with the nasty side-effects of their massive government-stimulus spending, Germany will remain in sound shape.

It is thus likely that over the next few years, the huge flows of “safe haven” money that for decades helped prop up the U.S. Treasuries market will flow instead into the German bund and equities markets: After all, where the hell else is there? That will reduce German interest rates and increase multiples on German stocks. For an international investor, it thus becomes essential to have a significant part of your portfolio in German stocks.

What to buy? Well, for a start there’s the German exchange-traded fund (ETF), the iShares MSCI Germany Index ( EWG ). At $334 million, it’s surprisingly small, but it has a Price/Earnings (P/E) ratio of 9.6, and a yield of 6.6%, so this ETF provides decent income as well as a broad exposure to the German market.

There are eight German companies whose American Depository Receipts (ADRs) have a full sponsored listing on the New York Stock Exchange (several others have moved to the Pink Sheets recently because of the costs of Sarbanes-Oxley compliance ).

Of these, Allianz SE (ADR: AZ ) and Deutsche Bank AG ( DB ) are both caught up in the travails of the global financial-services sector, while financial services industry’s travails, while Daimler AG ( DAI ) offers the limited prospects of the automotive industry (though Daimler’s a good bet once economic recovery is clearly in sight). Infineon Technologies AG (ADR: IFX ), a semiconductor manufacturer, and Qimonda AG (ADR: QI ), a maker of computer memory devices, are each currently making losses.

That means there are only three other possible recommendations, which is why, if you want a broad exposure to the German market, you should also consider a mutual fund or an ETF like EWG.

Deutsche Telekom AG (ADR: DT ) is Germany’s traditional fixed-line telephone service, which has mobile operations and that also has increased revenue by providing high-speed Internet access services. Based on both 2008 and 2009 earnings, the P/E ratio of its shares is a somewhat high 15. On the other hand, however, the stock’s dividend yield is better than 8%. A dividend cut must be possible, but the company in general seems fairly recession-proof.

SAP AG (ADR: SAP ), the well-known international maker and marketer of enterprise software, has a lower dividend yield of only 2.1%, but much better earnings-growth prospects: 2009 is currently projected ahead of 2008. At 14 times earnings, the stock currently looks cheap for this sector.

Siemens AG (ADR: SI ) is active in a broad range of heavy equipment, including items such as locomotives and electric power plants – the very kinds of businesses that are likely to benefit from heavy “stimulus” spending worldwide, especially infusions aimed at infrastructure development, which is very much the case in China.

With Siemens having recovered from losses in 2006, the company’s shares are now trading on only 8 times estimated earnings for the year to September 2009, with a dividend yield of 3.7%. They seem attractively priced.

Bloomberg Gold Price Forecast 2009 Survey- Gold the Perfect Insurance

Gold and Silver Investments have partaken in the Bloomberg Precious Metals Survey (see table of forecasts below) and the Reuters Precious Metals Poll. We would prefer not to get into the forecasting and predictions business as predictions and forecasts are fraught with uncertainty at the best of times and this is particularly the case in 2009 given the massive macroeconomic and geopolitical uncertainty and risk.

As many have found to their cost in recent years it is nigh impossible to predict the future movement of any commodity, currency, equity indices, property market or any other asset class (particularly in the short term) as there are so many variables. Having said that, in terms of accuracy we have been far more accurate than most other commodity brokers, bullion dealers and banks in recent years as we have called these markets right on a consistent basis and hopefully we can predict lines of probability.

Company	Gold	Silver	Platinum	Palladium
Dallas Commodity Co.	$1,200
MF Global	$1,200	$18
GoldMoney	$1,150
Gold & Silver Inv.	$1,025	$19.5	$950	$250
Adrian Day’s Asset Management	$990	$13.5
Standard Chartered	$985	$11	$1,000	$203
HanMag Futures Corp.	$950
Midas Management	$950
Bullion Desk	$921	$16.25	$1,080	$256
Heraeus	$910	$10.15	$945	$230
Religare Commodities	$910
NH Investment & Futures	$900
R.W Wentworth & Co.	$900
Samsung Futures	$840
Korea Exchange Bank	$825
Fortis and VM	$825	$12	$900	$180
Barclays	$820	$9.80	$1,020	$210
JPMorgan	$800	$9.80
Kitco	$810
Finotec	$780
———————————————————————————————————-
2009 Forecast: (Median)	$910	$12	$975	$220
2008 Average:	$872.25	$14.97	$1,574	$350.90

Massive volatility and unpredictability in all markets is why we advise avoiding leverage as leveraged players will likely again have a very torrid time in 2009.

