Let Us See....Let Us See

I have posted a lot in recent weeks with topics in a longer term
perspective. Now it is time for a few months of careful monitoring
to see how matters shape up.

My views run as follows. The US is on the borderline of far more
serious economic trouble. Analysis of business cycles over history
precludes reaching too negative a conclusion so quickly. The longer
run leading economic indicators have been positive for nearly 6
months and I have been anticipating a recovery to to take hold over
Half 2 ' 09. Many of the objections to this view can be rejected out
of hand, save for the issue of liquidity preference. Consumers have
cut back sharply on spending to rebuild savings at the expense of the
real economy. A troubled housing industry and low affordability
has kept people away from the residential market. The real wage
per capita is strong and this has been a key to recoveries in the past.
Housing affordability has improved sharply. So, we need to see
how folks balance savings, spending and investment in the months
ahead. Continued very strong liquidity preference will only sink
the economy further. To help consumers and the financial sectors,
there is modest tax relief ahead and another Fed / Treasury
program to boost consumer and small business borrowing. This
latter program based on a $200 bil. swap for Treasuries can be
leveraged up to 5 - 1, putting up to $1 tril. in play.

Businesses are fast trimming inventories to rebalance the pipeline
after a rapid fall of sales. This rebalancing has substantially
punished production and employment, but it is well underway.

By historic measures, a Half 2 ' 09 economic and profits recovery
should see a stock market bottom between March - May right
ahead. Now just below 700, the SP 500 is very reasonable on a
decent recovery in profits through 2010. I would also point out
that my fundamental indicators flashed positive at the end of ' 08,
but weak current earnings and diminished confidence have so far
weighed heavily on the market. I am on the hook for that and will
be for some time, as those indicators would not turn negative until
the Fed tightens policy.

In my view, commodities which are now cheap, should move up
sharply over Half 2 '09. Ditto oil, which at $40 bl. is also inexpensive.
My concern would be if economic recovery brings too rapid a rise
in commodities and begins punishing consumer incomes.

Look, from my perspective, the pieces to move the economy up and
out of the ditch are in place. The battle now is with fear and public
anxiety about the future. Since consumer sentiment can turn on a
dime, I plan to move forward in viewing the environment a couple
of steps at a time.