If you take a quick snapshot of key economic indicators, you'll see that there is obviously plenty of reason for concern. But a more liquid banking system, falling energy prices and the sheer resilience of the U.S. consumer could set the stage for the next upturn to begin in 2009.
It's an old investing axiom that the market looks six to nine months ahead, so the timing of an economic bottom and eventual turnaround is likely to dominate market discussions in coming weeks and months. Let's take a closer look at the current headwinds and possible eventual tailwinds.
Technology/semiconductors: Book-to-bill for semiconductors fell to just 0.83 in August 2008, down 37% from August 2007. Flat-panel TVs, GPS devices and iPods were key demand drivers for tech and chips in recent weeks. Those segments have matured, and it's hard to spot the next hot trend. Consumer PC technology is no longer making radical leaps, and consumers are upgrading only when their current systems wear out.
Silver lining: The weak book-to-bill figure could set the stage for lower inventories and firmer prices. And the weak demand environment is fueling rising losses for the smaller niche players; that should finally lead to industry consolidation and also keep the door closed to new tech IPOs.
That creates a little running room for the larger, better-capitalized tech names. Still-strong balance sheets will likely lead to more share buybacks. Valuations are also firmly in check: Tech bellwether Intel (INTC - commentary - Cramer's Take) trades just above its five-year low.
Small and medium-sized businesses are having an increasingly hard time securing loans while banks are stressed. These firms are typically the backbone of new job creation, and their cautious stance is likely to keep their employees (who are also consumers) fearful and tight-fisted as well.
Moreover, any small and medium-sized firms that saw a boost in exports due to the plunging dollar could see reduced foreign demand now that the dollar is strengthening. That could explain why capacity utilization figures appear to be softening.
Silver lining: These companies have stayed lean, with a tight lid on head count and inventories, so massive further retrenchment is unlikely, and signs of an upturn could fuel an inventory rebuild in 2009.
Market Commentary Paulson's Greatest Deals 9/22/2008 8:03 AM EDT The rescue plan won't fix the slowing economy, but it should save us from falling into the abyss.
David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.
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