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| Leeb's Market Forecast | |
| April 15, 2008 | |
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| Dear Investor, Market Update ------------------------------------- In this week's update... ***** The market misreads GE's results. ***** Real estate is actually becoming attractive again. ***** Regardless what you hear, inflation is the real threat, not recession. ***** Good time to buy gold. ------------------------------------- The stock market was jolted at the end of last week by disappointing news from one of our core holdings, General Electric (GE). Most of the media, including the New York Times, headlined this as further evidence that the economy is going to the dogs.
It's not often that this company misses its target. Naturally, we are disappointed by GE's numbers too, especially after its Chairman, Jeff Immelt, had promised that earnings for the year were in the bag -- and backed up that promise by purchasing shares for his own account just a month ago.
Looking at GE's results more closely, we do think they shed some light on what's happening in the economy. However, what they reveal is that things are not quite as bad as they appear at first glance.
It's important to note that the bulk of the writedowns that impacted GE's earnings had to do with financial services. GE was also unable to sell certain assets because of credit constraints at other companies.
The other contributing factor was poor sales in the healthcare arena. Some of this was company-specific -- certain products were not shipped in time. The remainder was again related to the credit crisis. (Hospitals stopped buying expensive digital equipment towards the end of March.)
However, if we look at GE's other divisions, we are struck by the fact that their infrastructure revenues jumped 23% to nearly $15 billion. And there was strength across the board. Backlog soared $3 billion, or over 30%. Infrastructure represents roughly 40% of the company's business, and its rapid increase is a very good sign that worldwide economic growth remains on a solid footing.
The figures also reassure us that the weakness we have seen in theU.S. economy remains confined to the financial sector. And the good thing about that is that the financial sector will respond most favorably to the massive injections of liquidity the Fed had been making recently -- and to the rebates that are coming in the second half of this year.
In fact, we are already seeing a positive response to the liquidity flood ...
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HOUSING: NOT IN QUITE THE SLUMP MOST PEOPLE THINK
Already, we are seeing some response to higher liquidity. Housing has been the weakest part of our economy. Yet, as we mentioned last time, the affordability of housing has jumped to near record levels. Plus, the rate of that increase has been greater than anything we have ever seen.
While many people have expressed amazement at the unprecedented declines in the housing sector over the past year or two, no one seems to be talking about the unprecedented increase in housing affordability. From our perspective, however, the glass is easily half-full.
In fact, we expect housing to become even more affordable as the credit markets begin to unlock a little. Mortgage rates will likely fall to be more in line with long-term yields. And any further drop in home prices will only make home-buying more attractive.
So, in another few months, we could see a situation in which inflation is rising, mortgage rates are low, and housing prices are lower. All that will make houses a compelling buy. And with the government doing all it can to provide liquidity, we could see housing leading a rebound in the economy much sooner than anyone expects.
In the meantime, we keep asking ourselves, "Is this economy really as weak as everyone thinks?" And the trouble is, when we turn our eyes from the news doom and gloom headlines and look at the solid data, the two simply don't line up...
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IT'S ONLY A RECESSION IF YOU'RE
It still appears to us that the weakness, as is the case with GE, is confined to the financial sector. Maybe the cause of all the gloomy forecasts in the papers is merely the fact that they are written by people in the financial sector. After all, if you are on the verge of losing your job, or if you are a Merrill Lynch economist and your pension has declined by 60% in the past few months, the glass probably does look half empty to you.
(We're joking just a little here.) Nonetheless, it seems that the most of the more bullish economists today seem to work for firms with no connection to Wall Street. Those we respect, such as Argus, are forecasting 3% growth this year, last time we checked.
We continue to watch our 3-dial Recession Gauge closely, because it's based on hard numbers. For instance, unemployment insurance claims a briefly spiked to 400,000, which is still a good number (in a real recession, we would expect to see it at 450,000 to 500,000). But more recently it's fallen back to 357,000.
Also NOT a sign of recession is the fact that commodity prices are in a strong uptrend, despite Wall Street's unwillingness to believe it. For the past 12 weeks, for instance, the Bloomberg survey of analysts has forecast lower oil prices. Yet West Texas Intermediate Crude closed last week at yet another new high of $110.14 a barrel. Some of this strength may be due to supply limitations, but much of the recent gains are the result of strong demand outside the
Bottom line: the economy has managed to avoid falling into a vicious circle. The Fed has successfully fended off a decline in which weakness might have fed on weakness -- or at least it is on the verge of fending it off. If they continue pumping out the money, boosting the liquidity, the vicious, recessionary circle will not arrive.
KEEP INVESTING FOR INFLATION
Unfortunately, fighting off the recessionary vicious circle will only create another type of vicious circle. That's the one we have been warning you about for the past seven or eight years -- the one involving commodities.
Remember, it's not just oil that is rising in price but virtually all industrial commodities. What's more, these price increases tend to feed upon themselves. For instance, when copper rises in price and water becomes scarcer, it becomes more expensive to drill for oil. As oil prices rise, it becomes more costly to refine aluminum. Alcoa's recent miss on its earnings estimates was entirely due to higher energy costs. Higher oil prices also lead to higher platinum prices. And if platinum prices rise, so do the prices of many other manufactured items which use platinum as a catalyst.
We hope you see our point.
In a world in which growth is driven by developing countries who, in their developing stage use a lot of commodities, there is no easy way out.
Gold has been a little disappointing this month, and indeed its price could continue to back and fill for another few weeks. We have no clue as to when gold will make its next move. But we continue to believe that this world will be driven by inflation, and that means there are few safe havens apart from precious metals.
In such a world, gold continues to provide you with the surest store of value. So continue to hold your gold positions. Add to them on any weakness. The worst case scenario is that gold will briefly return to the low $800s. But that case pales in comparison to where we expect gold's ultimate high will be -- in multi-thousands of dollars per ounce.
Continue to hold your other commodity plays as well. And you also won't get into too much trouble investing in the other stocks in our Growth Portfolio, or (if you need income) our Income Portfolio.
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