Economy

An end to the economy's nose dive?
Source: MSN Money

The US financial engine is sputtering, but all the recent tinkering just may keep it running. Maybe we can turn off the warning signals, at least for now.

What if they gave a recession and nobody came?

That's the question that government, private economists and all of us at home are going to have to mull this summer, as an unprecedented flood of monetary and fiscal stimuli, and renewed global demand for our agricultural and industrial exports, appear to have yanked the U.S. economy out of a nose dive and landed it for a slow roll on the tarmac with just a few bumps and bruises.

This might not be everyone's idea of a perfect soft landing for an economy that was screaming along at 5% annual growth during the days of easy credit three years ago, but it's also not the crash that bears have been fearing.

One of the nation's top independent economists reported this week that his data show the United States is now on track for at least 1% annualized economic growth through the first half of 2009, with no three-month spans forecast in the red.

That economist, Ed Hyman, one of the few number crunchers to whom portfolio managers actually pay attention, acknowledges that his finding is surprising, considering he alerted clients at the start of the year to go on "high alert" for recession.

Yet the founder and leader of ISI Group in New York called off his alert Wednesday because he believes that improving credit markets, powerful federal policy action and a massive wave of investments from the global glut of commodity money will bolster U.S. corporate and consumer balance sheets enough to allow industry to muddle through at least the next 18 months without serious disruption.

Rebates and rebounds

Consider that gross domestic product grew at a fast 4% annualized rate in 1994 while the broad market sank 2%. A year later, GDP growth plunged to 2%, but stocks advanced 34%. Weird, but true.

I'll give you a list of my top small-capitalization and midcap picks in a moment, but first let's explore what's happening under the surface of this crazy economy.

One big upside surprise could come from a source everyone has already discounted: tax rebates. Hyman thinks the effect may be astounding, lifting disposable income for consumers by 16% quarter over quarter. And there's a little-known nuance in the rebate code that allows for $50 billion in tax savings for corporations from accelerated depreciations, which will also likely go straight to U.S. industrial suppliers such as Emerson Electric (EMR, news, msgs) and Ametek (AME, news, msgs).

The jobs market may be in better shape than most suspect, as well. Hyman looks at household employment, rather than figures from the Bureau of Labor Statistics, every month because household employment better captures the swelling work forces of small business. By this measure, monthly employment increases over the past year have averaged 97,000 and are well up from their low of 3,000 in December.

Meanwhile, the four-week average of unemployment claims is down, while indexes kept by independent companies Automatic Data Processing and Monster both ticked up in April, in defiance of the weakness displayed by the government's data-gathering process.

Inflation trends may help, too. Despite what you sense from your own life about higher food and energy costs, the main input for inflation is wages, and they are flat at best. Inflation rarely rises at times of economic softness, and though we are hearing a lot about stagflation, a rare condition unlikely to occur while the costs of the biggest things on which we spend money -- homes and cars -- are falling.

Some aggressive companies such as Starbucks (SBUX, news, msgs) and McDonald's (MCD, news, msgs) are even cutting prices selectively in an effort to grow market share. China also remains a deflationary force; Hyman notes that it is stepping up low-cost production of high-tech medical devices such as MRI machines for export.

Meanwhile, the amount of money pouring into the economy from U.S. and overseas corporate investments is staggering. Hyman provided a list of capital investment plans announced just in the past week that includes $8.6 billion by Russian mining giant Uranium Holdings, $1.6 billion by Bristol Myers (BMY, news, msgs), $2 billion by British American Tobacco (BTAFF, news, msgs), $1.7 billion by Stone Energy (SGY, news, msgs) and $1.9 billion by giant German copper smelter Norddeutsche Affinerie (NDEAF, news, msgs).

Add to the list Austria's announcement that it will spend $4.8 billion developing energy properties in Russia, the launch of a $5.3 billion sovereign wealth fund by Saudi Arabia, the announcement of $40 billion in new investments by Warren Buffett, the $4.7 billion invested by Kirk Kerkorian in Ford (F, news, msgs), $163 billion raised by private-equity funds for investment in the first quarter and record European bond sales of $147 billion in April, and you can start to get a glimpse of the tidal wave of cash that is washing onto companies' profit-and-loss statements, from which it will then pass to investors.

Moreover, whenever you mention the higher price of oil and agricultural products as a drag on the economy, don't forget to add back the offsets: Plenty of farmers, oil-field workers, small-town retailers and bankers in Texas, Oklahoma, the northern Plains states and elsewhere in Middle America are earning much more than usual the past few years, and they are spreading the wealth by buying houses and cars.

At the same time, it seems like the Federal Reserve or the Bank of England announces a new way to directly inject money into troubled banks every few days, ranging from the $250 billion-plus Term Auction Facility to the acceptance of low-quality mortgages as collateral for one-month loans.

To be sure, not all is well -- far from it. Federal prosecutors are stepping up their investigation of subprime lenders; major companies such as GMAC ResCap have had their credit ratings cut to junk; top hedge funds have squandered hundreds of millions of dollars of rich clients' net worth on bad credit investments; banks will continue to write down massive losses and fire workers; insurance companies, including Berkshire Hathaway (BRK.A, news, msgs), are facing losses in their credit portfolios; and bankruptcy filings were up almost 50% in April versus 2007. Yet each of these painful headlines must be weighed against the positives to obtain a clearer picture.

When you stir up all this data, throw it into a pan and bake at 350 degrees, the net result appears to offer the prospects for both a contractionless recession and a growthless recovery. Though that sounds bad, it doesn't have to be the death of your investment portfolio.

The StockScouter rating system at MSN Money has done a sterling job of helping investors navigate this difficult year, focusing attention primarily on the shares of oil and gas producers and steel makers. Its portfolios, provided here every month, are up around 12% this year while the broad market is down 4%. I provided a list of some of those in my April 10 column on the Bakken Shale of North Dakota, but here is another short list, hot off the presses. Rather than hold these for the usual Scouter portfolio holding period of one to six months, you can consider keeping these for two years through inevitable ups and downs:

If Hyman is right, and StockScouter continues to highlight the right sectors and stocks to play, there is no reason for investors to fear the pressures facing big companies right now. It really may be time to go off high alert.

Fine print

Read about the Russian uranium quest here. Read about the German copper giant Norddeutsche here. Check out this page at the Federal Reserve Board's Web site to learn more about its latest efforts to add liquidity to the system. The Fed provides tons of economic data on the Web at pages like this. . . . Read an excellent op-ed piece co-authored by Lakshman Achuthan of the Economic Cycle Research Institute at CNN Money here.

Meet Markman at The Money Show

MSN Money's Jon Markman will be among more than 100 investment experts on hand for The Money Show in Las Vegas from May 12 to 15. You can hear from the experts in more than 250 free workshops while sharing tips and tricks with other active investors. Admission is free for MSN Money readers.

To sign up, call 1-800-970-4355 and mention priority code No. 009552, or register online.

Markman's presentation on "What I Am Trading Now" will be available via a live webcast from 2:15 to 3 p.m. Wednesday, May 14. To register in advance, click here.

At the time of publication, Jon Markman owned shares of following companies mentioned in this column: Stone Energy, Ametek, Emerson Electric, Approach Resources, Quicksilver Resources, Rex Energy and Apache.

< Back to Trend Reports >