Gold and Silver Investments are the fourth most bullish on gold but the most bullish on silver. We believe our estimates to be conservative as the average price of gold in 2008 was some $872/oz and thus an average price of some $1,020 is only some 20% above the 2008 average price. Similarly a high of $1,250 is only 21% above the 2008 high.

There is a potential that prices rise far above these levels, particularly as the (Commodity Futures Trading Commission) CFTC is now investigating the massive concentrated short positions in the COMEX gold and silver markets – if these short positions get squeezed and some of the bullion banks are forced to buy back their huge short positions, prices could rise to levels that will surprise even the bulls.

The survey is very interesting as it shows that there is a wide disparity between the forecasts of the many participants and between the bulls and the bears. There are more bulls than bears with only 7 of the 20 participants calling for a lower average price in 2009.

Most bearish are the online trading platform Finotec, bullion dealer Kitco and the bullion banks JP Morgan and Barclays. They all forecast an average price of between 6.3% and 11.8% below the average price of $872/oz in 2008. Many of the bears have been bearish for a number of years and have failed to realize that we are in a bull market. Given the deflationary headwinds assailing us early in 2009, they may be proved right this year as further massive deleveraging could affect the gold price.

However, we believe this to be unlikely given the massive macroeconomic and systemic risk and increasing monetary and geopolitical risk. And we believe that should the deflationary pressures continue throughout 2009 than most commodities and asset classes will again fall sharply in 2009 but gold will again outperform. As gold did in 2008 when it was up 6% in USD terms and by far more in most other currencies. Importantly, gold also rose during the last bout of sharp deflation in the Great Depression of the 1930’s when Roosevelt revalued gold by 60% and devalued the dollar by 60%, from $22/oz to $35/oz.

Also there is the significant risk that deflation will gradually give way to virulent stagflation (especially in the US) if the dollar resumes its bear market and begins to fall sharply again.

All in all it promises to be a very uncertain and likely volatile year and it will be interesting to see how gold and silver actually perform.

Dollar rises ahead of ECB meeting

Greenback hits one-month high against euro as investors await euro zone’s Central Bank meeting.

The dollar rose against major currencies Monday – hitting a one-month high against the euro – boosted by expectations that the European Central Bank will cut rates later this week.

The greenback also got a lift from a U.S. government report Friday that showed the number of jobs lost in December were slightly better than expected despite unemployment rising to 7.2%.

At 4:15 p.m. ET, the dollar was up 0.77% against the 15-nation euro, which was trading at $1.3373. Earlier in the euro was at $1.3476 – it’s highest level since Dec. 12.

The ECB meets Thursday and is expected to cut its key interest rate by 0.5 percentage points to 2%.

Last week, the euro was sharply higher against the dollar. Anticipation that the U.S. employment report would be much worse than predicted drove the euro higher, said Kido Takashi, strategist of NEXT Futures.

“This week, everyone’s focused on the ECB meeting,” said Takashi. “It’s weighing on the euro because it reminds investors of the dire straits of the global economy.”

The greenback rose 2.09% against the British pound, which fell to $1.4824. Meanwhile, the Japanese yen lost 1.15% against the dollar, falling to ¥89.11. The yen hit a one-month peak versus the euro

How to tell when a sector is about to crash

You’ve been taught – and probably believe – there’s no such thing as a predictive indicator in the stock market that works every time.

The stock market isn’t that easy, right? Oh, yes it is.

In fact, over the last five years, the financial industry has developed a new indicator that works 100% of the time and delivers gains of more than 50% per trade. More importantly, because this new indicator is triggered by investor sentiment and hype, it will surely continue to work for decades to come. Fear and greed are timeless.

After being in the newsletter business for nearly a decade, I’ve seen first hand how investors move in huge crowds. I’ve watched a dozen different manias develop – knowing they would end badly.

