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Published: August 2, 2010
If The old axiom "The stock market always
looks ahead" remains in force. And as is often the case, market
forecasters are all over the lot as to what we can expect in
2011, 2012 and beyond.
The most bearish forecasters can reasonably cite a bearish
consumer, stressed federal and state governments, and trading
partners that have major economic concerns of their own. But
it's important to remember that in times of fear, those bearish
pundits get plenty of attention and their bullish counterparts
may seem out of touch with reality.
So in the trade-off between all of the positive and negative
forces in our economy, the positive factors in play might be
getting short shrift. Here's a quick look at five factors that
could push the stock market onto a nice growth path
1. Profits = Cash = Jobs
Corporations are a fairly predictable lot. They react to
economic downturns and upturns in a repeated fashion. First,
they cut jobs. Then, they generate higher profits thanks to
now-smaller workforces. As those profits pile up on the
balance sheet, they post abnormally high levels of cash.
Finally, when convinced that the worst has passed and they have
tired of over-burdening shrunken workforces, they begin to
re-hire lost employees. Eventually, unemployment shrinks and
consumer spending rises. This is precisely how things played out
in the 1990s, with very positive results for investors willing
to stick it out through the lean years.
2. A long, long way from onerous interest rates
The cost of borrowing remains near an all-time low as the
Federal Reserve keeps inter-bank lending rates barely above
zero. The Fed is likely to keep rates low for some time to come.
When the Fed finally begins to raise rates -- perhaps some time
in 2011 -- they will go slowly and may simply move rates back up
300 to 400 basis points, a level which should still be conducive
to economic growth and a level that should still make equities
comparatively attractive relative to fixed income plays.
3. The global consumer
Lost in all of the hand-wringing about global economic problems
has been the stunning rise of a consumer class in Chile, Brazil,
Korea, China, India and elsewhere. Those countries alone account
for more than half of the world's population. And if history is
any guide, markets with fast-rising middle classes (such as
Japan in the 1970s) tend to drive demand for global brands.
Executives at firms like Coca-Cola (NYSE: KO), IBM
(NYSE: IBM), Walmart (NYSE: WMT) and Procter &
Gamble (NYSE: PG) have been busy establishing beach heads in
those newly-robust countries, and should become dominant brands
in these newer markets.
Brazil in particular is a great story -- the country is in the
process of lifting its neighbors through direct investments and
increasing trade flows. Conveniently for us, major Latin
American markets are just a direct flight away.
4. M&A and private equity give
benchmarks
We've seen a reasonable amount of deal-making in 2010. More than
we saw in 2009, when everyone was gun-shy, but perhaps less than
what many forecasters had expected.
The healthcare industry -- especially biotech -- has accounted
for the lion's share of deal-making in recent quarters. But as
the economy stabilizes and companies realize that organic sales
growth is muted, we might see a robust
uptick in mergers and acquisitions (M&A) in other sectors as
well -- that is, if the private equity (PE) shops don't beat
them to it. A lot of these PE firms raised oodles of money three
or four years ago and are bumping up against deadlines that
compel them to put that cash into play or return it to
investors.
All of these deals are very helpful for investors, as they
establish an appropriate value for businesses and industries.
Hypothetically, if a company is bought for 20 times trailing
earnings and its rivals are trading at 12 times earnings, you
can bet that investors will flock to cheaper rivals in search of
the next hot deal.
5. Buybacks
For companies sitting on lots of cash (see Reason #1), but have
no interest in doing a deal (Reason #4), then stock buybacks
become a real option. We're already seeing companies as diverse
as Hasbro (NYSE: HAS), DirecTV (NYSE: DTV) and
Cisco Systems (Nasdaq: CSCO) buying back gobs of stock.
Until and unless the stock market really zooms ahead, look for
an increasing number of companies to announce large buyback
programs, which can be a real boon for per share profits. For
example, since 2005, Home Depot (NYSE: HD) has reduced
its share count from 2.2 million to 1.7 million. That -23%
reduction in the share count means that
earnings per share (EPS) is +23% higher -- on the same
amount of
net income.
Action to Take --> This is
no time for complacency. Risks remain and investors may want to
lock in profits on any fast rallies. But whenever we get a stock
swoon as we saw in June, keep reminding yourself of all of the
positive factors that can be easily forgotten.
-- David Sterman
Staff Writer
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