USA Inc.: The Gloom Is Overdone

BCA Research ^ | Fri Jun 06 | BCA Newsletter

[Matchett-PI]

The U.S. economic outlook continues to look good compared with that of its major competitors.

The U.S. has cyclical problems while the woes of Japan and Europe are more structural.

In a new Special Report from BCA Research, we treat the U.S. as if it were a giant company and examine the outlook through the eyes of an investment analyst. The report ( USA Inc. 2003 Annual Report ) concludes that current widespread gloom about the U.S. is overdone.

Balance sheets are generally sound and the U.S. continues to have many advantages over its competitors. The main structural risk relates to the large external deficit, and even that largely reflects weak demand overseas.

Graph compares rate of return on equity assets in US v Europe/Japan:

The link to the report "USA Inc. 2003 Annual Report" can be downloaded from our website.

[Matchett-PI]

I happened to be tuned in to CNBC earlier today when they had a chart up that showed who now controls the equity markets.

The United States controls almost twice as much of the equity markets as Europe. I think the number given was 58%. Europe has been holding flat at around 30% for a long time, and Asia's share has dropped to 12%, if I remember correctly.

I haven't checked CNBC's web site, but the details may be there if anyone is interested.

[Willie Green]

Related thread: Real world greets grads with no jobs

[Matchett-PI]

Bump to those interested.

[irish guard]

I'm not trying to rain on the parade...after all, it is nice to see the equity markets recover a bit, but if you look at PEs (yes I still care about them and how the market is valued), I would be careful about PEs relative to the market right now....depending on how you look at them...we have between a 17 and 20 market multiple right now, which is historically high, unless the earnings due out for June are really great, then PEs come back into sync....I don't know what any of that means, but I am still not sure we are out of the woods.

[Matchett-PI]

Bump!! Any comments?

[Steven W.]

remember the cliche, it's a market of stocks more than it's a stock market - you can't apply things on a global level to individual equities.

My quote of the day comes from Mike Norman, the Contrarian:

Gloom-and-Doomers are already cooked; now the 'weak recovery' proponents are about to get baked!

Next week's short squeeze is going to be quite funny, given the tremendous amount of money being thrown away by the bears and their disciples, so prepare for some excessive squealing ahead!

[litehaus]

Hope ur rite bout the short squeeze....

[oust the louse]

would a good short term investment be inverse funds against the S&P or nasdaq? Just wondering.....

[Farnham]

I too believe in PE's. The problem I am torn over right now is that a PE of 15 to 17 makes stocks a good in vestment when interest rates on CD's are around 5. When CDs are at 3, it seems to me that on a simple ROI basis, stocks are a great investment well into the mid 20s. This of course is extremely simplified. Stocks PEs are affected by interest rates but it is definitley not a direct inverse proportion thing.

How much pent up demand is out there? (And a hundred other questions)

I found out a long time ago that my crystal ball lies. Evil, spiteful lies. You pays your money and you takes your chances.

[Lee_Atwater]

Lower marginal tax rates on income and capital...a central bank that has the money supply reflated -- look at the dollar gold price, holding steady above 350=stable money.

Also some hints of m&a activity

I wouldn't be short.

[american spirit]

I think the folks at BCA should search FR and read some of the reports bubbling up in the media about the 25-40 TRILLION in unfunded liabilities that the fedgov talking heads conveniently omit during discussions on the economy. It's hard to conceive what will happen to this country when the inevitable day of reckoning arrives.

[Tripleplay]

Another point:

The USA can fire people with relative ease........that is, resources are allocated to new viable industries at lightning speed in comparison to firmly entrenched European socialism.

[Lee_Atwater]

bump

[fightinJAG]

Here's a great article that sets out a comprehensive comparison of the US and Europe and shows why gloom is indeed overdone.

http://www.freerepublic.com/focus/f-news/785227/posts

[Matchett-PI]

Thanks for the link. Gonna copy lots of people on it. :)

[Starwind]

Thanks for the ping, Matchett-PI.

