| Improved Earnings, But Where's the Beef? |
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| Saturday, 15 May 2010 21:45 | |
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When financial guru, Warren Buffet speaks, people listen. So when Buffet says the economy is showing significant signs of life, it must be true . . . right? He certainly has a bird's-eye view of the overall health of the economy as he sits on his CEO perch atop Berkshire Hathaway Inc. After all, Berkshire owns businesses that cover the industry gamut from insurance, furniture, and clothing, to utilities, jewelry, and corporate jets. Based on the first quarter upsurge in manufacturing for companies under the Berkshire umbrella, Buffet feels confident about the economic outlook. In fact, he's stepping way out on the limb and predicting a quick 'V-shaped' recovery in the over-all economy. If you were thinking about investing, or as we like to say, "speculating," based solely on Buffet's words, you might want to stop and take a deep breath. Otherwise you could get hooked into herd mentality. If you'd like a little background on how easily things get out of control when enough people blindly follow a blanket statement like Buffet's, we encourage you to read our bookThe Big Gamble: Are You Investing or Speculating? We’ve devoted an entire section on the humorous, often dumbfounding examples of the hapless taking leave of their senses. Smart speculating requires more than following the advice of the so-called experts who stand to gain from their own recommendations. And it's about more than making a judgment call on the economic outlook. It's also important to understanding valuation, and sometimes investors don't pay enough attention to valuation. Yes, the S&P 500 first quarter results for US corporations sent positive signals—they exceeded expectations by 16 percent. That means corporate profits; and profits are key to value investors. But keep in mind, this is just the first quarter, and first-quarter results aren't a reliable benchmark for valuation if they turn out to be a temporary peak during an economy that might not be able to keep pace the current rate of growth. You also have to factor in how much of the positive results were due to government stimulus and cost-cutting measures versus actual revenue growth. There have been signs that consumers are spending again and that gives retailers an added boost that factors into the overall statistics. But maybe we shouldn't start celebrating just yet. Consumers must have money to spend and unemployment figures continue to run high. Who really knows how many are actually unemployed? Those stats are based on people filing for benefits and those still receiving benefits. Nobody can track how many have simply exhausted their benefits or given up trying to find work. So the recent uptick in consumer spending isn't a reliable indicator that we are experiencing the beginning of a sustained turnaround. What looks to be current corporate profits may seem to bode well for the US economy in general, but global markets are too intertwined to ignore the financial debt fiasco in Greece and the rest of Europe. We're waiting to see if this eventually creates a drag on the global economy. The big question for those considering investing/speculating is whether or not the first quarter results—which indicates a temporary improvement in consumer spending and corporate profits—actually has any beef in it. All this uncertainty is good reason pause and take some time to do your research before you start gambling in the markets. If you have any doubts about how important that is, read our book,The Big Gamble: Are You Investing or Speculating? Then proceed with caution. |
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