When all our subscribers are clamouring for a newsletter to make more recommendations about a particular sector, when we see dozens of start-up publishers covering the same popular idea, when it’s splattered all over the headlines in local papers… you can be sure of one thing: A crash is around the corner.

Subscribers wanted internet stocks in 2000 (80% crash)… China in 2007 (70% crash)… and oil in 2008 (72% crash). It’s just human nature. People tend to go crazy for the same ideas at the same time. In finance, this kind of crowd mentality produces horrific catastrophes for investors.

Remember in 2007 when agriculture was the rage? Food prices were soaring, Mexicans were rioting over the high cost of corn tortillas and there were actually shortages of rice in Thailand – which grows most of the world’s rice. You couldn’t watch CNBC without seeing an analyst talking up farming and fertiliser stocks. These stocks all went straight up for a few months… until they traded at absurd valuations. Most traded for over 40 times earnings. There’s not a farm in the world that’s worth 40 years of its production.

I saw the trend develop… and then I waited. I knew it was a mania. I knew it would end badly. Fertiliser companies advanced 350% in just 12 months; it was insane. In June 2007, I wrote, “A severe correction will coincide with a slew of agriculture & farming ETF offerings… Wall Street is never shy about releasing investment vehicles hundreds of percent too late.”

A few months later, Wall Street firms began to launch new exchange-traded funds (ETFs) to make buying the entire agricultural sector easier for small investors. Nine months after that, the agricultural sector peaked… and then collapsed. The leading agricultural index fund – MOO – is down almost 70% from its peak.

Another fad that collapsed 2008 was metals and mining. Base metals suffered one of their worst crashes in history… just months after the iPath Copper ETF (JJC) launched. The fund administrator simply gave clients what they wanted… which turned out to be a falling lump of red metal. The copper ETF is down 63% since inception.

When you see Wall Street starting a bunch of new ETFs, you know there’s going to be a disaster around the corner.

Launching a new ETF isn’t a charitable endeavour. A fund manager launches an ETF because it believes the public is willing to plough hundreds of millions of dollars into the fund… which sends the fund manager millions in management fees. A small ETF of $300 million can generate over $3 million in fees. A large, popular ETF can generate over $30 million.

The way to raise money is to build a fund that’s filled with the most popular stocks of the day. The same thing is true about selling newsletters. If you want to garner a lot of new subscribers, you have to fill your letters with whatever ideas are popular right now. And you can bet – every single time – when investment ideas get wildly popular, they also become wildly overpriced.

Investors who chase the hot sectors don’t get the big returns they were seeking. Instead, they become grist for the market. Their losses provide income and earnings for real investors. The ‘crowd’ keeps the market alive, while being eaten alive by Wall Street. This is the natural flow of the markets; it’s the market’s ecosystem. It will never change.

My friend, the legendary speculator Rick Rule, likes to say, “You’re either a contrarian or a victim.” New ETF introductions are an easy test to figure out which category you fall in. If you’re buying them, you’re failing the test.

Why you should hold on to gold

What was the best-performing asset of 2008? The Japanese yen. The many funds that had borrowed money in yen to buy assets in other currencies, now sold those assets and bought back yen to pay down debt. This was the unwinding of the Great Yen Carry Trade.

Hard to believe though it is with all the huge volatility, the next best performer was gold, up about 6% on the year against the dollar, and a lot more against everything else from stocks to real estate.

Gold was down some 15% against the yen. But those who bought their gold with British pounds will be delighted. After a hedge-funding beating 30% gain in 2007, we saw a stupendous 44% rise in 2008. Gold broke out above £600 to all-time highs.

The case for a quick recovery

There is no debate that the U.S. economy is in terrible shape at the moment.

Nearly 2.6 million jobs were lost last year, with the majority of them coming in the final four months of the year. And some economists are forecasting as much as a 5% to 9% drop in economic activity during the fourth quarter, which could be the biggest drop in 50 years.

But some economists are starting to believe that there could be a much stronger and quicker recovery than is now widely expected.

They say that the sharp drop in production and inventories during this recession will force businesses that are now busy cutting back to quickly ramp up production once the economy starts to improve.

The crisis in financial and credit markets sparked by the Lehman Brothers bankruptcy in September caused businesses to slam the brakes on production much harder than justified by reduced demand alone, according to Joseph Carson, chief economist at AllianceBernstein.

