VOL. 126 | NO. 21 | Tuesday, February 1, 2011
The Worldly Investor
The State of Things
DAVID S. WADDELL
The State of the Union
While the president acknowledged our current fiscal crisis, he did not provide a plan. We will find out on Feb. 14th, when the White House submits its budget for the next fiscal year, if a plan exists.
The $1.5 trillion deficit is inconvenient, but stimulus will fade and tax revenues will rise. What matters is the continued “blank check” approach to Social Security, Medicaid and Medicare and the impact of future interest rate increases on the debt we pile on to service them. In 30 years federal tax revenues will only support interest payments, Medicare and Medicaid. There will be no room for defense, education or Social Security.
The good news is that the severity of the situation has gained broad acceptance, and plans have been proposed by Paul Ryan, The Peterson Foundation, and the presidential-appointed Simpson Bowles Commission (among others). Each of the plans contains common elements, which would make an easy place for the president to start, if his conviction builds. Unfortunately, restructuring the entitlements requires bold presidential promotion, which is why the submission of the White House budget will truly reveal the state of our union.
The State of Earnings
Of the S&P 500 companies, 183 have now reported earnings. Seventy-four percent have surpassed analyst estimates, and earnings have grown 47 percent overall versus a year ago. Revenues have also increased sharply, up 8 percent versus a year ago. Gains in energy and materials companies have been particularly robust, although this may signal that margin crimping price pressures lie ahead for consumers of energy and materials, as seen anecdotally in many reports. Overall, it’s been a solid season.
The State of the Economy
Fourth-quarter GDP released last week indicates that the U.S. economy grew 3.2 percent on an annualized basis. While this came in a little short of estimates, the report contains plenty of encouraging data.
First, if you remove the volatile inventory figures, which subtracted 3.7 percent from growth, end demand grew at 7.1 percent, the highest rate since 1984. Lean inventories will require replenishment, assisting first-quarter growth. Consumers resumed their spending ways, adding 3 percent to the growth figure.
The pace of consumer spending in the fourth quarter was the highest since first quarter 2006. Most important, real GDP now surpasses the prior pre-recession peak from fourth quarter 2007.
Goodbye recovery, hello expansion!
The State of the Markets
Everything was going fine until Egyptians began rioting. The S&P kissed 1,300 last week, while the Dow Jones Industrials reached 12,000. Value in the markets equals earnings today times perception of future earnings capability.
Earnings today continue their steady climb, as we discussed in the state of earnings segment. Perceptions of the future fluctuate more erratically, and riots on TV momentarily hinder forward optimism. I am not overly concerned by short-term emotional reactions in the market. Regime change in Egypt will not impair Apple’s future earnings.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.