Equal Time for Roubini

Yesterday I gave space to the ECRI in the post, ECRI Pounds the Table So Hard It May Break. Giving equal time to a more bearish expert, I am linking to a recent Roubini Global Economics Monitor piece, Easing Job Losses Don’t Change Weak Prospects for U.S. Recovery.

In it, the following comment appears:

In a severe consumer-led recession like this one, labor market is a leading (rather than lagging) indicator of economic recovery and the consumer still drives the U.S. economy (private consumption still makes up over 70% of U.S. GDP). A slowdown of the pace of job losses from 650,000 to 250,000 is welcome but in no way offers comfort about a prompt comeback of the U.S. consumer. This raises concerns about the strength and sustainability of any economic recovery that most people are expecting in H2 2009 and beyond.

ECRI is looking at its predictors. It states that these predictors have worked based on a century or so of data. However, ECRI was only formed about 60 years ago. It would thus appear that these predictive algorithms have been formed to fit the prior data. Hmmm . . .

One potential difference between the Roubini approach and that of ECRI may be found in the above paragraph. If consumer wage (and interest) income is now a leading indicator, that might dramatically change the ECRI prediction.

The Roubini approach actually fits the 2000-2002-3 bear market in stocks better than the presence or absence of recession. The recession ended in the fall of 2001; the optimal time to buy the average stock was in late Q1 of 2003, 3 years after the stock market peak. The ECRI asserts that by next year, anyone will be able to look at the data and see a strong, broad economic recovery underway. Yet that was the general case in 2002.

Market action is mixed. The move out of a base by Wal-Mart after mediocre sales and earnings is technically encouraging, and goes along with the rotation one would want to see in a true bull market. On the other hand, McDonald's keeps eroding despite fine operating results; same for FPL. Other quality companies such as Northern Trust trade at unattractive valuations and have so-so charts. I only want to own companies that I expect I would want to own if the stock market closed for a year. MCD and FPL fit that bill. Probably GD and TEVA do as well. At cheaper valuations, ROST and NPK also qualify. All the above companies have strong long-term charts, rising dividends, reasonable to low P/E's, and strike me as generally shareholder-friendly. (No comments herein represent investment advice.)

Except perhaps for periods in the 1930s, there is probably no precedent in Angl0-American financial history in which the net deficit of the central government roughly equaled business profits, as I suspect is the case today. Talk about borrowing from Peter to pay Paul!

As Dr. Roubini punned some months ago, this all may be a "made-0ff" economy.

Caveat investor.

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