(sigh)...where to begin with this 'Annual Report'?

Making allowances for the attempt to shoe-horn the US economy into a corporate annual report (and overlooking the understandable desire to cheerlead and encourage clients) their 'report' is pretty lame.

The spacing of the X-Axis on most charts does not line up with any particular year on the scale, making precise interpretation of timing on most graphs difficult. This ambiguity varies among several charts.

They occasionally use forecasted data without explaining the source for the forecast.

They invent charts that are unexplained and unsubstantiated:

• "Real GDP per shareholder"
• "Rate of return on Assets" (don't say what assets or what accounting data were used)
• "Low Inflation, Not deflation" (excludes food & energy and who knows what else)
• Household debt exceeds 100% of Personal Disposable income, and Networth fallen to 500% of Personal Disposable Income

They show charts that reflect realistic declines over the last 2 years but make no comment at all about what it implies.

They argue we're ahead of our competitors (Europe & Japan) but don't comment about China or Asia.

They cherry picked some obscure sources trying to show:

• RE loan delinquincy rates have been falling steadily for the last year (when in fact banckruptcies are rising at record levels).
• Nondefense capital goods orders have been rising for 2 years (when in fact our manufacturing industry has been tanking).
• Debt/Equity ratios are 60% but not substantiating how the 'equity' was valued or the 'debt' measured.

Some of the more blatant 'analysis':

• 0.0 Percent change in Employment forecast for 2003
• Fears that a large amount of excess capacity precludes the need for new investment are misplaced.
• Debt Burdens are Manageable
• Corporate prices only grow 0.5% for 2003 & 2004, but Net Cash flow will grow from 1.0% to 4.0 in 2004 and profits will grow to 9.0 % in 2003 and 15.0% in 2004!!!!
• The Government Division has made a positive contribution to USA Inc. growth in the past couple of years, with real spending rising by 3.7% in 2001 and 4.4% in 2002. Some slowdown seems likely from these levels, but growth is unlikely to fall much below 3% this year and next. (Aren't you glad to know Gov't spending is a "positive contribution").
• Publicly held federal debt is only $4T in 2003 and growing to $4.2T for all of 2004.

One chart they got almost right portrays "Net External Debt as a % of GDP" going linearly off the scale in 2010? (hard to say what year because the X-Axis is hosed) but they cite that as "An Unsustainable Trend". - Gee, ya think?

I could go on, but the rest of you should sign up, read it, and make your own minds up.

[fightinJAG]

Wonderful! I think Zinsmeister's analysis, and the recounting of his experience at that conference, provides excellent food for thought and good discussion. The implications of this information for the future are truly astounding.

[Tauzero]

I looked at it also, and figured it wasn't worth responding to. But since you responded, here's a couple of my favorite laughers:

"The [Consumer] Division's aggregate balance sheet has clearly deteriorated in recent years, but this gives a misleading picture about the financial health of the average consumer. Although the values of equities plunged by $7.5 trillion (43%) between end-1999 and end-2002, the impact was highly skewed toward the wealthiest members of the division."

On other words, the most productive got hurt the most.

"Only half the households in the median income group own any equities, and the median holding was only $15,000 in 2001."

I'm not sure what he means by "only" here. Does he mean, say, compared to the peak of the stock mania in 1999/2000?

"That is a small amount,"

On the contrary, both figures are HUGE relative to historical norms.

"especially compared to the wealth tied up in real estate."

Whether that is a comforting or worrying fact is highly contestable.

"This helps explain why spending did not collapse in response to the equity meltdown."

It certainly does. The mania still isn't over.

[Starwind]

"Only half the households in the median income group own any equities, and the median holding was only $15,000 in 2001. ... That is a small amount,"

Yeah. I'm sure those median income households weren't so glib about their losses.

And you're right about the example you cite in that it is so ambiguously worded as to preclude meaningful analysis.

Glad you posted.

[Tauzero]

The piece is a good example though of the kind of fluffy report Buffet would instantly s**t-can. :)