In our view the current rally is another head-fake based on little or no evidence. The market is not only expressing its relief over a quick victory in Iraq, but is using the war as an excuse to ignore all of the negative economic news as “old”. Instead, investors are assuming that all of the post-war data will reflect the economic recovery that supposedly would have taken place had not geopolitics intervened.
In essence, investors are again attributing negative economic and market performance to events they consider temporary, rather than recognizing the severe structural imbalances that are actually at the foundation of the economic and market malaise. We pointed out in a previous commentary (see “Aesop’s Fables”, February 12, 2003) how investors have now been waiting over three years for recovery, only to come up with continual lame excuses why it is not happening.
With the Iraq war now ending, how convenient that SARS has now come along to provide the next potential excuse for the economy remaining in the doldrums. There is no evidence that an economic recovery is in sight. If anything the news has been getting worse, not better. Today’s release of the April Challenger layoff data show a sharp rise in layoffs that confirms last week’s extremely poor labor outlook. Layoffs were up 71% and were the third worst for any of the last 12 months.
Initial claims have been running at a high level while 525,000 jobs have been lost in the last three months. Since World War II only one time has employment declined for three straight months in a non-recessionary period, and that was during the steel industry strike in 1952. April auto sales were disappointing despite massive incentives. With the poor labor picture and record consumer debt, the outlook for consumer spending in the period ahead is not promising, while capital spending is likely to lag.
IT accounts for 55% of all capital spending, and the outlook remains poor. Ingram Micro is the world’s largest distributor of computers and electronics with annual sales of over $22 billion. Its CEO Kent Foster said last week, “There is no indication of any upturn in IT demand. There are people who are expecting or hoping for an upturn in the second half of the year but I don’t see any sign of that and I talk to people every day in almost every segment of the economy”.
Dell Computer COO Kevin Rollins said that he saw no signs that weak IT spending would change anytime soon. He stated, “We haven’t seen any change in the marketplace that would suggest we are out of the slowness”. In confirmation, the CIO Magazine Tech Poll for April projected IT budgets to grow 4.2% over the next 12 months, down from a 6.1% forecast in March. Those planning to increase spending decreased to 37% from 38.6% in March while those planning to decrease spending rose to 20.4% from 19.9% in March. Of all respondents polled, 35.8% don’t expect a pickup in IT spending this year, a significant rise from 14.8% who thought so in November.
In sum, there is no evidence for an economic pickup anytime soon, while the rally has carried the market into even higher zones of outlandishly excessive valuations. We think this rally will meet the same fate as every other rally in this bear market, and that the previous lows will be broken in the period ahead.
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