“We were producing 2 million tons of steel a week prior to Lehman. Now we’re producing 880,000 a week,” Carson said. “The economy has slowed, but it has not fallen by half in the last three months. This kind of significant inventory liquidation is exactly why recoveries take place.”

Many also believe that the significant steps being taken by the Federal Reserve and Congress to spur the economy will kick in later this year. That stimulus, coupled with low energy prices, could cause a jump in economic activity.

A V-shaped recovery?

This kind of recovery is known as a V-shaped recovery, because a chart of economic activity would look like the letter V: a steep decline followed by a quick and strong turn around.

“Generally the sharper the recession, the sharper the recovery,” said Lakshman Achuthan, managing director of the Economic Cycle Research Institute.

Achuthan said he is not yet ready to call the bottom of the current economic downturn. But he said his firm’s weekly index of leading economic indicators has been ticking higher in recent weeks, suggesting that the economy may finally be close to the bottom.

He added that when things start to show signs of improvement, the economy could well be helped by pent-up demand from consumers who sharply curtailed purchases in recent months.

“Consumers have been on strike,” he said. “They’ve been holding off buying things that they don’t absolutely have to have.”

Of course, hopes for a quick turnaround are still faint. There are many economists, including staffers at the Fed, who worry that there will be, at best, a modest pick-up in activity later this year and continued job losses continuing into 2010.

According to a plan released by the economic team of President-elect Obama over the weekend, the incoming administration believes the unemployment rate will continue to rise through the third quarter of this year, and top out at 8% — even if the economic stimulus plan it is proposing passes.

Or a U-shaped recovery?

And some economists who believe there will be a sharp recovery aren’t sure it will take place anytime soon.

“We’re eventually going to get a strong recovery. We just can’t forecast with any degree of certainty if it will be in the second half of the year,” said Ed Yardeni, president of Yardeni Research, an independent market research firm.

He added that the recovery could wind up looking more like a U, i.e. the economy hovers around the bottom for awhile, than a V.

Yardeni said everything will have to go right to bring any type of recovery in 2009, including quick passage of effective stimulus by Congress and an unfreezing of the credit markets.

He added there is some evidence of improvement in the economy, including narrowing credit spreads and lower mortgages rates. But it may be too little, too late for a turnaround this year.

“Right now there’s more going wrong than going right,” Yardeni said

Three Reasons Why Gold Moves Higher

In my mind, there is absolutely no reason that gold should still be sitting below $1,000.

Despite volatility that can cause short-term fear (such as that found in recent weeks), there are several reasons why the momentum points to higher prices in gold. I am concluding that we can all but ignore the typical “real world” supply-demand equation in favor of investment demand. The major catalysts I see for gold’s uptrend include:

1. Bullish trends in the gold options markets
2. The historical “gold-oil ratio” averages
3. Potential market-moving events to drive demand

Gold Options: Recently , options trading action pointed to levels upwards of $1,200 in the gold market. Bullion definitely has a chance to rally past these record-breaking levels, as a flurry of bets from out-of-the-money calls has a targeted range all the way up to $1,500 per ounce. After a recent fall in the commodity market, there has been strong volume on December $1,000 calls and spreads between $1,200 and $1,300. As gold options are currently dirt-cheap for traders, the trend in the options markets has higher gains on the radar.

Gold-Oil Ratio: One of the more interesting data points is the historical average gold-oil ratio which is at this point in time completely off the mark. If history proves an effective lesson, precious metals need to increase dramatically while oil needs to continue its decline. As we are sitting right now, gold would need to hit the $2,000 per ounce mark in order for the ratio to balance. Granted, this can be offset slightly with oil tailing off further; but the case for rising precious metals is evident.

World Events: Certain market moving world events could lead to a staggering demand for gold, adding yet another catalyst to the bullish playbook. With the possibility of domestic & international economic disaster, a strong threat of inflation around the world, the potential catastrophic war between Israel & Iran and even flailing currency markets, any one of these deal-breaker events could cause a sharp jerk upwards in the gold markets. Investors betting on the world’s furthered economic demise are moving all the chips on the table toward the precious metals markets.

