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America is no doughnut economy

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by Peter Switzer

Homer Simpson once asked the question:

"Doughnuts. Is there anything they can’t do?"

The same question might be asked of the Aussie economy with another run of great data today.

In contrast, the US economy, while getting better, is certainly not in the miracle doughnut class and that showed on Wall Street this morning.

An hour before the closing bell in New York, the Dow Jones was up 35 points following better than expected earnings from the likes of Wells Fargo and Morgan Stanley. Also, the Fed’s look at the US economy through its 12 economic districts confirmed an improving economy in manufacturing and even the housing sector but it was nothing like the fast lane stuff seen here in Australia.

Downgrade

And so if the US business and economic news today looked promising, how come the Dow Jones index finished down 92 points or 0.92 per cent to 9949?

The trouble came when prominent market analyst Dick Bove from Rochdale downgraded Wells Fargo from a “hold” to a “sell” because he did not like the bank’s loan quality. This raised doubts on what the bank could do in the next quarter and other banks’ share prices copped the backwash.

After being up, this slagging took the bank’s share price down five per cent.

By the way, both Wells Fargo and Morgan Stanley did better than expected on both earnings and revenue.

Also not helping the market was oil shooting over $US80 a barrel, which was not seen as a plus for the struggling US consumer.

The miracle economy

Meanwhile over in the miracle economy, as the new cliché goes, it’s all good!

First, the Westpac-Melbourne Institute leading index came in at 1.7 per cent for August and this compares to a one per cent contraction in July. It led to the bank's chief economist, Bill Evans, to say that the pace of recovery is “remarkable”.

Unfortunately, this could add to the case that interest rates could be jacked up by 0.5 per cent on Cup Day, which I think would be excessive.

Next, the world’s biggest miner, our BHP-Billiton, came out with record iron ore and petroleum output. And it reported that demand for steel is on the rise.

The analysts said the news points to no China paybacks for Aussie companies following some recent controversies.

Finally, car sales have risen 2.9 per cent in September, with passenger car sales up six months in a row.

But better still, cars are the cheapest in a generation. CommSec says five years ago it took 37 weeks pay to buy a Ford Falcon but now it only takes 30 weeks! That’s the cheapest in 33 years.

Across the Pacific

Back to the less convincing economy — the USA.

All up, the economy and the corporate performance is getting better. The American’s economic repair job will be slower because their economy was more damaged compared to ours.

However, remember how far the US stock market has recovered? From the level of 6547 to 9949 now. That’s a 52 per cent comeback.

Negative economic news and certain commentary will be used to spark a sell off and some profit taking, but the pullbacks are always small. There is not much stomach for a correction, which is defined as 10 per cent, because there is about $US3 trillion dollars of cash on the sidelines and there is no big, bad economic or corporate story that has rocked the market. Let’s hope it stays that way.

Eventually the market’s rise will level out until the economies and companies of the USA and the world start to really rocket back to normal. That’s what we should be positioning for but it could take a couple of years to materialise.

On the other hand, we could be pleasantly surprised.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, October 22, 2009