Famed economist Nouriel Roubini-he of the call on the crisis he saw that many of us didn't- has been in the news again saying the market has risen too fast and will ultimately meet with some disappointment when the recovery turns out to be more "U" shaped than "V" shaped. I would be thrilled with a "U" and hope that is the outcome. I haven't bought into the idea of a "V" shaped recovery primarily because of the status of the consumer. Since the consumer is so overly indebted and suffering from stagnant wage growth and a lack of savings, I have figured that what we might be facing is more what Lee Cooperman described recently as a square root sort of scenario. An environment where we get a snapback and then go sideways for a long time. I'll take the "U" and be glad of it. Maybe stocks are ahead of themselves as Professor Roubini says (I tend to agree) but time will play that hand out.
There was good news Monday from the non manufacturing ISM report which rose to the official expansionary number of 50.9. It was 48.4 last month so that is a nice increase. Such a number would be entirely consistent with a 3% annual advance in Q3 GDP. Soleil's Lyle Gramley has forecast a gain of 3.1% for the quarter. The inventory sub-index rose to 47.5 from 43 which shows the rate of inventory liquidation is slowing. If inventories across the economy were to be flat it would add 1.3% or so to GDP.
On the other side of the pond, the Eurozone service index also rose to 50.9 from 49.9 last month and is the first official expansion reading in 16 months. They do a composite index in Europe which combines some of manufacturing and non manufacturing, gets put into a blender and comes out as the Eurozone Composite Index. No getting past those Europeans for clever names to their surveys. It registered 51.1, also an expansionary number. Unfortunately, Eurozone retail sales were off -.2% in August which puts retail sales over there down -2.6% from a year ago. That was also the 16th month of decline for that stat. It shows the consumer worldwide is struggling.
Soleil's Mike Ward of Ward's Automotive Research offers some hope with recent comments. U.S dealer inventories at 1.67 million light vehicles are off 42% from a year ago. The Detroit Three (notice it's no longer the Big Three) inventory levels are -45% from last year. Mike feels that additional production of up to 700,000 units are required over the next six months which helps push the whole economic pile forward. He figures sales this year will be 10.3 million units and 12 million next year. His three buy rated stocks are Ford, TRW Automotive, and Borg Warner. Call for those reports.
We have had a nice gain in the market since the March bottom but my pal, Sydney Williams, reminds me the S&P 500 index is still a mind blowing 25% below where it was 10 years ago. The NASDAQ is 60% lower than its peak in March, 2001, and even the Shanghai Composite is 55% below its October, 2007 mark. Goldman Sachs upgraded some large banks on Monday which started the week off on a good note. It was bouncing around the internet that the guys at Bank America/Merrill Lynch reaffirmed earnings forecasts of $61.50 for 2009, $71 for 2010, and $80 for 2011. Sounds ok to me and their target for the S&P is 15 times the 2011 estimate, or 1200 (currently we are around 1037.) The average P/E for the years 1960 to 2008 was 16 times and the median P/E for stocks when inflation has been 2% or less has been more like 18 times.