Predictions & Opinion

In my mind, there is absolutely no reason that gold should still be sitting below $1,000. I am calling for $1,150 an ounce by the first quarter of 2009. With commodity levels headed back toward $900, I feel that a rebound in precious metal markets is imminent despite the occasional bear market rally on flailing oil prices. If you can stand the volatile short-term movements in the market, gold bulls may soon be rewarded.

The 2009 economy and your wallet

The new president’s first job will be to repair a badly broken economy. Here’s how he’ll take on the four biggest challenges – and what that means for you.

Under normal circumstances, the election of Barack Obama would have meant a lot for your wallet. As a candidate, Obama promised to shift the burden of taxes toward the affluent, get health coverage to the uninsured and slap tougher regulations on financial products.

But these aren’t normal circumstances. Major financial institutions have disappeared virtually overnight. American automakers are now in danger of doing the same. Retirement funds are drying up and job losses have skyrocketed.

Forget “change you can believe in” – this is change you hope that Obama can keep up with. The new president and the Democrat-controlled Congress have more to do, and will spend more taxpayer money, than almost anyone would have expected a few months ago.

“The recession train has left the station,” says Harvard University’s Kenneth Rogoff, former chief economist at the International Monetary Fund. “This is about trying to prevent it from driving off a cliff.”

So can the new crew head off a crash? Let’s take a close look at what to expect from the government in 2009 and at how that changes your own financial game plan.

Challenge No. 1: The bottomless housing pit

One in 10 mortgages is either in foreclosure or delinquent on payments. That’s costing the rest of us big-time: If two houses on your street go into foreclosure, you can shave 10% off the value of your house, says Mesirow Financial economist Diane Swonk. The home-equity bonfire has eliminated an easy source of credit – a heavy drag on an economy that has depended on consumer spending for 71% of GDP.

What to expect from Obama: Obama will be under intense pressure from both left and right to expand Washington’s footprint in the housing market. That’s because none of the efforts so far have had much impact. The Hope for Homeowners program, which offers banks a government guarantee in exchange for reducing the principal on mortgages, has led to just a few hundred loan modifications.

One reason: Many mortgages are serviced by firms that don’t actually own the debt. Those servicers have less incentive to act – and may fear lawsuits from far-flung investors holding bits and pieces of the mortgage. “It’s been like using a paper cup to bail out a sinking ship,” says Mark Zandi, chief economist of Moody’s Economy.com and a former McCain adviser. “We need some real big buckets.”

What would bigger buckets look like? First, Obama can attack the slump in demand. The administration might pull the trigger on a proposal from the current Treasury team to finance new mortgages at rates as low as 4.5%.

To stanch foreclosures, Obama wants new bankruptcy rules that would allow judges to modify some mortgages. Many Democrats also back a plan from Sheila Bair, current head of the Federal Deposit Insurance Corporation. The government would offer a deal: If the lender lowers the mortgage payment, Uncle Sam will pick up 50% of the losses if the borrower ultimately defaults. This might require a law to shield servicers from investor lawsuits. The FDIC estimates that this could stop 1.5 million foreclosures, at a cost to taxpayers of about $24 billion.

Some voters will find this hard to swallow. Bair’s program pays out to homeowners and financial players who made bad bets, while the rest of us keep living in the houses we could actually afford. And there’s an argument that home prices have to find their natural bottom. But many economists worry that the market will overshoot on the way down just as it did on the way up. “We could be looking at a death spiral in prices if the rate of foreclosures isn’t reduced,” says Nariman Behravesh, chief economist at Global Insight.

Even if intervention works, things will be ugly. “You can’t stop the correction that is still required to offset the speculative excesses of the bubble,” says economist Jared Bernstein, an adviser to Obama’s campaign. “That correction is going to continue through 2009.”

Your strategy if you’re a seller: Obama has no quick fix. If you must sell now, move fast and be realistic. Undercut asking prices in your neighborhood, using the (lower) prices actually paid as a guide, advises Gabriel Bedoya of the real estate firm Corcoran Group. “It’s a much better gauge of what people are willing to pay,” he says.

Your strategy if you’re a buyer: No hurry. But don’t fret about trying to pick the bottom – you can get a house at a good price now if you are willing to stay put. In 2009, houses will be more affordable than they have been in a decade, according to research by UBS. And thanks to a Federal Reserve rate-cutting spree, 30-year mortgages are at an all-time low.

Your strategy if you’re staying put: Whatever Obama does, the Fed’s rate push makes this a good time to look at refinancing.

Stocks Still Looking for the Support Level

By all accounts, the U.S. economy is not going to hard-land. It will have a crash-landing instead. The only uncertainty remaining at this point is just how wide the berth of that landing will be. This is the question that investors should be asking, particularly those who may think that, after two brutal months of losses, the worst might be over for equity markets.

Talking again about the U.S. economy’s crash landing berth, here are the latest indicators demonstrating that things can always get worse. The ISM manufacturing index plummeted to an alarming 38.9 in October (note that anything below 50 means the economy is contracting). This is also the worst reading in over a quarter of a century, suggesting that the economy has gone deep, far and wide into recession.

Joining the misery was the U.S. automobile sector, which suffered huge percentage drops in revenues because consumers were more worried about keeping a roof over their heads and food on their tables. So what if their car is not brand new? It finally dawned on the American consumer that money doesn’t grow on trees.

Speaking of money and where it grows, the U.S. government announced last week that the country’s payrolls will lose another 200,000 jobs in October. That would mark every single month in 2008 as a declining month for non-farm payrolls. Note that, since January this year, almost one million Americans have lost their jobs.

That kind of pressure on the economy had to have an effect on global equity markets, which went through a meltdown of their own in October, shaving off an estimated $5.79 trillion, overshadowing the previous record loss of $4.0 trillion reported in September. Some might think equity markets have hit rock bottom, that all the bad news has been factored in by now and that it might be time to start buying stocks again.

Well, I’d say not so fast, people, because you seem to be forgetting about the U.S. economy’s quintessential hero — the U.S. consumer — who appears to be sadly missing from the picture. This time around, the U.S. consumer is fresh out of ammunition to save the economy. There is no more cheap credit in any shape or form available. All those credit cards, car loans, mortgages, lines of credit (secured or not), etc. are gone for most people. It has been so intoxicating that most have completely forgotten incomes have barely grown for most Americans. Falling back on those incomes hasn’t been pretty, and not having them at all has been downright ugly.

“With the credit bubble spectacularly bursting,” -reported Japanese analyst Saeba Ikki- “along with the collapsed housing market and soaring unemployment, the U.S. consumer is battered and exhausted.” It’s no surprise that consumer spending has plummeted at an annual rate of 3.1% for the third quarter, which would represent the largest decline in almost three decades. And that was even before stock markets tanked in September and October.

Should investors still be worried? You betcha! The U.S. consumer comprises about two-thirds of the country’s total economic activity. So, the longer the recession and the longer it takes for the consumers to recover, the longer investors will have to wait for the market to find its support level and embark on the path of recovery.

Keep an Eye Out for Earnings Cuts

With the third-quarter earnings season set to pick up, there is cautious optimism. However, we do expect some nasty numbers out there with the blame fully on the condition of the economy. Just try reading some of the recent headlines on the wires and you’ll understand the concerns.

“US Bancorp 3Q falls 47 percent”
“DuPont 3Q profit falls on charges, cuts 2008 view”
“Caterpillar’s 3Q profit falls 6 pct”
“Nissan to cut production due to US slump”
“Freeport McMoRan profits fall by nearly a third”

The bad news on the earnings front may only be the beginning and could surely lead to earnings downgrades from Wall Street in the upcoming weeks. The consensus is calling for a weak third quarter and, unless we see some positive remarks going forward, stocks could edge lower over the next few weeks. Watch out for upcoming guidance cuts followed by downward revisions in analysts’ EPS estimates.

The current valuations appear to be attractive at this time given the selling, but should there be earnings cuts, stock prices would be vulnerable, as the valuation of stocks will be higher. We believe it is only a matter of time before Wall Street crunches its numbers and spreadsheets and determines that the earnings assigned to companies are too high and need to be adjusted down. This would not be a surprise, as we have seen very little as far as downgrades despite the slowing economy in the U.S. and worldwide.
But perhaps the recent downward move in the stock markets is just factoring in the expected cuts in earnings that are to come. Over the next few weeks, watch for earnings to be cut, as we see no other option for Wall Street.